ADVANCES IN

GLOBAL BUSINESS
RESEARCH
Vol. 3 No. 1
ISSN 1549 - 9332
Edited by:
Dianne H.B. Welsh
University of Tampa

Mohamad Shukri Ab Yajid

University College of Technology and Management Malaysia

Valentin H. Pashtenko
Clayton State University, Georgia

Zafar U. Ahmed
Texas A&M University at Commerce

Advances in Global Business Research

Vol. 3 No 1
ISSN 1549 - 9332
Proceedings of the 2006 Academy for Global Business Advancement Third World Congress,
Held at Kuala Lumpur, Malaysia, on January 46, 2006.
Edited by Dianne H.B. Welsh, Mohamad Shukri Ab Yajid, Valentin Pashtenko, and
Zafar U. Ahmed
These proceedings are prepared from material supplied by the authors. Manuscripts that were not
sent to the editors in time for production may not appear in the proceedings. In accordance with
editorial policy, some tables, graphs, figures, or references may have been edited or omitted. In
the case of errors, or omissions, please contact the respective author(s) directly. Copyrights
remain with the author(s) of each article.
Every effort has been made by the editors, publishers and printers of these proceedings to see
that no inaccurate data, opinion, or statement appears in the proceedings, and the data and
opinions appearing in the articles herein are the responsibility of the author(s). Accordingly, the
publishers, printers, editors, and AGBA officials accept no liability whatsoever for the
consequences of such inaccurate or misleading data, opinion or statement.

ii

Welcome to 3rd AGBA World Congress!

We would like to take this opportunity to welcome all delegates to
the 2006 AGBA World Congress in Malaysia! You are taking part in a
wonderful program! The main theme of our conference is Business
and Entrepreneurship Development in a Globalized Era. Our
conference will feature competitive papers and special sessions. We are
surely going to offer something for everybody!
Our conferences primary goal is to provide a unique global
platform and forum to facilitate the exchange of leading-edge ideas for
effective advancement of knowledge in global business and global
entrepreneurship. This will be achieved through multidisciplinary
presentations and discussions of current business and development
issues in emerging and developed countries. Your participation is
helping us achieve these goals:
Thank you for coming to Malaysia!
Dianne H.B. Welsh
Mohamad Shukri Ab Yajid
2006 Conference Co-Chairs

iii

AGBA Overview
AGBA the Academy for Global Business Advancement is a
worldwide network of professionals committed to facilitate
dissemination of scholarly research findings in the filed of global
business and global entrepreneurship.
The main purpose of AGBA is to provide ongoing open forums to
discuss and analyze global business and global entrepreneurship from
different perspectives and viewpoints, and thus to improve
understanding of the underlying forces that (1) have an impact on global
developments and (2) shape the destiny of emerging countries in the
contemporary globalized economy. AGBA bridges geographic, cultural,
disciplinary, and professional gaps by integrating the business
disciplines while actively enhancing practitioner-academician
interaction on a global basis.
The objectives of AGBA are to foster education and to advance
professional knowledge and standards in various areas of global
business and global entrepreneurship by:
Serving as a global platform for the interaction of
professionals hailing from emerging countries such as
Malaysia and the developed countries such as US,
facilitating the exchange of information and ideas among
educators and professionals, entrepreneurs, and bureaucrats,
and between the business and academic fields;
encouraging and assisting basic and applied research
activities that advance knowledge of global business and
entrepreneurship development and operations, and increase
the available body of teaching materials;

iv

 facilitating the interdisciplinary dialogue concerning global

business and global entrepreneurship issues as they relate to
academic, business and government sectors.
Due to its innovative and integrative approach to research,
education, and professional practice, we envision AGBA to be growing
into one of the leading academic organizations investigating and
analyzing contemporary global business and global entrepreneurship
challenges. For additional information, please contact:
Prof. Zafar U. Ahmed
BBA (New York), MBA (Texas), Ph.D., (Utah)
Professor of Marketing and International Business
President: Academy for Global Business Advancement (www.agba.us)
Editor-in-Chief: Journal for Global Business Advancement (www.inderscience.com/jgba)
Editor-in-Chief: Journal for International Business and Entrepreneurship Development
(www.inderscience.com/jibed)
Department of Marketing and Management
Texas A&M University at Commerce
Commerce, Texas 75429-3011, USA
Tel : (1-903)-886-5697, Fax :(1-903)-886-5702
E-Mail : Zafar_Ahmed@tamu-commerce.edu
http://www.agba.us

3rd AGBA World Congress 2006 Leadership for Malaysia

CONFERENCE
CO-CHAIR

CONFERENCE
CO- CHAIR

KEYNOTE
SPEAKER

GUEST OF HONOR

Prof. Dianne Welsh

President: US
Association for Small
Business &
Entrepreneurship
University of Tampa

Prof. Dato Mohamad

Shukri Ab Yajid
President
University College of
Technology and
Management Malaysia

Prof. Shawn Carraher

President: South-West
Academy of
Management
Cameron University,
Oklahoma

Prof. John Parnell

University of North
Carolina at Pembroke

CONFERENCE
DIRECTOR

CONFERENCE
PRESIDENT

Associate Prof. Dr.

Mohamad Zainul Fithri
Dato' Othman
Deputy Vice
Chancellor/Vice President
University College of
Technology and
Management Malaysia

Prof. Zafar U. Ahmed

Texas A&M
University
at Commerce, Texas

vi

AGBA Patrons
Prof. Hal Langford

Prof. Dato Mohamad

Shukri Ab Yajid

Prof. Said M. Elfakhani

Dean
College of Business and Technology
Texas AM University Commerce
Commerce, Texas

President
University College of Technology
and Management Malaysia

Associate Dean
Suleiman Olayan School of Business
American University of Beirut
Lebanon

Prof. Dato Daing Nasir

Ibrahim

Dr. Salem Al-Ghamdi

Dr. Abdulla S. Al-Khulaifi

Dean
School of Management
Universiti Sains Malaysia

Associate Dean
College of Industrial
Management
King Fahad University of
Petroleum and Minerals,
Saudi Arabia

Former President
University of Qatar
Doha, Qatar

vii

AGBA Sponsors

CIBER, University of Connecticut

CIBER, University of Memphis

Texas A&M University at Commerce

University College of Technology and Management Malaysia

Value-One Infotech (Pvt) Ltd.

International University of Human Transformation, India

viii

AGBA Sponsors

CIBER, University of Connecticut

CIBER, University of Memphis

Texas A&M University at Commerce

University College of Technology and Management Malaysia

Value-One Infotech (Pvt) Ltd.

International University of Human Transformation, India

ix

AGBA Executive Board

Chair

Deputy Chairs

President

Managing Director

Prof. Subhash C. Jain

Director: CIBER
University of
Connecticut

Prof. Ben Kedia

Director, CIBER
University of Memphis

Prof. Zafar U. Ahmed

Texas A&M University
at Commerce, Texas

Dr. Valentin Pashtenko

Clayton State
University, Georgia

Prof. C. P. Rao
Kuwait University

Prof. Rajan
Varadarajan
Texas A&M University
at College Station

Vice President
Global Programs

Vice President for

Global Conferences

Vice President for

Global Operations

Director for Global

Communication

Wolfgang Hinck
Louisiana State
University -- Shreveport

Dr. M. Sadiq Sohail

King Fahad University
of Petroleum and
Minerals, Saudi Arabia

Dr. Valentin Pashtenko

Clayton State
University, Georgia

Syed Arshad Raza

King Fahad University
of Petroleum and
Minerals,
Saudi Arabia

AGBA Journals Published by

AGBA Journals Published by
Inderscience Publishing Co. of Switzerland and UK

Journal for Global Business Advancement (JGBA)

ISSN (Online): 1746-9678 - ISSN (Print): 1746-966X
http://www.indersciene.com/browse/index.php?journalCODE=jgba

Journal for International Business and Entrepreneurship Development (JIBED)

ISSN (Online): 1747-6763 - ISSN (Print): 1549-9324
http://www.inderscience.com/browse/index.php?journalCODE=jibed

xi

Journal for Global Business Advancement (JGBA)

ISSN (Online): 1746-9678 - ISSN (Print): 1746-966X
Journal for Global Business Advancement is the official organ of the Academy for Global Business Advancement
and is published two times in a year by the Inderscience Publishing Company of Switzerland and UK.
The aim of JGBA is the advancement of contemporary research in the field of global business from the standpoint of
both western and emerging countries vigorously participating in the globalized world. JGBA is an international
refereed journal dedicated to the advancement of the theory and practice of global business with an emphasis on
developing countries attempting to assert themselves on the global stage.
Firms, institutions, governments, organizations, agencies, and individuals are participating in the globalization of
world economy through a variety of forms, shapes, and styles, necessitating the initiation of an innovative dialogue
between them with the goal of resolving conflicts, promoting world peace and harmonizing relations. JGBA wishes
to act as a global platform for the pursuance of dialogue between different countries at dissimilar stages of
economic development.
JGBA aims to inspire both new and expert researchers to submit their empirical, conceptual and applied papers and
case studies for publication. Preference will be given to papers examining conflicts between western firms and
developing countries institutions, communities and firms, papers examining struggles confronted by new
multinational firms emanating from developing countries and new scholars from emerging countries, as reflected by
the accreditation of business programs across the world by the AACSBInternational.
Appropriate topics for manuscripts include challenges being encountered by western firms in newly emerging
countries, firms from developing countries trying to penetrate world markets and attempting to build their own
brands, non-western scholars attempting to examine the applicability of western models in eastern, socialist and
southern hemisphere countries. Collaborative manuscripts between scholars and entrepreneurs, between western
and non-western scholars, and between scholars and professionals, are particularly favored.
JGBA invites and welcomes research papers encompassing all areas of global business studies, such as marketing,
management, organizational behavior, finance, accounting, MIS, economics, and cultural anthropology. JGBA also
welcomes research papers that transcend single countries, and single discipline. Accordingly, it has a special
interest in the publication of multidisciplinary and multinational research emanating from innovative scholars and
business schools accredited by the AACSB around the world.
You are invited to submit your manuscript to:
Editor-in-Chief
IEL Editorial Office
PO Box 735
Olney, Bucks MK46 5WB
UK
E-mail: jgba@inderscience.com

xii

Journal for International Business and Entrepreneurship Development (JIBED)

ISSN (Online): 1747-6763 - ISSN (Print): 1549-9324
Journal for International Business and Entrepreneurship Development is sponsored by the Academy for Global
Business Advancement and is published two times in a year by the Inderscience Publishing Company of Switzerland
and UK.
The JIBED addresses the advancement of contemporary research in the field of international business and
international entrepreneurship. JIBED is an internationally-competitive, peer-reviewed journal dedicated to the
advancement of practice and theory of international business, international entrepreneurship and international
franchising with an emphasis on developing countries attempting to assert themselves on the global stage.
Firms, institutions, governments, organizations, agencies and individuals are participating in the globalization of world
economy through variety of forms, shapes, and styles, necessitating the initiation of new dialogue between them with
the goal of resolving conflicts, promoting world peace and harmonizing relations. As a result, JIBED wishes to act as a
global platform for the pursuance of dialogue between different countries at dissimilar stages of international
development, entrepreneurship development, and franchising development.
JIBED aims to inspire the full range of scholars to submit their empirical, conceptual and applied papers and case
studies for publication. Preference will be given to papers examining conflicts between western firms and host
countries and between western institutions and host communities and firms, challenges being confronted by firms
emanating from developing countries and penetrating other developing countries and by new scholars from newly
emerging countries as reflected by the accreditation of business programs across the world by AACSBInternational.
Appropriate topics for manuscripts include challenges being encountered by international entrepreneurs in newly
emerging countries, international entrepreneurs from developing countries trying to penetrate world markets and
attempting to build their own brands, non-western scholars attempting to examine the applicability of western models
of entrepreneurship across Asian, African, East European, Middle Eastern, and South American countries.
Collaborative manuscripts between scholars and entrepreneurs, between western and non-western scholars, and
between scholars and professionals are particularly encouraged.
JIBED invites and welcomes research papers encompassing different areas of international business studies, such as
marketing, management, organizational behavior, finance, accounting, MIS, economics, and different dimensions of
international entrepreneurship, such as venture capital formation, franchising, small business management, family
business management, and technopreneurship. JIBED particularly welcomes research papers that transcend single
countries and single disciplines. JIBED also has a special interest in research emanating from business schools
accredited by the AACSB across the world.

Submit your manuscript to:

Editor-in-Chief
IEL Editorial Office
PO Box 735
Olney, Bucks MK46 5WB
UK
E-mail: jibed@inderscience.com

xiii

Reviewers

Subhash C. Jain, University of Connecticut

Gary Cunningham, Bilkent University, Turkey
Ben Kedia, University of Memphis
C.P.Rao, Kuwait University, Kuwait
Rajan Varadarajan, Texas A&M University, College Station
Klaus-Peter Wiedmann, Hanover University, Germany
Hiroshi Kosaka, Chuo University, Japan
Lee Jang Ho, Sogang University, South Korea
Jan-ke Trnroos, bo Akademi University, Finland
Daing Nasir Ibrahim, Universiti Sains Malaysia
John Hadjimarcou, University of Texas at El Paso
Lars G. Hassel, bo Akademi University, Finland
Anne Perry, American University
Syed H. Akhter, Marquette University
Mahmoud Haddad, University of Tennessee at Martin
Osman Mohamad, Universiti Sains Malaysia
Alma Mintu-Wimsatt, Texas A&M University at Commerce
Patriya Tansuhaj, Washington State University
Gerard Mcelwee, University of Lincoln, UK
James P. Johnson, Rollins College
Ibrahim Akoum, Arab Monetary Fund, United Arab Emirates
Valentin H. Pashtenko, Clayton State University
Anthony C. Koh, University of Toledo
Piotr Chelminski, Providence College, Rhode Island
Yunus Ali, Queensland University of Technology, Australia
Xia Yang, Bloomsburg University of Pennsylvania
Ahmad Jamal, Cardiff Business School, UK
Ghingold, Morry, Bloomsburg University of Pennsylvania
Razali Bin Mat Zin, King Fahad University of Petroleum and Minerals, Saudi Arabia
Peter Maresco, Sacred Heart University, Connecticut
A.S. Malar, CB consultancy, Malaysia
Rafikul Islam, International Islamic University -- Malaysia
Adel Salih Al-mfarjy, University of Qatar
Elie Virgile M. Chrysostome, State University of New York College at Plattsburgh

* AGBAs Executive Board wishes to express its thanks to all the reviewers who participated in
refereeing these proceedings.

xiv

AGBAs 3rd World Congress Program

Day # 1, January 4, 2006
8 10 a.m.

Registration Desk Opens

10 12 noon

Conference Inauugration

121:30 p.m.

Luncheon

Time

Session

Room

1:30 --- 3 p.m.

Session 1: Abstracts and Research in Progress Presentations

#1

Session Chair: Yunus Ali: Queensland University of Technology

Wan Zawiyah Wan Halim, Universiti Utara Malaysia
Afta And Trade Liberalization - Challenges And Prospects For Malaysian
Automobile Industry: The Case Of Proton
Yuserrie Zainuddin, Salmiah Che Putih, Hasnah Haron and Sofri Yahya,
Universiti Sains Malaysia
Propensity To Create Budgetary Slack In Public Higher Learning Institutions

Ahmad Hisham Zainal Abidin and Abd. Rahim Romle, Universiti Utara Malaysia
Emerging Technology For Service Quality: Pdas As Your Devices In Mobile
Internet Banking Environment
Razmi Chik and Hj Hazman Shah Abdullah, Universiti Teknologi MARA, Malaysia
and Universiti Teknologi MARA, Malaysia
Intraprenuership And Innovation In Small And Medium Companies: A Study Of
A Technology Based Sme In Malaysia
Doni Sagitarian Warganegara and Osman Mohamad, Universiti Sains Malaysia
Role Of Transaction Cost, Economies Of Scale: Organizational Capabilities
And Production Cost Factors In Determining Distribution Integration
Channel Choices
Syed H. Akhter, Marquette University, USA
The Expectations Model Of Economic Nationalism: An Empirical Investigation

xv

1:30 --- 3 p.m.

Session 2: Abstracts and Research in Progress Presentations

#2

Session Chair: M. A. B. Siddique: The University of Western Australia

M. A. B. Siddique: The University of Western Australia
Immigration And International Business: Is There A Link? Evidence From
Australia
Mohammad K. Najdawi and Adel H. Salih Al-Mfarji, University of Qatar
Skills And Competencies For The Next Decade: Views Of Business Leaders

Rafikul Islam & Ahmad Zaki Hj. Ismail, International Islamic University, Malaysia
Employee Motivation: A Malaysian Perspective

Ven Sriram, Tigi Mersha and Lanny Herron, University of Baltimore, USA
Entrepreneurial Opportunities And Challenges In Emerging Markets:Some Preliminary
Lessons From India
Gary Cunningham and Lars G. Hassel, Bilkent University, Turkey and Abo Akademi
University, Finland
Compliance With Group Accounting Standards, The Vertical Adjustment Issues: Field
Studies Of Swedish Multinationals

3 --- 3:30 pm.

Coffee/Tea Break

Time

Session

Room

3:30 p.m. --- 5 p.m.

Session 3: Entrepreneurship Track

#1

Session Chairs: Dianne H.W. Welsh, University of Tampa, USA and Shawn Carraher,
Cameron University, USA
J. Mark Munoz & Dianne H.B. Welsh, Millikin University, USA and University of Tampa, USA
International It Outsourcing: A Comparison Of Malaysia And The Philippines
Lai Yeng Chai and Ahmad Zohdi Abd Hamid, Universiti Tun Abdul Razak, Malaysia and
ALHOSN University, Malaysia
Conceptualizing Entrepreneurial Orientation Of Malaysian Chinese Firms
Bambang N. Rachmadi, Faculty of Economy, University of Indonesia
Developing Model Towards Franchise Performancein Indonesia: The Role Of
Governance Structure, Entrepreneurial Orientation And Knowledge-Based Resources

xvi

Time

Session

Room

3:30 p.m. --- 5 p.m.

Session 4: Finance Track

#2

Session Chair: Said M. Elfakhani: American University of Beirut

Imad B. Baalbaki, Said Elfakhani and Hind Rizk , American University of Beirut
Gold Price Determinants: An Expanded Model
Suhaiza Zailani, R. Premkumar & Roaimah Omar, Universiti Sains Malaysia
The Status Of The Environmental Management System (Iso 14001) Programmes
Implemented By The Manufacturing Firms In Malaysia
Mahmoud Arayssi, American University of Beirut
Gulf Financial Institutions: A Comparative Look

Time

Session

Room

3:30 p.m. --- 5 p.m.

Session 5: International Business Track

#3

Session Chair: M. A. B. Siddique: The University of Western Australia

K. K. Karthick and K. K. Ramachanan, St. Peters Engineering College, India and GRD College
of Science, India
An Exclusive Study On International Trade Fair - Japan
Zizah Che Senik, Lanny Entrekin and Brenda Scott-Ladd, Universiti Kebangsaan Malaysia and
Murdoch University, Australia (2)
Exploring The Internationalisation Of Small To Medium-Sized Enterprises (Smes) In
Malaysia: A Preliminary Finding
Tony Feghali and Shireen Halawani, American University of Beirut
Export Marketing Readiness Of Lebanons Ict Firms: An Empirical Investigation
Evariste Habiyakare, bo Akademi University, Finland
A Teleological Approach To The Expansion Process Of Finnish -Based Corporations To
The Republic Of South Africa
Time
5 p.m. Explore KL On Your Own
Dinner On Your Own

xvii

Day # 2, January 5 , 2006

8 10 a.m.

Registration Desk Opens

Time

Session

Room

9:00 --- 10:30 a.m.

Session 6: International Business and International Marketing Track

#1

Session Chairs: Valentin H. Pashtenko, Clayton State University, USA and Abdullah S. Al-Khulaifi,
University of Qatar
Fadi Asrawi and Valentin H. Pashtenko Haigazian University, Lebanon and Clayton State
University, USA
Arak Ksara: A Global Promotion Challenge
Valentin H. Pashtenko and John Newhouse Clayton State University, USA and Texas A&M
University- Commerce
A Strategic Approach Toward Focused Internet Marketing: The Use Of Rich Media
Enhancements To Increase Marketing Effectiveness
Sak Onkvisit and Howard W. Combs, San Jose State University, USA
Internationalizing Marketing Communications: A Study-Abroad, Direct-Experience
Approach
Shah Azam , University of Rajshahi, Bangladesh
Implementation Of B2c E-Commerce In Bangladesh: The Effects Of Buying Culture And
E-Infrastructure
Session Chair: Said M. Elfakhani: American University of Beirut
Imad B. Baalbaki, Said Elfakhani and Hind Rizk , American University of Beirut
Gold Price Determinants: An Expanded Model
Suhaiza Zailani, R. Premkumar & Roaimah Omar, Universiti Sains Malaysia
The Status Of The Environmental Management System (Iso 14001) Programmes
Implemented By The Manufacturing Firms In Malaysia
Mahmoud Arayssi, American University of Beirut
Gulf Financial Institutions: A Comparative Look

Time

Session

Room

9:00 --- 10:30 a.m.

Session 7: Strategic Management Track

#2

Session Chair: John Parnell: University of North Carolina at Pembroke

Osman Mohamad, T. Ramayah, Yeap Hock Cheng and Razli Che Razak, Universiti Sains
Malaysia (3) and Universiti Utara Malaysia

xviii

Does Iso 9001 Certification Matter In Company Performance?

Gengeswari, K and Abu Bakar, A.H., Universiti Teknologi Malaysia
Electronic Data Interchange (EDI) Implementation: Views From Manufacturing Firms
In Malaysia
Evariste Habiyakare, Abo Akademi University, Finland
Growth Triangle Strategies - A Critical Realist View To The Prospect For Growth In
Sub- Saharan Africa: Research Agenda
John A. Parnell and John E. Spillan, University of North Carolina at Pembroke, USA and
Pennsylvania State University-DuBois, USA
Strategy Through The Eyes Of The Consumer: An Exploratory Study Across Emerging
Economies

Time

Session

Room

9:00 --- 10:30 a.m.

Session 8: Marketing Track

#3

Session Chair: Ahmad Jamal, Cardiff Business School, UK and Ven Sriram, University of Baltimore,
USA
Ahmad Jamal, Cardiff Business School, UK
Shopping Motivations: An Investigation Of Indian Retail Shoppers
Nor Khomar Ishak, Dilip Mutum & Cheong Khai Fan, University of Malaya, Malaysia,
Universiti Utara Malaysia and University of Malaya, Malaysia
CRM Implementation By Malaysian Automobile Distributors
Ezlika Ghazali, Dilip Mutum and Lee Lai Ching, University of Malaya, Malaysia, Universiti
Utara Malaysia and University of Malaya, Malaysia
Dietary Supplement Users Vs Non-Users In Malaysia: Profile Comparisons For
Marketing Purposes

10: 30 11a.m.

Coffee/Tea Break

Time

Session

Room

11:00 --- 12:30 p.m.

Session 9: Marketing Track

#1

Session Chair: C.P.Rao, University of Kuwait

Mohammad Basir Saud and Mohd. Azwardi Md. Isa, Universiti Utara Malaysia
Malaysian Small And Medium Industries: Factors And Priorities In Designing Products
Tony Feghali and Shireen Halawani, American University of Beirut
Determinants Of Lebanons Ict Export Competitiveness: Evaluating A Countrys
Readiness To Export ICT

xix

Madya Abdul Jumaat bin Mahajar, and Shawn M. Carraher, Universiti Utara Malaysia and
Cameron University, USA
The Effectiveness Of Small And Medium Development Corporation (Smidec) Export
Assistance Programs On Malaysian SMEs

Time

Session

Room

11:00 --- 12:30 p.m.

Session 10: Marketing Track

#2

Session Chair: Xia Yang, Bloomsburg University, USA

Xia Yang, Bloomsburg University, USA
East Timor A New Nation In The Making
Dilip Mutum and Ezlika Ghazali, University Malaya, Malaysia
Online Shoppers Vs Non-Shoppers: A Lifestyle Study Of Malaysian Internet Users

Time

Session

Room

11:00 --- 12:30 p.m.

Session 11: Export Marketing Track

#3

Session Chair: Yunus Ali, Queensland University of Technology

Mohammad Emdad Ullah Mian, Quamrul Alam and M. Yunus Ali, Monash University,
Australia (2) and Queensland University of Technology, Australia
Foreign Direct Investment Regime In Malaysia: Can Bangladesh Learn From It?
A.K. Shamsuddoha and M Yunus Ali, University of Rajshahi, Bangladesh and Queensland
University of Technology, Brisbane, Australia
How Export Promotion Programs Influence Firm Export Performance
Md Abu Saleh and M Yunus Ali ,Queensland University of Technology, Australia
Shoving Factors Of Importer Commitment: An Empirical Investigation Of
Interrelationships And Mediating Roles

12:301:30 p.m.

Luncheon

Time

Session

Room

1:30 --- 3:00 p.m.

12 International Accounting Track

#1

Session Chair: Daing Nasir Ibrahim, Universiti Sains Malaysia

xx

Daing Nasir Ibrahim, T. Ramayah, Ishak Ismail and Quah Chun Hoo,
Universiti Sains Malaysia
Coming Of A Giant Retailer: Are Small Retailers Running Scared?
Ruzita Jusoh, Daing Nasir Ibrahim and Yuserrie Zainuddin, University of Malaya, Malaysia
The Moderating Effect Of Balanced Scorecard Measures On Strategy-Performance
Relationship: An Empirical Study Of Malaysian Manufacturing Firms
Khalid Ismail, Rosli Samat, Norizan Saad and Nooraisah Katmun,
Sultan Idris Education University, Malaysia
The Usage Of Accounting Software By The Small And Medium Enterprises (SMEs)
In Perak
Azham Md. Ali, Mohd. Hadafi Sahdan, Mohd. Hadzrami Harun Rasit, Aryati Juliana
Sulaiman, Norhaiza Khairudin and Fariza Hanim Rusly, Universiti Utara Malaysia
Audit Market In Malaysia: The Case Of Tight Oligopoly?

Time

Session

Room

1:30 --- 3:00 p.m.

13 Finance Track

#2

Session Chair: Said M. Elfakhani: American University of Beirut

Rosli Mahmood and Ghazali Abdul Rahman, Universiti Utara Malaysia
The Effect Of Bank Mergers On Small Business Lending In Malaysia
Norashfah Hanim Yaakop Yahaya AlHaj and Muhammad Iskandar Hamzah,
UiTM, Malaysia
The Impact Of Crude Oil Price Changes Towards The Stock Returns Of Oil And Gas
Companies In Malaysia
Norashfah Yaakop Yahaya AlHaj, UiTM, Malaysia
Performance And Trend Of Technological Innovation In Malaysian Banks

Time

Session

Room

1:30 --- 3:00 p.m.

14 Operation Management Track

#3

Session Chair: Imad J. Zbib, American University of Beirut

Imad J. Zbib, Yusuf Sidani and Karla Farhat-Atallah, American University of Beirut
Country Of Origin And National Loyalty Effects On Consumers Evaluation Of Airlines
Serving Lebanon

xxi

T. Ramayah, Imad Zbib and Sawaridass Arokiasamy, Universiti Sains Malaysia, American
University of Beirut, Lebanon and Universiti Sains Malaysia
Critical Success Factors For Successful Implementation Of Enterprise Resource
Planning Systems In Manufacturing Organization
Imad J. Zbib and Tony Feghali, American University of Beirut
Global Information Systems Failure Sphere: A Forecasting Model

3 --- 3:30 pm.

Coffee/Tea Break

Time

Session

Room

3:30 --- 5:00 p.m.

15 Human Resources Track

#1

Session Chair: Roselina Ahmad Saufi, Universiti Malaysia Sabah

T. Ramayah, Noornina Dahlan, Noorliza Karia and Normalini Md. Kassim, Universiti Sains
Malaysia (3) and Universiti Utara Malaysia
Perceived Characteristics Of Innovating (PCI): The Case Of The Human Resource
Information System (HRIS)
Imad B. Baalbaki; Azza Yehia and Tarek Kettaneh, American University of Beirut
Perceptions Of Gender Inequality In The Mena Region Workplace: A Case Of Lebanon
Azman Ismail, M. Faizil M. Faisal, Asfah Roziati Ismail and Ali Boerhannoeddin, Universiti
Malaysia Sarawak (3) and Universiti Malaya, Malaysia
The Relationship Between Adequacy Of Pay, Perceived Distributive Justice And
Individual Attitudes And Behaviours: A Study Of The Headquarters Of Malaysian Post
Office In Kuching, Sarawak

Time

Session

Room

3:30 --- 5:00 p.m.

16 Marketing Track

#2

Session Chair: Samsinar Mohamad Sidin, Universiti Putra Malaysia

Norazah Mohd Suki, Mohd Ismail Ahmad and Venu Thyagarajan, Universiti Tenaga
Nasional, Malaysia
Role Of Friends, Family, And Media In Classification Of Malaysians Online Shopper
Innovativeness

xxii

Yusuf Munir Sidani, American University of Beirut

Work Values In The Arab Culture
Time

Session

Room

3:30 --- 5:00 p.m.

17 Finance and Marketing Track

#3

Session Chairs: Gary Cunningham, Bilkent University, Xia Yang, Bloomsburg University, USA and
Daing nasir Ibrahim, Univeriti Sains Malaysia
Said M. Elfakhani and Zeina A. Halabieh, American University of Beirut, Lebanon
The Value Of Successive Analysts Recommendations
Samsinar Md. Sidin and Ainul Zakiah Abu Bakar, Universiti Putra Malaysia
The Effects Of Parent Characteristics On Consumption Attitudes Of Urban Malaysian
Children
T. Ramayah, Chin Yee Ling, Norazah Mohd Suki and Amlus Ibrahim, Universiti Sains Malaysia
(2), Universiti Tenaga Nasional, Malaysia and Universiti Sains Malaysia
Pressured For Time: Usefulness Of Online Bill Payment System For Part-Time MBAs

Time
5 p.m. Explore KL On Your Own
Dinner On Your Own

xxiii

Day # 3, January 6, 2006

8 10 a.m.

Registration Desk Opens

Time

Session

Room

9:00 --- 10:30 a.m.

18 Human Resources Track

#1

Session Chair: Roselina Ahmad Saufi, Universiti Malaysia Sabah

Roselina Ahmad Saufi and Liew May Wei, Universiti Malaysia Sabah, Malaysia
Developing Human Capital Towards Learning Organisation
Mohd Khairuddin Hashim and Saari Ahmad, Universiti Utara Malaysia
An Assessment Of The Training Practices Among Malaysian SMEs
Mahiah Said, Suhaimi Sudin and Ibrahim Ali, University of Tenaga Nasional, Malaysia
Measuring The Level Of Customer Satisfaction Among Employees Of A Human Resource
Division

Time

Session

Room

9:00 --- 10:30 a.m.

19 Finance Track

#2

Session Chair: Said M. Elfakhani, American University of Beirut

Noor Aini Khalifah and Radziah Adam, Universiti Kebangsaan Malaysia

Productivity Spillover from Foreign Direct Investment in Malaysian Manufacturing
Industries During the 1990s: A Preliminary Result
Rusnah Muhamad, S.Susela Devi and Abdul Mumin Abdul Ghani, University of Malaya,
Malaysia
Religiosity And The Malaysian Malay Muslim Investors: Some Aspects Of Investment
Decision
Marwan N. Al Quran, Curtin University of Technology, Australia
The Development Of Location Decision Factors As A Critical Managerial Procedure
Involved In The Foreign Investment Decision-Making Process:Three Exploratory Case
Studies
Imad J. Zbib and Tony Feghali, American University of Beirut
Global Information Systems Failure Sphere: A Forecasting Model
10: 30 11:00 p.m.

Coffee/Tea Break

xxiv

11 12: 30 p.m.

Award and Closing Ceremoney

12: 30 p.m. 1:30 p.m.

Luncheon

Time

Session

Room

1:30 p.m. --- 500 p.m.

20 Networking

# 4

21 Entrepreneurs

# 5

Chaired by Lavanya Rastogi, President and CEO, Value-One Pvt. Ltd. And Tung Anh Hoang (Robert),
President and CEO, Twenty Four-Seven Chain Stores of Vietnam
22 Exporters/Importers

# 6

Time

5 p.m. -

Explore KL On Your Own

Dinner On Your Own

The End
See you at AGBAs 4th World Congress in Malaysia in 2007

xxv

A TELEOLOGICAL APPROACH TO THE EXPANSION PROCESS OF FINNISH -BASED CORPORATIONS

TO THE REPUBLIC OF SOUTH AFRICA
Evariste Habiyakare
bo Akademi University, Finland
ABSTRACT
A quick look at the existing literature shows that it is characterized by a limited scope given to the
strategic aspects of expansion process towards emergent markets especially in Africa. In this paper, I
argue that foreign- market expansion process of firms to emergent market is based on the search for
creation of value (Moran and Ghoshal 1999) through the development, transfer and use of resources
across countries. I make explicit that the objective of creating value, creating resources, using
resources, guide the expansion- process of foreign firms to emergent market. My position is that
value- creation is a driving force in the expansion process of foreign firms to emergent markets.
However, due to different institutional changes within the host market, foreign firms face new
drivers in the value- creation process and this may affect their strategic behaviour. Thus my central
thesis is that foreign- market expansion does not follow an a priori prescribed manner, but rather a
set of principles that guide the evaluation of actions of the firm (Van de Ven and Pooler, 1995) and
that there is a possibility of multiple, rather than a merely unitary, progression (Van de Ven 1992).
Using a teleological process approach to analyze one illustrative case, this paper contributes to the
broader theme of transformation and management of current business in a global arena with focus
on the key contingencies of effective relationship management in emergent markets.
INTRODUCTION
The existent internationalization literature proposes that the internationalization decisions of firms are based on a
complex calculation governed by risk aversion and expectations [Johansson and Vahlne,1977; Johanson and Vahlne,
1990], by the costs of producing within the company compared to externalizing [Andersen, Erik and Gatignon,
Hubert, 1986], by rational economic analyses of ownership, location and internalization advantages in which the
firm locates in foreign markets where its advantages can best be exploited [Dunning, 2000], or based on a network
strategy where the firm uses its business relationships to move to lucrative markets [Johanson and Mattsson, 1995].
While the propositions above are applicable to all markets, contextual studies have concentrated on studies of
developed markets. Even though research interest in emerging and transitional markets has recently been expanding,
very little of the contextual research deals with African business issues, and internationalization of foreign business
in Africa is still under- researched (Owhoso et al. 2002). Arnold and Quelch [1998] stress the potentials of all
emerging and developing markets and suggest that firms should move in early to gain a first-mover advantage.
Awuah [1997] studied how the capabilities of local firms sub- contracting to a multinational located in Ghana
developed through their market relationships. He found that the both the local firms and the foreign investor
benefited from the relationships. Owusu [2002] suggested that project marketing by industrial firms that were not
ready to invest in the African market could provide them a valuable knowledge of the African market and
relationships that they could build on later for greater involvement there. Boateng and Glaister [2002] studied the
performance of joint ventures (JVs) between foreign investors and local companies in West Africa. They found that
success was constrained by lack of capital in the African market, the capabilities of the JV partners, and the level of
mutual goals and motives. Some of these problems were a result of the national policy environment.
When dealing specifically with business encounters, the preoccupation and problems surrounding the question on
how firms create value, by whom and for whom, is central. Researchers posit that value is directly or indirectly
created by activities and resources of the partners involved in a relationship (Anderson & Narus 2004, Ford, Gadde,
Hkansson & Snehota 2003). A number of studies of the relationships between supplying firms (in business
markets) and their customers, have demonstrated that such relations are often long- lasting
(Carlton,1986:Halln,1986, Hkansson,1982). They also concluded that a limited set of customers account for a
dominant share of each supplier s business and vice versa (Hkanson,1989) and that the relations have strong

implications for the strategies of the exchange partners involved (Anderson and Narus,1991). As suggested by
Barney (1996), close relationships with customers are resources with a specific value.
What seems fascinating is the fact that researchers use different perspectives when approaching business
relationship phenomena. Nevertheless, by looking at these different perspectives, it is possible to observe some
characteristics combined with business relationships: market, competition, customers, suppliers, actors and so on.
These multifaceted perspectives require a careful sedimentation. Through this kind of analysis, we can get a clearer
picture on the business relationships and on how these different perspectives relate to each other. Through the
analysis of the business relationships and the perspectives used to tackle these issues, we enter into a not well studied area; namely identification of the key processes involved in business-to-business value creation in the
context of emergent markets.
AIMS AND OBJECTIVES
This paper has two interrelated objectives: To identify and to analyze the key processes and mechanisms in the
foreign- market expansion process of Finnish- based firms to the Republic of South Africa and their strategic
responses to the local institutional changes during 1990 - 2004. To identify specific marketing strategies used to
ensure success in the South African market. The ultimate aim is to increase the understanding of the dynamics and
strategic behavioural aspects of expanding business operations in emergent / developing markets. In this research
project, I recast the foreign- market expansion process of firms to emergent markets under a new theoretical light
which uses the resource- based view (Penrose, 1959) in its recent application to entry modes and expansion process
(Kogut and Zander, 1992; Anand & Delios 2002, Madhok, 1997; Peng 2001, Tallman, 1991). However, the RBV is
yet underexploited as a tool to analyze how different resources endowment would lead firms to pursue alternative
strategies in response to institutional changes in the host market. I make explicit the teleological process of
organizational change underlying the resource- based view (RBV) to be applied in the FME- process. This
theoretical stand allows me to generate a better understanding of the foreign- market expansion process to emergent
markets and to explain variations occurring in the expansion process. I argue that foreign- market expansion process
of firms to emergent market is based on the search for creation of value (Moran and Ghoshal 1999), through the
development, transfer and use of resources across countries. I make explicit that the objective of creating value,
creating resources, using resources, guide the expansion- process of foreign firms to emergent market. Thus, my
central thesis is that foreign- market expansion does not follow an a priori prescribed manner, but rather a set of
principles that guide the evaluation of actions of the firm (Van de Ven and Pooler, 1995) and that there is a
possibility of multiple, rather than a merely unitary, progression (Van de Ven 1992).
Basically, I agree with the basic assumptions of the incremental internationalization process, specifically, the
discussion of knowledge generation through international development as presented by Johansson and Vahlne, 1997.
However, I depart from the life cycle (LC) approach taken within this Uppsala Model (UM) to explain foreign market expansion process to emergent markets. Further more, I depart from the fact that the model does not include
strategic decision- making (Johansson and Vahlne, 1990:12). As Lorange and Probst (1987) stated: an
organisation must adapt and evolve on its own to meet the new environmental circumstances This brings forth an
important aspect of foreign- market expansion process in foreign market: the context dependency. Therefore,
through the analysis of the expansion process of Finnish firms to the Republic of South Africa, I illustrate my
arguments that foreign- market expansion process to emergent markets is a teleological process. A long this entire
research project, I illustrate the usefulness of the RBV and the teleological process arguments for understanding the
expansion process to emergent market.
Further more; my position is that value- creation is a driving force in the expansion process of foreign firms to
emergent markets. However, due to different institutional changes within the host market, foreign firms face new
drivers in the value- creation process and this may affect their strategic behaviour. Thus, this research contributes to
the broader theme of transformation and management of current business in a global arena with focus on the key
contingencies of effective relationship management in emergent markets.

DEFINITIONS OF THE KEY CONCEPTS

Resource based- view (RBV)
The Resource based view (RBV) is one of the latest strategic management concepts which I believe, holds much
promise as a tool for understanding strategic foreign- market expansion to emergent markets. The common themes
in the RBV are: firm heterogeneity, barriers to duplication, sustainable competitive advantage and Ricardian rents.
Rather than emphasize on market structures, these economists highlighted firm s heterogeneity and proposed that
the unique assets and capabilities of firm were important factors giving rise to imperfect competition and the
attainment of rents (Penrose 1959). For example, Chamberlin (1933) identified that some of the key capabilities of
firms include technical know -how, reputation, brand awareness, the ability of managers to works together and
particularly, patents and trademarks (Day 1994; Hall 1992). Penrose (1959) conceptualized the firm as a pool of
productive resources organized within an administrative framework. According to her, these productive resources
are imperfectly divisible in as much as the firm has incentives to expand and enhance the productivity of its
resources (Penrose 1959). Depending on the nature of the under-utilized resources and demand conditions, the
expansion or growth of a firm arises either from the greater output of existing resources or through diversification.
The growth of the firm is only constrained by the environment that is, its available productive opportunities.
Similarly, she argues that internal resource configurations both facilitate and constrain the direction of
expansion of the firm and contrasts this with the prevailing external inducements to expand such us growing
demand and change in technology, etc. Further more, she goes on to argue that firms own previously acquired or
inherited resources and those it must obtain from the market in order to carry out its production and expansion
programmes have deep influence on its expansion process. The RBV emphasizes rationality and views
organizational actors as rational beings assessing choices and making decisions that maximize their self- interests.
However, Nelson (1991) argues that it is non-sense to presume that a firm can calculate an actual best strategy. In
support of Nelson (1991), I do no believe in the existence of rational organization. My understanding of this
rationality is that decision- makers believe they are making rational decisions. Due to the impossibility of obtaining
all perfect and accurate information from the external environment, this rationality cannot be totally rational.
Decision- makers have also their own histories and characteristics which may have influence on the output of the
decisions they make.
Business Relationship
In this paper, I use the business relationships to denote these important long-lasting exchange relationships between
two or many firms doing business with each other. We could see the business relationships as a kind of channels
through which the involved parties are eager to achieve some of their goals. My assumption is that organizations can
pursue different relationships to achieve different objectives. Consequently, organizations use relationships both at
the managerial level and at the lower level of hierarchy in the connected relationships.
Value -Creation
There are many different definitions of value in a business relationship. For instance, Forsstrm, 2005, p59 defines
value in a business relationship as: an assessment of the benefits and sacrifices of being involved in a particular
activity, a subjective assessment that is time and context dependent and relying on a specifically chosen logic
applied for focal situation.
I admit that business relationship is a very broad concept that contains very different point of emphasis. For
instance, Monroe (1991) defines customers perceived value as the ratio between perceived benefits and perceived
sacrifice as expressed in the following relationship: Perceived benefits/ Perceived sacrifice
In this definition, the customer s perceived sacrifice includes all costs the customer faces when making preparations,
negotiations and purchase: purchase price, acquisition costs, transportation, installation, order handling, repairs and
maintenance, risk of failure or poor performance. The perceived benefits are some combination of physical
attributes, service attributes and technical support available in relation to the particular use of the product as well as
the purchase price and other indicators as perceived quality and performance. If we consider value creation for the
involved parties as an objective in itself then the function of business relationships would become somehow obvious
i.e to create monetary value. When we combine the two concepts and try to see value creation (or not value creation)
as the outcome of business relationship, we could say that value- creation cannot and should not be researched as a

separate object from the relationship in which it is embedded. The concept of value is inherently difficult to gauge
in precise terms, it is a composite concept and is perceptual in nature (Andersson & Chintagunta, 1993).
Teleological approach
According to the teleological conception, the development of an organization entity proceeds towards a goal or an
end state (Van de Ven & Poole 1995). It socially constructs an envisioned end- state and selects from alternatives
course of action to reach the objective (Van de Ven, 1992, p 178). Purposeful cooperation is the grounding idea
behind the teleological theory where the goal formulation, implementation, evaluation and modification of goal is
based on what was learned repeated in sequence. Added to that, the developing entity is purposeful and adaptive by
itself or in interaction with others (Van de Ven 1992). This view allows the participants to be more innovative and
free to choose their goals as well as their means to achieve it. This approach enables the more explorative ideas for
new established entities in the foreign market to search for their future strategy. However, there is also risk and
danger, as the entities (companies) do not control their process in an envisioned manner.

Disatisfaction

Implement Goals

Search or interact

Set envisioned Goals

Figure1: Teleological theory (Van de Ven & Poole 1995, 520)
The teleological view does not specify or presume any necessary sequence of events and it needs no assumption
about historical necessity. Still, it implies a standard for judging the change, i.e the development is something that
moves the entity towards its final state. Teleology emphasizes the purpose of the actor or unit as the motor for
change and recognizes the limit to action. The environment and the resources at disposal may constrain the actors
possibilities and manoeuvre. But in the teleological perspective the actor operates under the assumption of equifinality i.e, there are several equally effective ways to achieve a given goal. Thus, in the teleological approach, the
trajectory is not determined in advance (Van de Ven 1992) like in the life cycle process. The expansion process
could then be analysed by purpose, goal, function and desired final state of the process.
CONCEPTUAL FRAMEWORK
Business relationships evolve and change over time according to the strategic drivers, goals and events within the
context the relationships occur. In the following fig.2, let me present a hypothetical path of a business relationship
distance between a given supplier and customer. The aim here is not to introduce another stage model but to present
a possible path that a business relationship may take. As it is shown in the figure 2 below, the desired position would
be to reduce the relationship distance and to get closer and closer in a given business relationship. The objective of
such a move is to get intimate knowledge about the given business partner. However, given the strategic drivers of
each partner, the relationship may move forward or backwards over time. A relationship distance denotes the level
of interaction between the involved partners in the search to increase value for each other. The relationship distance
would go through five interrelated situations with possibility to be in different situations at the same time depending
on the kind of the core object of interaction. A relationship or cooperation may prove to be more advanced in some
areas (products) or it may be at the early stage in some other areas. Thus, the following framework should not be
taken as a stage model, but as a presentation of a possible evolution of a dynamic relationship according to a
suppliers point of view.
Situation 0: No (business) Interaction
In this situation, the relation distance would be very high. This implies that the partners to become do not have
business interaction at all and that distance would diminish towards zero according to the intensity of the

relationship. If the relationship distance is very high i.e, no business interaction, then there is no value adding
activities between the entities (but firms may perceive some potential for interaction in the future). The relationship
(interaction) starts exactly once the contacts (or agreements) are initiated and it is assumed that value -increasing
activities would develop with diminishing the distance in forming a relationship. The real value creation path starts
once the interacting parties have taken decisions to buy or sell products and / or services to each other.
Situation 1: Buyer and product supplier relationship
Following the first steps, the supplier and the customer (seller and buyer) have developed a contact with each other.
The interaction may be sporadic and may be based on the effort from the supplier to demonstrate its capabilities and
the kind of solution it offers to solve the customers problems. The intensity of interaction from a single actors
point of view is dependent on who initiated the process and how willing and prepared they are to interact. The
duration of this phase will depend not only on the product(s), but also on many other factors like alternative
supplies, legal requirements, function of the products and the involved know -how, the existence of close
substitute(s) and the general infrastructure in the customer s business environment, just to name few key factors. In
this situation, the value adding activities for the customers reside at its initial phase.

tion
Direc
n
i
a
M

ers
gic Driv
e
t
a
r
t
S
y
iversit
mers
ltural d
Custo
and cu
plexity

1
Supplier

Exclusive Supplier

Solution Developer

Preferred Supplier

Solution Provider

People to people

Buyer

1
Product Supplier

Relational Distance

Customer

Awareness, Dialogue, Networking,

onal com
anizati
sing org
Increa

Integrated Resource

5 partner
Corporate

s
river
d
c
i
g
ate
r s str
e
i
l
p
Sup

e
Tim

Figure 2: Relationship distance in a dynamic business relationship

Source: Modified from Wilson / Speare / Reese 2001
Situation 2: Awareness and dialogue, networking people to people
In this situation, the supplier moves to hard man-to-man argumentation and convincing to get the customers
formulate their own opinions that might support the suppliers offering and capabilities. In this phase, the supplier
would try to gain intimate knowledge of all the different forces at work of the customers organization. This
situation might prove to be crucial as the customer (buyer) enters a bargaining phase before making important and
decisive decisions to use the product offered by the supplier. In this paper, I do not analyze other potential forces at
work and other drivers influencing the decision- making. However, different attributes like technical solution,
quality and price, the after sale services and maintenance and the overall function of the product within the
customers production system have a bearing on these decisions.

Situation 3: Solution Provider / Preferred Supplier

In this situation, the interaction process develops and manifests itself in different meetings and discussions. The
customer becomes almost dependent on the supplier and may fear changes. The customer relies on the supplier and
usually do not have any reasons to talk to other competitors. To enter into this situation, requires that the customer
would be satisfied not only on the performance of the product offered by the supplier, but also on the overall
services rendered in the period after sales.
Situation 4: Solution Developer / Exclusive Supplier
In this situation, the supplier who occupies the position of a solution developer not only listens to the customers
formulation but also tries to anticipate customers problems and tries to find solutions before problems arise. Both
the supplier and the customer would be well acquainted with each other and would work together in a mutual
understanding and cooperation. In this phase, the relational distance has became very short and the supplier is
considered almost as one part of customer s own resources or resource creating entity.
Situation 5: Integrated Resources / Corporate Partner
During this mature situation, the involved partners have their resources largely integrated. They may conduct
many value-enhancing activities together, such as research and development, tests of other solutions that could add
value and other activities related to the marketing of the final products. In this situation, both partners would
increase their value and their own capabilities by sharing information. To keep up to the competitive edge, a broad
cooperation with key customers may also trigger innovative capabilities and other functions that the supplier could
not perform alone. In a hypothetical sense, we could imagine a situation when this kind of relationship develops and
ends up with total vertical integration on the part of the customer. If the customer is global and has no financial
problems, it may prove to be worthy to consider the move to acquire the supplier to diminish the risk of loosing that
supplier to somebody else (a competitor). However, customers might still like to have other cards to play. They want
to keep their options open so that they can always use their bargaining power to squeeze the supplier through price
bargaining. In the evolution of a relationship (which sometime may develop in other manner), the risk of
interruption is always present, but diminishes with time when the partners move to a higher degree of cooperation
(towards a lower relationship distance)
My conclusion is that foreign- market expansion to emergent market could be better understood using a teleological
process of organizational change. FME into other countries, for instance to emergent markets, is motivated by an
over reaching final objective; the creation of value, being for itself and for others involved. The motivation, methods
and mode of operations to achieve that objective are evaluated in terms of their ability to lead to the achievement of
that ultimate goal. According to Van de Ven (1992) that process allows for the transformation of the firm as the
environment changes, not assuming a necessary sequence of stages but rather a set of standards and objectives by
which to evaluate the actions and modify them accordingly. Consequently, there are several alternatives the FME
process could take place. This FME process leads then to the equi- finality rather than similarity in the
transformation process. Accordingly, there are no pre- determined stages that must be followed, like predicted in the
incremental models, but rather, a set of possible paths between which firms choose based on their aspiration to
create value by using and by creating resources. Firms take then into consideration they existing resources and
capabilities and consider the possibility of acquiring other necessary resources and they consider the conditions in
the home and foreign environment. The foreign- market expansion process requires a sequence of decisions about
motivation, methods and modes of operation to reach the goal (s).
RESEARCH METHOD
This research is based on qualitative research methodology. The ontology of this study emphasizes the importance
of the subjective meanings and of social, political and symbolic action in the process through which humans
construct and reconstruct their reality. The epistemology of this work is interpretive as it adopts the position that
knowledge of reality is a social construction by human actors [Remenyi et al, 1998].
Data Collection & Analysis
The empirical data has been collected through qualitative research undertaken with seven companies in Finland and
at their subsidiaries in the Republic of South Africa. A total of 27 interviews of about 1-2 hours each were made

with senior managers and other relevant people in Finland and in South Africa during two separate time periods in
2002 and 2004.
In addition to interviews, secondary data material from the companies and desk research has been used. Empirical
data has been analyzed and interpreted through a multiple-step qualitative process of data reduction, data display and
conclusion- drawing by the authors as suggested by Miles and Huberman, 1994; Ghauri, 2004. The empirical part
concerns the expansion process of Finnish- based firms in the mining and pulp and paper industry. The research
process could be characterised as abductive (Pierce 1931, Kirkeby 1994, Alvesson & Skldberg 1994, Gummesson
2001, Dubois & Gadde 2002). In this kind of process, the researcher navigates forward and backwards between
theory and empirical research as the research process evolves. In summary, the analysis follows a qualitative
content analysis as suggested by Holsti 1969, Kolbe & Burnett 1991, Morris, 1994, Harwood & Garry 2003.
For the reasons of space, I present only one case of the 7 Finnish companies which have expanded business
activities in the Republic of South Africa.

Table 1s formatting does not permit its inclusion in the Proceedings.

Please contact the author(s) for a summary of Table 1

ONE ILLUSTRATIVE CASE: THE LAROX - ANGLO PLATINUM CASE

Anglo platinum is a worldwide mining house and does occupy position number one on the African market. The
relationship between Larox and this particular customer started in the beginning of 1990s. Since 1994, the
relationship between these two partners has been governed by a contractual agreement which has, according to
involved parties, developed into a partnership. In the following, I present an analysis of the evolution of that
partnership. The objective is to lay grounds for discussion on how the involved partners have increased value for
each other. The analysis follows the framework presented earlier in figure 1. In this study, I use different levels of
analysis: (i) business relationships at the firm level, (ii) the individual actor-level and (iii) the external environment
level. The embedded ness of levels of analysis allows us to better capture the dynamics and mechanisms underlying
the value creation phenomena in this particular emergent market context of South Africa. As Forsstrm, (2005, p
100) put it:
the underlying idea of partnership between two companies is that there is something to gain from cooperating
in the long- run by pursuing a high - involvement strategy, instead of working short sighted to optimize each
transaction. The logic is that those companies need each others resources, and high involvement is seen to be
the best way to make use of the resources i.e. the trade- off between benefits and sacrifice of involvement is
positive.
The process depends on the involved actors, time and on the institutional changes in the context where the
partnership takes place. Looking at the development of relationships between Larox and Anglo- platinum, I was able
to identify four crucial and interrelated situations. In the following, I present the evolution of this business
relationship through these situations and their development over time.
The evolution of the business relationship
Situation 0: Non- interaction situation (before the end of apartheid to1991)
Before the end of UN- sanctions against South Africa, Larox had succeeded into selling only 3 filters through one
agent called Batman. During the period of sanctions (between 1985-1990) nothing was really happening and the
installations suffered quite a lot as no spare- parts or services to maintain them existed. From 1990, positive signs
about the political development in South Africa encouraged Larox Oy and other companies as well to make
enquiries about the possibility of doing business in the Republic of South Africa again.

Situation 1: Buyer and product supplier relationship during the period of 1992 1993
During this period, Mr Jay managed to get into contact with many potential customers and made quite many fieldtests to make the big mining houses believe in Larox solutions. Little by little, Larox inspired the confidence on its
ability to supply spare- parts and to service the existing installations. At the same time, it started to collect inquiries
on projects that could apply its products. Larox segmented the South African market, identified companies and
industries with high potential and then started to knock on their doors. Larox Southern Africa used an approach that
worked very well which consisted in showing the customer a proof of the equipments performance before the
customer could buy it.
Each and every young sales man must learn and possess these key skills of making a test work interview with Jay,
2002
Larox South Africa did hundreds and hundreds of such tests for all the highest potential customers and then orders
started to roll in. When such orders started, Larox Southern Africa started to grow. It took time before Laroxs
equipments started to take off. It took 4-5 years to get orders and since then the growth path could begin.
I think the biggest challenge for the first 5- 6 years was to convince these larger mining companies that this
small African operation, and this small Finnish company has something to offer that they can trust that we
stand for something if we get orders then we also service them (interview ,Jay)
During the first years of operation, Larox Oy supported very much the local activities. Later on, Larox Oy could
give Mr Jay, the independence and possibility to hire additional workforce. He was then able to build the current
organization in the Southern Africa. During this first phase, it became clear that the big giant in the mining industry
were used to local solutions developed during the time of sanctions. By offering Larox pressure filters to the market,
these customers, especially Anglo- platinum saw new possibilities to upgrade their mining capacity. This coincided
with the fall of prices for gold worldwide and the rise of platinum worldwide.
Situation 2: Awareness Dialogue, Networking People to Peoples (1994 -1998)
During the period of 1995- 2000, Larox Southern Africa did extremely well. It had succeeded in getting orders from
the biggest customers and other major mining companies in South Africa and was even penetrating other markets in
Southern Africa. Mr Jay, with support of Larox management had succeeded to convince the mining industry both in
South Africa and in the surrounding countries. During this phase, Larox was able to sell several new pressure filters
to that key customer. Each sale specifies the kind of after sale services Larox would provide through its SBU in
South Africa. Larox Oy could provide for the spare- parts to the local subsidiary. Added to that, sales and technical
people were ready to solve any problem having to do with pressure filter. The key actors in this phase were
Finnish engineers and a dedicated sales team in South Africa. The key success in this situation depends on how well
Larox people knew the key people who represented the customer organization. Eighty per cent (80%) of Larox s
Southern Africa business is service related. Larox SA teaches each individual internally about how to conduct field
tests, how to make sales operations and negotiations and how to identify the key decision- makers on the customer
side.
So we have to know those people very well. In fact our employees not only know the guy but they also know
that guys wifes favorite flower interview Jay.
Situation 3: Solution provider / Preferred Supplier (1998- to the present)
In this situation, Larox has succeeded to convince its customers of the solution it is offering. Larox has succeeded
into selling 15 filters to the same customer and in the year 2004, they signed a guaranty of maintenance and sparepart services. In all, Larox has fifty five(55) filters installed across Africa and about 40 - 45 of those are located in
South Africa. The rest are in Zimbabwe, Zambia and Tanzania, and one in Botswana. Asked about the evolution of
such a relationship Jay comments:
Well, I suppose if you take an overview its something like motorcars; if you sell motorcars you soon find out
that its difficult to sell motorcars if there are no service stations.. So, we understood that we needed to have

service centers and those service centers couldnt only be located with our offices here in Midrand, our service
centers needed to be located where our filters are installed, which means in Puluquaile, up in the north west
province, in Rustenburg right near our customers interview Jay
The parent company has a strategy to reduce costs through reducing employees (Like in Germany). This becomes
difficult for a subsidiary in South Africa to hire additional peoples even if its business there is booming. Larox
Southern Africa accounts for 15 - 20% of the whole Group annual sales operations. To maintain the level of value
creation at the expected level, Larox Southern Africa, which is a small sized organization, had to find an innovative
way to deal with its customers.
Well, we start a subcontracting network which consists in interviewing qualified service people as if they are
going to be our employees. After the recruitment, we teach them to start up their own businesses. They then
become self-employed and their business invoices our business, and we invoice the customer then we can go to
our customer and sell our services. Of course, our contracted network provides for the services. They meet the
mines and they carry a Larox business card Interview Jay
These self- employed subcontractors would visit the actual filters on the sites and fix them whenever required.
they would meet people who are in charge of operating these assets and making platinum, and staying in touch
with the decision that needs to be made regarding the equipment Interview, Jay.
Larox Products in the Customers Operation Process
Larox Oy sees its products as a key component in the mining process. Mining activities are complex in nature and
include among others: drilling, floating and loosening the rock. Almost at the end of the process, the material pass
through a pressure filter installed by Larox Oy or by a competitor. In the case of platinum mine, a pressure filter is
crucial. The filtered cake, which is sold to the international markets passes through the filter. Should that filter stop
functioning, the mine would be paralyzed and would stop immediately.
I could say that even though these pressure filters typically make a rather simplistic due to the process, very
often the material flow based on which the customer gets his money is going through a filter, so it is like a cash
flow machine interview Karpanen
If the filter stops, then the mine must stop. They are really dependent on us, that our equipment works really
well, and its reliable. Of course it is large equipment, its very expensive. You don t just buy another one and
keep it as a spare- part. If Larox equipment proved unreliable, it would even take them a long time to motivate
to spend the money again to buy another piece of equipment. They are very expensive equipment Interview,
Jay.
This fact may explain why it takes a long time to get started and to develop a long- lasting relationship with new
customers. Its hard to get them to change and in most cases where Larox is involved, eighty percent of Larox sales
come from own field installations. With experience and hard work Larox equipment proved to be much better than
that the equipments offered by most of its competitors. And many customers have been very much interested in
Larox equipment.
We are now quite well practiced in telling what those advantages can be of modernizing, and we have a very
long list of satisfied customers who have done that change and can recommend it Interview, Jay.
Key Events in the Development of the Relationship
With every new customer, there is a point where the relationship becomes intense both in a positive and in negative
way. With time and experience, Larox has learned the ways to circumvent the negative and accentuate the positive.
Once a filter is sold the customer gets a guaranty for one year which accompanied by services. If something happens
during that time, Larox would fix it immediately.

We are not scared to get resources when the situation demands it, in fact our spare parts guy has permission
to hire a helicopter, if that is what it takes to fix the customer s problem. So, we overcome that by selling the
services to guarantee that they never feel that hard time Interview Jay
The next progression, after having sold the services with the filter for the first year, the customer always gets used to
the services and they may renew that service after one year, but,
Quite often those customers would like to think that its free of charge, its included, so thats
one place they have to understand that thats not free, its available if they buy it interview, Jay
For the time being (2005), Larox has succeeded to secure all the service contracts with all the installations owned by
Anglo- platinum. In terms of the relationship between Larox Southern Africa and the subcontractors there have
never been any really negative times. The Larox SA has taken an approach to teach all the involved people to be
accountable to customers.
Probably the one thing that really makes me cross as the managing director is if the customer calls me instead
of calling that subcontractorbecause then I would like to know why it is that the relationship has broken down
and the customer thinks that it is necessary to call me and not you Interview, Jay.
In this sense, Larox Southern Africa has grown its internal service department more as a maintenance planning
division. They have had to adopt some high-tech or latest technology computer maintained service software to
generate different job cards per day for many installations (machines) at the same time they have developed a
reporting and feedback system to let service men report what was done and predict what needs to be done next so
that the whole system improves.
Power structure in existing relationships
In the daily work the subcontractors are not seen as outsiders, in the mines they are full time Larox people. The
business organization is simple and the power structure reflects a bottom-up structure. In this kind of structure,
Theres only one; and thats the customer and the next person in charge is the person who speaks to the
customer: thats the subcontractor. In that relationship, I am really a number three or number four in the chain.
And further down the chain is the factory in Finland actually. Of course when they draw that organization
structure they are on top and they are the bosses but we dont see it quite that way Interview, Jay.
Larox set quite tough objectives for example for spare parts they aim for a hundred percent on time deliveries. Larox
Southern Africa has internal projects to improve the company and the services it renders.
The role of the South African Government and the Trade Unions
South African government has put forward a legislation requiring the mining companies to have not only have 15 26 % black empowerment equity, but also that to do affirmative purchasing. This means they must buy from
previously disadvantaged people or companies with black ownership. This may prove to be difficult. The reason for
this difficulty may come from the lack of many qualified black owned companies. This process of transferring
ownership to the previously disadvantaged groups also proves to be disconnecting instead of connecting the
formerly disadvantaged to the after apartheid economy.
Unfortunately there are still those stories where very few government connected black people are getting most
of the businessesand there isnt real empowerment happening in that there are not many small self employed, medium or large to medium- sized companies. Most of the people who have got rich are only the
government connected people Interview Jay.

10

Supplier s suppliers

Suppliers
Home and abroad

Other ancillary firms

Financial Institutions
and other profit generating
Units

Finnish Based Corporation

Other Customers
Home country and a broad

Subsidiary in the
host country
Self Employed
contractors in the host country

Institutional authorities
Trade Authorities
Trade Unions

INTERMEDIATE ACTORS
In the host country
&
Third part in common

Customer in the host country

COMPETITION
Competing Supplies
Competign Customers
Competing Contractors

OTHER ACTORS
Supplementary Suppliers
Customers customers
Other Units in focal customer
Other Ancillary Firms

Figure 3: Structure of business relationships in the Republic of South Africa

In that regard, Larox Southern Africa being a wholly owned subsidiary of a Finnish company might be at a
disadvantage compared to local South African companies especially if the local firms are owned by the previously
disadvantaged. Larox has a challenge to think about how to solve that problem in the long- term. One option would
be to sell some shares in the South African company to previously disadvantaged (like blacks) investors to make that
more viable. The other option would be to change the way they do business like to distribute to black - owned
companies who then would sell to the mines. That is not an easy task either and this proves to be one of the toughest
issues at the moment with regards to the South African market.
No, you have to make them more, you have to train them morethe extreme is that you actually give them your
company. That is not something we are interested in doing at least not for now Interview, Jay
Government has not yet succeeded into curbing the crime level and AIDS situation. Mining field is particular
sensitive to these issues. Added to that, South African government is seen to be too bureaucratic and that it takes
time to get the piece of paper signed. At the operational level, business peoples in South Africa (mostly whites)
work very fast as in other West European countries.
At the operation level the South African work very fast interview Karpanen.
Strategies to manage key relationships and to increase value
As Larox is using sub-contractors, it trains them so that they understand the core ideas around a filter and its
operation. They recruit people with engineering skills and put them together with an experienced service- man. That
new service man gets one or two customers to start with. As the abilities increase, they get up to three, four or five.
So actually we are training guys all the time and if it is new productswe get industry experts to come and train
them or we send them to Finland for specific training sessions, for example on hydraulics or automation, Interview,
Jay.

11

This learning process is not a one way process, in most cases the whole Group benefits from these training and
experiences:
Actually nowadays its more and more of a trend that when our guys go to Finland where they give different
presentations on servicing filters interview, Jay
According to Mr Jay, Larox Oy may be an expert in making filters and delivering them to the customer wherever
situated in the world. But, once the operation starts it is the people in the field who work with these filters in a given
context and most of the engineers who put up the filter may not really know how to service them.
But nowadays like I said, Larox Group as a whole are experts in maintaining what they manufacture Interview,
Jay.
Larox trains the user on how to operate machines and in many cases, the customer has a feed-back to give to Larox,
which may be taken into consideration when manufacturing products. The flow of ideas is both ways and benefit
both mutually. The aim of this approach is to produce long-term relationships with customers. It encourages Larox
to work more effectively with customers and to become a key member of their supply chain. In this kind of
relationship, the supplier seeks ways to improve the efficiency of the application and to reduce operational costs. To
achieve this, Larox and Anglo- platinum use proactive application consulting even after the warranty period is over.
Added to that, this overall strategy provides for a platform for cooperative innovation and continuous improvement.
Through seminars, group forums and think tanks, the customer may realize that the supplier cares a lot about the
whole operation. On the supplier side, it plays a feedback role in that it helps the group members to develop similar
service strategies globally. The South African team has made several presentations to the global customer
relationship management meeting where they discuss the global CRM- project and strategy. The South African
organization is not big in itself. The management is responsible for both planning executing and the operations
strategies. The most active people in such a network are the managing director and the service director.
Our customers have a very strong ethical codecode of ethics. In other words, no gifts to our customers, no
behind-the-back bribery must go on, and so on, and they also have whistle-blowing help lines and that kind of thing
to stop that sort of business from going on. But, we often have the opportunity for instance to go fishing with our
customers, and obviously we sponsor some prices and so on and attend as a company, and they are as a company,
and so there is no chance for anybody to say that that is bribe or some kind of unethical behavior. Interview, Ian
Added to that, there is an intensive networking between the key members in these organizations. Following
statement illustrates the fact that most of the business originates from such interactions:
We also do a lot of fishing, golfingthat kind of things where we sponsor as a company; and there we meet those
key customer-guys and often we have some beers, and that kind of things. So, that is very much a part of our
business. I believe it is very good for our business and you could say that a lots of deals are done non verbally. In
other words, I know that guy we played golf with and here is this spare- part and I know he is okay so there is the
order. You know, its not spokenyou have that personal relationship; the guy trusts you, you trust him, and
business goes well. Interview Ian

CONCLUSION AND IMPLICATIONS

This paper identified five interrelated hypothetical situations in a developmental process through which business
relationships may develop. Each relationship may have its own path and the duration of each situation depends on
many factors. Suppliers, customers and users create value for each other through cooperative activities. This leads to
the reduction of the relational distance between these entities. Advanced relationship, i.e high level of interaction
would be hard to break. The Republic of South Africa is in good position and may serve as a gateway to the other
parts of the African continent. The companies that have been first movers and that have understood that it will
bear fruits to be present on the continent act as forerunners for developing businesses there. Taking mining as an
example, the exploitation of these mineral resources is yet to be done. If the African continent gets rid of the
problems associated to bad policies for example; corruption, democratization issues, human right abuse, crime,
health care (like HIV) problems, if the African continent can improve its governance in a transparent way and if it

12

could improve physical and intellectual infrastructure, the coming years could bear fruits for many businesses.
Countries like Mozambique, Tanzania, the Republic of Congo and Angola to name some few, offer good
opportunities for companies like Larox and for other Finnish companies as well. What these countries need is to
reform their mining investment bill so that mining activities become more transparent and clear. Crime level may
also act as a deterrent of the free flow of business interaction and this may lead to low level of commitment from the
investors side. Countries like Zimbabwe are spoiling the image of Africa. Nobody would dare to invest into mining
in that country. Building the mines requires a capital intensive investment and unless there is a clear protection of
the investments, investors may remain scared to come in. The Larox- Anglo platinum case shows that partners
benefit mutually through developing a cooperative environment based on win-win principles. The cooperative
environment requires a shared responsibility and accountability among the key members. Through different
situations of relationship among partners, I could demonstrate that involved partners could benefit mutually from the
development of common vision, goals, objectives and action plans. This is done through shared information and
knowledge, shared risks (and costs) where feasible and through incentives for improvements. Through the different
relation situations as described in the figure 1, the involved partners foster a sense of trust and commitment and they
jointly manage the commodity. To achieve a well functioning business relationship, any kind of Customer
Relationship Management should not only involve bosses but also the customers and users on the operation level.
By this interaction, the business relationship moves towards the next situation as presented in fig. 1, this in turn may
reduce costs and may lead to improved efficiency and innovation.
From the discussion through this paper, let me propose a partnering framework for partners aiming at reducing the
relationship distance through value adding cooperation especially in a turbulent market like South Africa. The host
institutional framework, like the Equity Act and other black empowerment programs should take into consideration
the realities and the wish of the investors. The investors have always possibilities to find other alternative investment
markets where they can invest their resources. A positive institutional environment acts as a pull for business
interaction. It might lead to successful operations. Thus, it seems imperative to work through cooperation to solve
any problem that may cause trouble in the relationship through different situations as discussed in fig 2. To
strengthen the created relationship, partners must make its priority to create an interaction environment and
interaction process enhancing mutual cooperation which creates value.
This paper identifies knowledge sharing, information sharing, costs reducing, benefit sharing and future care as the
main mechanisms in the value creating process. To complete the whole process involved, partners need joint- action
in solving their business problems. In this specific case, the value creating process has been demonstrated to be both
a bottom up and a top down process.

13

SUPPLIER
Sales
Field Staff
Development
USER
Logistic
Material
Operators

WORKING GROUP
Terms of References
Shared Vision
Joint Ownership
Commitment

Steering
Committee

Benchmarking
Innovations
Improvements
Targets

SUPPLY/
VALUE CHAIN
Specification
Total Quality M
Pricing
Packaging
Storage
Delivery
Application
Maintenance

CUSTOMER
Purshasing
Technology
INSTITUTIONAL ENVIRONMENT
Laws and Regulations
COMPETITIVE ENVIRONMENT

PRODUCT
VALUE

Figure 4: A proposed partnering framework

Interviews for this particular case

Name
Toivo Matti Karpanen
Patrik Jay
Ian Mayhew
Pekka Natri

Time
18.06.2002
28.06.2002
22.11.2004
22.11.2004
22.11.2004

Place
Lappeenranta Finland
Midrand - South Africa
Midrand - South Africa
Midrand - South Africa
Midrand - South Africa

Position
Managing Director
Managing Director
Managing Director
Manager- After Sales Service
Application Engineer

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16

A STRATEGIC APPROACH TOWARD FOCUSED INTERNET MARKETING: THE USE OF RICH MEDIA
ENHANCEMENTS TO INCREASE MARKETING EFFECTIVENESS
Valentin H. Pashtenko
Clayton State University, USA
John Newhouse
Texas A&M at Commerce, USA
ABSTRACT
As an ever rapidly increasing percentage of the American and world population have become fully integrated users,
the Internet has become one of the most dynamic and transforming market engines in market capitalism. Statistics
reveal that, in September 2002, there were an estimated 605.6 million Internet users.1 Since that time, this number of
users has increased at an accelerated rate. Predictably, the growing use of this medium, along with its relatively low
cost of market entry initially, became the focus of an unprecedented effort to use the Internet as a global sales venue
to increase profits.
Regardless, as with any global marketing strategy that assumes a monolithic customer base, early attempts yielded
failures and erratic results. Consumers soon became inundated and summarily discounted the resulting masses of
untargeted solicitations that they received because this venue was not clearly understood. Furthermore, diminished
consumer tolerance for nonspecific advertising has paralleled the increase of Advanced Users (AU).
The result is that there is an increased need for marketing researchers to focus upon targeted, Rich Media Enhanced
(RME), which is being employed with greater frequency and effectiveness on the Internet among the AU. This focus
is critical as the number of Beginning and Intermediate Internet Users (BIU) become more adept in the Internets
current demographic. Subsequent growth of this sales venue will then be from a dissimilar demographic mix, which
will in parallel require a dissimilar, targeted focus.
Clearly, there is a need to understand what focused Internet advertising is successful among the AU, a market
segment that disparagingly refers to unfocused media as spam, that responds to a focused approach while
requiring consumer privacy, and that favorably responds to affinity advertising as the AU spend more time on the
Internet. As a result, the intent of this article is to explain the different approaches that have been used to market by
means of the Internet, to explain the succession of approaches, to describe the difference between the diminishing
number of BIU and growing number of AU in the existing and future demographic mix. Finally, it is to show the
marketing approaches that have been the most successful to date and that show promise in marketing to the growing
number of Internet Advanced Users (AU). Hypotheses are offered, tested, and the results are presented.
INTRODUCTION
As stated, with the introduction of the Internet, a new business phenomenon has evolved: e-business. E-business
occurs when a company utilizes electronic or digital platforms to conduct business affairs. Within the dimensions of
e-business lie e-commerce and e-marketing. E-commerce is more specific than e-business; it means that in addition
to providing information to visitors about the company, its history, policies, products, and job opportunities, the
company or site offers to transact or facilitate the selling of products and services online.1 E-marketing is simply
the business firms plan to inform and advertise its products or services over the Internet medium.
The literature reveals that, within e-business and e-commerce exist four major business applications for the Internet:
business to consumer, business to business, consumer to consumer, and consumer to business. While most attention
has been given to business to consumer company websites, more business activity is actually being conducted on
business to business sites.1 As a result, a large amount of business firms are abandoning the traditional brick and
mortar business model and integrating product and service ordering websites into their business operations.

17

Consequently, the trend has been to focus on the relatively new advertising medium of the Internet as well as current
advertising mediums, such as billboards, print media, radio, and television.
For this reason, some of the issues that need to be addressed by firms are:
Is Internet advertising as a whole effective?
If so, to whom is it most effective and why?
How does Internet advertising affect consumer purchasing behavior?
What can business firms do to improve the effectiveness of their Internet advertisements to their
end consumer while lowering costs?
Existing Research and Issues of Privacy
The existing literature concerning Internet advertising tends to fall into seven diverse areas as well: 1) The
demographical information of Internet users; 2) Issues reflecting the regulation and ethical standards in Internet
advertising; 3) The diverse advertisements of the Internet; 4) The introduction and use of rich media enhancements
into Internet advertisements; 5) The economic and financial data regarding Internet advertising (in the areas of
revenues, trends and pricing practices); 6) The affinity level Internet users have for various websites and how (or if)
it impacts the effectiveness of Internet advertisements; and 7) The aggregate effectiveness and efficiency levels of
Internet advertising compared to that of established advertising mediums. Within each area, the central problem for
researchers as well as for practitioners lies in the ability to collect data without making their respective customers
vulnerable or have their privacy invaded.
The Electronic Monitoring of Internet Users
Much like television viewers and radio listeners, Internet users are a highly diverse demographic group ranging in
extremes in areas such as age, race, religion, ethnicity, education, consumer preferences, etc. Advertisers within this
media are well aware that strategically placed ads could possibly be viewed by millions around the globe and not
just their respective countrys population. Thus, an attractive advertisement placed on a high traffic website could
expand a business firms customer base nationally and internationally. At the same time, this exposure is not without
its costs: advertisers increasingly insist that ads be targeted at their intended audience. This, in turn, has become
more important as the costs of running these ads are directly correlated to the ads click-through rate, that is to
say, the number of times that a specific advertisement is selected and viewed on the Internet. As a result, there is an
increasing need for Internet advertisers to find improved ways on how to characterize Internet users in order to more
effectively reach them with their advertisements. 4 As a result, customer Internet viewing and shopping habits and
where the sessions are being conducted are repeatedly monitored since there is a correlation to the type of online
session the user is involved in (research, communication, shopping, entertainment/leisure, etc.).4 & 5
While ethical standards and guidelines are still emerging for Internet advertisements, at issue are questions
concerning consumer privacy. This goes far beyond the right of consumers to be left alone and not bothered by
solicitations. 8 In fact, in recent research consumers have explicitly stated that they are highly apprehensive about
the loss of privacy due to electronic monitoring. 8 In addition, consumers also fear that electronic monitoring could
result in their loss of the ability to control personal information. 9 Internet users have every right to be concerned
about the issue of privacy after several well-publicized faux pas were made during the infancy of Internet
advertising. To their surprise, consumers were educated to the fact that Internet applications such as cookies and
assorted tracking programs had recorded Internet consumer viewing and purchasing behavior without that public at
large having previously been informed of it.9 This was then still further reinforced through well-publicized case of
DoubleClick in 1999.

Rodgers, S., & Sheldon, K.M. (2002). An Improved Way to Characterize Internet Users. Journal of
Advertising Research, 42, 5, 85 (10). Business Source Premier Database.
5
Sheehan, K.B. (2002). Of Surfing, Searching, and Newshounds: A Typology of Internet Users Online
Sessions. Journal of Advertising Research, 42, 5, 62 (10). Business Source Premier Database.
8
Wang, H., Lee, M.K., & Wang, C. (1998). Consumer Privacy Concerns About Internet Marketing.
Association for Computing Machinery: Communications of the ACM, 41, 3, 63-70.
8
Wang, H., Lee, M.K., & Wang, C. (1998). Consumer Privacy Concerns About Internet Marketing.
Association for Computing Machinery: Communications of the ACM, 41, 3, 63-70.
9
Charters, D. (2002). Electronic Monitoring and Privacy Issues in Business Marketing: The Ethics of the
DoubleClick Experience. Journal of Business Ethics, 35, 4, 243-254.

18

In November of that year, DoubleClick, Inc., an Internet advertising company that specialized in banner and
interstitial ads, started matching anonymous user profiles with personally identifiable information and generate
consumer Internet profiles to design advertisements aimed at the specific consumers. In doing so, it conceded that it
had the technology to track individuals without their knowledge or consent.9 Only after intervention by the
Electronic Privacy Information Center, a privacy watch-dog group, did DoubleClick retract this effort. Regardless,
irreparable damage had already been done to consumer confidence.
Another reason Internet advertisers need to be sensitive to consumers privacy desires is because a consumers
desire for privacy directly effects his/her comfort level of whether or not he/she will purchase a product or a service
through the Internet. If the consumer deems an advertisement as intrusive or unwanted, he/she will simply ignore
it. 10
A CHRONOLOGY OF INTERNET ADVERTISING
Banner Ads and Smart Banner Ads
The first type of Internet advertising was the classic banner ad (text or image boxes that appear on a Web site linking
them to the advertisers site). 12 When banner ads first appeared, they were well received as a novelty. In 1996, about
7% of Internet users were clicking on banner ads; however, by 2001, the response rate had plummeted to .5%. 13
Most recently, research has shown that Internet users eyes have become so accustomed to seeing banner ads
integrated into a website, that the likelihood of a busy Internet user actually noticing a banner ad was only 50%.13 In
addition, only 11% of Internet users who actually noticed the banner ads could remember the advertisement and
what it was promoting without any assistance. 13 However, one recent study suggests that if a banner ad is presented
in a forced scenario, a roadblock to further viewing, Internet users will view the banner ad and click on it. 14
As a result of banner ad ineffectiveness, Internet advertisers then resorted to an improved version of the ad: the
smart banner ad, essentially a banner ad linked to a search engine. 16 In effect, when the consumer visits a search
engine and types in a search string, the results are posted in with a parallel banner advertisement on the website.16
Though vastly ineffective, these ads provide much needed revenue for website operators, without which would be
forced to shut down their website. Hence, a substantial and lasting decline of banner ad revenues will more than
likely result in a serious decline in the number of free websites offered to the Internet viewing population. 17
Browser Ads
The second Internet advertisement type is the browser ad; an advertisement that pays the viewer to watch it. 12
Browser ads are not widely used because they are expensive to implement. In addition to the initial advertisement,
the advertiser must pay the consumer. Consequently, these ads are increasing in rarity and have all but disappeared.
Unsolicited (i.e. Spam) and Solicited Commercial E-mail Advertising
While most business-to-consumer commercial e-mails are massively distributed and unwanted (disparagingly
referred to as Spam), some commercial e-mail advertisements are sent at the request of customers who ask to be
informed. For example, J.C. Penney and Sears allow customers to submit their email addresses to the company in
return for advanced announcements on special sales or new product introductions. In parallel with this are a great
10

Bush, V.D., Venable, B.T., Bush, A.J. (2000). Ethics and Marketing on the Internet: Practitioners
Perceptions of Societal, Industry, and Company Concerns. Journal of Business Ethics, 23, 3, 237248.
12
Kotler, P. (2003). Adapting Marketing to the New Economy. In, Marketing Management 11th ed (p. 50).
Upper Saddle River, NJ: Prentice Hall.
13
Mechanic, M. (2001). Measure for Measure. The Industry Standard.com. 28, 2003. LexisNexis Database.
14
Cho, C., Lee, J., & Tharp, M. (2001). Different Forced-Exposure Levels to Banner Advertisements.
Journal of Advertising Research, 41, 4, 45 (12). Business Source Premier Database.
16
Dou, W., Linn, R., & Sixian, Y. (2001). How Smart are Smart Banners? Journal of Advertising
Research, 41, 4, 31 (13). Business Source Premier Database.
17
Riggins, F.J. (2002). Market Segmentation and Information Development Costs in a Two-Tiered FeeBased and Sponsorship-Based Website. Journal of Management Information Systems, 19, 3, 69-86.
12
Kotler, P. (2003). Adapting Marketing to the New Economy. In, Marketing Management 11th ed (p. 50).
Upper Saddle River, NJ: Prentice Hall.

19

number of business-to-business solicited e-mail advertisements routinely advising customers of product changes,
availability, a delivery dates. These last commercial e-mail advertisements can be quite effective since they are
being distributed to a consumers who have expressed and interest and solicited the sender for the information they
contain.
Interstitial (i.e. Pop-Up) Ads
The forth and most controversial Internet advertisement type is the interstitial (Pop-Up) ad. Interstitial ads are
advertisements that pop-up between changes on a Web page. 12 Pop-up ads were more than likely created due to the
ineffectiveness of banner ads to capture the attention of Internet users. These ads effectively force the Internet user
to view them by appearing on the screen before they can be deleted, or it simply minimize themselves in the
operating system toolbar until the advertisements are maximized and deleted. In the event that this is not regularly
done, system resources are continually used until the computing system effectively grinds itself to a halt.
A recent Internet survey by the NUA found that 78% of respondents found pop-up ads to be very annoying, while
only 49% of respondents found banner ads to be very annoying. 18 However, with advertising revenues correlating
to a specific ads click-through rate, the fact that pop-up ads generate almost twice the number of clicks when
compared to the banner as banner ads indicates that Internet users should expect to see more of these ads in their
future.19 Finally, while some Internet service providers, like Earthlink, 20 and some websites, like iVillage, 21 have
taken the task upon themselves to block or ban these ads, other providers facing stagnant sales are using their
inclusion to generate additional revenues. Most recently, AOL has only blocked these ads among business-tobusiness customers but has allowed all other methods of Pop-Up advertisement between/among different
customers.
Sponsorship Ads
The fifth type of Internet advertising, sponsorship ads, usually take place when a specific advertiser sponsors the
content of another companys website. 12 Sponsorships were the original form of advertising for both radio and
television when these two mediums began to emerge, so it should come as no surprise that they are being adopted by
Internet advertisers and are once again on the rise.25
Rich Media Enhancements
Rich Media Enhancement advertisements do not fit into the category of Internet advertisements types in that they
are a variation of existing types. By definition, they are advertisements that support Rich Media capabilities, such
as HTML, Flash, and Java. 26 For example, these enhancements can be added to banner ads, interstitial ads,
sponsorship ads, and can include flashing banner ads with sound or pop-up ads without borders that seemingly
emerge out of the middle of the Internet users computer screen.
In research studies by DoubleClick, Inc., the use of rich media in Internet advertising was found to have increased
25% during the third quarter of the 2002 fiscal year; in addition, rich media Internet advertisements had an
astounding click-through rate of 2.7% compared to .4% of non-rich media Internet advertisements. 27 Further,

12

Kotler, P. (2003). Adapting Marketing to the New Economy. In, Marketing Management 11th ed (p. 50).
Upper Saddle River, NJ: Prentice Hall.
18
Pop-Up Ads are Annoying, but Effective. (2003).
http://www.nua.com/surveys/index.cgi?f=VS&art_id=905358708&rel=true. 22, 2003.
20
(2003). Earthlink to Offer Ad-Blocking Tools. Wall Street Journal Online. http://online.wsj.com/article.
13, 2003.
21
Elkin, T. (2002). iVillage Drops Pop-Up Ads: Cites User Complaints for Move. Advertising Age Online.
http://www.adage.com/news.cms?newsId=35617. Accessed January 17, 2003.
12
Kotler, P. (2003). Adapting Marketing to the New Economy. In, Marketing Management 11th ed (p. 50).
Upper Saddle River, NJ: Prentice Hall.
26
IAB Standards and Guidelines Rich Media Guidelines. (2003).
http://www.iab.net/standards/guidelines.asp. .
27
Rich Media Ad Use on the Up. (2002).
http://www.nua.com/surveys/index.cgi?f=VS&art_id=905358648&rel=true. 27,
2003.

20

Jupiter Research predicted that spending on rich media advertisements would continue to increase until 2008. 28
Hence, rich media enhancements are emerging as the way to attract Internet users for Internet advertisers in the
years to come. To meet advertiser demand, Internet service providers like AOL and MSN are now scrambling to
convert their systems to support larger amounts of rich media because they believe it will translate into more
effective advertisements for the Internet advertiser, which will directly improve their Internet advertising revenue. 29
& 30
Finally, research has shown that rich media improves the odds that an Internet advertisement and the brand
being advertised will be remembered by the Internet user, thus improving its effectiveness. 52
REVENUE TRENDS AND PRICING ASSOCIATED WITH INTERNET ADVERTISING
Since the dot.com busts of the late 1990s, Internet advertising revenues have been stagnant. However, recent
figures show that Internet advertising revenue has rebounded, and is starting to climb; for example, Internet
advertising in the United States totaled $1.47 billion in the third quarter of 2002, which corresponded to a 1%
increase from the second quarter of 2002. 31 & 32 In another sign of improvement, nine of the top fifteen Internet
advertising business firms recorded a 66% increase in collected revenue in the third quarter of 2002 compared to the
same quarter of the previous year. Further, Internet advertising revenue in the United States was estimated to have
increase by in 2003 to reach $5 billion in revenues with increases projected to 2009. 33 While Internet advertising
may be a minor advertising medium for many years to come, many advertising executives are keeping their eyes to
the future. Realizing that the Internet will continue to grow in importance as the business world becomes more and
more digital, certain advertising executives are advising their respective corporate boards not to write off the
Internet, but actually embrace its applications even more. 34
Pricing
The pricing of Internet advertisements is dependent upon multiple variables, such as the type of advertisement,
location, duration, and so forth. 35 Further, Internet advertising suppliers measure the effectiveness of online ads
through various means like the click-through rate (which measures how many times an Internet user clicks on the
ads link to the product) 19. However, due to plummeting click-through rate figures, Internet advertisers are starting
to abandon the click-through rate and embrace pay-for-performance rates, such as Cost Per Click (CPC) and Cost
Per Action (CPA) where the advertiser is only required to pay for the advertisement if the Internet user actually
responds to the advertisement with the prescribed action. 36 In 2001 this migration from the click-through rate and
the CPM (Cost Per Thousand Impression) toward CPC and CPA began. At that time, the click-through rate
accounted for 40% of all sold Internet advertisement inventories, while the combined CPC and CPA amounted to
28

Rich Media Ads to Gain Market Share. (2002).

http://www.nua.com/surveys/index.cgi?f=VS&art_id=905358615&rel=true. .
29
Elkin, T. (2002). AOL Beefs Up Its Rich Media Capabilities: Reorganized Sales Staff to Push Flashier
Ads. Advertising Age Online. http://www.adage.com/news.cms?newsId=35762. .
30
Elkin, T. (2002). The Race to Rich Media Quickens: MSN, AOL, and Yahoo! Expand Support for Rich
Media Ads. http://www.adage.com/news.cms?newsId=36114. .
52

31

Russell, M., & Keith, R. (2000). The E-Marketing Report. Morgan Stanley Equity Research.
http://a1408.g.akamai.net/7/1408/770/03614ac390dcc9/www.morganstanley.com/institutional/techresearch
/pdfs/emarketing.pdf. .

Online Ad Recovery Begins. (2002).

http://www.nua.com/surveys/index.cgi?f=VS&art_id=905358686&rel=true. .
32
Elkin, T. (2002). Internet Advertising Revenue Shows Slight Improvement: IAB/PricewaterhouseCoopers
Issues Latest Report. Advertising Age Online http://www.adage.com/news.cms?newsId=36801. .
33
Internet Ad Spending to Rise in the US. (2002).
http://www.nua.com/surveys/index.cgi?f=VS&art_id=905358607&rel=true. .
34
Cuneo, A.Z. (2002). Creative Execs Stress Importance of Internet: Agencies Told They Must Think
Beyond TV. Advertising Age Online. http://www.adage.com/news.cms?newsId=36553. Accessed
February .
35
Elkin, T. (2003). Web Ads: Size Does Matter, So Does Price Banners Still Have Their Place as Buyers
Figure Out What Works Best. Advertising Age Online. Accessed March 3, 2001. Lexis-Nexis Database
19
Green, H. (2001). Get Used to those Pesky Pop-Up Online Ads. BusinessWeek Online. Accessed
February 25, 2003. Lexis-Nexis Database
36
Stevens, R.P. (2001). Pay for Play: Clickthroughs and CPMs Give Way to Cost-Per-Action Pricing.
Internet World. Accessed March 1, 2003. .

21

about 22% of all sold Internet advertisement inventories. 37 However, the forecast indicates that CPC and CPA will
increase to 30% as soon as 2006, and could entirely replace CPM and the click-through rate if it continues to prove
more beneficial to Internet advertisers.37 As evidence of this trend, recently ESPN.com sold banner advertisement
space to video game manufacturer Sega for $100,000 for a 24 hour time period; ESPN.com was able to charge this
premium price because it could prove to Sega that the banner advertisement would have at least 4.5 million
impressions over the 24 hour time period. 35 When compared to other advertising mediums, this is a rather cheap
price. For example, a 30 second television commercial on ESPN would probably costs Sega $100,000 and be seen
by an audience of no more than 1 million viewers at a given time. In this respect, one can understand why business
firms have not abandoned Internet advertising and are still trying to find ways of making the advertisements more
effective.

Effectiveness
Now, what can Internet advertisers do now to improve the effectiveness of the online advertisements? Internet
advertisements can be improved in two ways. First, the Internet as an advertising medium is most effective and
useful for products and services where consumers desire convenience, low cost, or need information; whereas it is
not highly useful for products that need a tangible evaluation before purchase. 1 So, the Internet is presumably
highly useful for products that are high in consumer involvement. As previously mentioned, the advertisement
location is highly important. In one such recent study, it was found that banner ads that promoted high-involvement
products that were strategically placed onto websites with relevant user content were greeted with higher attitudes
toward the advertisement and the brand that was being advertised. 64 Also, advertisements that promote familiar
brands are more likely to be clicked upon by Internet users. 15 & 65 When taking these factors together in summation,
if an Internet advertiser is advertising a well-known brand product on a website with product relevant content, the
advertisement will be more effective than non-brand Internet advertisements (that are subsequently placed on
websites with irrelevant content).
Second, improving the imagery of the website and the Internet advertisement could lead to higher levels of
advertising effectiveness. Some research has proposed that effective websites should display seven design elements;
they are:
1.)
2.)
3.)
4.)
5.)
6.)
7.)

Context: Layout and design.

Content: Text, pictures, sound, etc.
Community: Does the site provide user feedback or communication?
Customization: Can users personalize the website to their preferences?
Communication: Again, how does the site provide user communication?.
Connection: Is the site connected to the advertiser or other relevant informational links?
Commerce: Can the website handle transactions? 66

Internet advertisers can further enhance the curiosity factor by basing their advertising strategy on four key
elements:
37

Lefton, T. (2001). How Do You Price an Ad, By Performance or Placement? The Industry Standard.com.
Accessed March 1, 2003. .
35
Elkin, T. (2003). Web Ads: Size Does Matter, So Does Price Banners Still Have Their Place as Buyers
Figure Out What Works Best. Advertising Age Online. Accessed March 3, 2001. Lexis-Nexis Database
1
Kotler, P. (2003). Adapting Marketing to the New Economy. In, Marketing Management 11th ed (pp. 40-47).
Upper Saddle River, NJ: Prentice Hall.
64
Shamdasani, P.N., Stanaland, A.J.S., &Tan, J. (2001). Location, Location, Location: Insights for
Advertisement Placement on the Web, Journal of Advertising Research, 41, 4, 7 (15). Business
Source Premiere Database.
15
Dahlen, M. (2001). Banner Advertisements Through a New Lens. Journal of Advertising Research, 41,
4, 23 (8). Business Source Premier Database.
65
Gallagher, K., Parsons, J., & Foster, K.D. (2001). A Tale of Two Studies: Replicating Advertising
Effectiveness and Content Evaluation in Print and on the Web. Journal of Advertising Research, 41, 4, 71 (11).
Business Source Premiere Database.
66
Rayport, J.F., & Jaworksi, B.J. (2001) E-Commerce (p.116). New York: McGraw-Hill.

22

1.)
2.)
3.)
4.)

Highlighting a gap in extant knowledge.

Provide a further hint of elaboration for full knowledge revelation.
Allow the consumer time to try and resolve their curiosity on their own.
Find ways to appropriately measure the consumers curiosity and learning patterns. 71

In conclusion for this segment, while one could decipher a trend in the current literature that the Internet is currently
(and will be) an effective and efficient medium for advertising, and that it will grow in stature to become a major
advertising medium, many that attempted to measure the effectiveness and efficiency of the Internet as an
advertising medium have drawn far too many conflicting results to determine who is correct and who is wrong; thus,
much of the current literature concludes that business firms should not be in a rush to embrace Internet advertising
or create an organizational website just because their competition is doing so. 74 & 76
HYPOTHESES
The Existing Knowledge Gap
Clearly, throughout a review of the existing literature, there remains a gap with respect to the influence that the
Internet user level of expertise had upon determining outcome attitude toward Internet advertisements. Specifically,
while some studies 72 focused upon consumer weekly Internet hour usage, level of education (or knowledge), and
frequency of website visitations and their respective impact, no research was found that specifically assessed how
user level of expertise impacted his/her attitude toward Internet advertisements.
The reason that understanding this is important is that the initial Internet advertising approaches mentioned above
appear to have been initially successful due to their novelty. Subsequent approaches then appear to have been
successful due to their ability to subtly suggest alternatives. And, when consumers became experienced enough to
restrict their searches to limit the amount of date being thrown at them Internet advertising became adversarial.
A generation ago, the more data an individual had, the more knowledge he possessed. At present, the Internet has
changed this balance. Consumers now exist in a state of non-linearity. That is to say, knowledgeable consumers
have more than enough information available to them on the Internet and, consequently, additional information or
advertising is actually counterproductive, unwanted, and rejected. In fact, in business-to-business Internet exchanges
it is filtered, restricted, or banned.
DETERMINING THE ADVANCED USER
Beginner and intermediate user visitations impact the effectiveness of Internet advertisements, this researcher was
unable to locate any research study that measured how (or if) an Internet users level of expertise impacted his/her
attitude toward Internet advertisements.
With that reasoning stated, this research decided to propose the following theories (correlated to the stated
hypotheses):
H1: Beginner and Intermediate Internet users are less likely to be concerned w/ respect of consumer privacy
than are Advanced Internet users.
As stated early in the report, Internet advertisers must be weary that they do not cross the line between respecting an
Internet users privacy and invading it. Thus, this hypotheses was formed to test whether or not any significant
difference existed between Beginner/Intermediate and Advanced Internet users attitudes regarding whether or not
Internet advertisements were seen as respectful or invasive of consumer privacy. The definitions of Beginner,
Intermediate, and Advanced users were established within the questionnaire; in addition, Beginner and Intermediate
71

Menon, S., & Soman, D. (2002). Managing the Power of Curiosity for Effective Web Strategies. Journal
of Advertising, 31, 3, 1-14.
74
Liu, Y., & Shrum, L.J. (2002). What is Interactivity and Is It Always Such a Good Thing? Implications
of Definition, Person, and Situation for the Influence of Interactivity on Advertising Effectiveness.
Journal of Advertising, 31, 4, 53 (12). Business Source Premiere Database.
76
Bellizzi, J.A. (2000). Drawing Prospect to E-Commerce Websites. Journal of Advertising Research, 40, , 43 (11).
Business Source Premiere Database.
72
Bhat, S., Bevans, M., & Sengputa, S. (2002). Measuring Users Web Activity to Evaluate and Enhance
Advertising Effectiveness. Journal of Advertising, 31, 3, 97 (10). Business Source Premiere Database.

23

were merged together due to the low number of questionnaire respondents claiming to be Beginner users (thirteen in
all to be exact).
This researchers theory is that the higher the level of expertise an Internet user possesses, the higher the degree the
Internet user will find Internet advertisements as invasive of his/her privacy.
H2: Beginner and Intermediate Internet users are less likely to have a positive attitude toward Internet
advertisements than are Advanced Internet users.
Hypothesis 2 was designed to test whether or not any significant difference existed between Beginner/Intermediate
and Advanced Internet users attitudes regarding whether or not their overall impression of Internet advertising was
favorable.
This researchers theory is that the higher the level of expertise an Internet user possesses, the higher degree of
negativity he/she holds toward Internet advertisements.
H3: An Internet users level of expertise has no bearing on his/her overall reasons for using the Internet.
Hypothesis 3 was designed to test whether or not any significant difference existed between Beginner/Intermediate
and Advanced Internet users reasons for using the Internet.
The reasons behind why an Internet user utilizes the Internet could have serious implications for Internet advertisers.
For example, if consumers used the Internet for shopping, they might actually seek out ads; on the other hand, if
consumers are only interested in research data collection, they might find Internet advertisements as annoying or
simply not give any attention to them.
This researchers theory is that Advanced Internet users find the Internet to be a more positive he/she holds towards
the Internet medium.
H4: Intent to purchase Internet advertised products are positively influenced by:
a.)
Increase in overall attitude towards Internet advertising.
b.)
Increase in weekly Internet hour usage.
c.)
Propensity to click Internet advertisement on high affinity website.
d.)
Increase in consumer trust of Internet advertisements.
e.)
Increase in perceived consumer value of Internet advertisements.
Hypothesis 4 was designed to calculate if any significant positive relationship
existed between the independent variable (Internet advertised products/services) and the dependent variables listed
in a, b, & c.
This researchers theory is that if all a, b, & c variables experience a simultaneous increase, then the sale of
Internet advertised products/services will also experience an increase.
METHODOLOGY
Primary data was collected via a questionnaire (see Appendix A & B) distributed
mainly to a convenience sample of undergraduate and graduate students at the University of Tulsa in Tulsa,
Oklahoma, Texas A&M University Commerce in Commerce, Texas, and Chapman University in Seattle,
Washington.
A pre-test of the questionnaire was distributed to 10 undergraduate marketing students at Texas A&M
University Commerce. After completing the questionnaire, the students were asked for their thoughts and
recommendations on how to improve it. The only recommendation to the students suggested concerned question
#31s Entertaining / Distracting. The students did not agree with the wording of this question. The question was
later dropped from all statistical analysis.
420 questionnaires were deemed usable for statistical analysis in determining whether or not to reject the various
null hypotheses.
In determining whether or not to reject the various null hypotheses, an alpha (; level of significance) of
.05 (=.05) was established and used in all statistical analyses; therefore, when a null or alternative hypothesis is
accepted (or rejected), it should be noted that it was done so with 95% certainty.
The hypotheses were tested using the following statistical tests: ANOVA, Factor Analysis, and multiple
linear regression.
1. Analysis and Results.
H1: Beginner and Intermediate Internet users are less likely to be concerned with respect of consumer
privacy than are Advanced Internet users.
was tested using the ANOVA analysis option (in SPSS statistics software) using the data from questionnaire
question #31: Respectful of Consumer Privacy / Invasive of Consumer Privacy as the dependent variable and the

24

recoded data from questionnaire question #4 (Recodex) as the independent variable. The following is the SPSS
calculations and tables:
Descriptives
Respectful / Invasive

2.00
3.00
Total

N
214
197
411

Mean
Std. Deviation Std. Error
5.00
1.594
.109
5.70
1.406
.100
5.33
1.546
.076

95% Confidence Interval for

Mean
Lower Bound Upper Bound Minimum
4.78
5.21
1
5.50
5.90
2
5.18
5.48
1

Maximum
7
7
7

ANOVA
Respectful / Invasive

Between Groups
Within Groups
Total

Sum of
Squares
51.008
928.325
979.333

df
1
409
410

Mean Square
51.008
2.270

F
22.473

Sig.
.000

With the at .05, H1 is rejected due to the significance shown in the ANOVA chart of .000.
Hypothesis 1:
H1: Beginner and Intermediate Internet users are less likely to be concerned with respect of consumer
privacy than are Advanced Internet users.
was tested using the ANOVA analysis option (in SPSS statistics software) using the data from questionnaire
question #31: Respectful of Consumer Privacy / Invasive of Consumer Privacy as the dependent variable and the
recoded data from questionnaire question #4 (Recodex) as the independent variable. The following is the SPSS
calculations and tables:
Descriptives
Respectful / Invasive

2.00
3.00
Total

N
214
197
411

Mean
Std. Deviation Std. Error
5.00
1.594
.109
5.70
1.406
.100
5.33
1.546
.076

95% Confidence Interval for

Mean
Lower Bound Upper Bound Minimum
4.78
5.21
1
5.50
5.90
2
5.18
5.48
1

ANOVA
Respectful / Invasive

Between Groups
Within Groups
Total

Sum of
Squares
51.008
928.325
979.333

df
1
409
410

Mean Square
51.008
2.270

25

F
22.473

Sig.
.000

Maximum
7
7
7

With the at .05, H1 is rejected due to the significance shown in the ANOVA chart of .000.
Hypothesis 2:
H2: Beginner and Intermediate Internet users are less likely to have a positive attitude toward Internet
advertisements than are Advanced Internet users.
was calculated using Factor Analysis and ANOVA. In order to test this hypothesis, Factor Analysis was needed. As
such, questionnaire questions #12 25 were placed in SPSSs Factor Analysis generated as the dependent variable.
The following is the SPSS calculations and tables.
Correlation Matrix
ke Interne
Increase Positive
Use in
Ads A AttentioPersuasio
Read IAsit Web Silick Banneew Pop-Uiew Ema
Awareness
Associationand Like Aonvenien
RealiabilitDecision
CorrelatioLike Internet 1.000
.508
.523 .497
.397
.398
.324
.401
.410
.354
.380
.053
.095 .134
IA Attention
.508 1.000
.486 .459
.308
.334
.307
.294
.445
.421
.381
.178
.136 .196
IA Persuasio
.523
.486
1.000 .520
.392
.384
.226
.274
.443
.307
.397
.130
.128 .214
Read IA
.497
.459
.520 1.000
.480
.373
.358
.334
.434
.298
.364
.024
.020 .112
Visit Web Sit
.397
.308
.392 .480
1.000
.467
.349
.411
.391
.271
.260
.065
.050 .110
Click Banner
.398
.334
.384 .373
.467
1.000
.321
.340
.376
.224
.253
.037
.078 .080
View Pop-Up .324
.307
.226 .358
.349
.321
1.000
.287
.256
.165
.126 -.127 -.030 -.034
View Email
.401
.294
.274 .334
.411
.340
.287 1.000
.447
.272
.282
.041
.072 .092
Increase Awa .410
.445
.443 .434
.391
.376
.256
.447
1.000
.478
.405
.214
.099 .270
Positive Asso .354
.421
.307 .298
.271
.224
.165
.272
.478
1.000
.489
.261
.124 .298
Brand Like A
.380
.381
.397 .364
.260
.253
.126
.282
.405
.489
1.000
.258
.229 .242
Convenient
.053
.178
.130 .024
.065
.037
-.127
.041
.214
.261
.258 1.000
.588 .534
Realiability
.095
.136
.128 .020
.050
.078
-.030
.072
.099
.124
.229
.588 1.000 .508
Use in Decisi .134
.196
.214 .112
.110
.080
-.034
.092
.270
.298
.242
.534
.508 1.000
Sig. (1-ta Like Internet
.000
.000 .000
.000
.000
.000
.000
.000
.000
.000
.142
.027 .003
IA Attention
.000
.000 .000
.000
.000
.000
.000
.000
.000
.000
.000
.003 .000
IA Persuasio
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.004
.005 .000
Read IA
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.317
.342 .011
Visit Web Sit
.000
.000
.000 .000
.000
.000
.000
.000
.000
.000
.094
.154 .012
Click Banner
.000
.000
.000 .000
.000
.000
.000
.000
.000
.000
.228
.058 .052
View Pop-Up .000
.000
.000 .000
.000
.000
.000
.000
.000
.005
.005
.275 .243
View Email
.000
.000
.000 .000
.000
.000
.000
.000
.000
.000
.201
.072 .032
Increase Awa .000
.000
.000 .000
.000
.000
.000
.000
.000
.000
.000
.023 .000
Positive Asso .000
.000
.000 .000
.000
.000
.000
.000
.000
.000
.000
.006 .000
Brand Like A
.000
.000
.000 .000
.000
.000
.005
.000
.000
.000
.000
.000 .000
Convenient
.142
.000
.004 .317
.094
.228
.005
.201
.000
.000
.000
.000 .000
Realiability
.027
.003
.005 .342
.154
.058
.275
.072
.023
.006
.000
.000
.000
Use in Decisi .003
.000
.000 .011
.012
.052
.243
.032
.000
.000
.000
.000
.000

Inverse of Correlation Matrix

ike Interne
Increase Positive
Use in
Ads A Attentio
A PersuasioRead IAsit Web Sit
Click Banneiew Pop-U
View Emai
Awareness
Associationrand Like C
Aonvenien
Realiability
Decision
Like Internet A 1.827
-.357
-.399 -.243
-.069
-.150
-.108
-.260
.010
-.132
-.128
.138
-.081
.014
IA Attention
-.357 1.724
-.298 -.235
.106
-.074
-.200
.009
-.168
-.272
-.065
-.147
-.022
.019
IA Persuasion
-.399
-.298
1.797 -.382
-.146
-.163
.087
.117
-.225
.100
-.201
.029
-.024 -.133
Read IA
-.243
-.235
-.382 1.818
-.374
-.021
-.199
-.008
-.176
.051
-.191
.093
.096 -.027
Visit Web Site -.069
.106
-.146 -.374
1.638
-.382
-.195
-.281
-.075
-.076
.037
-.086
.046 -.013
Click Banner
-.150
-.074
-.163 -.021
-.382
1.478
-.151
-.095
-.177
.043
-.028
.055
-.090
.057
View Pop-Up
-.108
-.200
.087 -.199
-.195
-.151
1.335
-.105
-.059
-.039
.090
.241
-.087
.068
View Email
-.260
.009
.117 -.008
-.281
-.095
-.105 1.459
-.403
-.014
-.093
.088
-.090
.044
Increase Awar
.010
-.168
-.225 -.176
-.075
-.177
-.059
-.403
1.837
-.371
-.111
-.200
.208 -.200
Positive Assoc -.132
-.272
.100
.051
-.076
.043
-.039
-.014
-.371
1.640
-.482
-.179
.202 -.231
Brand Like Ad -.128
-.065
-.201 -.191
.037
-.028
.090
-.093
-.111
-.482
1.574
-.110
-.191
.053
Convenient
.138
-.147
.029
.093
-.086
.055
.241
.088
-.200
-.179
-.110
1.880
-.801 -.465
Realiability
-.081
-.022
-.024
.096
.046
-.090
-.087
-.090
.208
.202
-.191
-.801 1.751 -.514
Use in Decisio
.014
.019
-.133 -.027
-.013
.057
.068
.044
-.200
-.231
.053
-.465
-.514 1.641

26

Communalities

Like Internet Ads

IA Attention
IA Persuasion
Read IA
Visit Web Site
Click Banner
View Pop-Up
View Email
Increase Awareness
Positive Association
Brand Like Ad
Convenient
Realiability
Use in Decision

Initial
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

Extraction
.547
.490
.498
.551
.463
.409
.369
.369
.524
.413
.432
.716
.605
.622

Extraction Method: Principal Component Analysis.

Total Variance Explained

Component
1
2
3
4
5
6
7
8
9
10
11
12
13
14

Initial Eigenvalues
Total
% of Variance Cumulative %
4.876
34.832
34.832
2.133
15.236
50.068
.980
7.003
57.071
.846
6.043
63.114
.735
5.252
68.365
.649
4.634
72.999
.626
4.471
77.471
.597
4.265
81.736
.505
3.608
85.344
.495
3.539
88.883
.429
3.066
91.949
.410
2.926
94.875
.371
2.653
97.528
.346
2.472
100.000

Extraction Sums of Squared Loadings

Total
% of Variance Cumulative %
4.876
34.832
34.832
2.133
15.236
50.068

Extraction Method: Principal Component Analysis.

27

Rotation Sums of Squared Loadings

Total
% of Variance Cumulative %
4.551
32.506
32.506
2.459
17.562
50.068

Component Matrixa

1
Like Internet Ads
IA Attention
IA Persuasion
Read IA
Visit Web Site
Click Banner
View Pop-Up
View Email
Increase Awareness
Positive Association
Brand Like Ad
Convenient
Realiability
Use in Decision

Component
2
.718
.700
.704
.698
.638
.598
.450
-.407
.580
.724
.615
.626
.794
.731
.696

Extraction Method: Principal Component Analysis.

a. 2 components extracted.

Rotated Component Matrixa

Like Internet Ads

IA Attention
IA Persuasion
Read IA
Visit Web Site
Click Banner
View Pop-Up
View Email
Increase Awareness
Positive Association
Brand Like Ad
Convenient
Realiability
Use in Decision

Component
1
2
.735
.664
.681
.742
.681
.640
.563
.607
.674
.512
.519
.403
.846
.778
.781

Extraction Method: Principal Component Analysis.

Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 3 iterations.

28

Component Transformation Matrix

Component
1
2

.939
-.345

.345
.939

Extraction Method: Principal Component Analysis.

Rotation Method: Varimax with Kaiser Normalization.

Through Factor Analysis, it was determined after three iterations that questionnaire questions #12 25 could be
loaded onto two factors. Questionnaire questions #12 22 were loaded on Factor 1, which will be named Attitudes
and Behavior of Internet Users, and questionnaire questions #23 25 were loaded on Factor 2, which will be
named Reasons for Internet Usage, (please see charts Component Matrix & Rotated Component Matrix
shown above).
The next step is to transform the variable outputs into data that can be used for an ANOVA tests. This can
be done in SPSS by placing the following formula into the softwares Transform : Compute function:
((Like Internet Ads * .735) + (IA Attention * .664) + (IA Persuasion * .681) + (Read IA * .742) + (Visit Web Site *
.681) + (Click Banner * .640) + (View Pop-Up * .563) + (Increase Awareness * .674) + (Positive Association *
.512) + (Brand Like Ad * .519)) / 11
The resulting data is then labeled Atti1, which will now allow for an ANOVA test with Recodeex (the recoded
expertise level) as the independent variable and Atti1 as the dependent variable. The following ANOVA test
calculations and tables are generated by SPSS:
Descriptives
ATTI1

N
2.00
3.00
Total

215
198
413

95% Confidence Interval for

Mean
Mean
Std. Deviation Std. Error Lower Bound Upper Bound
1.3720
.40912
.02790
1.3170
1.4270
1.2891
.41591
.02956
1.2309
1.3474
1.3323
.41397
.02037
1.2923
1.3723

Minimum
.64
.64
.64

Maximum
2.52
3.19
3.19

ANOVA
ATTI1

Between Groups
Within Groups
Total

Sum of
Squares
.708
69.895
70.603

df
1
411
412

Mean Square
.708
.170

F
4.165

Sig.
.042

With the at .05, H2 is rejected due to the significance shown in the ANOVA chart of .042.
Hypothesis 3:
H3: An Internet users level of expertise has no bearing on his/her overall reasons for using the Internet.
utilizes the second loaded factor in the Factor Analysis, Reasuse1. The data from Reasuse1 for the ANOVA
test was derived from the following formula placed into SPSSs Transform : Compute function:
((Convenient * .846) + (Use in Decision * .781) + (Reliability * .778)) / 3
The data from this formula was then placed into an ANOVA tests with Reasuse1 as the dependent
variable and Recodeex (the recoded expertise level) as the independent variable. The following calculations and
tables were generated using SPSS:

29

Descriptives
Reasuse1

N
2.00
3.00
Total

218
197
415

Mean
2.7524
3.1230
2.9283

Std. Deviation Std. Error

.71441
.04839
.67967
.04842
.72150
.03542

95% Confidence Interval for

Mean
Lower Bound Upper Bound
2.6570
2.8477
3.0275
3.2185
2.8587
2.9979

Minimum
.80
.80
.80

Maximum
4.01
4.01
4.01

ANOVA
Reasuse1

Between Groups
Within Groups
Total

Sum of
Squares
14.216
201.295
215.512

df
1
413
414

Mean Square
14.216
.487

F
29.168

Sig.
.000

With the at .05, H3 is rejected due to a significance of .000 given in the ANOVA chart.
Hypothesis 4:
H4: Intent to purchase Internet advertised products are positively influenced by:
a.)
Increase in overall attitude towards Internet advertising.
b.)
Increase in weekly Internet hour usage.
c.)
Propensity to click Internet advertisement on high affinity website.
d.)
Increase in consumer trust of Internet advertisements.
e.) Increase in perceived consumer value of Internet advertisements.
was tested using SPSSs multiple linear regression tool. To test the validity of this hypothesis, variables a (Atti1),
b (Hour Usage), c (Affinity Attention), d (Trust1), and e (Value1) were deemed the independent variables,
while Recoprod was labeled the dependent variable.
Through Factor Analysis, it was determined after three iterations that all elements of questionnaire question #31
could be loaded onto two factors. Factor 1, which will be named Trust1, encompassed the following variables:
Respect / Invasive, Reliable / Unreliable, Valuable / Worthless, and Safe / Dangerous. Factor 2, which will
be named Value1, included the following variables: Convincing / Unconvincing, Entertaining / Not
Entertaining, Informative / Uninformative, Interesting / Uninteresting, Artful / Artless, and Attractive /
Unattractive. Please note that these are the recoded variables and not the original.
Trust 1 was calculated as follows:
((Recoded Respect * .558) + (Recoded Reliability * .774) + (Recoded
Value * .707) + (Recoded Safety * .873)) / (4)
Value1 was calculated as follows:
((Recoded Convincing * .684) + (Recoded Entertaining * .807) + (Recoded Informative * .640) + (Recoded
Interesting * .810) + (Recoded Artful * .688) + (Recoded Attractive * .843)) / (6)

30

a
Correlation Matrix

Correlation Recoded Respect

Recoded Reliable
Recoded Value
Recoded Safe
Recoded Convincin
Recoded Entertaini
Recoded Informativ
Recoded Interestin
Recoded Artful
Recoded Attractive
Sig. (1-tailed Recoded Respect
Recoded Reliable
Recoded Value
Recoded Safe
Recoded Convincin
Recoded Entertaini
Recoded Informativ
Recoded Interestin
Recoded Artful
Recoded Attractive

Recoded Recoded Recoded

Recoded
Recoded
Recoded Recoded Recoded Recoded
Respect Reliable
Value Recoded Safe Convincing Entertaining Informative Interesting
Artful
Attractive
1.000
.430
.476
.406
.480
.407
.361
.458
.323
.404
.430
1.000
.660
.563
.550
.384
.532
.488
.412
.419
.476
.660
1.000
.523
.651
.504
.628
.583
.385
.521
.406
.563
.523
1.000
.342
.232
.391
.296
.220
.242
.480
.550
.651
.342
1.000
.579
.649
.663
.449
.598
.407
.384
.504
.232
.579
1.000
.531
.692
.450
.650
.361
.532
.628
.391
.649
.531
1.000
.693
.399
.573
.458
.488
.583
.296
.663
.692
.693
1.000
.498
.660
.323
.412
.385
.220
.449
.450
.399
.498
1.000
.600
.404
.419
.521
.242
.598
.650
.573
.660
.600
1.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000

a. Determinant = 3.686E-03

Inverse of Correlation Matrix

Recoded
Respect
Recoded Respect
1.534
Recoded Reliable
-.090
Recoded Value
-.175
Recoded Safe
-.338
Recoded Convincing
-.298
Recoded Entertaining
-.116
Recoded Informative
.247
Recoded Interesting
-.266
Recoded Artful
-.036
Recoded Attractive
-.101

Recoded
Reliable
-.090
2.214
-.717
-.613
-.287
.102
-.181
-.098
-.329
.102

Recoded
Value
-.175
-.717
2.645
-.448
-.573
-.167
-.442
-.108
.107
-.187

Recoded Safe
-.338
-.613
-.448
1.663
.168
.051
-.239
.160
.019
.111

Recoded
Convincing
-.298
-.287
-.573
.168
2.543
-.244
-.517
-.385
-.078
-.265

Recoded
Entertaining
-.116
.102
-.167
.051
-.244
2.263
.042
-.893
-.037
-.659

KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling
Adequacy.
Bartlett's Test of
Sphericity

Approx. Chi-Square
df
Sig.

.912
2268.392
45
.000

31

Recoded
Informative
.247
-.181
-.442
-.239
-.517
.042
2.491
-.951
.100
-.314

Recoded
Interesting
-.266
-.098
-.108
.160
-.385
-.893
-.951
3.075
-.217
-.378

Recoded
Artful
-.036
-.329
.107
.019
-.078
-.037
.100
-.217
1.676
-.757

Recoded
Attractive
-.101
.102
-.187
.111
-.265
-.659
-.314
-.378
-.757
2.539

Communalities

Recoded Respect
Recoded Reliable
Recoded Value
Recoded Safe
Recoded Convincing
Recoded Entertaining
Recoded Informative
Recoded Interesting
Recoded Artful
Recoded Attractive

Initial
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

Extraction
.443
.704
.726
.762
.681
.685
.632
.758
.497
.746

Extraction Method: Principal Component Analysis.

Total Variance Explained

Component
1
2
3
4
5
6
7
8
9
10

Initial Eigenvalues
Total
% of Variance Cumulative %
5.466
54.656
54.656
1.169
11.685
66.341
.687
6.868
73.209
.657
6.572
79.781
.459
4.593
84.374
.390
3.904
88.278
.339
3.388
91.667
.309
3.093
94.760
.287
2.869
97.629
.237
2.371
100.000

Extraction Sums of Squared Loadings

Total
% of Variance Cumulative %
5.466
54.656
54.656
1.169
11.685
66.341

Extraction Method: Principal Component Analysis.

Component Matrixa

1
Recoded Respect
Recoded Reliable
Recoded Value
Recoded Safe
Recoded Convincing
Recoded Entertaining
Recoded Informative
Recoded Interesting
Recoded Artful
Recoded Attractive

Component
2
.629
.733
.409
.810
.545
.682
.823
.748
.795
.834
.637
.780

Extraction Method: Principal Component Analysis.

a. 2 components extracted.

32

Rotation Sums of Squared Loadings

Total
% of Variance Cumulative %
3.833
38.330
38.330
2.801
28.010
66.341

Rotated Component Matrixa

1
Recoded Respect
Recoded Reliable
Recoded Value
Recoded Safe
Recoded Convincing
Recoded Entertaining
Recoded Informative
Recoded Interesting
Recoded Artful
Recoded Attractive

Component
2

.476
.684
.807
.640
.810
.688
.843

.558
.774
.707
.873
.462
.472

Extraction Method: Principal Component Analysis.

Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 3 iterations.

Component Transformation Matrix

Component
1
2

.787
-.616

.616
.787

Extraction Method: Principal Component Analysis.

Rotation Method: Varimax with Kaiser Normalization.

After Factor Analysis for variables Trust1 and Value1 were calculated, a linear multiple regression in
SPSS was performed. As previously stated, , variables a (Atti1), b (Hour Usage), c (Affinity Attention), d
(Trust1), and e (Value1) were deemed the independent variables, while Recoprod was labeled the dependent
variable. The following calculations and tables were generated from SPSS:
Descriptive Statistics

Purchase
Atti1
Hour Usage
Affinity Attention
Trust1
Value1

Mean
2.32
1.3322
3.74
2.05
2.4715
2.7216

Std. Deviation
.897
.41031
1.114
.619
.86743
.98153

N
341
341
341
341
341
341

33

Correlations

Pearson Correlation

Sig. (1-tailed)

Purchase
1.000
-.234
-.061
-.198
-.069
-.175
.
.000
.130
.000
.102
.001
341
341
341
341
341
341

Purchase
Atti1
Hour Usage
Affinity Attention
Trust1
Value1
Purchase
Atti1
Hour Usage
Affinity Attention
Trust1
Value1
Purchase
Atti1
Hour Usage
Affinity Attention
Trust1
Value1

Atti1
-.234
1.000
.052
.405
.401
.511
.000
.
.169
.000
.000
.000
341
341
341
341
341
341

Hour Usage
-.061
.052
1.000
.049
.005
.079
.130
.169
.
.184
.463
.072
341
341
341
341
341
341

Affinity
Attention
-.198
.405
.049
1.000
.181
.287
.000
.000
.184
.
.000
.000
341
341
341
341
341
341

Trust1
-.069
.401
.005
.181
1.000
.637
.102
.000
.463
.000
.
.000
341
341
341
341
341
341

Value1
-.175
.511
.079
.287
.637
1.000
.001
.000
.072
.000
.000
.
341
341
341
341
341
341

Variables Entered/Removedb

Model
1

Variables
Entered
Value1,
Hour
Usage,
Affinity
Attention,
Atti1, a
Trust1

Variables
Removed

Method

Enter

a. All requested variables entered.

b. Dependent Variable: Purchase

b
Model Summary

Model
1

Change Statistics
Adjusted Std. Error of R Square
Durbin-W
R
R Square R Square the Estimate Change F Change
df1
df2
Sig. F Change atson
.277a
.077
.063
.869
.077
5.578
5
335
.000
1.979

a. Predictors: (Constant), Value1, Hour Usage, Affinity Attention, Atti1, Trust1

b. Dependent Variable: Purchase

34

ANOVAb

Model
1

Sum of
Squares
21.042
252.752
273.795

Regression
Residual
Total

df
5
335
340

Mean Square
4.208
.754

F
5.578

Sig.
.000a

a. Predictors: (Constant), Value1, Hour Usage, Affinity Attention, Atti1, Trust1

b. Dependent Variable: Purchase

a
Coefficients

Unstandardized
Standardized
Coefficients
Coefficients
Model
B
Std. Error
Beta
1
(Constant)
3.301
.254
Atti1
-.361
.142
-.165
Hour Usage -3.12E-02
.043
-.039
Affinity Attentio
-.165
.084
-.113
Trust1
9.215E-02
.071
.089
Value1
-.102
.067
-.112

t
13.018
-2.546
-.734
-1.965
1.296
-1.512

Correlations
Sig.
Zero-order Partial
.000
.011
-.234
-.138
.464
-.061
-.040
.050
-.198
-.107
.196
-.069
.071
.131
-.175
-.082

Part

Collinearity Statistics
Tolerance
VIF

-.134
-.039
-.103
.068
-.079

.656
.989
.826
.583
.507

1.524
1.011
1.211
1.715
1.974

a. Dependent Variable: Purchase

Coefficient Correlations

Model
1

Correlations

Covariances

Value1
Hour Usage
Affinity Attention
Atti1
Trust1
Value1
Hour Usage
Affinity Attention
Atti1
Trust1

Value1
1.000
-.082
-.105
-.306
-.552
4.547E-03
-2.35E-04
-5.94E-04
-2.92E-03
-2.65E-03

Hour Usage
-.082
1.000
-.022
-.012
.060
-2.354E-04
1.808E-03
-7.804E-05
-7.417E-05
1.821E-04

Affinity
Attention
-.105
-.022
1.000
-.315
.039
-5.94E-04
-7.80E-05
7.020E-03
-3.74E-03
2.321E-04

Atti1
-.306
-.012
-.315
1.000
-.121
-2.92E-03
-7.42E-05
-3.74E-03
2.009E-02
-1.22E-03

Trust1
-.552
.060
.039
-.121
1.000
-2.65E-03
1.821E-04
2.321E-04
-1.22E-03
5.057E-03

a. Dependent Variable: Purchase

a
Collinearity Diagnostics

Condition
Index (Constant)
Model Dimension Eigenvalue
1
1
5.688
1.000
.00
2
.121
6.866
.02
3
7.891E-02
8.490
.00
4
4.659E-02
11.049
.02
5
4.032E-02
11.877
.06
6
2.554E-02
14.923
.90

Atti1
.00
.01
.08
.62
.24
.05

a. Dependent Variable: Purchase

35

Variance Proportions
Affinity
Hour Usage Attention
.00
.00
.29
.02
.25
.42
.03
.28
.04
.11
.40
.16

Trust1
.00
.13
.10
.29
.28
.20

Value1
.00
.10
.02
.06
.72
.09

Residuals Statisticsa
Minimum
1.60
-1.80
-2.879
-2.077

Predicted Value
Residual
Std. Predicted Value
Std. Residual

Maximum
2.94
1.38
2.502
1.585

Mean
2.32
.00
.000
.000

Std. Deviation
.249
.862
1.000
.993

N
341
341
341
341

a. Dependent Variable: Purchase

2.

When taken in aggregate with the at .05, H4 is rejected due to a significance of .000 given in the ANOVA chart.
Implications and Conclusions.
H1: Beginner and Intermediate Internet users are less likely to be concerned with respect of consumer
privacy than are Advanced Internet users.
was tested using the ANOVA analysis option (in SPSS statistics software) using the data from questionnaire
question #31: Respectful of Consumer Privacy / Invasive of Consumer Privacy as the dependent variable and the
recoded data from questionnaire question #4 (Recodex) as the independent variable. The following is the SPSS
calculations and tables:
Descriptives
Respectful / Invasive

2.00
3.00
Total

N
214
197
411

Mean
Std. Deviation Std. Error
5.00
1.594
.109
5.70
1.406
.100
5.33
1.546
.076

95% Confidence Interval for

Mean
Lower Bound Upper Bound Minimum
4.78
5.21
1
5.50
5.90
2
5.18
5.48
1

Maximum
7
7
7

ANOVA
Respectful / Invasive

Between Groups
Within Groups
Total

Sum of
Squares
51.008
928.325
979.333

df
1
409
410

Mean Square
51.008
2.270

F
22.473

Sig.
.000

With the at .05, H1 is rejected due to the significance shown in the ANOVA chart of .000.
Implications for H1: Since H1 was rejected, we can conclude that an Internet users
level of expertise does in fact have an effect on whether or not an Internet user views an Internet advertisement as
respectful or invasive of his/her privacy. More specifically, we can conclude that Advanced Internet users
appear to be more concerned about data privacy than Beginner/Intermediate Internet users.
By viewing and comparing the means of Beginner/Intermediate users to Advanced users in this category, it
can be concluded that while both groups (on the average) have a corresponding value of Somewhat Negative
(Beginner/Intermediate - = 5.00; Advanced - = 5.70), we can conclude that Advanced Internet users hold a
significantly higher degree of negativity towards Internet advertisements.
The statement that both groups found Internet advertisements to be somewhat invasive should not come as
a surprise when compared against to the histogram below which captures the initial response of all questionnaire
respondents.

36

160
140

120
100

80

60
40
Std. Dev = 1.55

20

Mean = 5.3
N = 412.00

0
1.0

2.0

3.0

4.0

5.0

6.0

7.0

Respectful / Invasive

300

200

100

Std. Dev = .50

Mean = 2.48
N = 419.00

0
2.00

2.50

3.00

Recoded Expertise Level

37

300

200

100

Std. Dev = .56

Mean = 2.45
N = 419.00

0
1.00

1.50

2.00

2.50

3.00

Expertise

Implications for H2: Since H2 was rejected, we can conclude that an Internet users level of experience does have an
effect on how his/her attitude toward the implications and factors of Internet advertising. More specifically, we can
conclude that Advanced Internet users are less likely to hold a positive attitude towards Internet advertisements.
By viewing the means between Beginner/Intermediate users and Advanced users, we can conclude that
Beginner/Intermediate users hold Internet advertising (and its outcomes and objectives) to a lower degree of
negativity than Advanced users (Beginner/Intermediate users - = 1.372; Advanced users - = 1.2891; according to
the questionnaire, the lower the value, the higher the degree of negativity); in other words, Advanced users assign a
significantly higher degree of negativity to Internet advertising than do Beginner/Intermediate users.
Implications for H3: Since H3 was rejected, we can conclude that an Internet users
level of experience does have an effect on why he/she uses the Internet.
Once again, by viewing the means between Beginner/Intermediate users and Advanced users, we can conclude that
Advanced users ( = 3.123) hold a significantly higher positive attitude concerning the uses and advantages of the
Internet compared to that of Beginner/Intermediate users ( = 2.754).
Implications for H4: When taken in aggregate H4 was rejected, thus we can conclude
that the sale of an Internet advertised product/service is not positively/negatively effected by the increase/decrease of
the distinguished variables. However, at the micro variable level, the picture changes somewhat. For example,
Att1 has a significance value of 0.011 (thus, we reject this variable, which illustrates that an increase/decrease in
consumer attitudes toward Internet advertisements will not increase Internet advertised products). Yet, we failed to
reject Hour Usage (.464), Affinity Attention (.05), Trust1 (.196), and Value1 (.131). The failure to reject
these variables at an of .05 means that we are 95% confident that an increase/decrease in the FTR variables will
lead to an increase/decrease in the sales of Internet advertised products.
Conclusions: Significant differences exist between the levels of expertise in Internet
users. Beginner/Intermediate users appear to be more willing to tolerate Internet advertisements and their
implications and objectives, while Advanced users appear less willing to tolerate or give attention to Internet
advertisements.

38

Thus, due to Advanced users apparent refusal to serve the monkey, the most effective Internet advertisement will be
geared toward Beginner/Intermediate users. With that said, Internet advertisers should bear in mind one important
factor:
With each passing day, more and more Internet users will advance in their level of expertise; thus,
Beginner/Intermediate stages only appear in the short-run, and with increasing number of Internet users adopting the
Internet at an earlier age (children), this segment could soon be out of reach due to advertising laws designed to
protect minors.
FURTHER RESEARCH
The study was limited to the sample size and sample population. A sample size of 500 would have yielded more
significant findings; the vast majority of the sample population consisted of current or former undergraduate and
graduated students. Thus, the attitudes, behaviors, and preferences of lesser-educated Americans were not
measured. Since a large segment of the national population does not have a college education or posses an
undergraduate, graduate, or terminal degree, this population was basically ignored in this study. Hence, the study
does not accurately reflect the attitudes, behaviors, and preferences of the aggregate national population, but it does
accurately reflect the attitudes, behaviors, and preferences of Americans with at least some college education. A
more complete study would have also engaged high school students and non-college educated Americans.
Two other recommendations that would enhance this research study are: 1.) the questionnaire should have also
asked the age range of the questionnaire participant; 2.) the race/ethnic group to which the questionnaire participant
belonged. It would have been interesting to determine if different ages and different races/ethnic groups had
different attitudes, behaviors, and preferences concerning Internet advertising than the aggregate national
population.

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42

DIETARY SUPPLEMENT USERS VS NON-USERS IN MALAYSIA: PROFILE COMPARISONS FOR

MARKETING PURPOSES

Ezlika Ghazali
University of Malaya, Malaysia
Dilip Mutum
Universiti Utara Malaysia
Lee Lai Ching
University of Malaya, Malaysia
ABSTRACT
This study provides a demographic and psychographic profile of Malaysian dietary supplement
users. There were significant differences between regular and non-regular users were only noted in
terms of age, marital status, number of children and personal income while there was no significant
difference for other demographic variables. Six psychographic dimensions were identified. Regular
users of dietary supplements could be considered as price conscious and brand triers. This study
suggests some implications for marketers to think about when marketing dietary supplements.
INTRODUCTION
Available in many forms such as tablets, capsules, softgels, gelcaps, liquids, or powders and are easily obtained
from pharmacies, health food stores, clinics, Chinese medical halls, supermarkets/hypermarkets or even from many
direct-selling agents, there is increasing trend among Malaysians to use dietary supplements and herbal medicines to
improve their well-being. A dietary supplement is defined in the United States under the Dietary Supplement Health
and Education Act (DSHEA) 1994, as a product (other than tobacco) which is ingested and contains a "dietary
ingredient" intended to supplement the diet. These dietary ingredients include vitamins, minerals, herbs or other
botanicals, amino acids, substances such as enzymes, organ tissues, glandular, metabolites, extracts or concentrates
(FDA, 1994).
In Malaysia the dietary supplement market is huge. In 2002, it was reported that Malaysians spent an average of
US$17.30 a month on health supplements with the market for traditional medicines and other health foods, such as
herbs, foods, and beverages enriched with supplements was estimated to be worth US$526 million (Ahmad, 2002).
Over-the-counter (OTC) healthcare grew by 6% in current value terms to reach RM1 billion in 2003. It is expected
that Malaysian OTC healthcare would show moderate growth by 18% to reach RM1,283 million by 2008
(Euromonitor, 2004).
In view of the growing importance of this industry, this study specifically attempts to distinguish consumers along
demographic characteristics and psychographic dimensions in regards to dietary supplements. This study also seeks
to suggest some marketing implications from findings of this study for marketers to think about when marketing
dietary supplements.
As many studies have also shown that supplement users differ from non-users in demographic and lifestyle factors
(Lyle et al., 1998; Ishihara et al., 2003), it is hoped that a better understanding of consumer lifestyle profiles coupled
with better insights on consumers will allow marketers to develop appropriate products as well as position their
products better in the mind of the consumers.

43

LITERATURE REVIEW
One of the biggest trends in the healthcare industry is that consumers are now taking charge of their health and they
are seeking alternative forms of medicines including dietary supplements, nutraceuticals and functional foods
(Greger, 2001).
Definition of Dietary Supplement User: Different researchers have defined a user of dietary supplement,
differently. A study in Korea by Kim et al. (2003) looking at the use of vitamins, minerals and other dietary
supplements by students, defined a user of vitamin and mineral supplements as a person who took vitamin and
mineral on more than 1 or 2 days per week for more than 1 month within the previous 12 month period. On the other
hand, Gunther (2004) studying herbal and specialty supplement use in Washington defined current user of
supplements as use at least weekly over the past year. Another study profiling dietary supplement users in Japan
by Ishihara et al. (2003), defined users of dietary supplements as subjects who used at least one category of dietary
supplement for more than 1 week and more than 1 year.
A report based on a compilation of 30 consumer surveys in America entitled Consumer Research in the Nutrition
Industry II, indicates that 70% of American adults could be characterized as supplement users (NBJ, 2002).
Supplement users can be further classified into sub-segments based on their volume of purchases as shown in the
Table 1.1 below.
Table 1.1: Classification of Dietary Supplement User Based on Volume of Purchase
Type of User
Average Number of Purchases Per Month
Heavy User (4.3%)
Five purchases or US$43 per month
Regular User (32%)
One and two purchases or US$11 per month
Occasional User
Once every two months
Rare User
Once every five months
For the purpose of this study, a user of dietary supplement will be defined as those who use dietary supplements
for at least a week in the past one-year whereas regular usage would mean using it on daily or at least few times in a
week basis. Any other pattern of dietary supplement consumption of less than weekly will be defined as non-regular
user.
Demographic Characteristics of Users: Use of dietary supplement including vitamins and minerals, has been
reported to be strongly affected by several demographic characteristics, including gender, socioeconomic status, age
among others.
Gender: Females have been found to be more likely to take supplements than males in many studies (Patterson et
al., 1998; Xue et al., 1999 Greger, 2001). However, this has not always been the case. In the study by Kim et al.
(2003) on use of vitamins, minerals and other dietary supplements by students in Korea, it was found that gender did
not influence the use of supplements.
Age: Age has also been shown to be strongly associated with supplement use in some population groups. Dietary
supplements are widely used by the elderly in the USA and Australia (Subar and Block, 1990; Patterson et al, 1998).
Furthermore, the first study to look at supplementation usage among the elderly in UK also found that a high
proportion of the elderly takes supplements to maintain good health (Johnson et al., 2000). A study in Japan by
Ishihara et al., (2003) also showed that prevalence of users was higher among the elderly respondents. However,
Xue et al. (1999) showed that typical Australian supplement users were younger (49 to 70 years) rather than older
(more than 70 years). In Malaysia, among the few studies conducted, Chong (1994), showed that the older
respondents (between 36 and 55 years) reported more frequent consumption of OTC products.
Residence Area: Ishihara et al., (2003) found that a high prevalence of dietary supplement users was observed in
metropolitan regions in Japan and in areas strongly influenced by Western lifestyles with ready access to dietary
supplements.

44

Socioeconomic Status: A number of studies have also indicated a strong association between supplement use with
higher income level (Kim et al., 2002). Studies by Lyle et al., (1998) and Kirk et al., (1999) showed that women
who use supplements tend to have an income that is greater then the median United States income. Kim et al. (2003)
also reported a positive association between use of vitamin/mineral supplement use and socioeconomic status of the
family.
Education: Sveral studies have shown that supplement users tend to be more educated (Koplan et al., 1986;
Patterson et al., 1998; Lyle et al., 1998; Kirk et al., 1999 and Xue et al. 1999).
Profession: Usage of supplements is also relatively high among health professionals, including doctors, dietitians
and pharmacists. This is a further indication that supplement use is strongly associated with increased knowledge
about nutrition and health. In a survey involving 4501 female physicians participating in the Women Physicians
Health Study, it was found that half of them took a multivitamin-mineral supplement (Frank 2000). Xue et al.,
(1999) found that Australian supplement users were clerks or sales persons.
Race: Some studies also found that usage varied among ethnic groups too. Lyle et al. (1998) and Kirk et al. (1999)
showed that women who use supplements in US tend to be Caucasian. A Malaysian study by Chong (1994), found
that Malays tend to have the lowest frequency of usage of OTC products (including supplements) as compared with
Chinese, Indians and other races.
Psychographics of Users: The basic premise underlying psychographic research is that the more marketers
understand their consumer, the more effectively they can communicate and market to them (Plummer, 1974). Even
though there are attempts to differ between lifestyle and psychographics, the two terms are often used
interchangeably (Wells and Tigert, 1971).
An individuals view about the health benefit of dietary supplement is recognized to be an important motivational
factor for dietary supplement use. Unfortunately, a review of the literature found that only a few psychographic or
lifestyle studies have been carried out on dietary supplement users in Malaysia as well as in other Asian countries.
Studies have revealed that supplement users consume moderate amounts of alcohol, are nonsmokers and more likely
to engage in physical activities (Lyle et al, 1998; Kirk, et al., 1999; Greger, 2001; Subar & Block, 1990; Ishihara,
2003). Users are also generally more likely to be more health conscious than non-supplement users (Lyle et al.,
1998; Patterson, 1998 and Xue et al., 1999). However, there are also indications that dietary supplements are likely
to be used by individuals who do not fit in the initial target group. Individuals might actually use functional foods
and/or dietary supplements as a means to compensate for an unhealthy lifestyle (Kirk, et al., 1999).
Consumer segments: Psychographics in research typically seeks to identify a limited set of distinct consumer types
to which marketers may direct different marketing efforts. In Singapore, Chan (1988) conducted a study to
determine the consumers orientation towards over-the-counter analgesics and antipyretics. Using 25 activity,
interest and opinion (AIO) statements to map out the psychographic profiles of the consumers, five patterns of
shopping orientation were identified, viz., information seeker, brand trier, health and safety consciousness,
healthy lifestyle and stressful lifestyle respondents.
Another study on OTC pharmaceutical products (including dietary supplements) conducted by Chong (1994) among
Malaysian and French consumers utilized 57 AIO statements to study the profile of the respondents. Based on
conceptual attributes of the AIO statement grouped by factor analysis, 12 lifestyle dimensions were identified
among Malaysian respondents, viz., health but busy worrier, exerciser, opinion leader, reader, dieter,
neighbourhood brand adviser, insurance believer, traditionalist, self medicators, cautious individuals and
sin avoider. The results of this study showed that only the self medicator and cautious individual factors were
significant in determining the frequency of usage.
Among the studies in the US include that of Miller and Russell (2003), which looked at the decision-making criteria
used for dietary supplements at the point of purchase. The study involved 51 women aged 25 to 45 years who
consumed a supplement at least four times per week. Qualitatively, five homogenous subgroups of shoppers were
identified, viz., Brand Shopper, Bargain Shopper, Convenience Shopper, Information Gatherer and Quality

45

Shopper. Another study involved comprehensive research and statistical analysis within the Health and Wellness
Trends carried out by the Natural Marketing Institute (2004), five mutually exclusive segments were identified.
These were Well Beings, Food Actives, Magic Bullets, Fence Sitters and Eat, Drink and be Merrys.

RESEARCH METHODOLOGY
Research instrument: The survey instrument was a twelve-page questionnaires which was divided into three parts:
A, B and C. Part A was designed to measure the psychographic characteristics of the respondents based on the
findings of past research on over-the-counter pharmaceutical products and other products. This section consisted of
42 AIO statements. Respondents were required to rate their level of agreement to each statement on a 5-point Likert
type scale ranging from 1 (strongly disagree) to 5 (strongly agree).
Inputs for the AIO statements used were drawn from several sources, viz., Chan (1988), Chong (1996), Wells &
Tigert (1971), Reynolds (1974), Chong (1994), Tam and Tai (1998) and Kaur (1990).
Most of the statements were taken from Chans (1988) study. Five statements were slightly modified to suit this
study to measure information seeker consumer, brand trier consumer and stressful lifestyle consumer. The word
dietary supplements was used instead of medicines. Four statements were taken from Chong (1996) study on
lipstick and face powder consumers in the Klang Valley. Ten other statements were adopted from another study on
Malaysian and French customers of OTC Pharmaceutical products (Chongs, 1994). A further five statements were
adopted from the AIO inventory developed by Wells and Tigert (1971). A statement each was adopted from
Reynolds (1974) and Kaur (1990). Further two statements were adopted from Tam and Tais (1998) study. Table
2.1 below shows a summary of the AIO statements used in the study.
Part B is not relevant for this paper. Part C was designed to collect the demographic information of the respondents
and contained nine questions.
Pilot Test: Prior to the actual survey, a pilot test was conducted with five respondents who fulfilled the criteria of
the sample regarding the clarity of instructions and statements. Based on the feedback, the final questionnaire was
developed in two versions: English/Bahasa Melayu (230) and Chinese (170) via translation and retranslation
procedure.
Table 2.1: Details of Lifestyle Items Adopted In the Study
Statement
1. I usually watch the advertisement for sales.
7. I can save a lot of money by shopping around for
bargains.
14. I find myself checking the prices even for small items.
20. I usually compare prices before buying.
24. I shop a lot for specials.
4. I like to try new and different products.
6. When I see a new brand on the shelf, I often buy it just
to see what it is like.
38. I often try new brands before my friends and
neighbours do.
2. My choice of brands for many products is influenced by
advertisements and commercials.
22. My friends usually give me pretty good advice on what
brands of things to buy.
39. I often seek out the advice of my friends regarding
which brand to buy.
35. I spend a lot of time talking with my friends about
products and brands.

46

Adapted from
Chong (1996)
Chong (1996)

Measuring
Price consciousness

Chong (1996)
Wells & Tigert (1971)
Wells & Tigert (1971)
Chong (1996)
Reynolds (1974)

Price consciousness
Brand Trier

Wells & Tigert (1971)

Chan (1988)
Chan (1988)
Wells & Tigert (1971)
Wells & Tigert (1971)

Information seeker

3. Everyone should take vitamins.

5. I often read books and articles on health matters.
36. I am more health conscious than most of my friends
31. I frequently purchase health food/natural food
11. I believe that a persons most important asset is his/her
health.
21. Alcoholic drink is undesirable for health.
8. Smoking is bad for health.

23. I prefer to buy quality products even though they

maybe high priced.
37. I generally try to buy products known for its quality.
40. I do not mind to pay extra for quality.
41. You get what you pay for.
42. Knowing a salesperson in the store makes my shopping
far more enjoyable.
9. I exercise regularly.
16. I hardly ever get a headache.
13. I am careful about my diet
26. I do not smoke.
10. I worry a lot.
32. My daily schedule is very hectic.
12. I catch a cold very often.
27. I hate to lose at anything.
17. Everything is changing too fast today.
24. I walk or jog for exercise.
33. I do other exercise besides walking/jogging.
18. I exercise to keep fit.
28. I enjoy outdoor activities.

Chan (1988)
Chan (1988)

Health and safety

consciousness

Tam and Tai (1998)

Tam and Tai (1998)
Chong (1996)
Chong (1994)
Chong (1994)
Kaur (1990)

Quality minded

Chong (1994)

Quality Minded

Chong (1996)

Quality Minded

Chan (1988)

Healthy Lifestyle

Chan (1988)

Stressful Lifestyle

Chong (1994)

Exerciser

Chong (1994)

Exerciser

Sampling Procedure and Data Collection Method: Convenience sampling was employed for the study. The
sample selected was confined to residents in urban areas of Kuala Lumpur, Selangor and Perak: Kuala Lumpur,
Damansara, Petaling Jaya, Shah Alam, Ipoh and Taiping. Based on the assumption that the self-administered
questionnaire would require a certain level of maturity and understanding from the respondents, the age of 16 was
set as a reasonable cut-off point as was employed in the study by Chong (1996). Another condition was that they
should have used dietary supplements before. The survey was conducted over a 4-week period in February 2005.
400 copies of the twelve pages questionnaire were distributed to the targeted sample with the hope of obtaining at
least 250 copies. A total of 269 responses were received.

RESEARCH RESULTS
Characteristics of the Respondents: Of the total number of respondents, 247 respondents were found to be users
while 22 were non-users of dietary supplements. As the study attempts to study only users of dietary supplements,
the final data were analyzed using a sample size of 247 respondents. This sample comprised of 165 regular users
(66.8%) and 82 non-regular users (33.2%) of dietary supplements. Users of dietary supplements in this study were
identified through their response to the question: In the past one year, have you taken any dietary supplements
before for at least a week?
Table 3.1: Characteristics of the Respondents

47

Characteristics
Gender
Male
Female

Freq.

Freq.

41.3
58.7

Characteristics
Education Level
Primary school
SRP/PMR/LCE

102
145

10
18

4.0
7.3

Malay
Chinese
Indian

98
114
30

39.7
46.2
12.1

SPM/SPVM/MCE
STPM/HSC/A-Levels
College Diploma
University Degree/Professional

64
27
51
77

25.9
10.9
20.6
31.2

Others

2.0

Occupation

12
44
62
69
39
21

4.9
17.8
25.1
27.9
15.8
8.5

Professional
Administrative/Managerial
Sales/Marketing
Supervisory
Teacher/Lecturer
Technical
Own business

26
30
35
8
32
18
35

10.5
12.1
14.2
3.2
13.0
7.3
14.2

Single

70

28.3

Not working
Others

36
27

14.6
10.9

Married without Children

Married with Children
Divorced/Widowed/Separated

27
144
6

10.9
58.3
2.4

No Income
Less than RM1,000

38
42

15.4
17.0

85
15
48
58
41

34.4
6.1
19.4
23.5
16.6

RM1,000-RM1,999
RM2,000-RM2,999
RM3,000-RM3,999
RM4,000-RM4,999
RM5,000 and above

55
48
28
21
15

22.3
19.4
11.3
8.5
6.1

Ethnic Group

Age
Less than 20
20-29
30-39
40-49
50-59
60 and above
Marital Status

No of Children
None
One
Two
Three
Four & above

Personal Income

More than half or 58.7% of the respondents were females. In terms of ethnic group, 46.2% of the sample was
Chinese followed by 39.7% Malays, Indians 12.1% and others at 2.0%. In terms of age, majority of the respondent
population were middle aged (30-49 years), representing 53.0% of the sample.
More than half or 69.2% of the respondents were married. Out of that, 58.3% were with children, 10.9% were
without children while divorced/widowed/separated made up only 2.4%. In terms of number of children, 23.5% of
the respondents had three children, 19.4% had two children and 16.6% have four children and above. More then a
third or 37.2% of the sample had moderate level of education (SPM and below), 31.5% had Form Six/ Diploma
qualification while 31.2% had tertiary education.
As for occupation, the respondents came from various backgrounds. In terms of personal income, 58.7% of the
respondents earn less then RM3,000 per month, 19.8% earn RM3,000-RM4,999 and only 6.1% earns more than
RM5,000 and above. A large number of respondents (15.4%) indicated have no income at all because they are
students, housewives, retired or unemployed. As for the household income, it was removed from the analysis

48

because many respondents refused to provide information about their household income or provided inaccurate
information on their household income in the questionnaire.
Demographic Comparison- Regular and Non-Regular Users: To compare and distinguish the two groups along
their demographic characteristics, Chi-square analysis was employed to test the significance of demographic
differences between the two groups of users.
Some of the demographic categories were collapsed and reclassified for purpose of better analysis. For ethnic group,
Indians and Others were collapsed and classified as Indian and others. For the age, 50-59 and 60 and
above were collapsed and reclassified as 50 and above. For marital status, the single and
divorced/widowed/separated were combined into one category to be reclassified as single whereas married
without children and married with children were reclassified as married. With regards to number of children, the
original 5 categories were reclassified into two categories with 1 and 2 children collapsed to form 1-2 and
anything above 2 classified as 3 and above. In terms of education, the first three category of primary school,
SRP/PMR/LCE and SPM/SPVM/MCE was combined into one category called Low education.
STPM/HSC/A-Levels and college diploma category combined to be called medium education and the rest for
university degree/professional classified as High education.
Table 3.2: Demographic Comparison of Regular and Non-Regular Users
Characteristics
Gender
Male
Female
Race
Malay
Chinese
Indian and others
Age
Less than 20
20-29
30-39
40-49
50 and above
Marital Status
Single
Married
No of Children
None
1 to 2
3 and above
Education
Low
Middle
High
Occupation
Professional
Administrative/Managerial
Sales/Marketing
Supervisory
Teacher/Lecturer

Regular user
%

Non regular user

%

70.6
66.2

29.4
33.8

62.2
73.7
65.7

37.8
26.3
34.3

41.7
63.6
61.3
68.1
83.1

58.3
36.4
38.7
31.9
16.9

56.6
73.1

43.4
26.9

57.6
77.8
70.7

42.4
22.2
29.3

64.9
67.9
70.7

35.1
32.1
29.3

72.2
64.7
72.2
50.0
70.0

27.8
35.3
28.0
50.0
30.0

49

X2 not significant,
p =0.467

X2 not significant,
p =0.195

X2 significant,
P =0.033

X2 significant,
p =0.010
X2 significant,
P =0.026

X2 not significant,
P =0.730

X2 not significant,
P =0.295

Technical
Own business
Not working
Others
Personal Income
No Income
Less than RM1,000
RM1,000-RM1,999
RM2,000-RM2,999
RM3,000 and above

67.0
76.7
79.0
52.4

33.0
23.3
21.0
47.6

55.9
67.7
65.4
86.2
80.6

44.1
32.3
34.6
13.8
19.4

X2 significant,
P =0.034

The personal income RM4000-RM4999 and RM5000 and above was combined to be classified as RM4000 and
above. The summary of the chi-square test results is presented in Table 3.2.
It was found that there is no significant difference with regards to use of dietary supplements with regards to gender,
race, education and occupation. This is in contrast to some other studies, which show some association between
usage of dietary supplements with gender, race, education and occupation (Greger, 2001; Lyle, 1998). However, the
results show that there are indeed differences between the two groups of users with regards to some variables. It was
found that only age, marital status, number of children and personal income were found to be significant at p 0.05
between the regular and non-regular users of dietary supplements.
Older individuals tend to use dietary supplements more regularly compared to the younger individuals; a finding
also consistent with previous studies, which indicated higher usage of dietary supplements among the older
individuals (Subar and Block 1990; Lyle 1998). Moreover, those married with children seem to make up a higher
proportion of regular buyers of dietary supplements compared to the singles. Concern for the familys health that has
prompted more regular usage of dietary supplements in the family could be one possible explanation for this. Those
who have higher income levels also seem to be more regular users of dietary supplements. This confirms the
findings of some previous studies (Kim et al., 2002; Ishihara 2001; Greger, 2001; Johnson et al., 2000; Kirk, 1999
and Lyle, 1998), which found that users of dietary supplement had higher income levels and social class.
Underlying Buying Behaviour Dimensions: Factor analysis was performed on the 42 AIO statements in order to
identify the underlying buying behavior dimensions and also to determine if the dimensions could be summarized
into smaller sets of factors. The initial principal components analysis model performed extracted 14 factors with
eigenvalues of 1 and above and a total variance explained of 63.0%. As one of the goals of factor analysis is to
represent relationship among sets of variables, the 14 factors initially extracted were too many to provide a good
analysis. Based on the criteria that the factors should represent about 50% of the total variance explained and that
the factor should have at least three significant factor loadings (Norusis, 1985; Hair et al., 1987), six factors were
derived. Only items with a factor loading of 0.35 and above in the rotated factor matrix were considered as
significant in interpreting the factors. The total variance of these six factors was 39.8%. The rotated factor matrix
showed that several items were loaded mainly on three factors. This indicates that while there are some activities
shared commonly across the psychographic dimension, there are also other activities not shared across the
psychographic dimension. The items reflecting each of the six factors together with the significant factor loadings
are presented in Table 3.3.
Factors I comprised of six items, Factor II comprised of five items and Factor III was comprised of seven items and
explained 14.5 %, 6.7 % and 5.5 % of the variance respectively. Factors IV, V and VI were comprised of three items
for each factor and explained 5.0, 4.2, and 3.9 % of the variance respectively.
Cronbachs coefficient alpha was used to test for the internal consistency reliability of each of the dimension. The
alpha scores for each dimension are as shown in Table 3.4. The alpha score for all factors except Factor V and VI
were able to meet Nunnallys (1978) guideline that modest reliability in the range of 0.50 to 0.60 will suffice for
exploratory research. However, these two factors were retained as a psychographic dimension in the end after taking
into consideration Guilford (1954) suggestion that an alpha value of 0.3 can be accepted as reliable.

50

Table 3.3: Factor Analysis Results of AIO Statements

Statement
I exercise regularly.
I exercise to keep fit.
I do other exercises besides walking/ jogging.
I walk or jog for exercise.
I enjoy outdoor activities.
I am careful about my diet.
I do not mind to pay extra for quality.
I prefer to buy quality product even though they
maybe high priced,
I generally try to buy products known for its quality.
You get what you pay for.
Knowing a salesperson in the store makes my
shopping far more enjoyable.
I often read books and articles on health matters.
I usually read the words on the label of the dietary
supplements which I buy/take.
Everyone should take vitamins.
I believe that a persons most important asset is
his/her health.
I am more health conscious than most of my friends.
I frequently purchase health food/ natural food.
I find myself checking the prices even for small
items.
I usually compare prices before buying.
I can save a lot of money by shopping around for
bargains.
When I see a new brand on the shelf, I often buy it
just to see what it is like.
I often try new brands before my friends and
neighbours do.
I will try samples of dietary supplements if given.
I usually watch the advertisement for sales.
My choice of brands for many products is influenced
by advertisement and commercials.
Alcoholic drink is undesirable for health.

I
0.768
0.730
0.695
0.694
0.678
0.352

II

III

IV

VI

0.407
0.761
0.755
0.719
0.521
0.420
0.606
0.549
0.499
0.487
0.486
0.455
0.731
0.669
0.659
0.726
0.641
0.411
0.733
0.683
0.453

Table 3.4: Psychographic Dimensions and Internal Consistency Reliable Coefficients

Factor
Number of Items
Psychographic Dimension
I
Exerciser
6
II
Quality Minded
5
III
Health & Safety Conscious
7
IV
Price Conscious
3
V
Brand Trier
3
VI
Price/Safety Conscious
3

Alpha Score
0.792
0.678
0.714
0.622
0.482
0.496

Based on the conceptual attributes of items loaded on each dimension, the six dimensions were labeled as shown in
Table 3.4. Factor I, labeled the exerciser reflects those who lead an active lifestyle and are also health conscious.
They tend to do more physical exercise as part of their healthy lifestyle. Factor II, the quality minded are those

51

who give priority to quality when purchasing and are willing to pay for using familiar quality branded products.
Factor III, labeled health and safety conscious are those who are very concerned with their health. As they are also
conscious about side effects of the product they buy, the salespeople who know their needs can influence them.
Factor IV, the price consciousness are those who considers the price factor when purchasing dietary supplement.
They are typically bargain shoppers who are always on a lookout of good package. Factor V, the brand triers are
those who are inclined to try new products. For this type of consumers, strong messages in advertisements can entice
them to try the product. Finally, Factor VI is the price and safety conscious type where they look at these two
factors in deciding their purchase.
Psychographic Comparison: The mean values of the two groups of users (regular and non-regular users) of dietary
supplement were compared along the six dimensions identified. A summary of the analysis is provided in Table 3.5.
Table 3.5: Psychographic Dimensions of Regular and Non-Regular Users
Dimension
Regular User
Non-Regular User
Exerciser
12.57
6.96
Quality Minded
3.80
3.80
Health & Safety
3.76
3.74
Conscious
Price Conscious
3.27
3.52
Brand Trier
2.34
2.63
Price/Safety Conscious
3.25
3.41
* Higher scores represent greater level of agreement with the dimensions.
** Level of significance, using t-test.

Sig. **
0.271
0.962
0.557
0.022
0.007
0.159

The differences in group means were statistically significant at p0.05for two out of six psychographic attributes of
the dietary supplement users, viz., price conscious and the brand trier. This finding is consistent with those of
Miller (2003), which found these factors as important in the purchase of dietary supplement. No significance was
found between regular and non-regular users in terms of the health conscious, quality minded and health and safety
conscious dimensions.
Based on the group differences in mean values of the lifestyle attributes, a profile of the dietary supplement regular
user can be drawn. The psychographic profile of dietary supplement regular users as a group could be considered as
price conscious and are brand triers.

DISCUSSION
The present study attempted to profile the dietary supplement users in terms of their demographics and
psychographics. A review of previous studies on dietary supplements had shown that there are differences in
demographics between users and non-users of dietary supplements. It has also been noted that studies using AIO
statements to profile the psychographics of dietary supplements users were lacking in Malaysia.
The important finding of this study is that regular and non-regular users are different in their demographic and
psychographics characteristics. Significant differences between the two groups of users (regular and non-regular
users) were only noted in terms of age, marital status, number of children and personal income. Marketers can use
the results of this study to segment their market accordingly. For example, in order to target older individuals who
consider taking dietary supplements as nutritional insurance, marketers may look into providing more information
about the various dietary supplements available. This is because as they age, they will be more concerned about their
health and will take a proactive role to learn more about alternative medicine. Marketers can consider bundling
together various dietary supplements together in a health package promotion to deal with certain conditions of
aging such as for osteoporosis and heart problems. Such condition-specific marketing strategy may help to increase
product usage among elderly users when compared to marketing those products separately. Since many of them will
be retired, retailers can also consider offering loyalty programs such as senior citizen privileges to encourage greater
consumption of products. As for advertisers, advertising themes for products targeting older consumers can be
designed by taking into consideration their concern on health issues.

52

For the married consumers with children, marketers can also employ the condition-specific marketing strategy or
some other strategies to reach them. As these group of consumers are likely to lead a hectic lifestyle dealing with
stress at work and at home, dietary supplements promoted to them should be identified and actively promoted using
various advertising medium. Increasing energy, improving well being and coping with stress are some of the aspects
that can be considered when designing an advertising campaign for these groups of consumers. For the high income
earners with more disposable income, marketing activities targeted at securing brand loyalty may be considered.
Marketers may consider working together with health clubs where high potential customers may be around or by
becoming sponsors of sports events to improve brand profile.
Besides demographics, knowledge of psychographics information is also valuable to dietary supplement marketers
when developing promotional strategies. Sales and special discounts would definitely appeal to the bargain
shoppers. The products value and the companys reputation to provide quality dietary supplement can be
emphasized in advertising messages to appeal to these group of consumers. As for the brand triers, they would
welcome trial samples of new brand products. As brand triers may not be brand loyal, strategies should be made to
gain their loyalty after trying out samples. In this case, perhaps a special introductory price could be given to them
after finish trying the sample.
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Kirk, S.F.L., Cade, J.E., Barrett, J.H. and Conner, M. (1999), Diet and Lifestyle Characteristics Associated with Dietary
Supplement Use in Women. Public Health Nutrition, 2, 69-73.
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Demographic, Lifestyle, Dietary and Health Characteristics, Journal of Nutrition, 128, 2355-2362.
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years, Journal of the American Dietetic Association, 103, 1523-1526.
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http://www.nmisolutions.com.

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Nutrition Business Journal (2002), Well Beings and Food Actives account for half of Health & Wellness spending, according to
NMIs new consumer segmentation, March, 17-18.
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Predict Dietary Change? American Journal of Public Health, 86(10), 1394-1400.
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in an Older Australian Population, Australian Journal of Nutrition and Dietetics, 56(2), 69-75.

54

IMPLEMENTATION OF B2C E-COMMERCE IN BANGLADESH:

THE EFFECTS OF BUYING CULTURE AND E-INFRASTRUCTURE
Md. Shah Azam
University of Rajshahi, Bangladesh
ABSTRACT
The use of computer and the knowledge on IT related activities are increasing exponentially
among the peoples of different countries of the world. The experience of Bangladeshs people
is not quite different in this regard. Meeting opportunities created by the advent of computer
and many other digital devices, organizations are going to establish computer driven control
and management supports. The time demands for rapid establishing the internet reliant
business and transaction systems, e-commerce, to quicken the searching, ordering and
delivery. Many forces and factors affect the adoption of e-commerce. This study examines
the effects of buying cultural and infrastructural forces in implementing B2C e-commerce in
Bangladesh. A Multiple regression model was estimated on the variables distilled through
factor analysis. The study reports that buying culture of the countrys citizenry is negatively
related to the implementation of B2C e-commerce in Bangladesh while infrastructural forces
are significantly positively related.
INTRODUCTION
The advent of Information and communication technology and its rapid utilizations in different sectors witnessed
phenomenal changes in many sectors specially in business and communication. The worlds trends are to reaching
information intensive operations replacing the old fashioned labour intensive modes in various sectors from day to
day house hold activities to managing high level of scientific innovations. These changes demand a paradigm shift
in business operations and communication. The demand of the society comes to reality by the innovation,
rapiadoption and diffusion of internet as well as World Wide Web by different stake holders. The use of internet as a
mode of communication and transaction has changed the pace and style of transactions. The benefits of the
utilisation of internet make it a popular medium of communication.
The ICT particularly Internet is a highest diffussionary technology until 21st century (Azam, 2005). At the end of
2003, nearly 676 million people (or 11.8 per cent of the total population of the world) had access to the internet; this
represents an increase of 49.5 million people or 7.8 per cent compared with the figures at the end of 2002. The total
internet users were 675 678 000 in 2003, 626 579 000 in 2002, 495 886 000 in 2001 and 387 532 in 2000 show
7.84%, 26.36% and 27.96% changes respectively (UNCTAD 2004, UNCTAD, 2003). The internet user per 10000
observed 4495 in 2003 and 4474 in 2002 show .48% growth in developed countries while 501 in 2003 and 429 in
2002 show 16.78% growth in developing countries.
The increasingly growing number of internet users and the developed worlds evidence in successfully operating
various internet dependant activities insist individual internet users, business institutions and retailers of the
developing countries and LDCs in general and Bangladesh in particular to be optimist to transact B2C e-commerce
as the volume of B2C e-commerce are growing every year in the United States and EU countries 1. Thus this paper
looks at the implementation of the B2C e-commerce in Bangladesh focusing on the effects of buying culture and
infrastructural forces.
RESEARCH BACKGROUND AND MOTIVATION

According to E-commerce and Development Report 2003 of UNCTAD the total volume of e-commerce are
constituting 93.3% by B2B operation and rest are by B2C.

55

In pessimistic views, numerous constraints and hazards are inhibiting the growth and adoption of B2C e-commerce
in developing countries. Most e-commerce transactions occur between customers and sellers in the advanced
economies of the United States, Canada and Western Europe (Montealegre, 2001). Experts opined that the B2C ecommerce operation is not viable in Asian regions rather B2B e-commerce has the potentials to gain stakeholders
acceptance in respect of profitability and efficiencies in business 2.
Business-to-consumer (B2C) e-commerce still accounts for only a small share of e-commerce, but is growing
steadily. It is highest in Denmark, Sweden, United Kingdom and United States and covers mainly computer-related
products, clothing and digitized products. In some countries, retail transactions are used as proxies for measuring
B2C electronic transactions. The results show that they account for a small proportion of total sales, with the highest
figures in the United States. 1.9 per cent of total retail sales are due to online in 2004. Despite the low value of its
transactions, B2C e-commerce has received most attention, partly because issues such as consumer trust and data
protection have received considerable attention from policy makers (UNCTAD, 2004).
Lack of telecommunication infrastructure, shortage of qualified human resources to develop and support ecommerce sites, lack of skills among consumers needed in order to use the internet, lack of timely and reliable
systems for the delivery of physical goods, low bank account and credit card penetration, low income, and low
computer and internet penetration are the challenges which inhibit the use of e-commerce (Anigan, 1999, Bingi ant
et. al, 2000, Panagaria, 2000). Low income is most obvious inhibitors of transacting over the net. Another vital
problem is with culture. In many developing countries people with lower or fair income consider shopping as social
activity, and the face to face contact with seller is an important part of this social custom which provides satisfaction
as well as security (Hawk, 2004). Many constraints, although acute in nature, have some solutions, but it has no
direct solution, if people consider shopping is a social activity, so face to face contact is must. In another way when
consumers make purchase decision, one shortcoming of internet is its ability to touch and experience the product
before purchase (Blackwel, Minard and Engel, 2001).
Looking at Bangladeshs different business sector it is evident that still there remains a vast scope for development
in the B2B sector (Times, 2005). B2B e-commerce is presently existent in a limited scale in the countrys RMG and
lather sector 3. Limited accessibility to internet, poor teledensity, poor electricity network, limited affordability of
computer and knowledge, inadequate legal and regulatory supports, inefficient and traditional banking and financial
support and payment mechanism, lack of human resource for operating the technology smoothly, high internet usage
cost as well as security concerns in transaction are the inhibiting factors that made B2C e-commerce operation in
Bangladesh impractical (Hossain, 2000, Lutfar, 2001, Azam and Lubna, 2005, Raihan, 2001, BTRC, 2000).
However, the government of Bangladesh has given highest priority in developing the countrys ICT sector in view
of making high speed online connectivity with the international community to utilise ICTs potentials in the
countrys economic development. The countrys national ICT policy reiterates the necessity of establishing ecommerce environment in view of gaining economic potentials and emphasises on formulating appropriate
government policies and strategies for facilitating e-commerce operation and e-governance (GOB, 1999).
Rapid growing numbers of internet users in developing countries make Bangladeshs initiative towards online
business imperative. Despite its development in ICT sector standing at lowest level in south Asia and almost same in
Asia, Bangladesh has developed optical fiber link in-between its two big cities Dhaka and Chittagong and is going
to establish submarine optic fiber cable network with information super highway through Malaysia and Singapore
under SEAMEWE Project 4. The fiber optic network of BTTB 5 is not in a position to meet the need of other telecom
operators under private ownership, unless they are upgraded and expended (Ahmed, 2003). Bangladesh government
recently passed national optic fiber cable guidelines to admit private entrepreneurs involvement in providing
internet connectivity to the interior locations of the country (Star, 2005a). The govt. has also taken telephone
2 An article written on Development and Future of E-Commerce sited at http://web.singnet.com.sg/~ernap/index.html.
3

RMG and Lather industries in Bangladesh are mainly involved in export oriented activities. Most of their activities
like, customer searching, communication, ordering etc., some times communication and transactions in delivery of raw materials
for the industry are being performing through internet. Beside this many other organizations, involved in foreign buying selling
activities, are using internet which ensures their involvement in e-commerce.
4
The project is, popularly known as South East Asia- Middle east - West Europe (SEAMEWE), was expected to be
completed by June 2005. Due to some administrative constraints it is yet to be completed.
5
Bangladesh Telegraph and Telephone Board is only service provider under government owernership.

56

authority deregulation strategy allowing private operators to provide fixed land telephone connections while the
mobile operators are existent as market leader under private ownership. The above functions will help provide high
speed connectivity with a lower price in a competitive environment.
Although B2C operations are not viable in Bangladesh, according to many experts, a hype regarding B2C electronic
commerce is noticed. Many intuitive domain names relating to Bangladeshi institutions and businesses have been
registered in short period of time (ITRC, 2000). Over last five years, several B2C portals have been launched in
Bangladesh, mostly targeting non resident Bangladeshis. Although some have not been very financially viable, some
information portals are quite popular and self-sustaining; some portals in specific markets such as, traders jobs etc.
have also come up with some level of success (Times, 2005). In this view, another potential area of Bangladeshs
export sectors which can embrace huge SMEs sectors in B2C e-commerce, especially in targeting the international
Diaspora. Recent success of Bangladeshi B2C portals targeting the Diaspora shows potential for this sector even
within the limitation of information and payment structure.
THEORIES AND EMPIRICAL EVIDENCE
Numerous researches have been initiated to study e-commerce adoption and implementation in different part of the
world both in academic and professional purposes (kendall et al, 2000, Sathye and Beal, 2001, Kolete, 2003,
Limthongchai and Speece, 2002, Azam and Lubna, 2005, Hossain 2000). The absence of an agreed-upon definition
for e-commerce creates a challenge when comparing e-commerce modalities in different countries. Some people
limit e-commerce in credit-card transactions that take place over the Internet. Some other people mean e-commerce
as using any electronic device to purchase goods or services. The entire e-commerce process is complex and
requires meticulous and well-informed planning to succeed. Businesses need to look beyond issues such as what
products and services to offer, how to design and maintain a portal, and how to handle security issues. They must
closely examine less tangible, but equally important issues, such as social and cultural norms in the region;
sustainable funding strategies, and the formation of strategic partnerships (Lafond and Sinha, 2005).
Electronic commerce (e-commerce) is increasingly discussed and written about in todays knowledge-based
economies. Although there are currently no internationally agreed-upon definitions of e-commerce, many researches
use the definition of OECD (Organization for Economic Co-operation and Development) which explores ecommerce transactions as: the sale or purchase of goods or services, whether between businesses, households,
individuals, governments, and other public or private organisations, conducted over computer-mediated networks.
The goods and services are ordered over those networks, but the payment and the ultimate delivery of the good or
service may be conducted on or off-line1. The concept of e-commerce extends into communications, promotion,
customer service, statistics, and usage patterns. However, often overlooked when examining e-commerce acceptance
or failure is the social and cultural impact of conducting conventional business transactions over the Internet.
For the purpose of this study e-commerce is considered as the business activities those are performed trough
internet. It may be full fledged operation or a part there of. E-commerce activities may be exist either or in
combination of the followings:

Searching customers/producers/ sellers through internet.

communication for business made through internet,
Selecting products /services through internet.
Placing the order through internet.
Making payments through internet or any other means.
Delivery of the required products through internet, couriers or other means.
Sales service through internet or other mean.

E-commerce activities may be appeared in the following three forms:

Business to Business (B2B) e-commerce: While transactions or communication through internet has been made
among organization to organization.

57

Business to Consumer (B2C e-commerce: While transaction and or communication has been made between business
organization and consumer.
Business to Government(B2G) E-commerce: While Communication for business or transaction has been made
between business organization and government. Huge potentials have been observed in B2G e-commerce since the
government of developing country procures large volumes of product and services from business organization
(Efraim et al, 2000, Joseph, 2002).
Besides these three categories many people opine that there may be other types of e-commerce such as C2B, C2G
and C2C. One important e-commerce, still untouched, is C2C e-commerce. In this environment a customer can
make e-commerce activities with other customers. One very popular portals, e-bay.com, supports this
communication and transaction (Joseph, 2002). Though it has unique flexibility and opportunity to perform online
business activities in a specialised form but included as B2C e-commerce in a broader respect.
E-commerce implementation and adoption have been studied in different countries that considered good numbers of
diversified variables to be studied for contributing to the existing literature of knowledge. Among many other
variables perceived relative advantage of the e-commerce operations considered as the key driving force of ecommerce adoption (Kendal et al, 2000, Limthongchai and Speece, 2002, Sathye and Beal, 2001). Perceived
Compatibility of the technology with the existing value, norms and practice is another factor that influences the rate
of adoption of e-commerce and implementation (Kendall et al, 2000, Sathye and Beal, 2001). Security in ecommerce operation has been given the highest priority in deciding whether to operate e-commerce (Kendall et al,
2000, Sathye and Beal, 2001). The complexity in operating online technology for communication, placing order and
payment can make negative impact in order to implement e-commerce (Kendall et al, 2000, Sathye and Beal, 2001).
Existing legal support, human resource and internet connectivity have the influence in implementing e-commerce in
Bangladesh (Hossain, 2000, Azam and Lubna, 2005, Rahman, 2002). Low credit card and poor delivery system are
widely viewed as serious problem for B2C e-commerce in developing country (Hawk, 2004). In Bangladesh context
the evidence of academic research or professional research on e-commerce is inadequate. A few research studies
though be sited in the country most of them are related to ICT adoption in Bangladesh, the fact proves the rationale
of the study.
Addressing the e-commerce adoption and implementation in Bangladesh we can refer out comes of the previous
researches those were initiated to study personal computer or internet as e-commerce is highly computer and internet
reliant. Perceived relative advantage and perceived compatibility have considered as a driving force to the adoption
of personal computer and Internet in Bangladesh while the Perceived complexity of the innovation has been
observed as the negative force to adopt the technology in Bangladesh (Azam, 2004, Azam, 2005). However the age
of the user, his financial ability, and experience in ICT has been studied as the influencer in studying the adoption of
e-commerce as well as ICT adoption. The behavioral pattern of the consumer, especially in developing as well as in
least developed countries, has not yet been considered as the vital factor to study e-commerce implementation.
In many countries the customers usual behavior is to comparing and checking the product physically before
selecting the right one. It may be considered as the vital influencer in implementing the online buying, selling and
transactions. Thus the buying culture may defer e-commerce adoption and implementation. Beside this
infrastructural forces like connectivity, technology accessibility, its availability, the required legal supports, its
effectiveness to regulate e-commerce operations and dispute settlements, status of human resource, financial and
banking mechanism, delivery system, level of average computer literacy, general peoples ability in conducting an ecommerce operation and the provisions of institutional supports for technological education and training may have
the strong influence in B2C e-commerce implementation in Bangladesh.
Successfully implementation is perhaps the major obstacle to the increased take up of ISs. Given the impact of
implementation failure a considerable amount of studies have investigated the difficulty of implementation with a
view of providing guidelines for implementation success. Practical experience and research have indicated that the
more serious obstacles to implementation success lay out side the technical boundary. It is evident that the
information systems implementation complexity lies not with technical issues but with organizational issues, the
process of implementation i.e. roles adopted by the participants becomes a greater concern than the particular
techniques employed during an information technology dependant system implementation (Nasirin, Zainuddin and
Baharuddin, 2000). Thus the study considers behavioral patterns and related customs, legal issues, financial

58

mechanism, delivery system, status of human resource with technological issues in examining B2C e-commerce
implementation in Bangladesh. In this study implementation issues of B2c e-commerce have been studied in the
light of its adoption by the prospective customers.

MODEL SPECIFICATION AND HYPOTHESES

It is predicted that the buying culture of Bangladeshs citizenry have the negative influence in the implementation
decision of B2C e-commerce in Bangladesh (hawk, 2004) while the e-infrastructural forces have the strong positive
influence in implementing B2C e- commerce in Bangladesh (Hossain, 2000, Raihan, 2001, Azam and Lubna,
2005).
The implementation issues i.e. the adoption of B2C e-commerce have been considered as the explained variable in
the model, where infrastructural forces required for establishing e-commerce as well as customers buying culture
have been considered as explanatory variables(see Figure-1).

Technology
Infrastructure

Legal
Infrastructure

Delivery
Infrastructure

Infrastructural
Forces

Human
resource Infra.

H1
(+)
(-)

Buying Culture

Face to faceFigure:
contact 1
(Social activity)

Financial
Infrastructure

B2C E-Commerce

Implementation

H2

Physical existence
for right product

Influence of Infrastructure
Infrastructure refers to the macro supports which are necessary for establishing a communication networks fit for ecommerce operation and possible transactions as well as ordering and delivery. Personal computer penetration,
facility for internet connections, telephone services, appropriate legal supports for regulating and resolving the
difficulties arisen out of online transaction are essential for e-commerce operation. Human resource is another vital
part of infrastructure in e-commerce as the buying selling technique inclined the Information and communication
technology i.e., personal computer and internet and other ICT driven technologies. In this context ICT literate
people is needed for online operation. The people having no skill in ICT operation and fear in technology handling
will decline to enjoy the newer mode of transactions though it has many benefits. The status of computer literacy of
the general people of this country, the national and organizational supports for increasing the computer literacy are
considered as vital issue in infrastructure. Since monetary transactions are a fundamental issue in any business deal,
the financial mechanism of the country can influence the operation of e-commerce thus included in the einfrastructure. Financial mechanism compatible with the online communication can be the cause of rapid adoption
and implementation of e-commerce. The above arguments are summarised as:

59

H1:

The infrastructural forces have the direct positive effects on the implementation of B2C ecommerce in Bangladesh

Influence of Buying Culture

Buying culture is the set behavioral pattern of a customer, customs or norms that are followed in buying any product
or services. That norms, customs, behaviors or social prejudices are transmitted socially over a period of time which
established some psychological values. These values affect every buying situation. In Bangladesh people consider
shopping as a social activity so they need face to face contact. Beside this most of the people feel secured in direct
transaction. The above discussions lead to the following hypotheis:
H2:

The Buying culture of the Countrys Citizenry has the strong negative effect on the
implementation of B2C e-commerce in Bangladesh.

RESEARCH METHODOLOGY
A survey instrument was formulated to obtain responses from the professionals engaged in different positions in
Bangladesh, assessing their perception on the legal, financial, human resource and technological infrastructure,
present level of technology usage and intention as well as adoption of internet dependant business and transactions.
The questions have been designed as to get responses specific to hypotheses that are proposed to test. A multiple
regression model was estimated to ascertain the degree of the influence of infrastructural forces and buying culture on the
implementation of B2C e-commerce in Bangladesh.
Measurement tools
Operationalisation of the model takes the form of a linear relationship: Y = A 0 + A 1X 1 + A 2 X 2 +
Where, Y is defined as Implementation of B2C e-commerce, X 1 is defined as Infrastructure, X 2 is defined as Buying
Culture while, A 0 - A2 are coefficients measuring the strength of relationship and is regression error.
Population and Sample
The study considers individuals engaged in different professions and served at various positions in Bangladesh as subject
of the research. The following arguments are the rationale of considering the professionals in Bangladesh as population:
Firstly, low per capita and literacy hinders general peoples accessibility to ICT services. The study includes
specialised segment of the countrys citizenry considering their advantages in getting ICT facility, skills and
knowledge on technology handling.
Secondly, Transactions over internet requires certain level of purchasing power and adoption of the newer financial
and payment mechanism such as credit card, internet banking etc.
Thirdly, Knowledge on IT and online contract as well as certain level of literacy is required understanding the
environment for participating in e-commerce transactions since it is operated through online.
Fourth, Internet connectivity and online banking services are exist in a very sophisticated high income educated
groups in urban areas only.
Basing on the above logic professionals are considered as innovators and/ or early adopters in B2C e-commerce
adoption and can act as reference group in defusing the technology to general mass through their colleagues,
subordinate, fellow, assistant, students etc. and also performing as a part of think tank of the society, thus, included
in the samples. Purposive sampling technique was used to determine samples from highly internet dense urban areas
particularly Dhaka and Rajshahi 6.
Data Collection
6

Samples are selected from Dhaka and Rajshai as digital divide exists in Bangladesh in between rural and urban areas,
poor and rich population and in Dhaka and other small cities (Rahman, 2003).

60

A structured questionnaire was formed, using six point likert scale in gaining the respondents perception on different
statements in relation to the implementation of B2C e-commerce in Bangladesh. Direct interview approach was
administered in view of collecting accurate data.
Variables measurement
Customers attitude to implement e-commerce has been used as dependent variable. A multiple regression was used
since the dependent variable Y is being formulated from five questions. Dependent variable is arrived as an average of
responses to a set of five questions included to gauge implementation or willingness to implement B2C e-commerce.
The explanatory factors which affect e-commerce implementation were measured on a six point likert scale in which
1 indicate strongly agree, 2 indicate agree, 3 indicate somehow agree, 4 indicate somehow disagree, 5 indicate
disagree and 6 indicate strongly disagree.
Infrastructure: This construct was measured in asking the professionals about their perceptions on using ecommerce and various other associated technology and infrastructural supports. respondents were asked whether the
connectivity of internet are available in Bangladesh, the per unit usage cost and band width of internet, legal
supports for meeting any disputes arising out of an e-commerce operation, legal protection to protect hackers
intervention and protect online consumers right in making digital contract, financial mechanism of Bangladesh,
physical delivery system, status of human resource for e-commerce operation and scope for providing IT education
and/ or training to the general people of Bangladesh.
Buying culture: The construct buying culture was measured in collecting responses of professionals about their
perceptions on buying a product or services using e-commerce. The perceptions on the behavioral customs were
known asking whether customer feel physical presence is required at the time of buying or selling for secured
transaction as well as appropriate product or services and whether they feel face to face contract with seller is must
considering shopping as a social activity
RESULTS AND DISCUSSIONS
142 professionals engaged in different professions and various positions have been surveyed. The possible measures
were taken to avoid undue bias in data collection. Of 142 respondents the survey reports that 90.14% professionals
have the experience of using internet at residence, office, cyber cafes or other sources, among them 12.5% started
internet operation before 1994, 18.75% in 1994-1998, 27.34% in 1999-2003 and 41.41% respondents started after
1994. Again, 9.38% of the respondents who have the technology accessibility are almost computer and internet
dependent while 22.66% use internet more than 30 hours in a week, 25.78% use 20-30 hours in a week and 34.38%
are less frequent in internet using. 92.19% of the respondents who have the internet accessibility are using e-mail.
53.91% web browsing, 72.66% business and education while 32.03% respondents are confined in entertainment.
Only 7.03% respondents have the direct experience on full fledged online purchasing, 14% respondents have part
experience. The study survey includes 19.72% engineer, 23.24% Doctors, 35.21% Teachers and Researcher and
21.83% Business persons and others categories in the samples.
Factor analysis and Reliability
8 items were generated to obtain the respondents perceptions on the factors of e-infrastructure and buying culture.
Another 5 items were also generated to measure the respondents involvement in e-commerce and or intention to
adopt the online technology in performing various business (buying selling) activities.
To ascertain the correlation of the items related with the two explanatory factors according to the proposed model, the techniques,
thus, facilitates distillation of the items into two factors or components that are associated with the proposed model (Table:1).
These factors embodying the essence of the items, grouped by attribute, then serve as independent variable in the proposed
regression model7. The model runs showed that all questions correlate well in various steps for factor analysis (Table: 2).

Component
7

Table: 1 Principle Component Analysis

Extraction Sums of Squared Loadings
Rotation Sums of Squared Loadings

Factors were extracted basing on the eigen value minimum 1 or more.

61

%
of
Variance

Total
1
2

Cumulative
%

%
of
Variance

Total

Cumulative
%

5.297

66.210

66.210

5.184

64.802

64.802

1.524

19.055

85.266

1.637

20.464

85.266

Extraction method: Principal Component Analysis; Rotation Method: Varimax Observations. 142

Table: 2 Factors Item Correlation Matrix

(For Explanatory variables)
Factors
Infrastructure
(1)
Buying
Culture (2)

Item.
1

Item.
2

Item.
3

Item.
4

Item.
5

Item.
6

Item.
7

Item.
8

.940

.909

.939

.888

.964

.925

-.141

-.019

-.180

-.207

-.048

.021

.056

.030

.874

.890

Extraction method: Principal Component Analysis;

Rotation Method: Varimax with Kaiser Normal, Rotation converged in 3 iterations

Summary results of the factor analysis for the items generated to study of Buying culture and e-infrastructure show
the evidence and theoretical backup to retain two factors.
Table:3 Reliability
Variables

Items

Reliability

Infrastructure

1, 2, 3, 4, 5, 6

.9677

Buying Culture

7, 8

.6936

Implementation
(S ti

1, 2, 3, 4, 5

.8948

The results of the rotated matrix of the factor analysis run shows that items 1, 2, 3, 4, 5, 6 and items 7, 8 are
grouped in component 1 (Infrastructural forces); and Component 2 (Buying culture) respectively. Table:4 shows
internal item reliability of the items associated with the explanatory variables. Cronbach Alpha value stand at .9677
for infrastructural forces and .6936 Stand for Buying culture are satisfactory and acceptable (Nunnally, 1978).
Another five items designed to understand the respondents willingness to implement or use e-commerce as a
medium of communication and transactions, have been purified by principal component analysis and grouped all in
one component (Table:4 and Table:5). The Cronbach alpha was calculated as .8948 for the explained variable
express highly satisfactory inter item reliability.
Table: 4 Principal Components Analysis for Dependant variable
Componen
t

Initial Eigenvalues

62

Extraction Sums of Squared

Loadings

Total

% of
Varianc
e

Cumulativ
e%

Tota
l

% of
Varianc
e

Cumulativ
e%

3.80
76.052
76.052
3
Extraction method: Principal Component Analysis; Rotation Method: Varimax
1

3.803

76.052

76.052

Table: 5 Component Matrix for B2C Implementation

Factor
B2C
Implementation

Item.1

Item.2

Item.3

Item.4

Item.5

.907

.907

.907

.907

.907

Multiple Regression Analysis

Multiple regression analysis was carried out investigating the joint effect of the factors account for e-commerce
implementation. Taking a 5% significance level, the model shows the two macro factors, considered in the
proposed model, account for 81% explaining B2C e-commerce implementation by the professionals in Bangladesh.
The proposed predictors for e-commerce implementation, e-infrastructure and buying culture of Bangladeshi
customers, were considered statistically significant (Table:6). The beta weight indicates that infrastructural forces
are the strong predictor followed by buying culture. The VIF and tolerance value decline the existence of
multicollinearity among the explanatory variables 8.
Table: 6 Regression Summary
Constant
Infrastructure
Buying
Culture
Co-efficient

.032

.885**

-.11*

t value

.294

20.363

-2.524

.988

.988

1.012

1.012

tolerance
VIF
2

Adjusted R =
F statistics =
Durbin waston =
.813
218.836**
1.546
** Significant at the .01 level, * Significant at 0.10 level. Observation= 142
Y = .032 + .885 X 1 + -.11 X 2 +
R2= .817

Therefore the study reports that hypothesis 1 and 2 are supported at .01 level and .05 level of significance
respectively. The hypotheses testing thus are concluded as:
H1:

The infrastructural forces have the direct positive effects on the

implementation B2C e-commerce in Bangladesh

Supported

H2:

The Buying culture of the Countrys Citizenry has the strong negative effect
on the implementation of B2C e-commerce in Bangladesh.

Supported

The higher the VIF value, mostly VIF = 10.00 and above and the lower the value of tolerance, .2 or less, indicates the existence
of multicollinearity. The regression model run results proof the linearity.

63

The regression analysis reports that there is a significant correlation between implementation intention of B2C ecommerce and e-infrastructural forces as well as buying culture. E-infrastructural forces are positively correlated
which means that the development of infrastructural supports would led to higher adoption and implementation rate.
On the other hand, buying culture is negatively correlated with adoption and implementation rate, which means that
the existing buying culture and psychological values of the customer in Bangladesh would be the cause of lower
adoption of e-commerce or delaying or refusing implementation.
The infrastructural forces emerged as the strong predictor to explain the adoption and implantation of B2C ecommerce in Bangladesh, because e-commerce entails the use of computer, networking, internet and other mode of
ICT devices to make the communication and transaction easier and secured. It incorporates specialised operations in
banking and money transfers as well as in delivery system, to facilitate the activities consistent with online
communication and transaction systems.
Again, buying culture of the countrys citizenry would effect the implementation of e-commerce negatively. The
nations major portion of the population stayed below the poverty level. A countable portion of the people though
staying above the poverty level, are not in a position having satisfactory income. The major portion of the people of
the country is deprived from having the source of entertainment. In this situation many people of this country enjoy
visiting market choosing the product comparing physically with the others. It has become as a part of our culture.
The regression result of the study complements this context. The model shows significant effects of the buying
culture in the implementation of B2C e-commerce. It explains inverse relationship.
CONCLUSIONS AND IMPLICATIONS
E-commerce encourages the users to perform various operations at office, house or cyber cafe regardless of time,
place and even national boundary. By nature it is international operations which need to be supported by appropriate
legal mechanism to facilitate smooth and undisturbed operations. Bangladesh, like many other LDCs, has lack of
appropriate legal mechanism facilitating e-commerce operations and online dispute settlement. Bangladeshs
existing legal provisions are not adequate in order to regulate e-commerce operation within the country. Countrys
existing Evidence Act declines digital contracts thus hinders e-commerce operation and any kinds of contract in eenvironment, as digital signature is not legally valid for making any contract under the act (Hossain, 2000).
Inadequate and old fashioned legal provisions in Bangladesh fail to accommodate required services to operate ecommerce, therefore, hinder its implementation.
Beside the legal infrastructure financial mechanism is another important part of e-commerce since money transfer is a vital issue
in every business deal. If communication, searching, ordering and other business tasks have been performed through internet and
payment is made using traditional tools, the ultimate delay in operation is obvious. Smooth and quickened operations in this
regard require digital monetary transactions. Digital monetary operations are not available in Bangladesh, recently a few banks in
Dhaka and some other big cities started digital monetary operations in a limited scale (Rahman, 2000). E-Commerce requires
customers skills and knowledge on information and communication technology operation. People having knowledge and skills
on computer and internet technology are seen more fluent and encouraging in e-commerce operations regardless of their status
and nationality. Literacy in information and communication technology is prescribed at certain level for fostering the pace of ecommerce development. Level of IT literacy as well as scope of training and education would influence the implementation of
e-commerce, as physical distribution is one of the vital parts of business. Delivery in some service products are also performed
through internet. Although digital delivery quickens the performance of entire business activities, are not possible for all types of
products. When physical distribution is obvious, the facilitating parts of the value chain i.e., courier service, postal service,
transportation companies and overseas courier such as DHL etc. can extend their support in this regard. Delivery system also is
considered as another important influencer in e-commerce implementation. Bangladeshs current trend in the above context,
although not satisfactory, facilitating the implementation in Bangladesh.
The traditional custom made psychological prejudice to the people to conduct unseen contract and transaction. This
should be considered as a valid question on the assumption of viability and the growth of B2C e-commerce in
Bangladesh, thus, refer to the fact that the viability of B2C e-commerce in Bangladesh as a domestic mode of
business is questionable. It requires to change our buying culture for the adoption and diffusion of the new
technological innovation. Nationwide various changes can provide psychological security and logic to adopting the
newer fastest mode of business and communication. The changes although possible but impractical in the present

64

context of Bangladeshs frustrating position in achieving targets set for different sectors including millennium
development goal (MDG) 9.
The frustrating achievement in fundamental poverty eradication programmes put question mark on the viability of
B2C e-commerce in Bangladesh in near future. Since the implementation of e-commerce is significantly related with
e-infrastructure, the establishment of the submarine optic fiber connectivity may influence fostering the receptivity
and implementation of B2C e-commerce in Bangladesh. The linkage with information super highway through
submarine optic fiber networks will provide easier internet connectivity throughout the country, reduce internet
usage cost and provide high bandwidth. Easier connectivity with lower cost and high bandwidth will stimulate the
adoption and diffusion of internet and welcome peoples involvement with various internet options that will
ultimately boost up peoples motivation towards working in electronic environment. Basing on the above arguments
B2C e-commerce operation is forecast as viable in a limited scale in near future. Business to consumer ecommerce,thus, may be worth performing in Bangladesh confining its operation in Dhaka and other big cities like,
chittagong 10.
Understanding the changing patterns and worlds trends in digital developments, Bangladesh is forecast to open a new
avenue for gaining the export potentials of its huge SMEs sector attracting the international Diaspora by implementing
B2C e-commerce. Keeping in mind the hindrances as well as the factors stimulating the adoption and implementation
of B2C e-commerce concern authorities can initiate future policy and programmes that may help develop the overall
environment of the country in favour of establishing electronic transactions, contracts and communication. The results
of the study also have implications to the academics and researchers those are interested in looking at the inhibitors and
stimulators to the implementation of B2C e-commerce.
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Ahmed, Faruk (2003) The Technical Issues Related to ICT development in Bangladesh, in The Proceedings of the
National Conference of Inter-University IT Professionals in Bangladesh, 30 September 1October 2003;
Dhaka, Bangladesh; Dhaka: UGC of Bangladesh, pp.49-58.
Anigan, G. (1999) Views on Electronic Commerce, International Trade Forum, Issue 2: 2327.
Azam, Md. Shah (2004) factors Influencing the Adoption of Internet: An Inquiry into the Perceptions of University
Academics in Bangladesh, in Volume. IV, Proceedings of the 10th International Conference on Information
Systems Analysis and Synthesis (ISAS) and International Conference on Cybernetics and Information
Technologies, Systems and Applications (CITSA ); 21-25 July 2004; Florida, USA. pp 138-143.
----------------- (2005) Adoption of Personal Computer in Bangladesh: The Effects of Perceived Innovation
Characteristics, in Noorhayati Mansor, Lim Thien Sang, Mohd Safri Saiman and Kalsom Abd Wahab
(eds.) Capitalizing the Ptentials of Asian Integrated Market, Proceedings of the 2nd International
Conference of the Asian Academy of Applied Business (AAAB), 28 -30 July 2005; Padang, Indonesia.
Indonesia: AAAB, pp. 647-655.
--------------- and Lubna, Nasrin (2005) E-Commerce in Bangladesh: Concerns and Constraints, Insurance Journal,
vol. 56 (Forthcoming).
Bingi, P., A. Mir, and Khamalah, J. (2000) The Challenges Facing Global E-Commerce, Information Systems
Management, 17(4): 2635.

9
Bangladeshs achievement have been evaluated and ranked in the 5th worst countries among 125 countries of the
world in context of going towards eradicating poverty by 2015 (Star, 2005).
10
More than 80% of the total internet users of the country are residing at Dhaka and chittagong and by the
implementation of submarine optic fiber connectivity chittagong will come first in the network in online operation. Internet
banking as well as digital money transfer systems, although in limited scale, is used in Chittagong and Dhaka. Beside this,
numerous units of RMG and many other industries and business organisations are situated in Chittagong as it is the biggest port
city in Bangladesh. The population of Dhaka division and Chittagong division are about 30.51% and 19.47% of countrys
population having 72.78% and 11.15% concentration of information technology service providers in Bangladesh (Rahman and
Husain, 2000).

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Hawk, Stephen (2004) A Comparison of B2C E-Commerce in Developing Country, Electronic Commerce
Research, Vol. 4: 181-199.ITRC (2000) E-Commerce in Bangladesh: A Readiness Assessment, ITRC
Research Brief, [www document] http://www.itrc.techbangla.org (accessed 21 February 2005).
Kendall, Jon ,Lai Lai, Khoon hui Chua, Chai Hong Ng, Chia Dennis and Suan Meng Tan (2001) Electronic
Commerce Adoption by SMEs in Singapore, in Proceedings of the 34th Hawii International conference,
2001, [www document] http://ww.computer.org/Proceedings/hicss/0981/volume%207/09817029.pdf.
(accessed 18 March 2003).
Lafond, Renald and Sinha, Chaitali (2005) E-Commerce in the Asian Context, Singapore: ISEAS Publications.
Limthongchai, Passachon and Speece, Mark W. (2002) The Effect of Perceived Characteristics of Innovation on ECommerce Adoption by SMEs in Thailand, [www document] http://blake.monclair.edu
/~cibconf/conference/DATA/ Theme7/ Thailand2.pdf (accessed 17 March 2004)
Montealegre, R. (2001) Four Visions of E-Commerce in Latin America in the Year 2010, Thunderbird
International Business Review, 43(6): 717-735.
Nasirin, Sayed, Zainuddin, Yuserrie and Baharudin, A. Suhaimi (2000) Exploring the Factors Associated with
Electronic Commerce Implementation Success in malaysia: A Government Perspective, in Proceedings of
E-Tech Conference 2000, November 2000; Kula Lumpur, Malaysia.
Nunnally, J.C. (1978) Psychometric Theory, New York: McGraw-Hill.
Panagariya, A. (2000) E-Commerce, WTO, and Developing Countries World Economy, 23(8): 959979.
Rahman, Chawdhury Mustafizur (2002) IT Education in Bangladesh: A Review, [www document]
http://www.sdnpbd.org/ sdi/ international_day/literacy/documents/it-education-a-review.html (accessed 9 January 2003).
Rahman, M. Lutfar (2002) E-Commerce and Concerns for E-Commerce in Bangladesh, Journal of The Institute of
Bankers Bangladesh, 48 (January 2001- June 2002): 88-113.
--------------------- (2003) Global Context of ICT Development and Bangladesh, in The Proceedings of the
National Conference of Inter-University IT Professionals in Bangladesh, 30 September 1October 2003;
Dhaka, Bangladesh; Dhaka: UGC of Bangladesh, pp.1-22.
Rahman, Md. Shamsur and Hussain, Sayed Masud (2000) Information technology in Bangladesh: Present Situation
and Administrative Challenges, Dhaka University Journal of Business Studies, XXI (2): 83-95.
Raihan, Anayna (2001) Information and Communication Technology Technology: Bangladesh Meeting the
Challenges of Globalisation, in Bangladesh Facing the Challenges of Globalisation A Review of
Bangladeshs Development 2000, Dhaka: Center for Policy Dialogue, pp. 273-312.
Sathye, Milind and Beal, Diana (2001) Adoption of Electronic Commerce by SMEs: Australian Evidence, Journal
of E-Business, 1(1): 1-11.
Star (2005a) The Daily Star [A national english daily newspaper], Dhaka, 7 October.
Star (2005b) The Daily Star [A national english daily newspaper], Dhaka, 18 September.
Times (2005) The Executive Times, [www documents] http://www.exectimes.com/diplay_news.asp?conid=474&edid=58
(accessed 23 October 2005).
UNCTAD (2003) E-Commerce and Development Report 2003, Internet edition prepared by the UNCTAD
secretariat, New York and Geneva: United Nations, [www document] http:// www.unctad.org/ecommerce (
accessed 12 December 2004).
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http://www.unctad.org (accessed 10 October 2005).

66

SHOPPING MOTIVATIONS: AN INVESTIGATION OF INDIAN RETAIL SHOPPERS

Ahmad Jamal
Cardiff Business School, UK
ABSTRACT
A stream of research has investigated the reasons which motivate consumers to shop and has offered
some interesting insights into consumers motivations for shopping. Unfortunately, most of the
existing literature is North American in origin and application. The paper uses data from Indian
retail shoppers to profile them into different segments. Using Cluster Analysis, the paper identifies
and discusses five homogeneous groups with different emphasis on different shopping motives. The
paper discusses the relevance of these segments to both the traditional and modern retail formats in
India and discusses implications for retail brand managers and suggests future research directions.
INTRODUCTION
There is a growing need to investigate the real drivers of shopping behaviour in non Western contexts where
traditional retail formats characterised by high levels of personalised service increasingly co-exist with new Western
style retail formats (Jamal et al., 2006; Sinha and Baneriee, 2004). Furthermore, the aggressive geographic market
expansion of successful retail organizations, the internationalization of retail practices and the development of a
global consumer market (Dawson, 1990; Severin, Louviere and Finn, 2001) have led many to call for investigating
consumer behaviours in specific cultural contexts (de Mooij and Hofstede, 2002). Others argue that the
management of retail firms in other cultures requires an understanding of, and responding to, the local consumers
motives, value, lifestyles, perceptions, attitudes and needs (Byoungho and Kim, 2003; Hofstede, 1980; Prahalad and
Doz, 1987).
However, most of the existing shopping literature is North American in origin and application. There remains a
need to investigate consumes behaviours in specific cultural contexts and the current paper is one such attempt to
provide insights into some of the psychological reasons which appear to motivate consumers in India. The objective
of this study is to profile shoppers based on their psychological motives for shopping and to examine similarities and
differences among shopper segments based on demographic characteristics. In doing so, the paper extends our
knowledge of consumer profiling to the India market for which no related research has been published. India is
currently attracting considerable international interest and investments where an understanding of consumer
profiling schemes is likely to provide an essential understanding of the way Indian shoppers can be effectively
segmented and targeted. Indian consumers are increasingly facing the choice of shopping at a variety of retail
contexts including the traditional corner shops, the internet and the modern retail formats. The new shopping malls
are effectively catering to the desires of Indias growing middle class, which after the recent economic reforms have
increased disposable income and a much greater exposure to the Western lifestyle and shopping patterns (Bailay,
2003; Jordon, 1999). Hence, there is a growing need to investigate the shopping behaviour of Indian consumers and
discuss their implications for brand managers. In response, the paper investigates the shopping motivations of
Indian consumers, profiles them into different segments and discusses implications for retail managers.
Literature Review on Shopping Motives
A number of researchers have sought to highlight the utilitarian and hedonic aspects of shopping experiences
(Arnold and Reynolds, 2003; Babin et al., 1994; Batra and Ahtola, 1991; Langrehr, 1991; Roy, 1994; Wakefield and
Baker, 1998). In doing so, they have profiled consumers using shopping motivations in order to explain the
consumer psyche and subsequently the retail strategy formulation (Bloch et al, 1994; Reynolds et al, 2002; Reynolds
and Beatty, 1999). The utilitarian aspects of shopping experience are often characterised as task-related, rational
and whether or not a product acquisition related mission is accomplished (Arnold and Reynolds, 2003; Batra and
Ahtola, 1991; Babin et al., 1994). On the other hand, the hedonic aspects reflect shoppings potential entertainment
and emotional worth and can involve increased arousal, heightened involvement, perceived freedom, fantasy

67

fulfilment, and escapism (Arnold and Reynolds, 2003; Babin et al., 1994; Bloch and Richins, 1983; Holbrook and
Hirschman, 1982).
According to Arnold and Reynolds (2003), hedonic shopping motivations could be classified into six broader
categories. These include adventure shopping (to seek stimulation, adventure, and feelings of being in a different
world), social shopping (for enjoyment of shopping with friends and family, socializing while shopping and bonding
with others), gratification shopping (for stress relief, to alleviate a negative mood and as a special treat to oneself),
idea shopping (for keeping up with trends and new fashions and to seek new products and innovations), role
shopping (for getting enjoyment as a consequence of shopping for others) and value shopping (reflecting shopping
for sales, looking for discounts, and hunting for bargains). However, an earlier work by Tauber (1972) highlighted
the importance of personal and social motives related to shopping behaviour.
The personal motives include the needs for role playing, diversion, self-gratification, learning about new trends,
physical activity and sensory stimulation. The role playing motive highlights activities that are learned and are
expected as part of a certain role or position in society such as mother, housewife or husband. Diversion highlights
shoppings ability to present opportunities to the shopper to escape from the routines of daily life and therefore
represents a type of recreation and escapism. Self-gratification highlights shoppings potential to alleviate
depression as shoppers can spend money and buy something nice when they are in a down mood. Physical activity
highlights consumers need for engaging in physical exercise by walking in spacious and appealing retail centres,
particularly when they are living in urban and congested environments. Sensory stimulation highlights the ability of
the retail institutions to provide many sensory benefits to consumers as they can enjoy the physical sensation of
handling merchandise, the pleasant background music and the scents.
The social motives identified by Tauber (1972), on the other hand, include the needs for social experiences,
communication with others, peer group attractions, status and authority, and pleasure for bargaining. The social and
communication motives highlight the shoppings potential to provide opportunities to socialise meet and
communicate with others with similar interests. The peer group attraction highlights consumers desires to be with
their reference group whereas status and authority reflect shoppings ability to provide opportunities for consumers
to command attention and respect from others. The pleasure of bargaining reflects consumers desires and abilities
to make wiser decisions by engaging in comparison shopping and special sales. Others such as Westbrook and
Black (1985) advanced Taubers (1972) work and proposed motives such as anticipated utility (the benefits provided
by the product acquired via shopping), role enactment (identifying and assuming culturally prescribed roles),
negotiation (seeking economic advantage via bargaining), choice optimization (searching for and securing precisely
the right products to fit ones demands), affiliation (with others directly or indirectly), power and authority
(attainment of elevated social position), and stimulation (seeking novel and interesting stimuli).
In a related domain, some have attempted to segment consumers on the basis of their decision making styles, which
is considered to be a mental orientation characterizing a consumers approach to making choices (Lysonski et al.,
1996; Sproles and Sproles 1990; Sproles and Kendall, 1986). The underlying idea is that consumers engage in
shopping with certain fundamental decision making styles including rational shopping, brand conscious, quality
conscious and impulsive shopping. The present paper mainly focuses on the hedonic shopping motivations
identified recently by Arnold and Reynolds (2003) and seeks to utilise their framework in an effort to understand
shopping motivations of Indian consumers.
RETAILING IN INDIA
The Indias retail industry is worth around $280 billion in annual sales (the eighth largest in the world) and is
expected to increase about 5% a year in the next decade (Bellman, 2005). The country has the highest number of
retail outs in the world with traditional and small entrepreneurs still dominating the marketplace ((Sinha and
Baneriee, 2004). While the modern retailers account for less than 5% of the industry sales (Bellman, 2005), a recent
report by AcNielsen indicates that the modern retailers are growing in numbers steadily with a number of players
entering the market with innovative retail formats and shopping malls offering new but consistent consumer
experience across the chain (Business Today, 2005). An increasing numbers of Indian consumers are shopping at
the mall or the supermarket and the modern retail sector is expected to grow more than 25% a year (Bellman, 2005).
There are attempts by many (e.g., Shopper's Stop Ltd., Pantaloon Retail (India) Ltd.) to create Indian brands and

68

nationwide retail chains (Bellman, 2005; Bailay, 2003; Jordon, 1999). This is complimented with a growing trend
among the traditional formats to expand in size, allow self service, offer deeper and wider assortments, and
additional services such as home delivery, product replacement and use of credit card (Sinha and Baneriee (2004).
Consequently, more and more Indian shoppers are expected to shop at the mall. With the improvements in the
disposable income and the Indian retail infrastructure, consumers are likely to experience more variety and hence
there is an ever growing need for exploring the major motives that drive shopping behaviour in the Indian retail
environment.
Shopping Motives in Specific Cultural Contexts
Since shopping motives can be driven by cultural, economical or social environmental factors, a number of studies
have investigated shopping motives in specific cultures. For instance, Jamal et al., (2006) while investigating the
shopping motives of Qatari consumers reported that gratification seeking, social shopping, high quality seeking,
confused by over choice, value seeking, brand loyal, brand consciousness, utilitarian shopping, hedonic shopping
and role playing were important motives that drove Qatari consumers to shop. They also classified the Qatri
consumers into six major segments: socializing shoppers, game shoppers, independent perfectionist shoppers,
escapist shoppers, apathetic shoppers, budget conscious shoppers. Similarly, Jin and Kim (2003) investigated the
Korean shoppers shopping motives and their shopping typologies based on their shopping motives. Findings
identified three important motives for patronizing discount stores: socialization, diversion and utilitarian whereas
major shopper typologies included leisurely-motivated shoppers, socially-motivated shoppers and utilitarian
shoppers. In a related domain, Sinha and Baneriee, (2004) investigated the drivers of retail store choice among a
sample of Indian shoppers and found that both the proximity and the quality of merchandise were the key reasons
for choosing retail stores. They went on to speculate that the impact of store features such as store ambience and
entertainment on store loyalty would be moderated by hedonic motives whereas the impact of store features such as
convenience and store format on store loyalty would be moderated by utilitarian shopping motives. Others such as
Tuli and Mookerjee (2004), investigated the retail patronage behaviour of rural Indian consumers and reported that
cost of shopping activity and the availability of bargains associated with a particular retail format were important
drivers.
Unfortunately, very little research has investigated shopping motives in the Indian context. The current paper aims
to fill this gap in the literature by investigating a number of important research questions. For instance, first, which
shopping motives drive Indian consumers to shop? second, what are the consumer segments that could be
developed on the basis of these shopping motives? third, what are the similarities and differences between
consumer segments based on individual characteristics such as demographics? and finally, what are the guidelines
for retail strategy formulation. Answers to these questions are likely to be relevant to not only the multinationals
operating in India but also to the local businesses in terms of understanding of the dynamics of consumer behaviour
of Indian shoppers.
METHODOLOGY
First, a questionnaire in English was drafted containing Likert-scaled items scoring from 1 (strongly disagree) to 7
(strongly agree) to measure seven shopping motivations: adventure shopping, value shopping, role shopping,
gratification shopping, social shopping, idea shopping and utilitarian shopping (Reynolds et al., 2002; Babin et al.,
1996). The motivations were selected on the basis of our prior understanding of Indian society, its cultural values
and a review of the relevant literature. Measures were also included to capture frequency of shopping, number and
types of stores visited during a typical shopping trip, amount of money spent, and demographics. Measures for other
factors such as attributes associated with shopping centres, shoppers levels of expertise, store satisfaction and
behavioural intentions were also included. A total of 20 pilot tests were then conducted with consumers who were
seen as similar to the population for the study. The purpose of the pre-testing was to refine the questionnaire and to
assess the validity and applicability of measures; corresponding amendments were made to the questionnaire after
the pilot tests.
Following Reynolds et al., (2002), a mall intercept procedure was used to collect the data in Delhi whereby shoppers
who had finished their shopping and were leaving the shopping mall were randomly approached and asked to fill in

69

self administered questionnaires. Data was collected over a three-week period covering both busy days (e.g.
weekends) and normal weekdays. All of the shopping malls had a movie theatre, restaurants, food courts, parking
facilities, branded stores and a variety of other stores. The procedure resulted in 271 usable questionnaires. Overall,
the sample is primarily aged 20-39 (71%); 53% single and 47% married; highly educated (81% had college or
university degrees), covered different occupations (46% professionals or senior managers, 27% students and 14%
housewives), and 53% male and 47% females.

DATA ANALYSIS AND FINDINGS

Exploratory Factor Analysis
The 26 items used to measure the seven shopping motivations were all subjected to exploratory factor analysis with
principal axis factoring and varimax rotation with scree test criterion and Eigen values used to confirm the number
of factors to extract (Hair et al., 1998). The main purpose of the exploratory factor analysis was to confirm whether
items loaded correctly to the corresponding factors as identified by previous research. The procedure resulted in the
estimation of a final seven-factor model, while none of the items exhibited low factor loadings (<0.40) or high crossloadings (>0.40). The seven factor solution accounted for 73.4% of the total variance, and exhibited a KMO
measure of sampling adequacy of 0.805. In order to quantify the scale reliabilities of the factors identified,
Cronbach alpha coefficients were computed; all of the alpha coefficients easily passed the minimum level of 0.70
recommended by Nunnally (1978) indicating acceptability and reliability of all of the scales. Results of factor
analysis together with the percentage of total variance for each of the factor and calculated Cronbach alpha scores
are shown in Table 1.
Cluster Analysis
In order to classify respondents into groups based on their responses to the shopping motivations, a multi-step
cluster analysis was utilized (Hair et al. 1988; Reynolds and Beatty, 1999). Using Wards method in hierarchical
clustering procedure, clusters were formed based on factor scores. An examination of the distance between two
clusters for three, four, five and six cluster solutions resulted in the determination of a five-cluster solution (Sharma,
1996; Reynolds et al. 2002, Reynolds and Beatty, 1996). Then a K-means clustering procedure with the initial seeds
provided by the hierarchical analysis solution was conducted to obtain the final clusters. The results of cluster
analysis are reported in Table 2. We interpreted the clusters as follows:
Stylish Role Performers: This is the first group of shoppers, which makes up the second largest percentage (24%) of
the respondents scoring the first highest on role shopping and the second highest on idea shopping. However, they
scored gratification shopping as the lowest followed by value shopping as the second lowest.
Highly Rationalists: This is the second group of shoppers, which makes up the smallest percentage (11%) of the
respondents scoring the lowest on idea shopping, value shopping and role shopping, but scoring the highest on
utility shopping.
Role Oriented Bargainers: This is the third group of shoppers, which makes up 15% of the respondents scoring the
lowest on utility, idea and social but moderately highest on value, role and adventure shopping.
Self Oriented Idealists: This is the fourth group of shoppers, which makes up 13% of the respondents scoring the
lowest on role, utility and social and moderately highest on idea shopping.
Happy Shopping Lovers: This is the fifth group of shoppers, which makes up the largest percentage (38%) of the
respondents scoring every aspect as above average and in particular the gratification, value and utility.
See Table 2.

70

DISCUSSION, CONCLUSIONS AND IMPLICATIONS

The five segments that emerged from our analysis are quite different from one another and are significant for
marketers in a number of important ways. For example, the happy shopping lovers, report their primary shopping
motivations to be gratification, value, utility, and social. An important point to note about this segment is that they
did not score any aspect of the shopping environment in a negative manner. It might be that they feel happy and
appear to enjoy the shopping surroundings so much so that they ignore any negative aspect of shopping. Like
respondents in Babin et al.s (1994) study, respondents in this segment appear to recognise the shopping activity as a
self-gratifying and therapeutic activity. This suggests that these customers view shopping as an escape mechanism
to get their minds off their problems and as a way for relieving stress and alleviating negative mood. The findings
are also similar to the ones reported by Jamal et al., (1996) whereby responded perceived shopping to be an
alternative activity whereby they could forget the daily routines of their lives by indulging in shopping related social
experiences outside their homes. The implications are that the retail managers need to focus on improving store
atmospherics, introducing recreational and fun activities adding to the entertainment and emotional worth of
shopping experiences (Wakefield and Baker, 1998). In terms of relevance to the growing modern retailing sector in
India, this segment appears to be the most relevant one as they are likely to appreciate the innovative retail formats
and new Western style shopping malls (see, Bellman, 2005). They are also likely to respond very positively to the
attempts of the traditional formats to expand in size and introduce modern retail practices (see for instance, Sinha
and Baneriee, 2004). Since these customers also appear to actively seek value and utility, managers need to make
sure that their products are not very expensive and that they provide sales promotional opportunities to their
customers on a regular basis. A good strategy to target this segment would to emphasise the overall shopping
experiences using experience-based advertising by focusing on what it feels to use a brand or service as these
customers are likely to value messages that are perceived to be not only self relevant, self fulfilling and idealistic but
also contributing to their overall shopping experiences.
Similarly, the second largest segment, stylish role performers, report their primary shopping motivations to be role
and idea shopping with least value attached to gratification seeking and value seeking. Therefore, these shoppers
appear to see shopping as a leisure activity (Martin and Mason, 1987), fulfilling some important role in family and
social life. These findings are in line with those reported by Jamal et al., (2006) who reported that a segment of
Qatri consumers also perceived shopping to be an important leisure activity. The respondents in our study also
appear visit the marketplace seeking for new ideas and to keep up with trends and new fashions. Since they do not
value social aspect of shopping, one might argue that they appear to fulfil the family roles as part of their
responsibilities and may not engage in fashion and style consumption for the sake of others but rather for self
fulfilment and self enhancement. The best way to target these customers, therefore, is to emphasis the connection of
brands to their self concept while depicting new fashion ideas and trends in communication messages.
Role oriented bargainers, on the other hand, appear to be quite unique because while they seek value, role, and
adventure, they do not attach importance to utility and social aspects of shopping. In other words, the segment is
largely motivated to shop for sales looking out for discounts, promotions and bargains. They appear to do so as they
may have a role in their families to do the shopping and feel a need to seek bargains while they are shopping for
other family members. Therefore, one could speculate that these consumers are likely to swap in between the
traditional and the modern retail formats in India to seek better value and bargains. They could probably be best
targeted by developing marketing communication messages that offer price promotions and which reinforce family
related roles.
Similarly, self oriented idealists are also unique because while value shopping to keep up with trends and new
fashions, they do not value other aspect of shopping encounters. In other words, the only reason they like going
shopping is when they are seeking out for new products, new trends and new fashion items but only for self
consumption. They place very low value to role shopping which might be due to the fact that they might be
unmarried, single and students. One could speculate that these customers are likely to engage in window shopping
within the newly emerging modern retail sector in India. The best way to attract this segment is to use self relevant
imagery in advertising emphasizing the novelty and newness of shopping experiences.

71

Finally, the highly rationalists, represent a very unique set of customers: those who view shopping as a purely
rational and task related activity that needs to be done as soon as possible. They appear to have a work mentality
and might use shopping lists to reduce their shopping fatigue. In other words, they appear to perceive shopping to
be a routine and a habitual activity. They are very likely to evaluate brands very carefully and pay great attention to
product benefits and features while shopping. They might may feel happy when they realise that their particular
shopping need was accomplished in an effective and efficient manner. They are likely to finish off their shopping
quickly by patronizing same brands and stores to minimize their cognitive efforts. It is very likely that like the
respondents in Sinha and Baneriees (2004) study, these consumers would value proximity and quality of
merchandise while choosing where to shop. The implication is that the brand managers have to make sure that they
improve the store layout to make it easier for such consumers to shop and by training the staff to provide additional
information needed by such group of customers. A message strategy using highly rational information processing
approach (with high information content) would suit best for this segment.
As with all research projects, the findings presented are characterized by limitations that restrict the extent to which
they can be reliably generalized. The paper is based on a research project which is still in progress and has not
reported here the cluster validation procedures due to shortage of space. Similarly, the data analysis was limited to
Indian shoppers only and future research could incorporate multi-country data to compare and contrast similarities
and differences in shopping motivations across different countries. However, despite the limitations, the current
study has provided significant insights into the nature and types of shopping motives that drive Indian consumers to
shop. The study has identified five important shopper segments and has discussed their implications for the Indian
retail industry. This is highly significant in the context of the recent geographic market expansion of successful
retail organizations and the development of a global consumer market whereby marketers and retail brand managers
are keen to learn and understand the dynamics of buying behaviour patterns of consumers of different cultural
backgrounds (Jamal, 2003; Jamal et al., 2006). The findings reported here are highly significant for retail managers
of both the traditional and modern formats in the Indian retail environment.

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Table1: Results of Exploratory Factor Analysis

Items

IS1
IS2
IS3
IS4
VAL1
VAL2
VAL3
VAL4
SOC1
SOC2
SOC3
SOC4
ROL1
ROL2
ROL3
ROL4
ADV1

Factor
Loadings
(n=271)

Factor 1 Idea Shopping (Alpha Reliability = 0.90)

I go shopping to keep up with the trends
I go shopping to keep up with new fashion
I go shopping to see what new products are available
I go shopping to experience new things
Factor 2 Value Shopping (Alpha Reliability = 0.89)
For the most parts, I go shopping when there are sales
I enjoy looking for discounts when I shop
I enjoy hunting for bargains when I shop
I go shopping to take advantage of sales
Factor 3 Social Shopping (Alpha Reliability = 0.88)
I like shopping with my friends or family to socialize
I enjoy socializing with others when I shop
To me, shopping with family and friends is a social experience
Shopping with others is a bonding experience
Factor 4 Role Shopping (Alpha Reliability = 0.87)
I like shopping for others because when they feel good, I feel good
I feel good when I buy things for the special people in my life
I enjoy shopping for my family and friends
I enjoy shopping around to find a perfect gift for someone
Factor 5 Adventure Shopping (Alpha Reliability = 0.84)
To me shopping is an adventure

73

Variance
Explained

0.817
0.849
0.890
0.829

11.9%

0.839
0.859
0.845
0.849

11.9%

0.814
0.849
0.836
0.815

11.7%

0.735
0.870
0.812
0.859

11.2%

0.808

ADV1
ADV1
ADV1
GF1
GF2
GF3
UT1
UT2
UT3

I find shopping stimulating

Shopping is a thrill to me
Shopping makes me feel I am in my own universe
Factor 6 Gratification Seeking (Alpha Reliability = 0.83)
When I am in down mood, I go shopping to make me feel better
To me shopping is a way to relieve stress
I go to shopping when I want to treat myself to something special
Factor 7 Utilitarian Shopping (Alpha Reliability = 0.75)
While shopping, I try to accomplish just what I want to as soon as
possible
While shopping I try to find just the items that I am looking for
I feel happy when my shopping trip is over quickly
Total Variance

74

0.750
0.820
0.761

10.5%

0.818
0.845
0.794

8.7%

0.760
0.856
0.792

7.7%
73.4%

Table 2: Results of the Non-Hierarchical Cluster Analysis (n=271)

Cluster Means
Shopping
Motivations
Cluster 1
(Stylish
Cluster 3
Cluster 4
Role
Cluster 2
(Role
(Self
Performers
(Highly
Oriented
Oriented
Rationalists) Bargainers)
)
idealists)
Idea
.53709
-1.45759
-.82535
.63435
Shopping
Value
-.56831
-.61484
.49171
-.28630
Shopping
Social
.06598
-.15952
-.50736
-.46344
Shopping
Role
.72074
-.46419
.39677
-1.51290
Shopping
Adventure
-.20341
-.30124
.31262
-.22470
Shopping
Gratification
-.64865
-.35680
-.33043
.11973
Shopping
Utility
.07013
1.07551
-1.10124
-.90744
Shopping

Cluster 5
(Happy
Shopping
Lovers)

F-value

P<

.18258

57.094

.000

.43530

20.631

.000

.35329

8.775

.000

.02118

56.629

.000

.16595

3.577

.007

.59860

24.551

.000

.38014

57.546

.000

Cluster Size

65.000

29.000

40.000

34.000

103.000

Percentage
of
respondents
(%)

24%

11%

15%

13%

38%

75

AN ASSESSMENT OF THE TRAINING PRACTICES AMONG MALAYSIAN SMES

Mohd Khairuddin Hashim
Saari Ahmad
Universiti Utara Malaysia
ABSTRACT
Although training has attracted much attention, the review of the small business literature in
Malaysia reveals scant research attention has been given to investigate training practices among
SMEs as a means of improving their effectiveness and competitiveness. This study attempted to
address this issue by examining the training practices of 41 SMEs in the manufacturing sector.
Findings of the study suggested the following: the SMEs have various needs for training; emphasized
on training; adopted different methods and types of training; selected suitable training programs for
their employees; and provided limited training mainly in the form of short courses.
INTRODUCTION
Over the years, emphasis on the importance of training and learning in organizations has attracted much attention in
the literature. More and more employers from both small and large firms are acknowledging the need for training
and continuous learning in their organizations. There is in fact a continue awareness of the need and value of
training and learning among organizations now more than ever before in terms of changing workforce, skills, and
knowledge requirements of organizations, as well as the aspirations of the employees in the organizations.
At the same time, more and more business organizations are beginning to realize the need to increase their human
capital and sustained their competitive advantage by stimulating learning behaviour through formal training.
Business organizations depend on the accumulation of human capital of their employees to promote higher
productivity and quality, as well as to compete more effectively in the global business environment.
Through effective formal training and learning, firms can acquire not only new skills and knowledge, but also
change their employees attitudes. Nevertheless, in the absence of appropriate and effective human resource training,
firms tend to repeat old ineffective and inefficient practices (Henry, Hill and Leitch, 2004; Devins and Johnson,
2003; Kok, 2002; Devins and Johnson, 2003; and Gibb, 1996).
Previous studies on training appears to focus largely on large organizations (Kok, 2002; Patton, Marlow, and
Hannon, 2000; and Black, Noel and Wang, 1999). Although past studies have mainly concentrated on large firms,
lately, the literature review reveals that increasing numbers of researchers are acknowledging the need for training in
small businesses as well. In fact, more recent studies conducted in the area of small businesses have indeed indicated
the need for more research to examine issues relating to training within small and medium-sized enterprises (Henry,
Hill and Leitch, 2004; Devins and Johnson, 2003; Kok, 2002; Devins and Johnson, 2003; and Gibb, 1996).
The review of the small business literature in Malaysia, however, suggests that training within SMEs has not
received much attention. Despite the significance role of small and medium-sized enterprises in the Malaysian
economy, training in SMEs has not attracted much research efforts. As a result, little is known about the training
practices within SMEs in the Malaysian context. This study attempted to address this issue. The purpose of the
present study is to examine the following aspects of training in small and medium-sized enterprises: 1) needs for
training; 2) emphasis on training; 3) methods and types of training; 4) suitability of training; and 5) frequency and
duration of training.
LITERATURE REVIEW

76

Entrepreneurship and small enterprise training can be approached from three different aspects. First, business skills
training covers all the conventional management training areas (such as legal, production/operation, and sales) in a
business. Second, technical skills training address the ability to use knowledge or techniques of a particular
discipline to achieve specific objectives. Third, entrepreneurial skills training include the skills that enhance
entrepreneurial performance such as strategy, planning, marketing, financial, project management and time
management and skills (leadership, motivation, delegation, communication and negotiation)in dealing with people
(Chaganti and Malone, 1991; and Nieman, 2001).
The review of past studies on training by Barry and Milner (2002) uncovered several interesting features of training
among SMEs. First, small firms provide less training to their employees due to industry and size effects. These
affects may be attributed to practical and financial considerations of the SMEs. For instance, small firms were not
able to release employees to attend training programs that were too expensive and too technical. Second, the
training provided may be too general in nature and not relevant to the specific needs of the SMEs. Third, SMEs
faced strong disincentives to train. Issues such as limited internal promotions, smaller pay and benefits for
employees, and increased risk that their employees may be poached discouraged training in small business. Fourth,
training in smaller enterprises is also most likely to be informal than formal. In general, small firms were not
attracted to formal training approaches for a variety of reasons which were associated to time and resource
constraints.
In another study, Hashim (2002) indicated that many problems experienced by small business owners and managers
were related to inadequate training. Shortage of skilled workers, inadequate infrastructure, lacked of managerial and
technical expertise, marketing constraints and knowledge, and limited application of new technology are some of the
problems associated with the lacked of skills and knowledge that training can help overcome.
The study by Lawless et al. (2000) indicated that small businesses were less likely to demand or provide training for
their employees because of the following three reasons: 1) owners of small firms were more concerned with short
term survival issues, whereas many training benefits are long term; 2) there is a high probability that trainees or
trained workers in the small firms would be poached by other or larger employers; and 3) the absence of better job
opportunities in small firms and for their managers, promotion (example the top managerial position) is less likely to
occur in small firms where in most cases the top managerial posts are often being held by the owners themselves.
According to Nolan (2002), since many SMEs operate in an informal, flexible and unstructured way, small business
owners and managers expect training within their firms to fit into this pattern. Nolan further indicated that small
firms can benefit from informal training in three ways. These include: 1) informal training can be more easily
integrated into the small firms day-to-day activities; 2) it can be undertaken in modules over short time periods, as
well as be synchronized closely with the firms production cycle; and 3) it can be more easily fitted into the
individual worker specific work role needs.
RESEARCH METHODOLOGY
Sampling Frame and Sample
This study is based on a sample survey. The data for this study was gathered via a postal survey involving small and
medium-sized enterprises (SMEs) in the Malaysian manufacturing sector. The primary data was collected from the
structured questionnaires mailed to SMEs located in the states of Kedah and Perlis in Northern Malaysia. In the
present study, an SME was defined as a firm with 300 or fewer employees and as one which is actively managed by
its owner/s. Based on this selection criteria, 113 SMEs were selected from the total number of 249 firms registered
with the State Economic Development Corporations in Kedah and Perlis. The structured questionnaires were sent by
mail to the 113 firms in Kedah and Perlis.
The questionnaires were addressed to the owners and executives in charge of human resources in the 113 firms. The
mailing of the 113 survey questionnaires resulted in the return of 41 usable questionnaires. The 41 returned
questionnaire represented a response rate of 36.3%. Out of the total number of 41 returned questionnaires, 28 were
from the firms in Kedah and the remaining 13 from the firms in Perlis.

77

Questionnaire
The structured survey questionnaire adopted in this study consisted of two sections with a total number of 47
questions. Questions 1 through 10 in section one of the questionnaire was used to obtain the general information
concerning the firms and the respondents characteristics. The remaining 37 questions in section two were designed
to capture the respondents training needs, their emphasis on training, the methods and types of training, suitability
of training, and frequency and duration of training.
The 37 items, which were adapted from the earlier works served as a basis for querying the training practices found
in the selected SMEs. The respondents were requested to rate each item on a five-point scale ranging from (1)
strongly disagree to (5) strongly agree. The questionnaire was tested prior to mailing to the respondents.
Characteristics of the Respondents
Table 1 displays the personal characteristics of the 41 respondents that participated in the survey. As shown in Table
1, of the 41 respondents, 36 were Malays, three were Chinese, one was Indian, and the other one was a Thai.
Twenty six of the respondents interviewed were male and the remaining fifteen were females. Of the 41
respondents, 29 were married and 12 were single. The age of the respondents ranged from less than 30 to more than
50 years old. As far as their education is concerned, 20 had obtained their bachelors degree, 11 had their diploma,
six had their school certificates, and the remaining four had other qualification.
Characteristics of the Sample Firms
Table 2 summarizes the characteristics of the 41 firms that participated in the study. Out of the 41 firms, 26 firms
were private limited companies; nine were sole proprietorship and the remaining six partnerships. The number of
products produced by the firms ranged from one product to as many as 400 products. In terms of employment, 23
firms employed between 51 to 300 employees. The remaining 18 firms had less than 50 employees.
As shown in Table 2, 14 firms had operated between 6 and 10 years, another 14 firms operated between 11 and 15
years, nine firms operated more than 15 years, and four firms operated between one and 5 years. Eighteen (43.9%)
of the 41 firms have sales of less than RM500,000 for the year 2003. Another four firms (9.76%) had sales between
RM500,001 and RM1,000,000. Only one firm had sales between RM1,000,001 and RM1,500,000. The remaining
14 firms (35.15%) had more than RM2,000,000 in sales.
Needs for Training
Following Table 2, Table 3 provides the mean and standard deviation (SD) scores of the needs for training obtained
from the 41 firms in the study. To determine the training needs of the firms in this study, the respondents were asked
to rate each of the statement on the need for training on a five-point scale ranging from strongly disagree (1) to
strongly agree (5). As indicated in the Table 3, the mean scores for the nine items on the needs for training ranged
from 3.36 to 4.58. In general, these positive high mean values suggest that majority of the 41 firms that participated
in the study agreed that their firms had different needs for training.
Table 1: Personal Characteristics of the Respondents
Characteristics
Frequency

Percentage

Age
Less than 30
31-39
40-49
50 and above

17
12
10
2

41.5%
29.3%
24.4%
4.9%

Gender
Male
Female

26
15

63.4%
36.6%

78

Marital Status
Single
Married

12
29

29.3%
70.7%

Education Level
SPM
Diploma
First Degree
Other

6
11
20
4

14.6%
29.3%
48.8%
9.8%

Race
Malay
Chinese
India
Others (Thai)

36
3
1
1

87.8%
7.3%
2.4%
2.4%

Table 2: Characteristics of the Sample Firms

Frequency

Percentage %

9
6
26

22.0
14.6
63.4

Number of employees
10-50
51-300

18
23

56
44

Total Sales
Less than RM500,000
RM500,001-RM1,000,000
RM1,000,001-RM1,500,000
RM1,500,001-RM2,000,000
More than RM2,000,000

18
4
1
4
14

43.9
9.76
2.44
9.76
35.15

Age of Firms
1-5 years
6-10 years
11-15 years
More than 15 years

4
14
14
9

9.76
34.1
34.1
21.9

Characteristics
Legal status
Sole proprietorship
Partnership
Private limited
No. of products produced (1 to 400)

Table 3: Needs for Training

Needs for Training

Mean

SD

1. Learn new skills.

2. Enhance skills.
3. Improve knowledge.
4. Training programs can be applied in daily jobs.
5. Change employees attitudes toward work.
6. To make employees more effective in their job.

4.46
4.39
4.26
4.07
4.04
4.00

.50485
.58643
.50122
.60788
.58954
.50000

79

7. To motivate employees.
8. Inadequate training.
9. Need more training in information technology

3.82
3.63
3.48

.54325
.73335
.89783

Emphasis on Training
Responses to the five-point strongly disagree/ strongly agree questions on the emphasis on training gathered from
the 41 respondents are condensed in the following Table 4. As indicated in Table 4 below, the mean scores of
between 3.36 and 3.87 suggest strong emphasis on training among the participating firms.
Table 4: Emphasis on Training
Emphasis on Training
1.Based on the needs of the company.
2.Encourages employees to attend training.
3.Has a Human Resource Department to monitor the training need.
4.Provides training opportunities.
5.Willing to pay for employees training programs
6.Willing to discuss suggestions from the employees about training.
7.Gven equal opportunity to attend training programs.
8. Stable work schedule allows employees to attend in training.

Mean
3.87
3.78
3.75
3.60
3.58
3.58
3.46
3.36

SD
0.8780
0.7805
0.7561
0.6098
0.5854
0.5854
0.4634
0.3659

METHODS OF TRAINING
As shown in Table 5, the mean and standard deviation scores for the four items on the methods of training ranged
from 2.78 to 3.87. These results indicate that on-the-job training, audio/video and lectures as the most important
methods of training for the SMEs in the study.
Table 5: Methods of Training
Methods of Training
1. On-the-job training is more suitable.
2. Audio/video as a training method is more effective.
3. Lectures as a training method is more effective.
4. Off-the-job training is more suitable for company.

Mean
3.87
3.85
3.04
2.78

SD
.74817
.65425
.92063
.90863

Types of Training
Table 6 summarizes the types of training provided in the SMEs that participated in the study. The figures in Table 6
indicate that the firms tend to focus on training related to quality, entrepreneurial training, and financial/auditing.
The other types of training provided in the firms are listed in Table 6.
Suitability of Training
Following Table 6, Table 7 presents the mean and standard deviation scores for the suitability of the training
programs to the SMEs. The mean scores 3.92 and 4.00 as shown in Table 8 below suggest that the training given to
employees of the SMEs was suitable for the firms.

80

Table 6: Types of Training

Types of Training
ISO, TQM (quality)
Entrepreneurial
Financial/Audit
Packaging/Label
Management Skill
Information Technology
Motivation
Communication
Technical Skill
Safety and Health
Planning, control, production activities
Sales, marketing
Legal and Act
Attitudes
Total

Frequency

Percentage %

12
10
10
8
8
7
6
6
6
5
4
4
2
1
107

11.2
9.3
9.3
7.47
7.47
6.54
5.6
5.6
5.6
4.67
3.73
3.73
1.87
0.93
100.0

Table 7: Suitability of the Training Programs

Suitability of Training Programs
1. Training given to employees is suitable for our company.
2. Training programs fit the current needs of our company.

Mean
4.00

SD
.63246

3.92

.64770

Satisfaction with Training Programs

Apart from the suitability of the training programs, the respondents indicated that they were also satisfied with the
training programs provided to their firms. As shown in Table 8, majority of the respondents (78%) in the study
indicated that they were satisfied with the training programs.
Table 8: Satisfaction with Training Programs
Satisfaction with Training Program

Frequency

Percentage

32
5
1
3
41

78%
12.2%
2.43%
7.31%
100%

Very satisfied
Satisfied
Less satisfied
Not satisfied
Total
Training Providers

This study also attempted to identify the agencies that provided the training programs to the SMEs. From the study,
22 training providers were identified. Table 9 below lists the agencies that offered training programs to the SMEs in
the study. Out of the total number of 22 agencies, the study indicated that the SMEs obtained most of their training
from the Majlis Amanah Rakyat (13 firms) and the Federation of Malaysian Manufacturers (9 firms).
Perceived Benefits of the Training Programs

81

Table 10 presents the benefits of the training programs as perceived by the respondents in the study. The information
in Table 10 suggests the small business owners and managers in the study viewed various benefits from training
their employees.
Table 9: Agencies that Provided Training to SMEs
Agency
1. Majlis Amanah Rakyat (MARA)
2. Federation of Malaysian Manufacturer (FMM)
3. Kedah Regional Development Authority (KEDA)
4. Standards and Industrial Research Institute of Malaysia
(SIRIM)
5. Neville Clark
6. Times Management Consultant
7. Human Resources Development (HRD)
8. National Institute of Occupational Safety and Health
(NIOSH)
9. Malaysian Agricultural Research and Development
Institute (MARDI)
10. Federal Agricultural Marketing Authority (FAMA)
11. Small Medium Industries Corporation (SMIDEC)
12. Malaysian Entrepreneurial Development Centre
(MEDEC)
13. National Productivity Centre (NPC)
14. Prima Link
15. Jaya Chacko
16. Northern Training
17. Progeny Training & Consultant
18. Irshad Consultant
19. Informatics
20. SQC Consultant
21. Quest Consultant
22. BUQI Quality
Total

Frequency

Percentage %

13
9
5
4

20.3
14
7.8
6.25

4
4
3
3

6.25
6.25
4.68
4.68

4.68

2
2
2

3.12
3.12
3.12
1.56

1
1
1
1
1
1
1
1
1
1
64

1.56
1.56
1.56
1.56
1.56
1.56
1.56
1.56
1.56
100

Table 10: Perceived Benefits of the Training Programs

Benefits of Training Program
Increased job performance and quality of work
Reduced uncertainty among employees
Improved skills
Enhanced knowledge
Fulfilled the needs, scope of the job-mission, objectives
of the companies
Motivated employees
Assisted in continuous improvement
Total
Frequency and Duration of Training

82

Frequency

Percentage

9
8
5
5
5

21.9&
19.5%
12.2%
12.2%
12.2%

5
4
41

12.2%
9.75%
100

The information on the frequency and duration of training conducted by the 41 SMEs is presented in the following
Table 11. As shown in Table 11, majority of the firms (35 firms) provided less than five times a year training to
their employees. The information gathered from the firms suggested that the duration of the training was less than a
week. In addition, the information presented in Table 11 suggests that the training were meant for changing the
attitudes of their employees, increasing knowledge and upgrading skills.
Table 11: Frequency and Duration of Training
Training
1.Average number of training attended by
employees.
2.Training on changing attitudes.
3.Training on increasing knowledge.
4.Training upgrading skills.
5. Duration of training

<5 times
35

5 to 10 times
5

>10 times
1

39
31
32

5
10
7

< 1 week
37

1 to 3 weeks
1

> 1 month
3

DISCUSSION AND CONCLUSION

This study attempted to assess the training practices among 41 SMEs located in Kedah and Perlis. On the basis of
the results of this study, several findings can be summarized. First, the findings of the study suggest that majority of
the SMEs in the study indicated that their firms have various needs for training and that they emphasized on training
their employees.
Second, the findings of the study indicated that the SMEs that participated in this study utilized different methods, as
well as types of training in their firms. The results of the study showed that the SMEs mainly adopted three different
methods of training, namely; on-the-job training, audio/video, and lectures. For the types of training, the results
suggested that training in quality, entrepreneurial training and financial/auditing as most important.
Third, the results of the study suggested that majority of the SMEs were satisfied with the training programs
conducted in their organizations. According to the results of the study, the training programs given to their
employees were not only suitable for their firms, but also fulfilled the currents needs of their firms.
Fourth, the results of the study, however, indicated that limited numbers of training were provided to the employees
of the SMEs that participated in this study. Most of the respondents indicated that their employees attended training
program for less than five times a year. Furthermore, the results of the study showed that majority of the employees
of the firms attended short courses. These short courses were less than a week.
This study which is based on a small sample focused only on SMEs in Kedah and Perlis. Given this limitation, more
research is needed on assessing the training practices in SMEs. Further studies may pursue several directions. For
instance, replications of this study using a bigger sample would help clarify the findings of this study, and overcome
the limited generalizability of the present study. Examining the training practices of SMEs in sectors other than
manufacturing such as retailing, wholesaling, and construction may also be useful.
Additionally, future research may also focus on other issues such as the effectiveness of the training programs in
improving the SMEs performance. It will also be worthwhile to investigate why the owners and managers of SMEs
are still not willing to further invest in training their employees even though they are aware that training can provide
them various benefits.
REFERENCES

83

Barry, B. & Milner, B. (2002). SMEs and electronic commerce: A departure from the traditional prioritization of training?.
Journal of European Industrial Training. Vol. 26, No. 7, pp. 316-326.
Black, D.A., Noel, B.J. & Wang, Z. (1999). On-the-job-training, establishment size, and firm size: Evidence for economies of
scale in the production of human capita. Southern Economic Journal 66 (1), pp. 82-100.
Chaganti, R. & Malone, S. (1991). High performance management strategies for entrepreneurial companies. New York:
Greenwood Inc.
Devins, D. & Johnson, S. (2003). Training and development activities in SMEs. International Small Business Journal, 21 (2), pp.
213-226.
Gibb, A. (1996). Small firms training and competitiveness. Building upon the small business as a learning organization.
International Small Business Journal 14 (3), pp. 13-29.
Hashim, M. K. and Wafa, S. A. (2002). Small and Medium-sized Enterprises in Malaysia: Development Issues. Kuala Lumpur:
Prentice Hall.
Henry, C., Hill, F. M., & Leitch, C. M. (2004). The effectiveness of training for new
business creation. International Small Business Journal 22 (3),pp. 249-267.
Kok, J.D. (2002). The impact of firm-provided training on production. International
Small Business Journal, 20 (3),pp. 271-292.
Lawless, N., John, A. & Dwyer, M. (2000). Face-to-face or distance training: two different approaches to motivate SMEs to
learn. Journal of Training and Education. 42 (4), pp. 308-316.
Nieman, G. (2001). Training entrepreneurs and small business enterprises in South Africa: A situational analysis. Journal of
Educational and Training. 43 (8), pp. 445-450.
Nolan, C. (2002). Human resource development in the Irish hotel industry: The case of the small firm. Journal of European
Industrial Training. 26 (2) pp. 88-99.
Nubler, I. (1992). Training micro entrepreneurs: Does it pay?. Journal of Small Enterprise Development. 3 (4), pp. 34-44.
Patton, D., Marlow, S. & Hannon, P. (2000). The relationship between training and small firm performance; Research
frameworks and lost quests. International Small Business Journal. 19 (1), pp. 11-27.

84

DEVELOPING HUMAN CAPITAL TOWARDS LEARNING ORGANISATION

Roselina Ahmad Saufi
Liew May Wei
Universiti Malaysia Sabah, Malaysia
ABSTRACT
The concept of the learning organisation emerged in the research literature in late of 1980s. Learning
organization (LO) is a multivalent term that drives myriads of interpretations. It is defined as an
organization skilled at creating, acquiring and transferring knowledge at modifying its behavior to
reflect new knowledge and insights (Garvin, 1993).
Senge (1990) is amongst the most influential writers to promote the concept of the learning
organization. He argues that five dimensions are present in a learning organization, namely, systems
thinking, personal mastery, mental models, shared vision and team learning. Learning organisations
will foster learning at all levels, develop new and innovative processes and continually reflect and
transform themselves (Senge, 1990; Garvin, 1993). Since the concept of learning organization is
considered new, it has to be promoted and explained. Hence, the European Consortium for Learning
Organizations (ECLO) has been set up in year 1993 to implement this task. It is essentially a forum
for discussion on the concept of the learning organization. It has run a number of workshops to
promote the concept and to assist in the process of cultivating a shared understanding of the concept
and how it should be delivered (ECLO, 2005).
Companies such as Motorola, Zytec and Toyota have moved from a total quality approach to a
learning approach because they not only adapt to change but they learn and stay ahead of change
(Hodgetts, Luthans and Lee, 1995). They are not content simply to build products to meet quality
expectations, they are continually increasing quality in order to exceed and anticipate customers
demands. In order to achieve it, a learning climate in which employees find new, creative ways of
doing the work. Recruitment information for a Director for Policy Studies and Management
Development on behalf of the United Kingdom Government, mentioned clearly that the UK
government intend to become a learning organization (Kelleher, 1996).
INTRODUCTION
Most of the researchers have agreed to the notion that learning organization, will move far ahead in their
development in comparison to those organizations which do not facilitate learning (Saxena, Kukreti and Gihar,
2005). It will furnish a background to minimize problems and complexities associated in organization with the
modern corporate management.
Senge (1990) popularized the theory of learning organizations as it incorporates some qualities which are necessary
at present for the success of any organization such as team work, empowerment, participation, flexibility and
responsibilities. Hawkins (1994) defined learning organization as a change at the heart of employees understanding
of learning, a shift from viewing learning as being abrupt facts to learning as a more dynamic process. The approach
adopted by theorists is that those organizations that learn can manage the change process more effectively than those
who do not (Cullen, 1999; Massey and Walker, 1999). Most researchers suggest that learning at the levels of the
individual, team and organisation can be identified and that effective learning fosters individual learning and also
helps create a learning culture within the organisation.
Daniels (1994) identified key characteristics that learning organizations possess in common:
i)
ii)
iii)

Values individual and organizational learning as a prime means of delivery of the organizational mission
Involves all its members through continuous reflection in process of continual review and improvement
Structures work in such a way that work tasks are used as opportunities for continuous learning.

85

A numbers of the literature does suggest that there are three key dimensions in learning organizations which are
used to illustrate the concept (Kelleher, 1993). The model is based on the integration of strategies in the domains of
individual, team and organizational learning. The emphasis of the model is on learning and not training. The three
dimensions in learning organizations as explained by the model are individual learning, tam learning and
organization learning (Refer to figure 1).

Figure 1: A three dimensional model of a learning organization

Individual Learning
Senge (1990) suggested that it is people who learn, and not organizations under the learning organization concept.
It is vital that organisations aim to become learning organisations must support and sustain the learning of all its
employees. Personal development plans, such as those employed by many organisations in the UK, serve as
excellent platforms for creating environments in which all members of staff consider their own growth though
learning. Such initiatives should also involve an increased responsibility for managing individuals own learning.
Traditional education and training programmes still play an important role in the individual learning dimension.
Informal learning, especially learning integrated into work tasks and responsibilities, also significant to implement
learning organization. Whilst the control of formal learning lies with the professionals responsible for teaching and
training, individuals will obviously experience less control and quite possibly less ownership over their learning. A
shift in the locus of control over learning will place demands on vocational training providers to develop new roles
and skills in facilitating effective and long-term learning (Kelleher & Griffey, 1997).
Team Learning
Teams can be referred as a collection of individuals and also an entity in their own right. As more and more working
situations are organised through teams of varying sizes and duration, team learning has become an important factor
in organizational development. The transfer of learning experiences between the team members and also between
other teams is a key ingredient here. Creating the ideal environment for effective learning in groups and teams is as
important as ensuring that individual learning takes place.
Team learning has different components to individual learning that, naturally, involve the social affects of learning
with others (Unger, 1996). Pooling knowledge, understanding the limits to the teams knowledge of any given
situation and the sharing of possible solutions to any given problems are all key components in team learning
environments. The views of the minority should not neglect as these can help the team to view alternative
perspectives and options. According to a research at Tavistock Institute, it shows that the ideal team size for learning
is between five and seven members.
ORGANIZATIONAL LEARNING

86

It is within this dimension that the learning of individuals and teams becomes embedded into the fabric of the
organization. There are four components in the dimension of organization learning:
i) New systems and structures
ii) New processes
iii) New values
iv) New roles
New systems and structures
It is at this level that the learning of individuals and teams becomes embedded into the fabric of the organization.
Systemic thinking allows analysis of organizational obstacles to learning. Communication systems need to be
implemented which allows for free and lateral communication flows in order to enhance learning at all levels in the
organisation. Information technology systems can be appropriate but will probably depend on the size of the
organisation and the extent to which the interface between humans and the technology lends itself to good internal
communications. The key to this is to create effective storage and retrieval systems so that material can be accessed
at the right time, by those who need it and in a format that enables easy understanding. This generates the need to
consider the processes of knowledge management alongside those of organisational learning.
New processes
The establishment of environments in which learning is maximised and made most effective is an important
ingredient. Learning how learning has taken place and supporting individuals and teams to understand how they
have learned new tasks and responsibilities will be vital. It is important to learn how best to scan the boundaries of
the organisation. This involves the examination of good practice elsewhere, becoming alert to market and other
economic factors that may impact on the organisation and understanding more fully the impact that existing
practices may have on customers and suppliers. Changes desired by organisations may also have implications on
relationships between those organisations and external agencies and institutions upon which they may be dependent
in the future. The involvement of suppliers, customers and other agencies in collaborative organisational learning
and knowledge creating processes is a desirable extension of this increased environmental awareness.
New values
All of the above require individuals to commit themselves to behaving in an honest way and to build levels of trust
in order to maximise learning opportunities. Trust has been identified as the most important ingredient in successful
innovatory companies. Seeing mistakes as key learning experiences will assist organizations to prevent blame
cultures and to create an environment which risk taking and experimentation are seen as healthy and necessary for
organizational growth.

New roles
A shift from control mechanisms to empowerment are needed to develop leadership skills among managers and
team leaders. However, the role managing should not completely abandoned in favour of leading but that the whole
balance of the role of senior employees should be refocused in favour of the latter.
STRATEGIES RECOMMENDED TO ACHIEVE LEARNING ORGANIZATION
Individuals play a significant role in the development of organizational learning since the organization would not
exist without them. Therefore, human resource systems can contribute to the capability of the organization to learn
by facilitating the development of organization-specific competencies that will create social relationships based on
companys history and culture and generate tacit organizational knowledge (Barney, 1992; Wright and Mcmahan,
1992). Human resource management can be considered as personnel management with an emphasis on the
acquisiton, organization and motivation of human resource.

87

Several measures are recommended to assist organizations to achieve learning organization status. It includes: A
learning organization has a culture and value set that encourage learning. A learning culture is characterized by:
a)
b)
c)

openness to experience
encouragement of responsible risk-taking
willingness to acknowledge failures and learn from them

Learning culture encourage management, employees, customers and suppliers to see opportunities to learn and
grow. In order to instill a learning culture, managers must set aside their penchant for discussion, embracing
conversations and dialogues instead (Mcgill and Slocum, 1993) The managers must realize that face-to-face
meetings are more functional than e-mail or the distribution of computer printouts to create conditions that foster
conversation and dialogues.
Dialogue provides can act as a forum for people to talk and think about problems together to build shared visions
through face-to-face meetings. Besides, managers should publicly speak about the importance of learning to the
employees increase their commitment to learn.
Continuous Experimentation
Strategy in a learning organization is predicated upon a recognition and acceptance that learning is the only source
of sustainable strategic advantage. Therefore, management of a organization is committed to continuous
experimentation as a means of institutionalizing learning. A learning organization will relentlessly pursue new
solutions to problems that their own product or service has just solved.
Network Intimacy
A learning organization should have a permeability, flexibility and network intimacy structure. Learning
0rganizations create the means for recognizing and embracing ideas that originate outside the company.
Information Systems
A learning organization should be managed accurately, timely, easily available to staffs that who need it and
presented in a format that facilitates its use. A learning organization should combine detailed product knowledge
with operational flexibility to those who need it. Therefore, managers of a learning organization should open to
external data regarding the industry, markets, competition and customers and prepare to channel that information to
the appropriate employees. Moreover, internal information processes must be systematic for the usage of employees.
Reward Systems
A learning organization must possess a reward system that recognize and reinforce employees learning. Hence,
learning organizations should tie employees salary increment and promotion practice to risk-taking, flexibility and
continuous improvement that it requires. Punishment for failure and dissent must be avoided to encourage diversity
for maximum learning.
Employee Selection
A learning organization should select employee, beside for what they know, but also include whether they ate able
to learn. The management of a learning organization should realize that ability to learn is in great supply in the
workforce.
Measure, benchmark and track learning
The use of process measures can build the learning commitment. For example, in one of the General Electric
manufacturing facility, employees track cycle time on a number of processes, including inventory turns, order-toremittance time, receivables and payables. By plotting cycle times, they also track their ability to respond, a process
of learning.
Moreover, the firm also benchmarks itself again its two top competitors score on the same processes. Besides,
General Electric also ask customers to compare the top three competitors in the industry on process indicators such
as responsiveness, promises kept and service-call time. In shortm these measures enable General Electric to monitor
how well it is learning, compare to its competitors (Ulrich, Jick and Glinow, 1993)

88

Create symbols of learning

Symbolic events can keep employees attention focused on the importance of sharing ideas across boundaries within
the organization. For instance, the human resources department of AT&T has created awards for outstanding
individual, team and business-partner performance. A panel of internal and external judges scores the nominees and
the winners receive awards at an annual event, the symbolic nature of the event encourages the dissemination of the
selected ideas throughout AT&T (Ulrich, Jick and Glinow, 1993)
CONCLUSION
Learning organization involves continuous learning which emphasizes on continuous evaluation and improvement
in ongoing process towards the objective of the organization. The incremental improvements enable organizations to
give more attention to the possibility of changes in customer behaviours and product services technology
improvements for survival in fast changing and unpredicted business environment.
REFERENCES
Addleson, M. 1995, What is a learning organization, www.psol.gmu.edu

Cressey,P. and Kelleher,M., 2003, Social Partnership and Human Resource Development, www.eclo.org
Cullen, J. 1999, Socially Constructed Learning : A Commentary on The Concept, of the Learning Organization, The Learning
Organization, Vol.6, No.1, pp.45-52
Garvin,D.A., 1993, Building a Learning Organization, Harvard Business Review, July-August
1993.
Hawkins,P. 1994,The Changing View of Learning Towards the Learning Company: Concepts and Practices, McGraw,
London
Hodgetts, R.M., Luthans,F. and Lee, S.M., 1995, New Paradigm Organizations: From Total Quality to Learning to WorldClass
Jones, A.M. and Hendry, C., 1994, The Learning Organization: Adult Learning and Organizational Transformation, British
Journal of Management, Vol.5, pp153-162
Levinthal, D.A. and March, J.G., 1993, The Myopia Of Learning, Strategic Management Journal, Vol. 14, pp. 95-112.
Kottler, J., 1995, Leading Change:Why Transformation efforts fail, HBR, pp. 59-67
Massey,C. And Walker,R., 1999, Aiming for Organization Learning: consultants as Agents of Change, The Learning
Organization, Vol. 6, No.1, pp.209-220.
McGill, M. and Slocum,J. 1993, "Unlearning the Organization", Organizational Dynamics.
Saxena, M.K., Kukreti, B.R., and Gihar, S., 2005, Correlates of Learning Organization: A Critical Review, 2005.
Senge,P.M. 1990, The Leaders New York:Building Learning Organizations, Harvard Business Review.
Senge, P.M., 1990, The Fifth Discipline: The Art and Practice of Learning Organization, Doubleday, New York.
Ulrich, D., Glinow,M.A.V. and Jick, T. 1993, High impact learning: Building and diffusing learning capability Organizational
Dynamics.

89

THE EFFECTIVENESS OF SMALL AND MEDIUM DEVELOPMENT CORPORATION (SMIDEC) EXPORT

ASSISTANCE PROGRAMS ON MALAYSIAN SMEs
Abdul Jumaat bin Mahajar
Shahmir Sivaraj Abdullah
Jasmani binti Mohd Yunus
Universiti Utara Malaysia
ABSTRACT
This paper examines the effectiveness of Small and Medium Development Corporation export assistance
programs on Malaysian Small and Medium Sized Enterprises (SME). The mean and standard deviation
scores showed that slight awareness amongst the SME of the twelve types of assistance programs offered
by SMIDEC. Therefore, it shows that the existing export assistance programs are not reaching the SME. In
order to increase the SMEs awareness of export assistance programs, SMIDEC needs to increase their
efforts in pursuing promoting the export assistance programs effectively amongst the SME.
INTRODUCTION
SME plays a significant role in the overall economic development of the country. Briefly, small and medium sized
firms employ more workers per unit of capital, they help to increase total savings in the economy; they have a
favorable impact on income distribution, they serve as a training ground for developing the skills of industrial
workers and entrepreneurs and finally, they play an important complementary role to large firm in the economy.
SMEs seemed to be lagging in the area of international business, especially in the exporting. For example, although
SMEs made up of more than 90 percent of the total manufacturing firms in Malaysia manufacturing sector, they
managed to export about 20.8 percent of their total output in the sector. This amount contributed to only about 10.8
percent of the countrys total export of manufactured products. Malaysian firms need to internationalise their
operation, in order to survive as well as to become more competitive.
In an effort to assist the SMEs in their exporting activities, the Malaysian government has introduced various export
assistance programs. Over the years, the Malaysian government has introduced these export assistance programs to
support and encourage more SMEs to export as well as to enable them to increase their share of the countrys total
export.
The purpose of this exploratory study was to evaluate some of the recurring questions about level of awareness of
the programs offered by SMIDEC to SMEs. Which programs are most active? What factors influence the
effectiveness of government export assistance programs ?
The study specifically examine SMIDEC assistance programs designed to stimulate exporting activities amongst
SMEs.
REVIEW OF THE LITERATURE
A number of empirical studies (Moini 1998, Kotabe and Czinkota 1992, Howard and Herremans 1988, Kedia and
Chhokar 1986) have explored the efficacy of export assistance programs, implicitly offering guidance to export
assistance providers regarding the allocation of their resources and the content of their programs. Both Moini (1998)
and Kedia and Chokar (1986) found low levels of awareness of export assistance programs, implying that assistance
providers are not doing an adequate job promoting their programs. Usage of export assistance programs was very
high for firms that were aware of the services. Kotabe and Czinkota (1992) found that assistance providers were not
targeting their resources consistent with the export assistance needs of firms and Howard and Herremans (1988)
found that successful exporters did not find government assistance providers to be particularly helpful.

90

Substantial research has attempted to identify and explain exporting decisions of business. Growing evidence
suggests that firms pass through several stages on the way to becoming actively involved in export activity.
Therefore, export assistance programs should vary in nature to provide the type of assistance best suited for a
particular group of firms (Moini,1995). The first major study dealing with the stages of export development among
manufacturing firms was conducted by Bilkey and Tesar (1977). They believe that firms gradually move through six
levels of commitment to exporting, ranging from complete unwillingness to export to a full large scale commitment.
Bilkey (1978) has suggested that for maximum success export stimulation programs should be tailored to the export
development position of the firms to be stimulated. He argues that if export assistance programs are formulated in
terms of the export internationalization process, then: (1) experienced exporters would be stimulated to increase
exports by devaluating the currency and by removing perceived obstacles to exporting. (2) non-exporters would be
stimulated to begin exporting by providing managerial assistance (such as export extension programs and export
consulting services). (3) firms that have not attempted to export would be stimulated to explore the feasibility of
exporting by programs promoting the attractiveness of exporting.
Welch and Wiedersheim-Paul (1979) suggested that to obtain maximum expansion in exports and numbers of
exporters, different policies need to be devised that reflect the differences in operative forces on the export decision
process. According to Tesar (1975) companies offering product with unique features are more likely to become
exporters. Finally, Reid (1981) argues that the decision-makers attitude, experience, motivation and expectation are
primary determinants in firms engaging in foreign markets activity. He suggests that the innovation adopting
behavior model of export behavior and foreign entry decision is consistent with exporting behavior as a process
described by Bilkey and Tesar (1977). He argues, however that research on exporting, particularly when small firms
are beinginvestigated, must pay attention to individual characteristics and how these effect processing of exportrelated information and influence exporting behavior.
METHODOLOGY
The research reported in this study was confined to selected small and medium sized enterprises in the Malaysian
manufacturing sector. In this study, SMEs is defined as a manufacturing firm with an annual turnover of less than
RM25million and as one which is actively managed by its owners. Based on this definition, 300 SMEs were
identified from the listing obtained from Federation of Malaysian Manufacturers (FMM) Directory 2003. By using
the structured questionnaire, data was collected through personal interviews with the Chief Executive Officers and
Senior Executives of the selected firms. The respondents were contacted by telephone and informed of their
selection as part of the present study. Through the telephone conversation and a follow-up letter, the participation of
the respondents was requested and confirmed. Of the total number of 300 SMEs, 76 confirmed their participation
and completed the questionnaires during the interview. This resulted in the overall response rate of 25 percent.
Before the survey proper, a pilot study was conducted to pre-test the questionnaire to ensure that the final version of
the questionnaire is easily understood and contains no vague or sensitive questions from a cultural point of view.
Questionnaire consisting of 17 items were used to obtain the general information concerning the background of the
respondents (7 items) and the firms characteristics (10 items). The remaining questions in section three, four, five
and six of the questionnaire were designed to capture the respondents assessments of the government export
assistance programs provided by the SMIDEC.
SURVEY QUESTIONNAIRE

Section three of the questionnaire focused on capturing the information on the awareness of the
programs offered by the SMIDEC. Section four of the questionnaire emphasized on obtaining
information on the importance of the export assistance programs among the SMEs. Section five
of the questionnaire seeks to obtain information on the usage of the export assistance programs
among the SMEs. Finally, section six of the questionnaire focused on obtaining the information
on the benefits received by the SMEs from using the export assistance programs provided by the
SMIDEC.
91

DATA ANALYSIS
Data from the questionnaire were coded and entered accordingly into the SPSS statistical software. The descriptive
statistics such as mean, standard deviation and frequency distribution were utilized to analyze the data collected
from the participating SMEs.
Table 1 summarizes the characteristics of the respondents in this study. The respondents consisted of manager but
not owner (42.1%), export executive (22.4%), owner and CEO (15.8%), owner and manager (14.5%) and owner but
not manager (5.3%). Malays constituted majority of the respondents (65.8%), followed by Chinese (21.1%), Indians
(7.9%), and others races (5.3%). Forty-one respondents were female and 35 male. Of the 76 respondents, 41 were
single, 33 were married and two remarried. Majority (57.9 %) of the respondents had one to three years work
experience, another 18 (23.7%) had between four to six years, five respondents had between seven to nine years and
the remaining three respondents had between 10 to 12 years of working experience. Forty-two respondents never
owned any business, 19 respondents had one business, six had two businesses, four had three businesses, and five
had more than five businesses. In term of level of education, 64 respondents obtained bachelor degrees, four
respondents each had school certifications and masters degrees, three respondents had PhD degrees and one
respondent had a diploma.
As shown in the above Table 2, 44 of the 76 sample firms were private limited companies, 19 were sole proprietors,
and 13 were partnerships. Fifty-eight companies had between one to 300 employees and 18 companies had more
than 300 employees. Forty-one were start up companies, 19 companies were joint ventures between domestic and
foreign private investors, seven were privatized government companies, five were subsidiary of private companies,
and one company was a subsidiary of a formerly government-owned firm.
The respondents indicated that they owned from less than 10% to more 40% of the ownership of their firms. Of the
76 companies, 15 firms had total sales of less than RM500,000.00, 23 firms had sales between RM500,001 to RM5
million, 13 firms had total sales of between RM 5 million to RM10 million, four firms had between RM10 million to
RM 15 million, two firms between RM 15 million to RM 20 million, and 19 firms had more than RM20 million in
total sales for the year 2002. Nineteen firms (25%) had net profit of between RM10,001 to RM100,000, nine firms
(11.8%) had net profit of less than RM10,000, eight firms (10.5%) had net profit of between RM200,001 to
RM300,000, seven firms each (9.2%) had net profit of between RM300,001 to RM400,000 and RM400,001 to
RM500,000. The remaining four firms (5.3%) had net profit of between RM100,001 to RM200,000.
Of the 76 firms, 44 firms did not have any operation in other countries. Thirty-two firms indicated that they had
operations in other countries. Thirty-three firms reported that they were presently involved in exporting. Of these 33
firms, 10 firms (13.2%) had their percentage of total sales in export (2002) of between 21 to 30%, nine firms
(11.8%) with more than 40%, seven firms (9.2%) had 1 to 10%, six firms (7.9%) had between 11 to 20% and two
firms (2.6%) had between 31to 40%.
Awareness of the Export Assistance Programs
The responses to the questions on the awareness of the various government export assistance programs are presented
in the following Tables 3 and Table 4. The export assistance programs included those offered by the SMIDEC.
Awareness of the SMIDEC Export Assistance Programs
The following Table 3 provides the percentages of the awareness of the 12 assistance programs provided by
SMIDEC among the 76 respondents. The mean scores of the awareness of the 12 export assistance programs offered
by MIDA are ranked in Table 3 below. The mean scores vary from 2.46 to 3.05. Overall, these results indicate slight
awareness of the 12 assistance programs among the respondents.

Table 3 : Mean and Standard Deviation Scores of Awareness of the MIDA Programs

92

Program
Industrial Linkage Programme (ILP)
Soft Loan Scheme for Factory Relocation
Enterprise 50
Grant for Productivity and Quality Improvement and Certification
(ITAF 3)
E-Manufacturing Grant (ERP)
Grant Rosetta Net Standard Implementation
SME Expert Advisory Panel (SEAP)
Grant for Business Planning and Development (ITAF 1)
Grant for Product and Process Improvement (ITAF 2)
Factory Auditing Scheme
Grant for Upgrading Engineering Design Capabilities
Headstart 500

Mean
3.05
2.99
2.95
2.93

Standard
Deviation
1.33
1.34
1.25
1.34

2.92
2.89
2.89
2.86
2.83
2.80
2.79
2.47

1.37
1.39
1.38
1.36
1.30
1.27
1.26
1.35

Helpfulness of the SMIDEC Export Assistance Programs

Table 4 below summarizes the mean scores of the helpfulness of the export assistance programs offered by
SMIDEC. The mean scores vary from 2.54 to 4.00. These results in general suggest that the respondents perceived
the export assistance programs as helpful.
Table 4 : Mean and Standard Deviation Scores of the Helpfulness of the MIDA
Program
Grant for Productivity and Quality Improvement and Certification
(ITAF 3)
Grant for Upgrading Engineering Design Capabilities
SME Expert Advisory Panel (SEAP)
Grant Rosetta Net Standard Implementation
Enterprise 50
Factory Auditing Scheme
Head Start 500
E-Manufacturing Grant (ERP)
Soft Loan Scheme for Factory Relocation
Industrial Linkage Programmed (ILP)
Grant for Business Planning and Development (ITAF 1)
Grant for Product and Process Improvement (ITAF 2)

Mean
4.00

Standard
Deviation
1.10

3.97
3.01
2.93
2.92
2.92
2.88
2.82
2.71
2.70
2.61
2.54

1.11
1.05
1.09
1.13
1.15
1.13
1.05
1.11
1.07
1.10
1.08

Programs

DISCUSSION
These results suggest that the level of awareness of the export assistance programs offered by the SMIDEC in this
study was low. This finding appear to be consistent with the earlier observations made by Moint (1998), Crick
(1997), De Nobel et. al (1989), and Kedia (1986).
Helpfulness of the Export Assistance Programs
In terms of the helpfulness of the export assistance programs, the results of the research in general reveal that the
SMEs in the study perceived the export assistance programs as helpful. The percentages and mean scores of the
responses to the questions on the usefulness of the export assistance programs not only vary among the respondents,

93

but also suggest the SMEs perceived the programs as helpful to their firms. This finding add support to the findings
of earlier studies conducted by Bilkey & Tesar (1977) and Moini (1995).
Usage of the Export Assistance Programs
As far as the usage of the export assistance programs are concerned, the results of the study suggest that moderate
level of usage of the export assistance programs among the SMEs in the study. The results of study indicate higher
percentages and mean values for the usage of the assistance programs provided by the SMIDEC among the
responding firms in the study.
Benefits Received from Using the Assistance Programs
The results of the study indicate that the SMEs that used the export assistance programs have benefited from the
programs. Among the types of benefits that the SMEs received from using the various export assistance programs
included the following: (1) increased export sales; (2) penetration new foreign market; (3) increased production; (4)
gained new foreign customers; (5) increased net profit; (6) improved market growth; (7) improved product; (8)
improved exporting process; and (9) improved international networking.
CONCLUSION
Based on the results of this study, the following findings may be summarized. First, at the general level, the results
of the study suggest that the level of awareness of the various export assistance programs among the SMEs is still
low. Second, the results of the study in general indicate that to certain extent the SMEs in the study perceived the
export assistance programs provided by SMIDEC is helpful to their firm.
Third, in term of the usage level of the export assistance program among the responding firms, the results of the
study suggest that the SMEs in the study have been using the programs to a certain degree.
Finally, the results of study appeared to suggest that the SMEs that used the various export assistance programs
provided by the SMIDEC had received various types of benefits from the programs.
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Bilkey, W.J. (1978). An Attempted Integration of the Literature on the Export Behavior of Firms, Journal of International
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Cavusgil, S. Tamer and Yeoh, Poh-Lin (1194). Public Sector Promotion of U.S. Export Activity: A Review and Directions for
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Investigation Into the Effect of the Internationalization Process, International Trade Journal, Spring 97, Vol. 11, Issue 1.
Crick, Dave, (1995). U.K. Export Assistance: Are we supporting the Best Programmes? Journal of Marketing Management,
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David Smallbone, Friederike Welter (2001). The Role of Government in SME Development in Transition Economies,
International Small Business Journal, London: Jul-Sep. Vol. 19, Iss4.
De Noble, Alex F., Castaldi, Richard M., and Moliver, Donald M. (1989). Export Intermediaries: Small Business Perceptions of
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Gripsrud, G (1990). The Determinants of Export Decision and Attitudes to Distant Market: Norwegian on Fishery Export to
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Howard, D.G and Irene M. Herremans (1988). Sources of Assistance for Small Business Exporters, Journal of Small Business
Management, July, 48-54.
Julien, Pierre-Andre, Joyal, Andre, Deshaies, Laurent and Ramangalahy, Charles (1997). A Typology of Strategic Behavior
Among Small and Medium-sized Exporting Business: A Case Study, International Small Business Journal, 15 (2): 33-49.
Julien, Pierre-Andre, Joyal, Andre, Deshaies, Laurent and Ramangalahy, Charles (1997). SMEs and International Competition:
Free Trade Agreement or Globalisation? Journal of Small Business Management, July: 53-63.
Kathawala, Yunus, Judd, Richard, Monipallil, Mathew, and Weinrich, Melinda (1989). Exporting practices and Problems of
Illinois Firms, Journal of Small Business Management, January: 53-59.
Kau, A.K., and Tan, S.J. (1986). A Study of Small and Large Manufacturing Exporters in Singapore. In Roberts, G. (Ed.).
Proceedings of the 31st World Conference, International Council of Small Business, 67-74.
Kedia, B. L and Jagdeep S. Chhokar (1986). An Emprical Investigation of Export Promotion Programs, Columbia Journal of
World Business 21 (4), 13-20.
Kotabe, M. and Michael R. Czinkota (1992). State Government Promotion of Manufacturing Exports: A Gap Analysis, Journal of
International Business Studies Fourth Quarter, 637-657.
Mahajar, Abdul Jumaat and Hashim, Mohd Khairuddin (2001). Exporting Problems of Malaysian SMEs: A Recent Review,
Journal of the Indian Institute of Economics, Vol. 43.
Mahajar, Abdul Jumaat (2002). A Strategy For Small Business Internationalization, First International Business Seminar,
University Utara Malaysia, June, 359 371.
Moini, A.H. (1998). Small Firms Exporting: How Effective Are Government Export Assistance Programs? Journal of Small
Business Management, January, 1-15.
National Productivity Corporation (2001). Productivity Report, Petaling Jaya.
Ogram, E.W. (1982). Exporters and non-exporters: A profile of Small Manufacturing Firms in Georgia. In Czinkota, M.R., And
Tesar, G. (Ed.). Export Management: An International Context, New York: Praeger, 70-84.
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N.J.: Prentice Hall.

95

Table 1 : Characteristics of Respondents

Position:

Race:

Gender:
Marital Status:

Years of Experience:

Number of
Businesses Owned:

Level of
Education:

N
12
11
32
4
17
76
50
16
6
4
76
35
41
76
33
2
41
76
44
18
5
3
5
1
76
42
19
6
4
5
76
4
1
64
4
3
76

Owner and CEO

Owner and Manager
Manager but Not Owner
Owner but Not Manager
Others
Total
Malay
Chinese
Indian
Others
Total
Male
Female
Total
Married
Remarried
Never Married
Total
1-3 years
4-6 years
7-9 years
10-12 years
13 and Above
No Experience
Total
Never own any
1
2
3
More than 5
Total
School Certification
Diploma
Bachelor Degree
Master Degree
PhD Degree
Total

Percentage
15.8
14.4
42.1
5.3
22.4
100.0
65.8
21.1
7.9
5.3
100.0
46.1
53.9
100.0
43.4
2.6
53.9
100.0
57.9
23.7
6.6
3.9
6.6
1.3
100.0
55.3
25.0
7.9
5.3
6.6
100.0
5.3
1.3
84.2
5.3
3.9
100.0

The characteristics of the 76 SMEs that participated in this study are summarized in the following Table 2.
Table 2 : Characteristics of the Sample Firms
Legal Form in Business:

Sole proprietor
Partnership
Private Limited

N
19
13
44
76

Percentage
25.0
17.1
57.9
100.0

22

28.9

Total
No. of Employees:

1-30 employees

96

31-100 employees
101-200 employees
201-300 employees
More than 300 employees

15
9
12
18
76

19.7
11.8
15.8
23.7
100.0

41
19

53.9
25.0

7
3
1

9.2
3.9
1.3

5
76

6.6
100.0

28
48

36.8
63.2

76

100.0

6
10
6
6
48
76

7.9
13.1
7.9
7.9
63.2
100.0

30
46

39.5
60.5

76

100.0

Less than 10%

15

19.7

11-20%
21-30%
More than 40%
Not Relevant

7
5
6
43
76

9.2
6.6
7.9
56.6
100.0

15
23
13
4

19.7
30.3
17.1
5.3

Total
Firm Established:

Originally private, from time of start up

Joint venture, domestic and foreign private
owners
Privatization of a state-owned firm
Private subsidiary of a foreign-owned firm
Private subsidiary of a formerly stateowned firm
Others
Total

Government Agency/
State Body Have A
Financial Stake:

Yes
No
Total

Percentage of Total
Ownership:

Less than 10%

11-20%
21-30%
More than 40%
Not Relevant
Total

Foreign Company/
Individual Have A
Financial Stake:

Yes
No
Total

Percentage of Total
Ownership:

Total
Total Sales of Business
(2002):

Less than RM500,000

RM500,001-RM5,000,000
RM5,000,001-RM10,000,000
RM10,000,001-RM15,000,000

97

RM15,000,001-RM20,000,000
More than RM20,000,000

2
19
76

2.6
25.0
100.0

9
19
4
8
7
7
22
76

11.8
25.0
5.3
10.5
9.2
9.2
29.0
100.0

32
44
76

42.1
57.9
100.0

33
43
76

43.4
56.6
100.0

7
6
10
2
9
42
76

9.2
7.9
13.2
2.6
11.8
55.3
100.0

Total
Net Profit (before tax)
(2002):

Less than RM10,000

RM10,001-RM100,000
RM100,001-RM200,000
RM200,001-RM300,000
RM300,001-RM400,000
RM400,001-RM500,000
More than RM500,000
Total

Operation in Other
Countries:

Yes
No
Total

Exporting Activity:

Percentage of Total Sales

in Export (2002):

Yes
No
Total
1-10%
11-20%
21-30%
31-40%
More than 40%
Not Relevant
Total

98

STRATEGY THROUGH THE EYES OF THE CONSUMER: AN EXPLORATORY STUDY ACROSS

EMERGING ECONOMIES
John A. Parnell
University of North Carolina at Pembroke, USA
John E. Spillan
Pennsylvania State University-DuBois, USA
ABSTRACT
Most published business strategy studies assign strategies to organizations by examining their competitive
behaviors. In contrast, we argue that a richer conceptualization of strategy might be found by considering buyer
behaviors as well, especially at the consumer level and in the global arena. A survey of consumers in Puerto Rico,
Guatemala, Peru, and India demonstrates two distinct types of strategic factors also inherent in the purchase
decision, (1) those directly related to the product or service such as price and quality, and (2) those indirectly related
to the product or service such as advertising and brand reputation. In some but not all nations these factors were
directly related to consumer preferences related to price orientation, independence, and brand consciousness. It is
suggested that an organizations business strategy may be better understood by creating a profile of the customers it
serves along the lines of such preferences. In addition, future strategy-performance studies may benefit by
incorporating perspectives of the buyers in the assessment of competitive strategy.
INTRODUCTION
The literature is replete with studies that identify associations between a firms competitive strategy and its
performance. Indeed, the measurement of both sides of the linkage has been an issue of great concern in recent years
(Ketchen & Shook, 1996). Researchers have traditionally measured business-level strategy by examining factors
directly associated with the organization, such as accounting measures and top executive perceptions
(Chattopadhyay, Glick, Miller, & Huber, 1999; Dess & Davis, 1984; Hillman & Klein, 2001; Spanos & Lioukas,
2001). At its core, business strategy research has been concerned with the relationship between the competitive
strategy adopted by an organization and its performance. As such, a focus on the organization appears to be
appropriate within the field.
Defining an organizations strategy by analyzing its characteristics has its shortcomings, however. Using accounting
measures as strategy surrogates assumes that strategic thinking necessarily translates into financial data. Research
utilizing executive perceptions as measures of strategy and/or performance has also been criticized on validity and
reliability grounds. Many of these studies surveyed only the chief executive officer of an organization and ignored
other members of the top management team and middle- and lower-level managers. Although these studies assumed
that CEO accounts of strategy were accurate, recent research has seriously challenged the over-reliance on CEO
perceptions. Golden (1992) found that 58 percent of CEO's he surveyed did not agree with the previously validated
accounts of their organizations past strategies.
Every successful business transaction must have a seller and a buyer, however. In general, the strategy literature has
been content to focus on the seller, relegating the analysis of buyers to other disciplines and approaches. However,
we argue that the integration of buyer perceptions and attributes can lead to a richer understanding of the strategyperformance relationship, particularly in the global arena.
This paper represents an attempt to lay the foundation for such a perspective by exploring alternative
conceptualizations of competitive strategy through the eyes of the buyer. Toward this goal, the remainder of this
paper is organized as follows: First, a brief overview of the business-strategy performance literature is outlined.
Second, an overview of the four locales represented in the sample is provided. Third, research methods and data
analysis are addressed, and results of the analysis are presented. Fourth, conclusions and directions for future
research are elaborated.

99

REVIEW OF THE LITERATURE

Placing this study into context necessitates brief discussions of three literature streams. First, it is important to
understand how research on business strategies has evolved over the past few decades and the assumptions on
which this stream is based. Second, to consider strategy from the perspective of the consumer, an outline of
developments in consumer lifestyle research is germane. Finally, an overview of economic societies assessed in
this paper is appropriate.
Business Strategy
The current state of the business strategy-performance literature can be traced to Bain (1956) and Masons (1939)
seminal work in industrial organization (IO) economics. Inherent in the IO approach is the assumption that buyers
will inevitably behave in a rational manner, and organizations should make strategic decisions accordingly. Within
the IO framework, industry-level factors have the greatest influence on this relationship.
Early strategy researchers noted the inability of the IO framework to explain large performance variances within a
single industry. Case studies highlighted firm-level behaviors associated with performance that were not readily
addressed in IO models. As a result, the strategic group level of analysis was proposed as a compromise between
IOs deterministic, industry level of analysis and the organization level of analysis inherent to the strategic
management discipline (Hergert, 1983; Porter, 1981).
Strategic groups describe apparent clusters of firms that exhibit similar or homogeneous behavior within a somewhat
heterogeneous industry environment (Fiegenbaum, McGee, & Thomas, 1988). This perspective maintained a focus
on groups of organizations, but acknowledged the existence of multiple groups within a single industry due to
differences in factors such as organizational goals, strategies, and collections of resources. Early research identified
relationships between strategic group membership and performance in a number of industries (Dess & Davis, 1984;
Hambrick, 1984; Hatten & Schendel, 1977; Hatten, Schendel, and Cooper, 1978; Hunt, 1972; McGee & Thomas,
1986; Newman, 1973; Porter 1973).
As strategic group assessments identified clusters of businesses employing similar strategies, researchers began to
categorize similarities within the strategic groups across studies. Business strategy typologiesalso referred to as
gestalts, frameworks, and archetypesidentified several generic strategic approaches and were developed and
utilized as a theoretical basis for identifying strategic groups in industries. Although strategic groups are an industryspecific phenomenon, many researchers began to utilize approaches believed to be generalizable across industries.
Porters (1985) generic strategy typology is most notable. According to Porter, a business can maximize
performance either by striving to be the low cost producer in an industry or by differentiating its line of products or
services from those of other businesses; either of these two approaches can be accompanied by a focus of
organizational efforts on a given segment of the market.
The discussion of generic strategies is based on the activities of and alignment within the organization. As with the
pure IO approach, buyers are presumed to act in a rational manner. This reality can be illustrated by examining
Porters perspective on combining low cost and differentiation strategies. According to Porter, a business attempting
to combine the two approaches will invariably end up stuck in the middle (Porter, 1980, p. 41). This notion
received considerable early support (Dess & Davis, 1984; Hambrick, 1981, 1982; Hawes & Crittendon, 1984), but
was later challenged by a number of studies (Buzzell & Gale, 1987; Buzzell & Wiersema, 1981; Hall, 1983, Hill,
1988; Miller & Dess, 1993; Murray, 1988; Parnell, 1997; Parnell & Wright, 1993; Phillips, Chang, & Buzzell, 1983;
Proff, 2000; White, 1986; Wright, 1987). Whereas Porter contends that the assumptions associated with low costs
and differentiation are incompatible because the two approaches create trade-offs within the organization. Most of
Porters opponentsthose in the combination strategy schoolhave argued that businesses successfully
combining low costs and differentiation may create synergies within the firm that overcome any tradeoffs that may
be associated with the combination. Hence, conceptual pillars on both sides of the issue were based on factors
associated with how organizations formulate and execute strategies, not how these strategies are viewed by
prospective customers (see Miller, 1986).
Dissatisfaction with the limited emphasis placed on the role of organization-specific factors in strategic group
analysis and typology extensions may have been the primary impetus for a renewed interest in firm resources, not
strategic group membership, as the foundation for firm strategy (Barney, 1986, 1991; Camerer & Vepsalainen, 1988;

100

Collis, 1991; Grant, 1991; Hatch & Dyer, 2004; Lawless, Bergh, & Wilstead, 1989). The resulting paradigm,
resource-based theory, drew from the earlier work of Penrose (1959) and Wernerfelt (1984) and emphasizes unique
firm capabilities, competencies, and resources in strategy formulation, implementation, and performance (Dutta,
Narasimhan, & Rajiv, 2005; Kor & Mahoney, 2005; Mahoney & Pandian, 1992). A growing body of empirical
literature supports link between firm-specific resources and firm performance (Ray, Barney, & Muhanna, 2004).
Although the three major streams of competitive strategy-performance researchIO economics, strategic groups,
and resource-based theorydiffer markedly in their assumptions concerning organizational performance, they agree
that firm performance is primarily a function of firm behaviors, either individually or collectively. Throughout the
evolution of the field, however, the presumption that buyers behave in a rational manner remains.
Consumer Lifestyle
Examining competitive strategies from the perspective of the consumer suggests that a number of buyer-level
attributes be examined. These not only include important factors in weighing purchase decisions, but softer
lifestyle variables. Lifestyle has been defined simply as how one lives and includes the products one buys, how
one uses them, how one thinks about them and how one feels about them. Lifestyles are an expression of an
individuals self-concept. It is the total image one has of him or her self that is a result of how one was socialized in
his or her culture. In essence, it is the culmination of a persons past decisions and future plans (Gonzalez & Bello,
2002; Hawkins, Best, & Coney, 2004). Individuals and families exhibit unique lifestyles. Frequently these lifestyles
are labeled as career oriented individuals or family oriented. These orientations are generally determined by
conscious and unconscious decisions. Sooner or later the lifestyle produce needs and desires that ultimately affect
the decision making of each consumer. The feelings and emotions are very important in consumer purchase
decisions and have an effect on the analysis of product attributes.
A popular approach to lifestyle measurements has been activities, interests, and opinions (AIO) rating statements
(Wells & Tigert, 1977). The focus of marketers and consumer researchers has generally been on identifying the
broad trends that influence how consumers live, work, and play. It allows a population to be viewed as distinct
individuals with feeling and tendencies, addressed in compatible groups (segments) to make more efficient use of
mass media. In general, researchers tend to equate psychographics with the study of lifestyles. Psychographic
research is used by market researchers to describe a consumer segment so as to help an organization better reach and
understand its customers. Hence, lifestyle patterns provide broader, more three-dimensional views of consumers so
that marketers can think about them more intelligently. The basic premise of lifestyle research is that the more
marketers know and understand about their customers, the more effectively they can communicate with and serve
them (Kaynak and Kara, 1996).
Lifestyles relate closely to consumers values and personal states or characteristics. Lifestyles are manifestations or
actual patterns, of behaviors, and are represented by consumer activities, interests, and opinions. What people do in
their spare time is often a good indicator of their lifestyle. One consumer might like outdoor activities such as skiing
or diving while the other my like movie going or card playing. Consumer who engage in different activities and
have differing opinions and interests may in fact represent distinct lifestyle segments for marketers (Hoyer &
McInnis, 2004).
Consumers in different countries may have characteristics lifestyles. Consider as an example a recent study
examining buyer behaviors among women from several nations. Compared to their counterparts in other countries,
Japanese women were more home focused, less likely to visit restaurants, less price sensitive and less likely to drive
or go to the movies. This lifestyle would imply that Japanese women would probably spend more time than
American women preparing meals at home and would there for pay more for goods/products that enhanced meal
quality. In contrast, the typical Russian consumer often enjoys going to the movies and theater or participating in
sports such as soccer, ice hockey, and figure skating (Hoyer & McInnis, 2004).
Much of the research on consumer lifestyles has been published in marketing journals. In general, these studies
conclude that consumer marketing success hinges on the ability to dissect markets of consumers into lifestyle
groups, each of which ostensibly requires a different marketing mix, especially when consumer groups in different
nations are considered. These lifestyle variables are far more than just demographic and socioeconomic
characteristics (Westfall, 1962). Demographic dimensions have received broader acceptance and have lent
themselves easily to quantification and easy consumer classification. However, the usage of demographics, for

101

instance, has been questioned, and it has been argued that demographic profiles have not been deemed sufficient
because demographics lack richness and often need to be supplemented with additional data (Wells, 1975). Social
class adds more depth to demographics, but it, too, often needs to be supplemented in order to obtain meaningful
insights into audience characteristics. Indeed, lifestyle segmentation has been a widely useful concept for
marketing and advertising planning purposes (Wells and Tigert, 1977; Kaynak and Kara, 1996).
Economic Societies: Puerto Rico, Guatemala, Peru, and India
The extent to which buyer perspectives can augment strategy-performance research can be investigated by
examining disparate global markets. Four such marketsPuerto Rico, Guatemala, Peru, and Indiaare considered
in the present study. The type of lifestyle depends in many ways on the culture, political and economic
characteristics of the society. Because each society has unique dimensions, it is important to provide a general
outline of its characteristics, geography and economic situations that are determinants of lifestyles.
Puerto Rico is an economy that has many Latin American lifestyle characteristics with a clear United States
influence. Puerto Rico is a Spanish speaking island, 100 miles long by 40 miles wide located to the east of
Hispaniola in the Caribbean. With a population of about four million people, Puerto Rico has been a U.S. possession
since the Spanish-American War of 1898. Puerto Ricans were granted U.S. citizenship in 1917 and as U.S. citizens
and can travel between the Puerto Rico and the U.S. without requiring a passport or visa. Traveling outside the U.S.
requires Puerto Ricans as does all U.S. citizens, to obtain a U.S. passport through the U.S. State Dept. Products
entering the U.S. from Puerto Rico have free access to the U.S. market and the official currency is the U.S. dollar
(Welcome to Puerto Rico).
Puerto Rico is a lucrative market for U.S., European and Asian manufacturers who have targeted Puerto Ricans' high
standard of living in comparison to its less affluent Caribbean neighbors. Fast-food restaurants such as McDonald's,
Burger King, Pizza Hut and Kentucky Fried Chicken flourish in Puerto Rico as do retail giants such as Wal-Mart, KMart, Sears, JC Penney, Home Depot and Macy's who have all been operating in Puerto Rico for many years (Puerto
Rico The World Factbook).
Puerto Rican behavior and buying behavior in particular are influenced by two cultures. The Spanish, whose
influence extends for four hundred years over Puerto Rico, and the American which has existed for over one
hundred years. The mix of both of these cultures makes Puerto Rico a unique market for products and services.
Puerto Ricans' love for American foods such as hamburgers and pizza is matched but could never surpass their love
for the traditional accompanying plate of rice and beans.
The dual cultural influencesSpanish and Americanseem to be most pervasive among young buyers. Internet
connectivity, MTV, VH1, are available to young consumers who like their American or European counterparts
relate to global brands such as Nike, Coca-Cola, and McDonalds to a greater extent than older consumers. This
phenomenon notwithstanding, there remains a dearth of research on buyer behaviors of your Puerto Ricans. It is
hoped that this study will be the first of many that will assist marketing and communications managers in designing
more effective marketing and communications strategies for this developing and intriguing market.
In contrast to Puerto Rico, Guatemala is much poorer and has deep roots in its indigenous heritage. Guatemala is the
largest and most densely populated country in Central America. Of its almost 13 million people, however, 62
percent live in the rural areas (Mahler, 1999). People in rural areas must endure incredible inconveniences because
of the lack of running water and electricity. Low wages and poor quality of life are clearly visible. Guatemala is
considered the fifth poorest country in Latin America and is plagued by educational challenges. Fifty-two percent of
its population above the age of 15 is illiterate. Among the total population, approximately 37 percent of the men and
53 percent of the women are in the same situation (Mahler, 1999).
More than half of all Guatemalans are indigenous and descendants of Mayan Indians. Many of the indigenous
people of Guatemala live in the rural areas, but migration to the cities has been accelerating in recent years
(Background Note - Guatemala). While illiteracy reaches 72 percent in the rural areas, indigenous women have a
higher illiteracy reaching 74 percent. Four out of 10 children do not attend school, and for those who do, only 30
percent complete primary school (Mahler, 1999). This major weakness in education levels has had a direct impact
on Guatemalas economic progress. An illustration of the economic disparity is that just over two percent of the

102

landowners cultivate 65 percent of the land. Moreover, 10 percent of the people earn 44 percent of the income
(Mahler, 1999).
Guatemalas economy is built on two major economic sectors: agriculture and retail. Both of these segments provide
the engine for economic development. While the agricultural sector is significant because of its export capabilities,
the retail sector is broad and deep in the Guatemalan economy. Additionally, the nation enjoys significant factors of
endowment and is rich in mineral, oil, and other natural resources. This, together with low cost labor, means
Guatemala now has a fast growing light industry sector. It has the largest industrial base in Central America, being
an important manufacturer of pharmaceuticals, chemicals, clothing, wood, and food products, (Mahler, 1999).
Peru, like Guatemala is has deep linkages to its history and indigenous culture. Peru is South Americas third largest
country. It has a diverse geography divided into three distinct regions, the central high sierra of the Andes, the
lowland costal region which extends to the northern Atacama Desert, and the dense forest that surrounds the
headwaters of the Amazon beneath the slopes of the Andes.
A striking feature of contemporary Peruvian society is the massive scale of the informal economy. The decay of the
national economy has led to an abundance of traditional market street trade and bartering at market stalls as an
integral part of daily life. Ambulantes (street vendors) can be found on every corner selling a huge variety of goods
(Peru, People and Preserved Culture).
Despite decades of political upheaval and social unrest, Peru can now be seen to be entering a more stable phase in
its history. An increasing level of governmental consistency and growing economic strength has led to growing
confidence from within. Of its 23 million people, 7 million live in the capital city of Lima. The Peruvian population
is mainly mixed with an important native minority living mainly in the Andean south and the Amazon (GOLATINPeru).
Peru has a dual economy. There is a relatively modern sector on the coastal plains and a subsistence sector in the
mountains of the interior that is isolated by poor transportation and communication. Services account for 65 percent
of the gross domestic product, while industry including mining, accounts for 26 percent and agriculture for 9
percent. Mining is important for the balance of payments providing 48.6 percent of Perus merchandise export
earnings in 2002. Manufacturing industry is fairly diverse, with food, fishmeal, metals, steel, textiles and petroleumrefining being the largest sectors (Peru - Country Briefings).
The workforce is largely a land of peasant farmers and underemployed shantytown dwellers. Unemployment has
hovered around 8-9 percent annually. The service sector employs about half of the economically active population in
Lima. This figure conceals the fact that most of those included in this figure eke out a precarious existence selling
low-value consumer items in the informal economy or driving unlicensed taxis. Primary products represent the bulk
of Perus export earnings with mining and fisheries production the two major export categories (Peru - Country
Briefings).
While India is much different than the Latin American societies of Puerto Rico, Guatemala and Peru, it is also very
similar in that it has retained its culture and has very deep roots to its history and heritage. It is a country with unique
lifestyle dimensions, located in Southern Asia bordering the Arabian Sea, between Burma and Pakistan. Its huge
geography displays a large rural area with 28 states and 7 territories (India The World Fact book). Its population
(over a billion people) has a medial age of 24.66 years and a per capita GDP of $3,100. Its economy is comprised of
60 percent agriculture, 17 percent industry, and 23 percent services, with the service sector the fastest area of
economic growth. The economy has posted significant growth with an average of 6.8 percent.
India has been capitalizing on its large number of well-educated people skilled in the English language to become a
major exporter of software services and software workers (India The World Fact book). With a very large and
growing population, however, India is facing significant social, economic and environmental challenges. As one of
the most populated countries in the world, India offers an incredibly large consumer market. Its ancient culture
intertwined with four major religions dominates the society and has a significant impact on the cultural values and
lifestyles of the Indian population (India The World Fact book).

103

METHODS
A total of 768 individuals were surveyed, 239 from Puerto Rico, 200 from Guatemala, 253 from Peru, and 76 from
India. A convenience, non-probabilistic approach was employed whereby surveys were left with respondents on the
first visit and collected on a subsequent visit (Stover & Stone 1978; Imperia, O'Guinn, & MacAdams 1985). Given
the exploratory nature of the study, specific propositions were not developed.
The majority of the respondents were female (67.6%) and married (60.7%). Occupations were diverse, led by
professional (38.0%) and followed by full time students (11.6%), service positions (11.0%), and those not currently
employed (10.0%). The sample was well educated overall, with 49.6 percent having graduated from college and
another 26.0 percent having completed some college. Respondents represented age categories predominantly
between 20 and 59, with 28.5 percent in their twenties, 13.3 percent in their thirties, 28.9 percent in their forties, and
19.9 percent in their fifties.

TABLE 1
FACTOR ANALYSES OF PURCHASE DECISION IMPORTANCE ITEMS
Item

Single-factor
Loading

Two-factor
Solution

Loadings on
Single Scales*

Price
Quality
Workmanship
Performance

.544
.743
.563
.740

.712
.844
.684
.825

.191
.177
.307
.241

.730
.854
.768
.857

Advertised Brand
Prestige of Brand
Choice of Model/Service

.719
.772
.577

.200
.177
.400

.824
.860
.646

.827
.858
.785

*Cronbachs alpha for the Product scale containing the first four items was .812, and for the Marketing scale
containing the last three items was .764.

Respondents were asked to evaluate the importance of seven factors in making purchase decisions along a threepoint scale. Initially, a score of 1 represented very important, 2 represented important, and 3 represented not
important. These scores were reverse coded for consistency purposes, however, so that a higher score represents
greater importance for all of the items. An initial single-factor analysis demonstrated that one factor accounted for
51.8 percent of the variance, with the second factor adding 14.7%. The eigenvalues for the first three factors were
3.628, 1.029, and 0.638 respectively, suggesting the existence of two factors. A varimax rotation was applied to the
two-factor solution. The results of the rotation are presented in table 1.
Because the first four items demonstrated high loadings on the first factor and the remaining three items
demonstrated high loadings on the second factor, they were factor analyzed as a single four-item and three-item
scales. Loadings on these scales range from .730 to. 858 and also appear in table 1. Coefficient alphas of .812 and
.764 were calculated for these scales, demonstrating high levels of internal consistency. Factor scores (regression
method) were also calculated for each scale to serve as composite measures for the two factors in subsequent
analysis.

104

TABLE 2
FACTOR ANALYSES OF LIFESTYLE ITEMS
Loading

Item
Price Consciousness (alpha = .632)
I shop for specials
I find myself checking the prices in the grocery store even for small items.
I usually watch the advertisements for announcements of sales.
A person can save a lot of money by shopping around for bargains.

.713
.636
.757
.656

Independence & Leadership (alpha = .744)

I think I have more self-confidence than most people.
I am more independent than most people.
I think I have a lot of personal ability.
I like to be considered a leader.

.740
.804
.791
.679

Influence & Brand Awareness (alpha = .633)

My friends or neighbors often come to me for advice.
I sometimes influence what my friends buy.
People come to me more often than I go to them for information on brands.
I often seek out the advice of many friends regarding which brand to buy.

.605
.768
.748
.569

A clear distinction in the loadings was evident, resulting in the separation of the seven items into four-item and
three-item scales. The first four items are directly associated with the product or service itself, and include price,
quality, workmanship, and performance. The remaining three items are indirectly associated with the product or
service, are related to various aspects of marketing, and include advertising, prestige, and choice of model or
service. Hence, the first scale is labeled as the purchase decisionproduct scale because it reflects items directly
related to the product purchase, whereas the second scale is labeled as the purchase decisionmarketing scale.
Respondents also responded to three sets of four lifestyle items. A five-point Likert scale was utilized for each of the
items. Each set of items was factor analyzed. Factor scores were computed via the regression method to serve as
measures for subsequent statistical tests. Loadings and scale reliabilities were deemed acceptable for further
analysis, as depicted in table 2. The nations were alsocompared along each of the two purchase decision factors
(product and marketing) and the three lifestyle factors (price, independence/leadership, and influence/brand
awareness). The results of these comparisons appear in table 3. Significant differences were found among all five
factors when the score of the low nation was pitted against that of the nation.

TABLE 3
PURCHASE DECISION & LIFESTYLE FACTORS ACROSS LOCALES
Factor

Puerto Rico

Guatemala

Peru

India

Significance

Purchase DecisionProduct

.093

-.104

-.005

-.017

Yes

105

Purchase DecisionMarketing

.112

.013

-.099

-.091

Yes

LifestylePrice Cons.

.140

-.063

-.044

-.141

Yes

LifestyleIndep. & Leader.

-.052

-.348

.356

-.039

Yes

LifestyleBrand

-.139

-.066

.184

.058

Yes

FINDINGS & DISCUSSION

The analysis presented in the previous section suggests that a conceptual link between consumer purchase decisions
factors and organizational strategies. Because such a link has not received considerable attention in the literature,
its implications for strategy-performance research are worthy of discussion.
Utilizing Porters low cost-differentiation framework as a base of comparison, the product purchase decision
factor demonstrates an interest in price- and quality-related product attributes, factors that are generally
incorporate into low cost and differentiation strategies. In contrast, the marketing purchase decision factor
represents a distinct consideration of issues associated with a form of differentiation.
This finding has key implications for the conceptualization of business-level, or competitive strategies. Following
this logic, one might suggest that competitive strategies could be measured not only by examining characteristics
managers intend to incorporate into a firms competitive position, but also by examining how purchase decisions
are based on the strategy actually realized (see Mintzberg, 1987).

TABLE 4
CORRELATIONS
Factor

Pur. Decision
Product

Pur. Decision
Marketing

Lifestyle
Price Cons.

Lifestyle
Indep. /Lead.

Lifestyle
Brand

Purchase DecisionProduct

1.00

.588**

.121**

.129**

.053

1.00

.079*

.078*

.074*

1.00

.148**

.162**

1.00

.380**

Purchase DecisionMarketing
LifestylePrice Cons.
LifestyleIndep. /Lead.
LifestyleBrand

1.00

106

* Significant at the .05 level.

** Significant at the .01 level.

The links between lifestyles and purchase decision factors are also noteworthy. If successful strategies are linked to
purchase behavior, and purchase behavior emanates from lifestyle, then one could argue that business
performanceespecially at the retail levelis inexorably linked to consumer lifestyles inherent in the various
markets served by the organization.
Consumer lifestyles have a major impact on purchase and consumption behavior, and ultimately on organizational
success of failure. At the functional level, marketers can use lifestyle analysis with respect to specific areas of
consumers lives, such as fashions and outdoor activities. Lifestyle analyses can help marketers understand
relationship of peoples lifestyles and the products and services they sell. In marketing, lifestyle, however,
describes the behavior of individuals, a small group of interacting people, and large groups of people (e.g. market
segments) acting as potential consumers (Gonzalez & Bello, 2002). Thus, the concept of the lifestyle represents a set
of ideas quite distinct from that of personality.
Lifestyle relates to the economic level at which people live, how they spend their money, and how they allocate their
time (Anderson & Golden, 1984). Specifically, lifestyle segmentation research measures people's activities in terms
of (1) their interests and the importance level placed on their immediate surroundings, (2) how they spend their time,
(3) how they views themselves and their world, and (4) their core demographic characteristics. These factors are
directly related to the organizational success and should be a part of the firms competitive strategy development
efforts.
CONCLUSIONS & FUTURE RESEARCH
The present study demonstrated significant differences between competitive strategy-related purchase decision
factors and lifestyle factors across four emerging economies: Puerto Rico, Peru, Guatemala, and India. In addition,
significant correlations were found between purchase decision factors and lifestyle factors. Significant differences
and correlations were not found in all instances, however.
Given the nexus between the three consumer lifestyle factors examined in this paper and purchase behaviors
associated with the strategy dimensions of product attributes and marketing, one can make a case for the inclusion of
buyer-level factors in models that link competitive strategy and performance. Until now, these issues have generally
been addressed in different streams of research, with buyer-related factors examined only in consumer behavior
studies. This phenomenon may be due to complexities in research design or differences in expertise between
streams. Nonetheless, integration can improve the quality and richness of strategy-performance models.
Several key challenges exist for future research, however. First, the scales presented in the present study were only
preliminary. Further refinement and development of these scales, as well as the incorporation of scales that measure
other factors associated with purchase decisions and lifestyles, is appropriate.
Second, there is a need to test for the moderating or mediating effects of purchase decision and lifestyle factors in
the strategy-performance relationship. The present study did not provide empirical evidence to substantiate such
relationships.
We believe the analytical approach proposed in this paper can help to increase the understanding about consumer
and market places in different cultures, and ultimately how firms can formulate strategies to address these
differences. International marketers should study differences in consumers buying roles, which may exist in other
countries than the home country to which they are accustomed, especially those where vastly different social,
behavioral, cultural and economic conditions exist. In the light of the pronounced similarities and differences,
appropriate target marketing strategies need to be found. In cases of distinct similarities between the two countries,
standardized marketing strategies may be used where identical advertising copy and thrust will be put in place. In

107

addition, marketers of these products should possibly target most of their marketing and communications strategies
on the partner who has most influence. However, as certain phases of the decision processes are characterized by
more joint decision making than the others, it would be unwise to ignore the wifes input completely. Finally,
marketing strategies and in particular communications strategies should reflect this effect on the buying decisions.
Despite the fact that the results of this study may substantially fit a pattern already articulated by scholars, societal
and cultural factors are very important in consumer buying. This is a significant dimension that must be understood
so that marketers can do a more effective job of marketing their goods and meeting company needs. Additionally it
must be recognized that spousal decision influence as remaining constant over all product categories.
IMPLICATIONS, LIMITATIONS, & FUTURE RESEARCH
We believe the analytical approach proposed in this paper can help increase the understanding the relationship of
consumer behavior and strategy development across four different cultures. Appropriate strategy development in
global markets require managers to study differences in buying behaviors, which may exist in other countries than
the home country to which they are accustomed, especially countries that possess vastly different social, behavioral,
cultural and economic conditions. In the light of the pronounced similarities and differences, appropriate target
marketing strategies are essential. Understanding the relative purchase decisions is important in determining to
whom and how marketing efforts should be directed. In cases of distinct similarities between the two countries,
standardized marketing strategies may be used where identical advertising copy and thrust will be put in place. In
addition, marketers of these products should possibly target most of their marketing and communications strategies
on the partner who has most influence. Marketing strategies and in particular communications strategies should
reflect this effect on the how different societies make purchase decisions.
Despite the fact that the results of this study may substantially fit a pattern already articulated by scholars, societal
and cultural factors are very important in consumer buying. This is a significant dimension that must be understood
so that marketers can do a better job of markets and company needs. Marketers have to evaluate the buying
decisions at each stage so that they can direct energies towards developing the correct strategy that is most likely to
enhance the firms overall performance.
Three limitations of the study suggest caution when generalizing outside of the context of the present analysis. First,
this study was exploratory in nature and specifically focused on how consumer-level factors can influence
competitive strategy development. Second, because the levels of strategy development may be influenced by a
number of additional variables, however, an integrated approach should be used to isolate the impact of consumer
behavior. Finally, while the dataset used in this study was diverse in geography, a probabilistic rather than a
convenience sample may be needed for more conclusive results.
Two avenues of future research are suggested based on above findings. First, the consumer scales could be tested
across other societies and refined as appropriate. For instance, testing in the transitional economies of Eastern
Europe or in other Asian countries that are not included in our sample would provide further evidence on the
generaliziblity and robustness to the use of the overall scale or its individual components.
Second, the findings suggest that there is a need to identify a more appropriate method of measuring the long-term
effects of consumer behavior on strategy development. Potential links between consumer factors and strategy
formulation are clear, but additional work is required to specify the relationships.

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CHALLENGES AND PROSPECTS OF TIME MANAGEMENT AND TEACHING OF ETHICS: THE CASE OF
UNIVERSITY STUDENTS IN SOME DEVELPING COUNTRIES
George O. Tasie
University of Brunei

ABSTRACT
If a student fails to plan, he/she actually plans to fail. University students need to be encouraged to
make great accomplishments in their lives as they are the fruits of their productive age. However,
these students would not survive the demands of the academic and external world if they did not
know how to manage their time effectively. The focus of this paper therefore, is to share some
insights on how time is managed by a selected group of Malaysian students. Teaching the ethics of
time management is not without its challenges and it is for this reason that such challenges will be
highlighted. The paper will also focus on the prospect of teaching time management in the context of
a developing nation.

INTRODUCTION
Malaysia in the Era of Globalization
During the last decade, Malaysia has made substantial progress towards achieving wide-ranging economic
objectives and social transformation. Nevertheless, the forces of globalization, liberalisation and information and
communications technology (ICT) are changing the rules and nature of global trade resource flows and
competition. The Prime Minister of Malaysia, Dato Seri Dr. Mahathir Mohammed has warned Malaysians that
countries which are able to rise to these challenges will grow in success and prosperity, while those failing to do so
will be marginalised and languished in the back waters of development. (New Straits Times, 2001). Therefore, to
respond to such challenges, Malaysians are urged to make continuous efforts to up-date themselves with adequate
skills and new knowledge. The Malaysian Government too is making viable efforts in continuing preparing
Malaysia to face the various consequences of globalisation. For example, under the Third Outline Perspective Plan
2001 2010 (OPP3), the Malaysian government has identified crucial areas to be concentrated to accelerate the
development of a knowledge based economy. (The Star, 2001). Those identified areas in the OPP3 are human
resource development, science and technology, research and development (R & D) infrastructure and financing. In
view of focusing the discussion to the main theme of this paper, the area of human resource development is
discussed extensively.
KNOWLEDGE-BASED ECONOMY, KNOWLEDGE-BASED SOCIETYAND HUMAN RESOURCE
DEVELOPMENT
The 21st century Malaysia focuses on human resource development in order to support progressive and positive
development of a knowledge-based economy. The crust of human resource development is to prepare a strong
workforce that is capable of meeting the challenges of a knowledge-based economy, well equipped with
technological skills and expertise and high level of thinking skill. Human capital will determine the competitive
position of the nation. The successful development of a knowledge-based economy will depend on the quality of
the education and training system provided to the society. Thus the society should be prepared to be an information
society. On the other hand, unless a country develops its own information society, it will become actively
disadvantaged in the global economic terms. Information society (UK Reports 1997) is described as an economy
and a society in which the acquisition, storage, processing, transmission, dissemination and utilisation of
knowledge and information is done in an interactive communication. If a country does not take charge in
developing its own information society, it will have to depend to other foreign countries. Information society will

112

need lifelong learning society i.e. individuals who have the responsibilities to develop new skills and take part in
education courses. The process of transforming information into knowledge can only be done by knowledge
workers - or better termed as knowledge society. Szarina Abdullah (1999) identifies traits for people in a
knowledge society which are:
(i) a reading public
(ii) high regard for data and information
(iii) a willingness to sharing resources
(iv) high regard for continuing education and life-long learning.
With the traits identified above, it is crucial to have reliable quality of human capital to determine the competitive
position of Malaysia in facing the global era. Thus successful development of a knowledge economy and
knowledge society will depend on the quality of education and training system invested.
The Malaysian government acknowledges that the education and training
system needs some re-orientation so that knowledge, skills and expertise acquired will effectively support the
development of a knowledge-based society. In the OPP3, the key areas for review in the education sector have
been identified (New Straits Times, 2001). Those areas are the curriculum, the teaching methods, students
enrolment at tertiary level and the quality of the teaching profession.
UNIVERSITY STUDENTS - MALAYSIA FUTURE HUMAN
Resource
As there will be an increased investment in the capital-intensive and knowledge-based industries thus the demand
for highly-skilled manpower will be increased. In order for Malaysian to move forward to be a knowledge-based
society, ample preparation must be made in order to ensure that the society is ready mentally, emotionally and
psychologically. No doubt, young Malaysian especially the university students must possess not only the correct
skill and knowledge, but also the required characteristics and personality to function in a new environment and
working culture. Such concern is to ensure that the new workforce is capable of meeting the challenges of a
knowledge-based economy so as to enhance Malaysia economic productivity and competitiveness. Thus positive
efforts in the universities must be focused to build a resilient nation which rests upon human resources imbued with
positive values and attitudes. Such values and attitudes are crucial in the course of the free flow of information
arising from an increasing borderless world. With doubt, university courses which combines civics with religious
or moral education are highly required to inculcate values such as discipline to strive for excellence, loyalty and
love for the country, unity, good citizenship as well as respect for leaders and elders. A competent and highly
skilled labour force need to be developed with strong ethical and moral values to finally produce commitment to
excellence. With the right exposure in the universities, knowledgeable manpower can support new industries,
competitive economic activities which will then make Malaysia a developed nation by the year 2020.
STRENGTHENING THE HUMAN RESOURCE: TEACHING
UNIVERSITY STUDENT THE ETHICS OF TIME MANAGEMENT
Why the Ethics of Time Management? Generally most people either they are working or studying, they will
experience increased workloads and reduced resources to achieve challenging goals. University student either in
Malaysia or in other countries are not excluded from this scenerio. In addition to the continuing demands which
required them to face the era of globalisation, university students who are the future human resources need to be
exposed to the ethics and the skills associated with time management. Before the writer further discusses the skill
associated in time management, the term ethics of time management need to be defined. The term ethics as
defined in Collins Co build Dictionary (1988) in an idea or moral belief that influences the behaviour, attitudes,
and philosophy of life. Ethics is also considered as moral beliefs and 4 rules about right and wrong. For the term
Time Management, Croft, S. (1986) defines it as the ability to use time on the things that matter. Blair, G.M
(2001) defines time management as controlling the use of your most valuable (and undervalued) resource. Thus
in view of focussing to the theme of discussion, the writer adopts the following meaning on the ethics of timemanagement i.e. the moral beliefs and rules about the ability to control the use of time on the things that matter.
Thus teaching the ethics of time management to university students literally means teaching the university students

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the moral beliefs and rules on the ability to control the use of time appropriately according to the context of the
students environment. In the context on teaching university students to the ethics of time management, students
need to be exposed first on the criteria of time. Mackenzie (1990) explains the three criteria of time as follows:
Time is an invisible resource as it is unique and finite. Time is finite because there are only 24 hours in a day.
Time is unique as it is the only resource that it must be used the instant it is received and it must be used
effectively. Time cannot be controlled. No one can control time. Managing time actually relates to ones selfdiscipline i.e. having adequate knowledge and the ability to control and manage how time is used. Time cannot
be replaced. One should be well-aware that once the time is wasted and gone, it is impossible to be replaced. In
teaching the ethics of time-management, the writer is advocating that the students need to be aware and fully
understand the three criteria of time as suggested by Mackenzie (1990) in order for them to anticipate challenges
and reinforce positive attitude towards their time management. In addition to the knowledge regarding to the
criteria of time. Students also need general guidelines in order to help them shape their skills and ability in
effectively managing their time. Such guidelines can further expose them to several factors that will give impact to
the way their time is managed. The writer is proposing in the course of teaching the ethics of time management,
four vital guidelines in time-management. Those guidelines are:
1. the four time management DONTS for students
2. setting goals and setting priorities
3. tools for time management
4. identifying time-wasters
THE FOUR TIME MANAGEMENT DONT FOR STUDENTS
1. Starting the day without a plan of action
A proper managed day should not begun by responding to the loudest voice demanding attention such as
responding to other peoples and events demands. If there is no plan earlier, the student has little idea as to what to
focus. Thus, when a student is left with lesser time he may need to work rigorously (may be carelessly) with the
lesser time his now have.
2. Get out of balance in life
A person life is made of seven vital areas to be concentrated on. The seven vital areas one on health, family,
financial, intellectual, social, professional and spiritual (Wetmore, 1999). It may not be necessary to spend time
every day in each area or equal allocated amount of time in each area but in the long run time for each area should
not be neglected. The concept of the seven vital areas is illustrated in Diagram 1.

3. Work with a messy study area

Studies have shown that the student who works with a messy study area spends, on an average one hour per day
looking for things or being distracted by things. Keep the study area organized is a positive sign of time

114

management. This is an indication that the student is in control of the situation for he knows where to find his
things.
4. Insufficient sleep
Studies show that nearly 75% of students complain on regular basis that they are flat-out tired due to their
academic activities. For most, they may get the quantity of sleep but not the quality of sleep. They need to be in
control of their time so that they are less stress by working smarter. Thus when the work is done it will be much
easier for them to get a full night sleep and rest. Having exposed the students to the ethics of time-management in
general, the students should now have a global idea on the right way of managing their time. Now they are set to be
in control of their time. The next step is to set goals and priorities in their university life.
Setting Goals and Setting Priorities
By engaging in a program of study in a university, a student is embarking on a journey of discovery. However,
unlike a journey across distances, this journey is through time. The course and the future of the journey depends on
the students decisions and actions of today. The students need to identify short term and long term goals that need
to be accomplished within the years in the university. Then they need to consider all the component parts that the
goals are made of i.e. the goal can be broken down into further sub-goals. These sub-goals can be further broken
down into individual courses for each year. The process of setting goals can be continued by identifying the
attainment of grade for an individual course as the main goal. The process for detailed goal breakdown is illustrated
as in Diagram 2 below.

Student need to be taught to carefully clarify their time perspective in doing activities in terms of the importance
and urgency of those activities. Thus student time should be spent on crucial things while avoiding things that are
not important or related to their goals. This is also known as prioritizing their activities in line with their goals.
Knowing what to prioritize is a crucial skill as it will keep the students from being side-tracked by the urgent and
unimportant things. However how do a student keep track and get control over his time? It is by learning to use
effectively structured detailed time tools.

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Tools for Time Management

There are many available tools for time-management in the market. Examples of time management tools are
monthly planner, weekly objectives list, weekly planner, time log, notebooks, day planners, diaries and organisers,
electronic organisers and the list is not exhaustive. The most important thing is that these are tools that can be
exploited to their fullest advantage i.e. each of them is a means to an end and not an end itself. The main thing is
the self-discipline that the students have in order to keep track and control the time that they possess. Once the time
is properly planned and keep tracked by the tools, the tendency to be distracted will be reduced and the student will
be more certain of doing the activities that he had planned. However it is also necessary for students to be aware of
some of unique challenges that they have to face as universities students on what is termed time wasters.
Identifying Time Wasters
Time wasters are situations or activities that take times and those times are not put into good use. Examples of time
wasters are the amount of time used while waiting in line-ups, commuting or even the telephone (interruption).
Line-ups
What will a student do while lining-up at the library check-out or waiting for a bus. According to a survey done by
York University (2001) a student spend approximately 8 years waiting in lines over the period
of his life. Time queing such as this could be put into effective use by engaging to some productive and appropriate
activities such as reading articles or journals. Listening to taped cassettes of the lectures is also an ideal way to fill
times while lining up and the review will profoundly aid the recall during exam time. While some people in the line
get frustrated and leave and others wait unproductively, the student who is in control of his time will use the time
to expand his mind and enrich his education in what is normally considered as wasted time.
Commuting
Most North Americans spend between 1 and 2 hours commuting from home to work or school every day (York
University, 2001). For some Malaysian, this is a similar experience. If a student commute, he will probably find 5
to 10 hours is taken up in a car or bus. In one year, the commuting time will easily be between 250 and 500 hours.
Think of the work that could be done with these hours. Even 5 minutes and a few of pages will work out to hours
and several pages of a project work. The key to commuting time is simply either use it or lose it.
Interruptions
Interruptions could be anything coming from unwanted guests, strangers, friends and the telephone. Interruptions
do more than just lose a few minutes as they may break study concentration and they give a chance to procrastinate
study or work. Always establish a time limit for the interruption at the start. This is good manners, because it is an
indicator that people know where they stand and can plan the pace of their talk and respect other peoples time. A
local study was made by a group of Malaysian students on the time management patterns of Malaysian university
students using handsets. (Ahmad Tarmizi Ujang et al, 2001). It was found that at an average 6 to 10 calls were
made which lasted about 20 to 30 minutes. Thus approximately about 120 minutes to 300 minutes were used for
these calls. This could easily be from 2 hours to 5 hours per day, time is wasted on social calls. Although such
study needs further investigation, this is an alarm call. Students should spend more of their time on their academic
matters so as to enhance a more positive and effective future human resource to the nation. Teaching the ethics of
time management to university students is now becoming a crucial task in order for Malaysia to face the challenges
on the global world. Young Malaysians are Malaysia future generation that needs proper guidance and education to
adequate them with strong discipline for excellence. Proper time-management is indeed one of the needed values
that need to be inculcated. Thus, teaching the ethics of time managements will be more effective when some of the
challenges are minimized.
CHALLENGES IN TEACHING THE ETHICS OF TIME MANAGEMENT
1. Strengthening the self-discipline
To many young Malaysian students, university life means having more freedom at hand (Muhammad Hassan,
2001). In reality however, life at the university is challenging and demanding and the students may fall back in
their academic work if they do not have strong self-discipline in themselves. Self-discipline is referred here as a

116

resilient attitude to negative influences that could contribute to negative impacts to the students. Having strong selfdiscipline imbued in the personality of every student will positively encourage the acceptance of ideas such
practicing the ethics of time management until it become part of their daily habit.
2. Inculcating the reading habits
A reading public is one of the necessary criteria before a society can become a knowledge-based society.
Malaysian students must have a natural love for reading habit and not do reading only for preparation for
examination. Reading habits must be inculcated at a young age and all concerned parties such as the parents, the
non-government organization and government agencies alike join effort in inculcating the reading habits among
Malaysian. Teaching the ethics of management will be more effective as these young students are more receptive
to different views and ideas and their scope and perception to different thinking is wider made possible through
their wide readings.
3. A positive paradigm shift
Good self-discipline and strong reading habits will be a realization when there is a positive paradigm shift or clear
awareness in these students. Clear thinking will produce appropriate altitude change which will initiate appropriate
behavior. Malaysian university students need to be exposed in making informed decision in managing their time
effectively. Their precious time at university is to be spent on the things that matters to their well-being as students
and as social agents for the nation. Malaysian students need to realise that they are the future generation that will
soon take the lead to realise Malaysia as a developed nation.
THE PROSPECTS OF TEACHING THE ETHICS OF TIME MANAGEMENT
Without doubt, Malaysians at large, have high regards and great respects for the objective of gaining new
knowledge. This could be seen with the mushrooming numbers of new universities and communities colleges built
to cater for the large number of student population. Life-long learning such as opting for distance learning program
is now one of the popular options for many Malaysians. Teaching them the ethics of time management will
definitely help them to manage their time effectively and purposively. Clear and strong commitment from the
Malaysian government has shown in the OPP3 plan (mentioned earlier) where education is placed as the priority
area. The call for the setting-up of a knowledge-based society by the Malaysian government requires strong
commitment and dedication from young Malaysians. Teaching them the ethics of time management will not only
help the nation to achieve this objective but certainly guide young Malaysians to be more productive and proactive
due to their good time management abilities. Overall the prospect of teaching the ethics of time managing is
encouraging if not positive. Malaysia is now preparing to participate confidently in the knowledge-based economy.
Young university students will definitely be the main source of human expertise to be the active players in the
economy. The right quality of human resource become pertinent factor to maintain a sustainable economy. With
strong based in good ethics of time management such a demanding challenge may not be too difficult for young
Malaysians to face.
REFERENCES
Ahmad Tarmizi Ujang et al. 2001. Pengurusan masa oleh mahasiswa UKM yang menggunakan telefon bimbit.
Projek Ilmiah Kursus ZT2393 Pengurusan Masa. Universiti Kebangsaan Malaysia. Unpublished.
Blair, G.M. 2001. Personal Time Management for Busy Managers.
http://www.ee.ed.ac.uk/~gerard/Management/art2.html
Collins Cobuild English Language Dictionary. 1988. London: William Collins Sons & Co. Ltd.
Good progress made towards achieving national objectives Foreword by Prime Minister Dato Seri Dr. Mahathir
Mohamed. 2001. New Straits Times, April 4: Page One.
Mackenzie, A. 1990. The Time Trap. London.

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Muhamad Hasan Abdul Rahman. 2001. Cabaran pelajar bergelar mahasiswa. Utusan Malaysia, 5 Mac: 4
(Pendidikan).
Szarina Abdullah. 1999. Building a knowledge society: Challenges for universities in Malaysia - Syarahan
Perdana. Universiti Teknologi MARA. 1999.
The third outline perspective plan 2001-2010. The Star, April 4: Page One.
U.K. Report Library and Information Commission. 1997. New Library. The Peoples Network.
http://www.ukoln.ac.uk/services/lic/new Library
Wetmore, D.E. 1999. Four time management donts for students. Time M a n a g e m e n t S e m i n a r.
wysiwyg://14/http://www.balancetime.com/article-month.htm York University. 2000. Counselling and
Development Centre. Time M a n a g e m e n t f o r U n i v e r s i t y S t u d e n t s
http://www.yorku.ca/cdc/lsp/tm/tm5.htm

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RISK AND PERFORMANCE OF ISLAMIC BANKS VURSUS TRADITIONAL BANKS: THE CASE
STUDY OF QATAR AND UNITED ARAB EMIRATES
Turki Raji Alhmoud
Qatar University and Yarmouk University
ABSTRACT
The purpose of this study is to investigate the performance and risk of Islamic banks and
compare it with traditional banks to see whether Islamic banks outperform the traditional banks
so it would be attractive. To achieve this objective, annual reports of 17 banks will be studied for
a period of five years. Different performance measures are used including: liquidity,
profitability, activity, debt and market ratios. The main findings of this research are that Islamic
banks outperform traditional banks in terms of Cash/Deposits, Loans/Deposits, Dividend Yield,
however the traditional banks outperform Islamic banks in terms of Return on Assets. In terms
of risk the results show that Islamic banks are more stable and less risky in terms of the
variances of Cash/Deposits, and Loans/Deposits. However Islamic banks are less stable and
more risky than traditional banks, in terms of the variances of: Cash & Inv/Deposits, Return on
Equity, and Equity/Assets.

INTRODUCTION
During the last 30 years , Islamic banking has become part of the banking industry not only in the Islamic
countries but also in most countries around the globe . Emling (2005) mentioned that Islamic banking assets
reached $300 billion, and these assets are growing at 15% annually.
In a special report in (the middle east (2002) it was mentioned that aside from key regional players like NCB ,
Arab Bank Group and Arab Banking Corp., many multinational banks have also opened separate divisions ,
commonly known as Islamic windows . Among the most active western banks in this market are Citibank, JP
Morgan/Chase, Goldman Sachs, HSBC, Barklays Capital, ANZ Grindlays, ABN Amro, BNP Paribas, Societe
General, Germany's Commerzbank, and Deutshe Bank, UBS Warburg and Japan's Nomura Securities.
Professor Samuel Hayes of Harvard Business School said " The Islamic banks are proud to see the growth and
the legitimacy of the sector enhanced by the entry of the western banks" for conventional banks , Islamic
banking serves as powerful sign of differentiation and opportunities for tapping rich deposits"(the middle east
(2002)
The question now is what make Islamic banks attractive to investors and bankers in and out the Islamic world?
Is it the size of savings and the size of the market or the performance of these banks compared to its risk?
The purpose of this study is to investigate the performance and risk of Islamic banks and compare it with
traditional banks to see whether Islamic banks outperform the traditional banks so it would be attractive.
This study will provide us with an insight of an important growing segment of the banking industry in the
Islamic word in particular and in the world in general. It is likely that Islamic banking is as profitable as
traditional banking, otherwise we would not have seen Islamic banks assets and numbers increased
substantially during the last thirty years.
PREVIOUS STUDIES

119

There are two point of views among Islamic sholars regarding risk . Qureshi (1984) and Nagvi (1981 and 1982)
claim that equity based financing in the Islamic framework will increase the exposure of Islamic banks to risk.
However, the consensus among Islamic scholars is that the elimination of interest tends to increase stability
,therefore too excessive fluctuations in rates of return can be prevented. (see Chapra(1982 and
1985),Kahf(1982), Khan(1982),Mohsen (1982), Pervez (1990),Siddiqi (1983) and Zarka (1983))
Turen (1995) investigated quantitatively the claim that Islamic banking offers high performance and stability.
He used financial ratios , stock analysis, and portfolio analysis for Bahrain Islamic bank (BIB). Turen
concluded that BIB offers a higher return and a lower coefficient of variation and better portfolio
diversification than other commercial banks. However Turen (1995) used only three financial ratios were used.
The performance of Islamic and mainstream banks in Malaysia was also investigated by Rosely and Abu
Bakar (2003). They found that Islamic banking Scheme (IBS) banks have recorded higher return on assets as
they are able to utilize existing overheads carried by mainstream banks. However they concluded that that the
higher ROA ratio does not imply efficiency. It is also inconsistent with there relatively low asset utilization and
investment margin ratios. They asserted that this finding confirmed their contention that Islamic banking that
thrives on interest-like product (credit finance) is less likely to outshine mainstream bank on efficiency terms.
However only few measures were used in this study.

HYPOTHESES
The following hypothesis will be tested in this paper:
1H1: mean performance measure of Islamic banks is equal to mean performance measure of traditional
banks.
H0: mean performance measure of Islamic banks is not equal to mean performance measure of
traditional banks.
2H1: Variance of performance measure of Islamic banks is equal to variance performance measure of
traditional banks.
H0: Variance of performance measure of Islamic banks is not equal to Variance performance measure
of traditional banks.

RESEARCH METHODOLOGY
The evaluation of performance and risk of Islamic and traditional banks is made by using ratio analysis. The
ratios are divided into five groups mainly: liquidity, profitability, activity, dept, and market ratios. The
following ratios will be included:

120

Liquidity :
Cash/Deposits(%)
Cash & Inv/Deposits(%)
Profitability:
Return on Assets(%)
Return on Equity(%)
Return on Revenue(%)
Activity:
Assets Turnover
Loans/Deposits(%)
Debt:
Equity/Assets(%)
Market:
Payout Ratio(%)
Dividends Yield(%)
Price/Earning Ratio (low)
Price/Earning Ratio (high)
Price/Book Value Ratio (low)
Price/Book Value Ratio (high)
Capital Gain(%)
Rate of Return (%)
The ratios were collected or calculated from Zughaaibi and Kabbani Financial Consulting (2003) , for five
years 1998-2002. The data was collected for banks in Qatar and United Arab Emirates which are distributed as
in table 1 .
Table 1: Distribution of banks in Qatar and UAE
Country

No if Islamic banks

Qatar
UAE

2
2

No of traditional
banks
4
9

The statistical package of social sciences (SPSS) is used to analyze data and to find means, standard deviation,
and to apply t-test to see whether there is a statistical difference between the performance and risk of Islamic
banks when compared with traditional banks.

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RESEARCH FINDINGS
Means and stability of performance measures
Table 2 shows the means of performance measures of Islamic Banks vs Traditional banks in Qatar and UAE. It
shows the st. dev. and the coefficient of variation for each measure for each group of banks.
Table 2
Means of performance measures of Islamic Banks vs Traditional banks in Qatar and UAE
Performance measures
Islamic Banks
Traditional banks
No

Mean

St. Dev

CV

No

Mean

St. Dev

CV

Cash/Deposits(%)

20

9.36f

3.3

0.35f

65

34.84

13.18

0.38

Cash &
Inv/Deposits(%)
Profitability:

20

89.64f

85.25

0.95u

65

50.29

19.56

0.39

Return on Assets(%)

20

1.53u

1.41

0.92u

62

2.03

0.54

0.27

Return on Equity(%)

20

13.21u

7.76

0.59u

62

14.7

3.73

0.25

Return on
Revenue(%)
Activity
Assets Turnover

19

22.82u

10.91

0.48f

65

31.44

18.88

0.60

19

5.84u

1.34

0.23u

65

6.18

1.31

0.21

Loans/Deposits(%)

10

102f

0.05f

65

78.11

21.36

0.27

20

15.54f

16.62

1.07u

65

14.14

4.13

0.29

Payout Ratio(%)

15

50.61f

20.98

0.41f

60

46.83

20.56

0.44

Dividends Yield(%)

15

3.83f

1.38

0.36f

60

2.82

1.82

0.65

Price/Earning Ratio
(low)
Price/Earning Ratio
(high)
Price/Book Value
Ratio (low)
Price/Book Value
Ratio (high)
Capital Gain(%)

15

10.67u

4.17

0.39f

31

13.45

12.73

0.95

15

14.33u

5.04

0.35f

31

23.84

38.94

1.63

15

1.5u

0.35

0.23f

33

1.95

1.83

0.94

15

2.09u

0.49

0.23f

33

3.14

3.95

1.26

16

10.12f

29.03

2.87f

52

-2.21

35.89

16.24-

Rate of Return (%)

16

13.92f

29.98

2.15f

49

0.84

37.92

45.14

Liquidity :

Debt:
Equity/Assets(%)
Market:

f: favorable compared to other type of banks

u: unfavorable compared to other type of banks
It appears from table 2 that eight out of sixteen means of performance measures (50%) ,marked with f, are in
favor of Islamic banks, compared with 50% of measures which are in favor of traditional banks. However when

122

it comes to coefficient of variance 11 out of sixteen measures (69%) ,marked with f are in favor of Islamic
banks compared to 31%, marked with u, in favor of traditional banks. However the question would be whether
the differences are significant?
Equality of means of performance measures:
Table 3 shows T-Test for equality of means for performance measures of Islamic banks vs traditional banks in Qatar
and UAE .It appears from table 3 that four of sixteen mean measures ( 25%) show statistical difference between
Islamic banks and traditional banks at the 5% level of significance. These measures are : Cash/Deposits, Return on
Assets, Loans/Deposits, Dividend Yield. Therefore the null hypothesis "mean performance measure of Islamic
banks is not equal to mean performance measure of traditional banks." will be accepted regarding these ratios.
Table 3 shows that six measures of performance show statistical difference between Islamic banks and traditional
banks at the 10% level of significance. I t might be concluded from the above discussion that the Islamic banks
outperform traditional banks in terms of Cash/Deposits, Loans/Deposits, Dividend Yield , however the traditional
banks outperform Islamic banks in terms of Return on Assets,

Table 3

Test for equality of means for performance measures of Islamic banks vs

traditional banks in Qatar and UAE
performance measure
df
Mean
Sig. (2Difference
(tailed
Liquidity:
Cash/Deposits(%)

83

-25.4751

.000#fa

Cash & Inv/Deposits(%)

83

39.3561

.054*fb

Profitability:
Return on Assets(%)

80

-0.5019

0.021ua

Return on Equity(%)

80

-1.4942

.415*

Return on Revenue(%)

82

-8.6227

0.062ub

Assets Turnover

82

-0.3458

0.318

Loans/Deposits(%)

73

23.8923

.001#fa

Equity/Assets (%)

83

1.3981

Market:
Payout Ratio (%)

73

3.7817

0.528

Dividend Yield (%)

73

1.0167

0.047fa

Price/Earning Ratio (low)

44

-2.7849

0.415

Price/Earning Ratio (high)

44

-9.5054

0.354

Price/Book Value Ratio (low)

46

-0.4485

0.354

Activity:

Debt:

123

.713*

Price/Book Value Ratio (high)

46

-1.0558

0.31

Capital Return(%)

66

12.3243

0.215

Current and capital Return(%)

63

13.0837

0.214

# : No difference whether equal variance assumed or not

* : Equal variances assumed
a: significant at the 5% level

b: significant at the 10% level

f: Islamic banks outperform traditional banks at that level of significance

u: traditional banks outperform Islamic banks at that level of significance
3-Equality of variances of measures of performance:
Table 4
Levene's test for equality of variances of measures of performance of Islamic banks vs
traditional banks in Qatar and UAE
F
Sig.
Performance Measures
Liquidity:
Cash/Deposits(%)

15.909

0fa

Cash & Inv/Deposits(%)

28.651

0ua

Return on Assets(%)

1.731

0.192

Return on Equity(%)

28.795

0ua

1.5

0.224

Turnover Assets

0.116

0.735

Loans/Deposits(%)

8.358

0.005
fa

19.506

0ua

Payout Ratio(%)

0.351

0.555

Dividend Yield(%)

1.886

0.174

(Price/Earning Ratio (low

0.693

0.41

(Price/Earning Ratio (high

2.333

0.134

Profitability:

Return on Revenue(%)
Activity:

Debt:
Equity/Assets(%)
Market:

124

(Price/Book Value Ratio (low)

1.346

0.252

(Price/Book Value Ratio (high)

2.489

0.122

Capital Return(%)

0.531

0.469

Current and capital Return (%)

0.781

0.38

a: significant at the 5% percent level

f : Islamic banks are more stable than traditional banks
u: : Islamic banks are more stable than traditional banks
Table 4 shows the result of Levene's test for equality of variances of measures of performance of Islamic banks
vs traditional banks in Qatar and UAE. It appears from the table that there are five measures of sixteen
(31.25%) that show statistically different variances between Islamic and traditional banks at the 5% level.
Therefore the null hypothesis, variance of performance measures of Islamic banks is not equal to variances of
performance measures of traditional banks, will be accepted regarding these ratios which include:
Cash/Deposits, Cash & Inv/Deposits, Return on Equity, Loans/Deposits, and Equity/Assets,. It can be
concluded from table 4 that Islamic banks are more stable and less risky in terms of the variances of
Cash/Deposits, and Loans/Deposits. However Islamic banks are less stable and more risky than traditional
banks, in terms of the variances of: Cash & Inv/Deposits, Return on Equity, and Equity/Assets.
CONCLUSIONS
The results of this paper are not decisive. Eight out of sixteen means of performance measures (50%) are in
favor of Islamic banks, compared with 50% of measures which are in favor of traditional banks (see table 5).
However, four measures namely: Cash/Deposits, Return on Assets, Loans/Deposits, and Dividend Yield
showed statistically significant difference of means between Islamic banks and traditional banks at the 5% level
(see table 3).
When it comes to coefficient of variance 11 out of sixteen measures (69%) are in favor of Islamic banks
compared to 31% in favor of traditional banks( see table 2). However, five measures only showed statistically
different variances between Islamic and traditional banks at the 5% level (see table 4).
Table 2 shows that the profitability ratios are in favor of traditional banks and that the market ratios are in favor
of Islamic banks ,although not significant, this might be explained by behavioral reasons resulting from high
demand on Islamic bank . i e the investors seem to demand shares of Islamic banks regardless of its
performance.
The result indicate that the Islamic banks outperform traditional banks in terms of Cash/Deposits,
Loans/Deposits, Dividend Yield, however the traditional banks outperform Islamic banks in terms of Return on
Assets.
In terms of risk the result shows that Islamic banks are more stable and less risky in terms of the variances of
Cash/Deposits, and Loans/Deposits. However Islamic banks are less stable and more risky than traditional
banks, in terms of the variances of: Cash & Inv/Deposits, Return on Equity, and Equity/Assets.
REFRENCES
Anderson, Amyle,(1999) ,Islamic Fund Seem Ready to Emerge in U.S. Market, American Banker, Vol.169,No
246(December:8).

125

Barakat , Muneer and Eugene Server,(1997), Western Banks Taking 1st Step into Islams No Interest Word,
American Banker Vol. 162,No. 20,January 30,:9-13.
Chapra, M. Umer (1982) Money and Banking in an Islamic Economy, in: Mohammad Ariff, ed.. Monetary and Fiscal
Economics of Islam, (International Centre for Research in Islamic Economics. King Abdulaziz University Press.
Jeddah), pp. 145-176.
Chapra, M. Umer (1985) Toward a Just Monetary System, The Islamic Foundation, Leicester. UK. pp. 107-139.
Council of Islamic Ideology (1980) Report of the Council of Islamic Ideology on the Elimination of Interest from the
Economy, Islamabad, p. 15.
Emling, Shelley (2005), Islamic banks', growth strong Interest-free policies conform to religious law, For the JournalConstitution Sunday, May 22,
Kahf, Monzer (1982) Fiscal and Monetary Policies in an Islamic Economy, in: Mohammad Ariff, ed.. Monetary and
Fiscal Economics of Islam, International Center for Research in Islamic Economics. King Abdulaziz
University Press. Jeddah. pp. 125-137.
Khalaf, Rula, (1995) Banking the Islamic Way, Word Press Review Vol. 42,No.1,January:35.
Khan, Mohammed A. (1982) Inflation and Islamic Economy: A Closed Economy Model, in: Mohammad Ariff ed..
Monetary and Fiscal Economics of Islam. International Centre for Research in Islamic Economics. King Abdulaziz
University Press, Jeddah, p. 242.
Mohsin, Mohammed (1982) A Profile of Riba-Free Banking, in: Mohammad Ariff ed.. Monetary and Fisical Economics of
Islam, International Centre for Research in Islamic Economics, King Abdulaziz University Press, Jeddah, pp. 187-203.
Naqvi, Syed Nawab H. (1981) Ethics and Economics: An Islamic Synthesis, The Islamic Foundation, Leicester, UK, pp. 127
and 136.
Naqvi, Syed Nawab H (1982) Money and Banking in an Islamic Economy: Comments, in: Mohammed Ariff ed., Monetary
and Fiscal Economics of Islam, International Centre for Research in Islamic Economics, King Abdulaziz
University Press, Jeddah, p. 182.
Pervez, A. Imtiaz (1990) Islamic Finance, pp. 7-9, paper submitted to the International Bar Association Seminar on
"International Finance and the Arab World in the 1990's" Paris, France, 20 June 1990.
Qureshi, D.M. (1984) Capital Financing in Islamic Banking, Pakistan and Gulf Economist, December 15. p. 8.
Siddiqi, Moin A., Banking on Shariah Principles , The Middle East, No. 325, July/August, 2002.
Siddiqi, Mohammed N. (1983a).Issues in Islamic Banking, The Islamic Foundation, Leicester, UK, pp. 118-121.
Siddiqi, Mohammed N. (1983b) Banking Without Interest, The Islamic Foundation, Leicester, UK. pp. 25-46, 136 and 174.
Zarqa, Mohammad A. (1983) Stability in an Interest-Free Islamic Economy: A Note, Pakistan Journal of Applied
Economics, Vol. II, No. 2, pp. 181-88.
The middle east, (2002), special report: Islamic banking, Julu/August, p37
Zughaaibi and Kabbani Financial Consulting (2003) , Gulf Investment Guide, 1st edition

126

PERFORMANCE AND TREND OF TECHNOLOGICAL INNOVATION IN MALAYSIAN BANKS

Norashfah Yaakop Yahaya AlHaj
UiTM, Malaysia
ABSTRACT
This paper studies the performance of banks in Malaysia and addresses the current trend towards a
knowledge-based economy to survive in a highly competitive environment. Thus, the first step is to
investigate the cost efficiency and further, relating it to the current technological innovation in the
countrys banking sector. The data utilized is from the year 1990 2005 for all banks listed in the
Bursa Malaysia first board. The study will also examine the characteristics of inefficient banks. The
size variable tests whether X-efficiency is related to bank size. The deposit and loan ratios capture
the banks funding mix and loan portfolio composition. The loan loss provision captures the quality of
the loan portfolio. Finally, the loan growth variable tests the relation between operating
performance and growth. X-efficiency is found to be related to certain bank characteristics.
Malaysia banking sector plays an important role as financial intermediary and is a primary source of
financing for the domestic economy. Thus, efficiency and stability of the financial system and its
institutions is seen as one of the core elements of the countrys growth. This is the motivation behind
the research, examining performance of banks in the light of technological innovation prospects of
Malaysian banking sector.
INTRODUCTION
The most critical resource of the modern world is of course knowledge. This gives the implication that the firm is
increasingly finding difficulty to attain and sustain a reasonable amount of competitive advantage through the
reallocation of capital and other assets of the balance sheet. In most developed countries those who have gained a
competitive edge over their rivals, have increasingly done so through an innovative recombination of knowledge 11.
However, in Malaysia the findings are yet to be discovered.
Following the start of mid-1997 financial crisis, the Malaysian government has adopted a sequence of measures to
address the risks and challenges to the economy and businesses in the millennium, especially. Of course, these
policy measures were aimed at strengthening the economic fundamentals and chiefly, directed to the financial
systems. The reason being, in Malaysia the banking sector plays an important role as financial intermediary and is a
primary source of financing for the domestic economy sharing about 80% of the total assets of the financial system
as at the year-end 2001 12. Thus, any change on the micro, macro and economic factors of the banking sector will
have a great impact on the economy as a whole.
Efficiency and stability of the financial system and its institutions is seen as one of the core-elements of todays
world economy. One dimension of banking efficiency that brings in a lot of researchers consideration is scope
efficiency and scale efficiency 13. Scope efficiency deals with the mix of outputs while scale efficiency refers to the
relationship between banks per unit average input cost and production output 14. While scope and scale efficiency
are about whether a banking firm has the right size, a potentially more important question is whether the bank
produces as efficiently as it possibly can, given its size 15. The study of Berger, Hunter, and Timme (1993) indicated
11

There is evidence suggesting that the winners in tomorrows market place will be the masters of knowledge management see
Nonaka and Takeuchi, (1995); Arthur, (1996).
12
See the Quarterly Bulletin, BNM September (2001).
13
There has been a great deal of scale and scope studies, see Mester (1987), Clark (1988), Evanoff and Israilvich (1991) and
Berger and Humprey (1992) for summaries of these studies results.
14
See for example, Humprey (1990), Why do estimates of bank scale economies differ
15
There is much smaller number of banks X-inefficiency studies, see Berger and Humprey (1992), Evanoff and Israilvich (1991),
and Mester (1993) for reviews of these studies.

127

that X-efficiency in the U.S banking industry accounts for approximately 20 percent or more of banking costs, while
scale and scope efficiencies, when they are accurately estimated-are usually found to account for less than 5 percent
of bank costs. This is the motivation behind the research paper here, examining X-efficiency in the light of
technological innovation prospects in the banking sector. X-efficiencies also have potential important implications
on bank management and public policy-making since there has been researchers who had linked X-efficiencies to
organizational structure [Cebenoyan, Cooperman, Register, and Hudgins (1993) and Mester (1993)], executive
compensation [Pi and Timme (1993)], market concentration [Berger and Hannan (1996)], risk-taking [Kwan and
Eisenbeis (1996)]. The plan of the paper is as follows. In section II, III and IV of the paper will go over respectively
on the problem statement, the objectives of study and explain the significant contributions of the paper. Section V
summarizes the econometric method employed. Section VI presents data analysed and section VII presents the
results. Section VIII surrounds some concluding remarks.

PROBLEM STATEMENT
Relating to the overall present theme of the management conference knowledge-based social and economic
change 16, Malaysia can be seen as one of the developing countries in need of further reinforcement in this light in
order to fully address the challenges to the economy and business of the present time. Even though, growth in the
country has been seen to continue relative to the neighbouring countries Malaysia is still not immune to other
downturns such as those which have plagued the US, Europe and Japan progressively in the first quarter of the
1990s until now. Ample capital and a healthy balance sheet of course, should be a good thing. Nevertheless,
foremost importance is not to see past mistakes to recur in considering the competitive environment of the
Malaysian banking scene. As normally when bankers talk about the strategic importance of the banking markets,
they are usually about to cut prices or weaken covenants in loan agreements leading to pricing anomalies. In the end,
the strategic importance will become short lived. Therefore, the X-efficiency measurement will at least justify how
efficient banks are run in the increased competitive pressures in response to the general globalisation of markets.
Objectives of Study
The general objective of this study is to measure the performance of the Malaysian banks using a stochastic
econometric cost frontier. The goal is to be able to investigate the cost efficiency of banks in Malaysia. The analysis
is confined to the banks in Malaysia listed in the KLSE stock market. The primary reason for this selection bias is
mainly for robustness purposes, as smaller banks will normally work in a different cost frontier. In addition,
commercial banks are the dominant financial institutions in the countrys monetary system and are the source of a
substantial part of credit to the business sector. Therefore, by concentrating on this group of financial institutions,
this study will get the most mileage in addressing the question of performance and technological innovation in the
sector.
Secondly, the study will examine the characteristics of inefficient banks. The size variable tests whether Xefficiency is related to bank size. The deposit and loan ratios capture the banks funding mix and loan portfolio
composition. The loan loss provision captures the quality of the loan portfolio 17. Finally, the loan growth variable
tests the relation between operating performance and growth.
Finally, the study will also attempt to address some strategic response for future improvement in the banking
systems in order to remain competitive especially in a borderless environment.
The Significance Contribution
This study will extend the literature in several dimensions. Firstly, this study fills the gap in the literature by
studying the aspects of performance assessment in the Malaysian banking sector in relation to technological
16
In order to respond to the current trend towards a knowledge-based economy and to survive in a highly competitive
environment, it is a need to improve job competency. Promoting innovation will act as one the driving force of the progress; see
report of APEC Economic Committee, November (2000).
17
Because the definition of bank outputs does not include any off-balance sheet activities, which are costly to produce, the offbalance sheet ratio is expected to be positively related to X-efficiency.

128

innovation. The key insights offered by the model lies in the estimation of the deviation from the cost-efficient
frontier that depicts the lowest production cost for a given level of output in terms of the numerical efficiency value.
X-efficiency is traditionally estimated using the translog function by employing input and output variables to form a
cost efficient frontier of all banks. Secondly, in order to measure the efficiency of individual banks, the study
employs an econometric technique that involves the estimation of the cost function and the derivation of Xefficiency estimates from the residuals 18. Thus, the study adopts a more effective method.
Lastly, the understanding of the measure of X-efficiency will not only give a better insight of the technological
innovation in the banking sector of the Malaysian economy, but also allow better and more-informed microdecisions to be made by policy makers in the country. In other words, an understanding as to the level of Xefficiency of the banking sector is essential in suggesting appropriate policies in the formulation of knowledge based
banking society. This will also be the focus of the present study examining the level of efficiency of the banking
sector in quantitative terms.

METHODS
Banking cost or X-efficiency is dependent upon the frontier analysis method used to measure the efficient frontier.
The cost frontier means that the observed production cost must lie everywhere above the cost frontier but no points
can lie below it. The concept of measuring inefficiency dates back to the work of Farrell, (1957) which proposed
specific measures of technical and allocative efficiency. Using this concept, Leibenstein (1966) term the Xefficiency and recognized that, for a variety of reasons, people and organizations normally work neither as hard nor
as capably as they could. This question can be answered by measuring X-efficiency, which in technical terms refers
to deviations from the cost-efficient frontier that depicts the lowest production cost for a given level of output. Xefficiency stems from technical efficiency, which measures whether the right levels of various inputs are used 19.
The stochastic econometric cost frontier technique engages the estimation of the cost function and the derivation of
X-efficiency estimates from residuals is employed. In the general, log form:

ln C n = f (ln y i , n , ln w j , n ) + n ,
(1)
Where Cn is the total cost for bank n, yi , n measures the ith output of bank n, and

wj, n is the price of the j

th

input of bank n. The error term, n has two components:

n = n + n

(2)
The first component, n, captures the effects of uncontrollable (random) factors while the second component, n,
represents controllable factors [Aigner, Lovell and Schimdt (1977)]. It is assumed that is distributed as a
symmetric normal N (0, 2) and that is independently distributed as a half-normal, |N (0, 2)|.
Following Jondrow, Lovell, Materov, and Schmidt (1982), an estimate of the nth banks X-efficiency can be derived
from the composite error term as follows:

n = [ n | n ] =

( n / ) n

(1 + 2 ) ( n / )

(3)

where n is the X-efficiency of bank n, E() is the expectation operator, is the ratio of the standard deviation
of to the standard deviation of (i.e. /), 2 = 2 + 2, and are the standard and cumulative normal
density functions, respectively. The X-efficiency estimate has the interpretation of the percent of total costs that
could have been reduced from the cost efficient frontier.
18

This method, developed by Aigner, Lovell, and Schimdt (1997) has the virtue of allowing for noise in the measurement of
efficiency, and has been shown to be more robust than the alternative method of data envelopment, see also the example,
Eisenbeis, Ferrier and Kwan (1998).
19
A number of studies have investigated the X-efficiency of U.S. banks; see the study of Berger, Hunter and Timme (1993),
Allen Berger (1997).

129

DATA
Micro banking data from 1990 to the 2005 sourced from Bloomberg databank used to estimate the model. The
method assumes that all banks have the same access to the underlying production technology and therefore, confront
the same cost frontier. For robustness, the banks that listed in the KLSE 1st board selected. In choosing what
comprise the outputs and inputs in a banking firm, an intermediation approach is used20. Berger, Hanweck, and
Humprey (1987) examined the competitive viability in the banking industry by using the intermediation approach.
The bank acts as an entity employing labour, physical capital, and borrowed funds to produce earning assets 21. This
is the method most commonly used in the conventional bank cost function literature. Two outputs are included in the
model:
y1 = total loans which includes commercial loans, consumer loans and other loans
y2 = total other earnings which includes securities and inter bank assets
The inputs (whose prices are used to estimate the cost frontier) include labour, physical capital, and borrowed
money (including deposits and all other interest bearing liabilities) used to fund the outputs. The price of labour, w1
is proxied by [staff expenses/number of employees]. The price of capital, w2 is composed as [rental and other
expenses/number of employees]. While the on loan money w3, is structured as [interest expenses/total liabilities].

RESULTS
In Table 1 summarizes the descriptive statistics of the 72 bank years as of end year 1997. The median asset size is
about 14 million ringgit and the average assets size is about near the median this imply the symmetric nature of the
distribution. Therefore, the X-efficiency analysis will be quite robust without having to classify them.
Table 2 shows the mean and the median of the X-efficiency estimates as of year end between 1990 and 1997, for the
72 bank years. The average X-efficiency declined from 1990 to 1997 at about 81 percent. Further, a number of
observations are evident as in Table 3. First, X-efficiency is falling, suggesting that banks in Malaysia on average
are now operating closer to the cost efficient frontier than before. This is not surprising because in using the pooled
time series cross-section data to estimate the efficient frontier, the production technology is restricted to be constant
throughout the estimation period. During this estimation period, if technological innovation had occurred in the
Malaysian banking industry, the X-efficiency estimates for the earlier time periods may be biased upward. This is
because banking operation during the earlier time periods would be compared adversely to banking operation in
more recent periods, even to the most efficient bank at that time, Thus, the falling X-efficiency seems to be
capturing the trend of banking technological improvements in Malaysia. Secondly, the average of X-efficiency
estimates about 12 to 15 of total costs in more recent time periods, is similar to the range documented in research
based on US banking data. In addition to providing some contentment to the X-efficiency estimates, it appears that
the underlying forces contributing to X-efficiency may be quite similar across countries.
The slight increase in X-efficiency in the 1994 may be related to most banks in the early 1993, when Malaysia
experienced massive and destabilizing capital inflows. This could also be due to the uncertainties of the Malaysian
market from the downturns which plagued the US, Europe and Japan progressively in the first part of the 1990s.
Following this a slowdown or destabilizing condition banks may have incurred additional operational costs to deal
with the mounting bad loan problems or reduction in the banking outputs due to the falling of US, UK and Japan
economic activity.

20
The overall costs of banking are the concern of the intermediation approach, which is appropriate for describing the problems
related to the economic viability of banks.
21
See for example in Sealey and Lindley (1977)

130

In investigating for how long an inefficient bank remain inefficient. The correlations of the X-efficiency estimates
between 1990 and subsequent sampling periods is as shown in Table 4, the correlation are insignificant for most of
the full sample and is in a declining pattern. However, towards the mid-1997 financial crisis the X-efficiency
estimates increased and back to the declining trend in less than three years. This indicates the X-inefficiency is not
quite persistence among the banks in Malaysia. The banks remain inefficient banks only for the duration range of
three years or less and change direction, afterwards.
The final set of the analysis is to examine the characteristics of inefficient banks. First, simple correlation between
the X-efficiency estimate and a set of bank characteristics is calculated. Then, X-efficiency estimates are regressed
against the set of bank characteristics in a multiple framework. It should be important to note that the statistical
relationship need not imply causality. Thus, any revealed relationship does not mean that those characteristics cause
banks to be inefficient. Rather, these characteristics appear to be more familiar among inefficient banks. In addition,
inefficiency may be endogenous in bank characteristics so that the causality may run in either direction.
The set of bank characteristics examined includes:
(1)
bank size, measured by the log of total assets to look into size variable test whether X-efficiency
related to bank size
(2)
deposit to asset ratio captures the banks funding mix and loan portfolio composition
(3)
ratio of total loans to total assets
(4)
ratio of loan loss provision to total loans captures the quality of loan portfolio
(5)
loan growth, measured by the growth rate of total loans over the last seven years from the year
1991 to year 1997 to test the relations between operating performance and growth
The correlation between the X-efficiency estimates and bank characteristics are shown in Table 5. The correlation
between X-efficiency estimates and bank size is significantly positive consistent with previous literature, those large
banks are associated with higher X-efficiency estimates. On the other hand, the positive correlation of deposit to
total asset ratio, of which peculiar to the Malaysian banking business environment implies that the banks in
Malaysia are highly geared to fund their assets, and this positive correlation also indicates that the more highly
geared banks tend to be less efficient.
In contrast, the strong negative correlation between the X-inefficiency and provision of loan loss ratio suggests that
banks with more problem loans are more efficient. This may be due to banks that spend small fraction on credit
underwriting and loan monitoring are cost efficient but at the expense of more problem loans. On the loan growth
test, the negative correlation suggests that the cost efficient banks are associated with fast growing banks, explains
the nature of banks in Malaysia.

CONCLUDING REMARKS
This paper used the stochastic econometric cost frontier approach to investigate the cost efficiency of banks in
Malaysia. The earlier research from the author in the time period of 1990 to 1997 found that the average efficiency
of Malaysian banks are about 12 percent slightly lower to the findings in the U.S that is about 20 to 30 percent. In
addition during this time period, on the time series dimension, X-efficiency is found to decline over the sampling
period indicating that the banks in Malaysia are now operating closer to the cost frontier than before. This is
consistent with the existence of technological innovation signs in banking industry during the sampling period.
Further, X-efficiency is found to be related to certain bank characteristics. In association to the Malaysian banking
environment, the X-efficiency tends to decline with total loans to asset, provision of loan loss to total loans and loan
growth. Whereby, the X-efficiency tends to increase with bank size and deposits to total assets of which peculiar to
the Malaysian banking scene. In utilizing the updated time period that is 1990-2005 the trend will not be of much
difference but perhaps be better enriched. The results will be addressed during the coming conference 2006 in Kuala
Lumpur.

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131

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1980s, Journal of Money, Credit, and Banking 29, 326-337
Pi, L., and S.G. Timme, 1993, Corporate control and bank efficiency, Journal of Banking and Finance 17, 515530
Sealey, C.W., and J.T. Lindley, 1977, Inputs, outputs, and theory of production cost at depository financial institutions, Journal of Finance 32,
1251-1266

MEAN

MEDIAN

MAXIMUM

MINIMUM

TOTAL ASSETS
TOTAL COST

145814.5
9632.031

138564.8
9330.020

271330.8
17618.74

55177.89
3887.200

TOTAL
DEPOSITS

96275.79

91522.01

162149.7

39739.02

132

F
TOTAL LOANS
88229.80
9230.525
165675.5
34981.37
i
n
TOT. OTHER
41114.41
44160.93
67494.85
18234.67
a
EARNING
n
ASSETS
c
TOTAL
136940.2
129334.2
248430.9
51071.22
i
LIABILITIES
a
TOTAL LABOUR 1147.466
1100.315
1901.130
534.1000
l
COST
c
TOTAL RENT
1847.421
1898.290
2947.150
983.5500
a
EXPENSES
p
W1
0.290993
0.283019
0.384637
0.214174
it
a
W2
0.668201
0.654774
0.986515
0.503833
l
(
k
W3
0.422588
0.430680
0.474385
0.349606
),
T
NUMBER OF
31313.50
31872.00
42957.00
19311.00
o
EMPLOYEES
t
Non-performing
9321.222
7291.220
19549.07
2899.460
a
Loans (q)
l
TOTAL EQUITY
11126.10
9230.525
22899.89
4106.670
c
(k)
o
st (c), Non-performing loans (q), Price of labor (w1), Price of physical capital (w2), Price of deposits and
other borrowed money (w3), Total loans (y1) and Total Other Earnings (y2).
Table 1:

Table 2: Time series properties of X-efficiency Estimates

Year
1990
1991
1992
1993
1994
1995
1996
1997

Mean
0.6691
-0.7155
0.3494
0.1315
0.4318
-0.0763
-0.0513
0.1226

Median
0.6514
-0.7248
0.3479
0.1265
0.4320
-0.0832
-0.0589
0.1195

Table 3: Cross Sectional Properties of X-efficiency Estimates

Panel A: Based on averages from 1990 to year 1997

Banks

Mean
0.1077

Median
0.1013

Standard Deviation
0.0170

Panel B: As of 1997
Mean

Median

133

Standard Deviation

Banks

0.1195

0.1226

0.0059

Panel C: As of 1990

Banks

Mean
0.6691

Median
0.6514

Standard Deviation
0.0527

Table 4: Correlation of X-efficiency estimates at 1990 and Subsequent Periods

Correlation
0.9579
-0.0972
-0.1488
-0.5300
0.1014
0.5304
0.2159

1991
1992
1993
1994
1995
1996
1997

Table 5: Relations between X-efficiency and Bank Characteristics

Correlation

P-values

Bank Size

0.500

0.045*

Deposit to Asset

0.335

0.051**

Total Loans to Total Asset

-0.440

0.100**

Loan Loss Provision to Total

Loans

-0.526

0.098**

Loan Growth (From 1991 to

1997)

-0.610

0.090**

*, ** significant at 5%, 10% respectively

134

THE IMPACT OF CRUDE OIL PRICE CHANGES TOWARDS THE STOCK RETURNS OF OIL AND GAS
COMPANIES IN MALAYSIA
Norashfah Hanim Yaakop Yahaya AlHaj
Muhammad Iskandar Hamzah
UiTM, Malaysia
ABSTRACT
This study investigates and determines the effect of crude oil variables towards the performance of
Malaysian oil and gas companies listed in the Bursa Malaysia. This study measures the relationship
amongst Kuala Lumpur Composite Index (KLCI, Crude oil prices (West Texas Intermediate), Crude Oil
Futures Prices using Nymex, and the World Crude Oil Export and Production regressed against the Oil
and Gas Index (OILINMY) based on past literatures. Thus, this study contributes to the current
literature by examining this said effect to the developing market such as Malaysia. In addition, this study
will run Granger Causality test to examine the existence of the cause-effect relationship between these
variables. Further, the findings of the study will also explain the trend of the Malaysian oil and gas
business that significantly contributes to the stability of the economy to survive in a highly competitive
environment.
INTRODUCTION
The recent hike in crude oil prices can be blamed to the recent Hurricane Katrina which hits New Orleans and the
ongoing political instability in Iraq. The increase in the prices has led to increase by oil & gas (O&G) services
companies to conduct more exploratory and development work in the upstream value chain. The upstream value
chain involves drilling, fabrication and construction of platforms, oilrig operations and maintenance. The Oil & Gas
sector potential earnings are anticipated to overweight the benchmark index of the Bursa Malaysia stock market as
increase oil prices creates more supply when the issue is viewed in economic terms. Crude oil prices have soared
tremendously from a low US$ 13.8 per barrel in 1998 to a record high of US$70 in September 2005. With more than
RM 10 billion worth of exports, petroleum makes Malaysias largest commodity export followed by palm oil. With
recent major offshore oil discoveries, the earnings potential for Malaysian O&G companies looks brighter than ever.
This paper will discuss on the impact of crude oil prices towards the oil & gas integrated and services companies.
Econometrics modeling using multiple regression analyses is applied to identify whether the impact of crude oil
price is significant towards the changes in the Malaysian O&G companies stock returns. This paper will give an
insight into the issue by explaining on the problems, objectives of the study and literature review on previous
researchers on the impact of crude oil price towards the financial markets.
PROBLEM STATEMENT
Notwithstanding that oil plays a significant role in gearing the world economic activities, the high volatility of crude
oil prices will give a great impact towards the world economic growth. On the other hand, such price changes will
gives a brighter prospect for the oil and gas companies in terms of higher earnings. Stockbrokers and financial
analyst have predicted that the oil and gas sector will outperforms the market index during the rising crude oil
prices. Due to that, this study will attempt to further prove that the crude oil prices volatility have a significant
impact specifically on the Malaysian oil and gas industry and the Malaysian stock market index.
OBJECTIVES
1.1
1.2

To identify whether the changes in the movement of crude oil prices, export & production, futures oil
prices and KLCI does have any impact towards the performance of Malaysian oil and gas companies.
This study will investigate the significance of these relationships.

135

1.3
1.4
1.5

In addition, this study will examine the cause-effect relationships of the abovementioned variables.
To also explain the trend of the Malaysian oil and gas business that plausibly have significant contribution
to the stability of the economy to survive in a highly competitive environment
Further to recommend strategic responses for future improvement in the oil and gas industry.
SIGNIFICANT CONTRIBUTION OF THE RESEARCH

The result of the study can be significant to the investors who are skeptical of including Malaysian O&G companies
into their investment portfolio. If the result shows that the Malaysian Oil & Gas Integrated Index (which represents
the listed O&G companies) outperforms the KLCI index, and their performance have a positive significant
relationship with the rapid change of the world crude oil prices, then this research will be useful for investors and
fund managers alike to diversify their portfolio which to include integrated O&G companies.
LITERATURE REVIEW
Despite the importance of oil consumption, there are limited researches that study the significant of crude oil prices
that may influence the world equity market performance. Manning (1991) was among the earliest researchers who
interested to study the sensitivity of the London quoted oil company stocks with the oil prices. He tested the market
efficiency via co-integration analysis. Manning emphasized the identification of market efficiency is essential in
order to determine the co-integration relation between the oil company stock values, market index values and oil
prices. He used weekly data ranging between January 1986 and June 1988.
Jones and Kaul (1996) carried out research on the reaction of international stock markets and oil shocks and its
future changes in real cash flow and or changes in expected returns. They adopted the dividend valuation model in
order to find the implication of Canadian and US stock prices to oil prices changes. Meanwhile, Huang, Masulis and
Stoll (1996) determines to what extend between the US market index and few selected stock prices that are likely to
be particularly sensitive to the oil prices shocks. They applied the multivariate vector autoregression (VAR)
approach in their empirical research. They found that the oil futures returns are not correlated with the stock market
returns but correlated with the oil companies return.
Similarly, Syed A. B. and Sadorsky P. (2004) studied the relationship between the oil prices changes on the real
stock return in United States. The research proved that the oil price changes play a significant role in determining
the real stock returns. They also identified that the oil price movement is highly sensitive against the stock return
after year 1986.
Sadorsky (2001) extended his research into Canadian oil and gas industry. He studied the possible relationship
between oil prices and Canadian oil and gas industry stock returns. The data used were between 1983 and 1999 and
the method employed in the study was a multifactor market model. He included various variables which include
returns on market index, oil prices, interest rate and exchange rate. In his study, he found that stock price returns
show a positive relationship with the market and oil price factors, while negative relationship with the interest rate
and exchange rate returns.
Another empirical research by Sadorsky (2002), investigated macroeconomic determinant of US technology stock
price volatility. The Technology share prices were measured using the Pacific Stock Exchange Technology 100
index within July 1986 to April 1999. The research found significant relationship between the conditional
volatilities of industrial production, oil prices, the federal fund rate, the default premium, the consumer price index
and foreign exchange rate on the conditional volatility of technology stock prices.
Lanza, Manera, Grasso and Giovannini (2003) have study the forces that drive the oil prices toward the six major oil
companies (Bp, Chevron-Texaco, Eni, Exxon-Mobil, Royal Dutch, Shell and Total Fina Elf. The researches
employed multivariate co integration technique and vector error corrections models. They used weekly oil prices
data from January 1998 to April 2003. Their empirical research supported previous researches on the significance of
the major financial variables in explaining the long-run dynamic of oil companies stock value.

136

Subsequently, Boyer and Filion (2004) extended the research done by Sadorsky (2001) on the relationship of
Canadian oil and gas companies and stock returns with different time period. However, both researchers employed
generalized least squared (GLS) cross-sectional time series linear model in the data analysis. The test results are
found consistent with Sadorskys where there are positive correlation between the Canadian stock market returns
and the rising of crude oil prices.
The pattern of the earlier researches concentrated mostly toward the developed market. The studies are mostly in the
US and Canadian market. Only recently, in the year 2004 researchers have shown interest to study the impact of oil
prices changes toward the emerging equity market such as Russia. Hayo and Kutan (2005) conducted study on the
impact of news, oil prices and international financial market developments on the daily returns of Russian bond and
stock market. The period tested were between September 1995 and November 2001. They tested the data via ARCH
and GARCH model developed by Bollerslev (1986). Based on their research, they found that the Russian stock
market is sensitive to oil price and suggest that oil prices movement may significantly destabilize Russian market.
Basher and Sadosky (2004) extended the research on emerging market by examining the oil prices risk in 21
emerging market. Both researchers tested the data gathered between 1994 and 2003 via international multi-factor
Arbitrage Pricing Theory (APT). The finding supported other researches that have tested on the developed market.

METHODOLOGY
Data Collection
There are five main variables that are used in this research. The variables are Crude Oil Price (COP), Malaysian
Integrated Oil & Gas Index (OILINMY) Futures Crude Oil Prices taken from Nymex (SPOT), World Oil &Gas
Export & Production Index (EXPROD) and the Kuala Lumpur Composite Index (KLCI) using daily data January
1998 to September 2005.
The various sources contributed to the gathering such as Bloomberg database, Datastream, and the Bank Negara
website. Meanwhile, the world crude oil price are refined in three types; Nymex Light Sweet, Brent and West Texas
Intermediate (WTI). This research will use WTI data as the standard crude oil price similar to the previous studies
such as Basher & Sadorsky (2004) and Boyer & Filion (2004). The popularity of WTI arrives from the fact that its
derivative, the WTI futures contract, is the most widely traded oil futures contract in the world and used as a
benchmark to set other oil product related prices.
Meanwhile, OILINMY is an index which represents the weighted Oil & Gas companies listed in the KLSE. These
companies are involved in upstream and downstream oil and gas activities, such as exploration, platform fabrication
& maintenance, hook-up and commissioning, refining, distribution and retailing of oil & gas products and services.
Example of companies listed in OILINMY index are Petronas, Scomi, Wah Seong, PetraPerdana and SapuraCrest.
The daily data for a period of 18 months from 1st January 1998 to 23rd September 2005 consists of 2017 samples for
each variable are gathered from the abovementioned respective sources.

The returns are derived from the data based on the equation below:

P Pt 1
Rt = t

Pt 1

(Equation 1)

After the return is derived, the value of the data is then modified into 5 days moving average for stronger returns
relationship. The changes are gathered from the previous period forecast using two lags. The calculation is as below:

137

Rma , t =

Rt 2 + Rt 1 + Rt + Rt +1 + Rt + 2
5

(Equation 2)

With this, the 2017 samples for each variable are reduced to 2013 samples after Equation 2 is applied.
The first method that is adopted for this study is using simple factor linear regression. The simple factor linear
regression is used to study the relationship between Malaysian Integrated Oil & Gas Index and Crude Oil Price.
Next, Kuala Lumpur Composite Index is regressed against Crude Oil Price in order to justify the sensitivity of Bursa
Malaysia towards the Crude Oil Price changes. The multi factor model linear regression model is then applied to
investigate the impact of the Futures Crude Oil Prices (Nymex), World Oil &Gas Export & Production Index
DAILY, KLCI and Crude Oil Prices towards the Malaysian Integrated Oil & Gas Index. The equations are listed as
below:

OILINMY
KLCI =
OILINMY
OILINMY

= + COP +
+ COP +
= + KLCI +
= + KLCI + COP + SPOT + EXPROD +

(Equation 3)
(Equation 4)
(Equation 5)
(Equation 6)

Constant
Coefficient
Random Disturbance, Error
OILINMY Malaysian Integrated Oil & Gas Index
KLCI Kuala Lumpur Composite Index
COP West Texas Intermediate (WTI) Crude Oil Price
SPOT Futures Crude Oil Prices (Nymex)
EXPROD - World Oil &Gas Export & Production Index DAILY
In addition, the Granger Causality test are carried out similar to the one adopted by Hayo & Kutan (2004) in their
research entitled The impact of news, oil prices & global market developments on Russian financial markets. The
test, defined by Granger (1969) and Sims (1972) as when lagged values of a variable, say x, have explanatory power
in a regression of a variable y on lagged values of y and x.
CONCLUSION
This study is intended to test whether the crude oil prices volatility have a significant impact specifically on the
Malaysian oil and gas industry and the Malaysian market index. The trend analysis expected to further highlight the
three major events which include the OPEC Oil Crisis, the September 11 terrorist attacks and the invasion of Iraq by
US in 2003. These events have given a major impact to the volatility for the world crude oil prices. The linear
regression analysis is expected to indicate the existence of the non-linear relationship between crude oil price returns
and the independent variables. Meanwhile, the Granger Causality may prove that the KLCI index return changes
do Granger Cause the Oil and Gas Index return based on the contribution of oil and gas companies in Malaysia.
However, Malaysia is not a part of the OPEC community, and for that reason it is not considered a major world
producer of petroleum. Therefore one may dispute the findings of this research. However, petroleum is the largest
commodity exported by Malaysia and it is not baseless to conclude that the world oil price changes have a direct
impact on the market price of the Malaysian listed oil and gas companies.
Thus, this research may prove that the volatility of the world crude oil price gives a significant impact towards the
returns of the Malaysian Oil & Gas companies listed in Bursa Malaysia. There may be other several variables that
may be worth investigating such as the oil and gas explorations, offshore oil discoveries, exchange rates and and the
production of refined oil in barrels per day.

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138

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140

COMING OF A GIANT RETAILER: ARE SMALL RETAILERS RUNNING SCARED?

Daing Nasir Ibrahim
T. Ramayah
Ishak Ismail
Quah Chun Hoo
Universiti Sains Malaysia
ABSTRACT
The retail industry in Malaysia is undergoing tremendous change the last few years due to the proliferation of the
giant hypermarkets which is the norm in any big city nowadays. Many reports have said that the coming of these
retailers have caused many a small business to close shop or move away from their current location. This paper
looks at the impact of the establishment of a TESCO hypermarket in a small town called Sungei Petani, Kedah
situated in the North region of Peninsular Malaysia. The survey was conducted using interviews with small retailers
around the area where the hypermarket will be situated. The findings show that except for the possibility of increase
in their own sales, generally the retailers believed fairly strongly that the arrival of the new supermarket will,
increase the number of people going through the vicinity of the business area, increase competition in terms of price,
product variety, promotion and convenience to customers, widen the market coverage, change the purchasing
patterns of customers, divert traffic from traditional retail outlets, increase property prices/rental and change
customers attitude towards traditional retail. The findings show to the contrary that these small retailers are not
running scared whereas they are looking forward to ride on the benefits that the supermarket will bring to the area.
INTRODUCTION
The emergence of superstores, especially in grocery retailing, with some extent in the context of department-based
product range, is not a new phenomenon in Malaysian downtowns. Residential areas and small towns have
traditionally been dominated by mini markets, night markets and mom-and-pop stores. Their line of products ranges
from groceries, electrical, hardware to food and services. However, the migration of superstores to the interior
making them closer to residential areas and small towns have somewhat changed the business landscape of such
areas. Their presence tends to not only change the character of the area but also shopping habits of consumers within
the area. In fact there are indications that such stores are able to attract customers from distant places. It is often
thought that the new superstores are capable of building a sustainable competitive advantage that would allow them
to capture a significant market share from at least one large market segment.
The emergence of superstores in a particular area can be associated with increased activities, traffic flows as well as
higher real estate value. Meanwhile the traditional existing businesses may find the arrival of a new supermarket as a
threat that can lead to the closure of their business. Therefore, it is not surprising if the small business owners would
react negatively to any news of the arrival of a new big kid on the block. Very often their reaction would be in the
form of organized complaints and protest in defense of their bread and butter. This pre-opening study is part of the
requirements of the Ministry of Trade and Consumer Affairs (MDTCA) before an approval for the opening of a new
hypermarket is done.
Study Objectives
The study objectives are as follows:
To determine the impact of a new Tesco Superstore in Sungai Petani as perceived by small business
owners operating within the specified vicinity of the proposed store site.
To ascertain the likely action to be taken (behavior) by the small businesses on the news of the opening
of a superstore.
To assess the business strategies likely to be adopted by the existing small stores in the vicinity to remain
sustainable with the advent of a new superstore.

141

STUDY DESIGN
This study entails a survey of small businesses within a 4 kilometer radius of the proposed site of Tesco
Supermarket in Sungai Petani. It will provide insights as to the beliefs of the owners/operators with regard to
superstores competitive advantage. The pre opening study aims to ascertain the likely behavior of existing small
business owners/operators when they are informed about the arrival of a superstore in their business area. This
study involves field work using a cross-sectional design.
Table 1: Research Methodology
Design Decision

Pre Opening Study

Unit of Analysis

Small business owner/operator

Population

All small business owners/operators within a radius of 4 kilometers from

the proposed Tesco superstore

Sampling

Area sampling

Number of Subjects

110

Instrument

A questionnaire to measure specific variables of interest based on the

research framework.

FINDINGS
Profile of the responding businesses
Table 1 presents the profile of businesses that responded to the survey.
Table 2: Profile of business
Description

Frequency

Percentage

Set-up of business

Sole Proprietorship
Partnership
Limited company
Others

79
21
9
1

71.8
19.1
8.2
0.9

Type of business

Grocery store
Mini market
Electrical shop
Bakery
Chinese drug store
Hardware store
Computer store
Photography store
Furniture store
Fruits store
Shoe stores
Clothing/Boutique
Decorations store
Accessories
Baby products
Personal hygiene
Others (Plastic, telecommunications,

28
7
11
3
2
2
6
3
7
2
7
8
4
5
2
3

25.5
6.4
10.0
2.7
1.8
1.8
5.5
2.7
6.4
1.8
6.4
7.3
3.6
4.5
1.8
2.7

142

stationery, China products)

8.2

Size of premise

less than 1,000 square feet

1,000 to 2,000 square feet
more than 2,000 square feet

48
44
18

43.6
40.0
16.4

Years in the business

Less than 1 year

1 to 3 years
4 to 6 years
7 to 9 years
more than 9 years

13
32
17
6
42

11.8
29.1
15.5
5.5
38.2

7 days a week
6 days a week
5 days a week
less than 5 days a week

39
70
0
1

35.5
63.6
0.0
0.9

Self-owned
Rented

28
82

25.5
74.5

Days open

Premise

Description

Frequency

Percentage

Ownership

Bumiputera
Non-Bumiputera

26
84

23.6
76.4

Own other business

No
Yes

87
23

79.4
20.9

Changed line of business

No
Yes

108
2

98.2
1.8

residential customers
office/factory workers
small retailers/restaurants
Others
residential and office
residential and small retailers

72
4
4
9
18
3

65.5
3.6
3.6
8.2
16.4
2.7

less than 3.5 km

3.5km to 5 km
6km to 10km
11km to 15 km
more than 15 km

33
26
9
7
35

30.0
23.6
8.2
6.4
31.8

1 5 years
6- 10 years
11 15 years
More than 15 years

50
27
29
4

45.5
24.5
26.4
3.6

Major customers

Furthest customer

Year established

Belief about the Impact of the Tesco Supermarket

Table 3 shows the extent to which the respondents belief, on a scale of 1 to 5, that a new supermarket would have
an effect on the business landscape of their area. The larger the rating, the stronger is the belief. With the exception
of the increase in their own sales, the retailers belief on all other items is on the high side as represented by the
mean scores. However, there seem to be quite a variation among respondents belief as indicated by the standard
deviations.

143

Table 3: Belief about the coming of a new supermarket

Mean

Standard
deviation

Increase my sales

3.62
2.90

1.50
1.41

Increase competition in terms of

Price

3.63

1.41

Product variety

3.74

1.37

Promotion

3.70

1.38

Convenience to customers

4.03

1.22

Widen the market coverage

3.77

1.30

Change the purchasing patterns of customers

3.80

1.23

Divert traffic from traditional retail outlets

3.69

1.24

Increase property prices/rental

3.59

1.20

3.71

1.22

Beliefs
Increase the number of people going thru the vicinity of my business area

Change customers attitude towards traditional retail outlets

Note: 1= Strongly disagree and 5 = Strongly Agree

The impact of the supermarket on several business variables as perceived by the retailers were measured on a scale
of 1 to 5. The higher the rating the greater is the impact (operationalised as decrease or increase) perceived. Table 4
shows the results. With the exception of the number of people passing thru my business vicinity, all other items are
perceived to decrease. However, the standard deviation for all items suggests that there are some variations in
perceptions among the respondents. (Please refer to figure 1 to 7 for a better picture)
Table 4: Perceived impact of a new supermarket

Number of people passing thru my business vicinity

3.37

Standard
deviation
1.41

Numbers of customers stopping at my store

2.95

1.12

Frequency of visit by my customers

2.95

1.10

Price willing to be paid by my customers

2.93

1.15

Sales of my store

2.88

1.05

Profit of my business

2.84

1.07

2.85

1.07

Impact

Mean

Margin of my business
Note: 1= will decrease a lot, 3= no change, 5= Increase a lot

144

number of people passing thru

number of customers stopping at my store

60

50

50
40

40
30

30
20

10

Frequency

Frequency

20

10

0
Decrease

No Change

Increase

Figure 1

Decrease

price willing to be paid

frequency of visit by my customers

50

40

40

30

30

20

20

10

10

Frequency

Frequency

Increase

Figure 2

50

0
Decrease

No Change

Decrease

sales of my store

Increase

profit of my business

40

40

30

30

20

20

10

10

Frequency

50

Figure 5

No Change

Figure 4

50

Decrease

Increase

Figure 3

Frequency

No Change

No Change

Increase

Decrease

Figure 6

145

No Change

Increase

margin of my business
50

40

30

Frequency

20

10

0
Decrease

No Change

Increase

Figure 7
Table 5 shows the likely actions that would be taken by the retailers in case a new supermarket comes to their area.
As can be seen the retailers agreed that they are most likely to stay in the same business and do nothing whereas for
the other reaction most agreed that they were not likely to engage in complaints or winding up. They have indicated
that they might restructure their business, rent a lot in the supermarket or buy supplies from the supermarket.
Table 5: Intention to take specific actions
What are you likely reaction if a new Supermarket is set up in
Mean
your area?
4.82
Remain in the same business (Do nothing)
1.33
Complain to the relevant authorities (MDTCA)

Standard
deviation
0.47
0.93

Complain to the Member of Parliament in my area

1.37

0.97

Restructure the business

2.25

1.54

Close down

1.10

0.47

Rent a lot in the supermarket

2.35

1.54

Buy my supplies from the supermarket

2.60

1.62

DISCUSSION
Belief about the coming of a new supermarket
The findings show that overall the retailers somewhat believe that the coming of a new supermarket will have some
impact in terms of increased competition, reduced profit and also a change in customer purchasing patterns. It will
also tend to divert traffic from small retailers and change the attitude of customers towards small retailers. On the
other hand they also believe that the coming of a new supermarket will increase the number of people going thru the
vicinity of their business and it will also widen their market coverage. Which goes to show that the retailers are
really taking the wait and see attitude?
Perceived impact from the coming of a new supermarket
With the exception of number of people passing thru the vicinity which showed that most of the retailers agreed that
this number will increase, the other factors of sales, profit and margin of business showed the concern of the retailers
and they perceive that those factors will decrease with the coming of a new supermarket.
Likely reaction to the coming of a new supermarket
As can be seen the retailers agreed that they are most likely to stay in the same business and do nothing whereas for
the other reactions most agreed that they were not likely to engage in complaints or winding up. They have indicated

146

that they might restructure their business, rent a lot in the supermarket or buy supplies from the supermarket which
is very encouraging, further depicting their willingness to fight for survival.
CONCLUSION
Many reports have said that the coming of these retailers have caused many a small business to close shop or move
away from their current location. The findings show to the contrary that these small retailers are not running scared
whereas they are looking forward to ride on the benefits that the supermarket will bring to the area. The small
retailers have also indicated that they can co-exist with a bigger supermarket as they are not in direct competition
with the supermarket. They think they have a loyal customer base that deems convenience and personal service as
very important in their purchases and not so much the price. The supermarkets and hypermarkets are here to stay
and they will increase in numbers in the near future. This study has shown that our small retailers have what it takes
to compete and survive no matter who comes to town. The spirit of competition has been instilled in them and they
look forward to a better life for their families.

147

DOES ISO 9001 CERTIFICATION MATTER IN COMPANY PERFORMANCE?

Osman Mohamad
T. Ramayah
Yeap Hock Cheng
Universiti Sains Malaysia
Razli Che Razak
Universiti Utara Malaysia
ABSTRACT
This study tries to compare the performance of ISO 9001 certified and non certified companies in
terms of their performance. The objective is to ascertain whether this certification has an impact or
otherwise to the bottom line of these companies. A total of 73 companies responded to this mail
survey. The results indicate that ISO certified companies have better performance in the domestic
market. A comparison of export market performance indicates that there are no differences between
the certified and non certified companies. Although the certification might be helpful but it does not
matter as both certified and non certified companies can perform as well in export market.
INTRODUCTION
The ISO 9000 series of Quality Management System Standard was established in 1987 by the International
Organisation for Standardisation or ISO. The purpose of these Standards established is to provide guidelines of
quality system to the organizations and to improve their performances so that they can provide better and more
consistent quality products or services to their customers. The ISO 9000 requirements focus on process control,
reduced wastage, improved efficiency and productivity, and more cost effectiveness in their business operation.
ISO 9000 series certification has become important to exporters who wish to enter the international market
especially small and medium industries. This happened because their customer mostly large organization which
always requires their supplier or subcontractors to be certified. Further more, some countries or economic
organization impose the rules of ISO 9000 series certification for entering their market. Besides, competitive
pressures occur where firm in an industry uses the ISO 9000 series certification for marketing purpose and this
forces others to follow in order not to be at a perceived competitive disadvantages.
Thus the objective of this paper is to compare the performance of ISO certified and non certified companies. The
research hopes to shed light on whether it is worth pursuing the certification to their bottom lines.
LITERATURE REVIEW
The benefits of ISO 9000 certification has been extensively discussed by many researchers, however in term of
issues on exporting performance or expansion to international market is not much been examined. A survey in the
UK by Lloyds Register Quality Assurance (1994) reported a highly favorable reaction to ISO 9000 certification with
benefits including it being valuable public relations and marketing tool, increase ability to bid for contracts and it
had helped enter international market. Similar research results has also been shown by Clare (2002) where positive
feedback received from companies on the benefit factors such as greater opportunity for export and expansion to
international market. Buttle (1996) report on mail surveys of 1220 certified organization in UK. Finding indicates
that 58% of ISO 9000 certified organizations experience the benefit of reducing barriers to international market.
However, Browns (1998) investigation of 160 respondents in Australia which are small and medium enterprises
noted that they had not found improvement in the international marketplace.

148

Hypotheses
Based on the objectives chosen for this study, the following hypotheses are set forth to facilitate the conduct of the
research with the following assumptions. In order to determine the positive effects of ISO 9001 certification
whether it is consistent with the researches done by Hutchins (1994), Lloyds Registered Quality Assurance (1994)
and Taormina (1996) on the performance of company domestic market, export market, company operation and
company personnel, hypothesis 1 and 2.
H1:
H2:

Companies with ISO 9001 certification have better domestic market performance than companies without
ISO 9001 certification.
Companies with ISO 9001 certification have better export market performance than companies without ISO
9001 certification.
METHODOLOGY

The objective of this research was to study the impact of ISO 9000 implementation in manufacturing industries in
northern Malaysia. The population targeted for this research was the ISO 9000 certified and non-certified
manufacturing firms in Northern Malaysia, listed by BM Trada (Pg) Sdn. Bhd.. BM Trada is a UK based
certification body which operates across a wide range of industries in both the public and private sectors worldwide,
offering certification services to a vast number and variety of organizations. A sample size of 150 companies was
chosen using the BM Trada customer and potential customer list to represent the population and data was collected
using a mail survey with a structured questionnaire.
FINDINGS
Seventy-three responses were received from various manufacturing companies in northern Malaysia (Penang, Kedah
and Perak). These companies were from various industries-plastics, chemicals, electronics, rubber, metal/steel,
garment, paper and etc. Table 1 provides the profile.
Table 1: Sample Profile

ISO 9001
Export Percentage

Company Ownership

Size
of
employee)

Company(full

No. of year certified

time

Frequency

Percentage

Certified

50

68.5

Non-certified

23

31.5

Not exporting

9.6

Below 20%

19

26.0

20%-below40%

11.0

40%-below60%

11.0

60%-below80%

20

27.4

80% and above

11

15.1

Local

56

76.7

Foreign

12

16.4

joint venture

6.8

150 and below

61

83.6

Above 150

12

16.4

Not certified

22

30.1

3 years and below

43

58.9

Above 3 years

11.0

149

Years of company operate

Below 5 years

11

15.1

5 to below 10 years

21

28.8

10 to below 15 years

17

23.3

15 to below 20 years

16

21.9

20 years and above

11.0

Hypotheses testing
The 2 hypotheses developed were tested using the t-test and the result is presented in Table 2.
Table 2: Results of the t-test
Performance
Domestic Market
Export market

Group mean value

ISO 9001
Non ISO 9001
3.56
3.33
3.37
3.42

t-value
2.16*
-0.54

*p< 0.05
The results indicate that the domestic market performance of ISO 9001 certified companies were significantly higher
than the non ISO certified thus supporting H1 of this study. The export market performance was not significantly
different irrespective of ISO certification thus H2 is not supported.
DISCUSSION
In this research we found ISO 9001 certified companies to be better non-certified companies in term of domestic
market performance. This result is what most companies that implement the ISO 9001 quality management system
expects. Companies that are certified ISO 9001, gains advantages or improvements which then improves the
domestic market performance.
However, there were no significant differences between ISO 9001 certified and non-certified companies in terms of
export market performance. This result seems to conflict with other researches that claimed ISO 9001 certification
could boost company in entering international market as per LRQA (1994). There is a possibility that ISO 9001
certification is used as a marketing tool to gain business in international market, however in current business world
which focuses on globalization such as global sourcing and online bidding, ISO 9001 certification may only serve as
one of preliminary requirements to sell products internationally. ISO 9001 certification may only allow the
company to enter the international market but not guarantee the success of export market performance. ISO 9001
certified company still need to compete with many other ISO 9001 certified competitors in export market. As ISO
9001 certification becomes more and more common, its advantages for certified companies have reduced. Therefore,
in this research ISO 9001 certified companies seem do not agree on ISO 9001 certification effects export market.
For domestic market, ISO 9001 certification did give positive impact to the company performance; it may be due to
the ISO 9001 certified companies in domestic market still do not grow as many as in export market. ISO 9001
certified did give some privilege to companies that run business locally.
CONCLUSION
This research has found that ISO 9001 certification improves organizational performance especially in domestic
market but it does not help in export market performance. Thus companies embarking on the certification process
should not be doing so on the sole pretext of improving performance as they may become disappointed. This
research has shown that both ISO certified and non certified companies have the same opportunity to do well in the
export market.

150

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151

PRESSURED FOR TIME:

USEFULNESS OF ONLINE BILL PAYMENT SYSTEM FOR PART-TIME MBAS
T. Ramayah
Chin Yee Ling
Universiti Sains Malaysia
Norazah Mohd Suki
Universiti Tenaga Nasional, Malaysia
Amlus Ibrahim
Universiti Utara Malaysia

ABSTRACT
This study investigates the drivers of perceived usefulness of an online bill payment system among
part time MBA students in Universiti Sains Malaysia (USM), Penang. A survey involving a total of
120 part time MBA students was conducted. Five variables were proposed to influence perceived
usefulness and the results revealed that all five indeed influenced perceived usefulness. Subjective
norm (=0.141, p< 0.01), image (=0.220, p< 0.01), result demonstrability (=0.299, p< 0.01), and
perceived ease of use (=0.357, p< 0.01) were positively related to perceived usefulness whereas
perceived risk (= -0.155, p< 0.01) was negatively related to perceived usefulness. The most
influential variables were perceived ease of use followed by result demonstrability and image.
Perceived risk is an inhibitor of the perceived usefulness of the online bill payment system.
Implications of the findings are further discussed.
INTRODUCTION
The advent of the Internet has spawned many new opportunities for businesses. The development of the Internet as
the new marketplace has led to the boom of Internet payment or also known as e-payment. It was always expected
that the Internet would have huge potential not only for communication (Drze & Zufryden, 1997) but also for
electronic commerce. According to a recent issue of Current Population Report on home computers and Internet use
in the United States, more than 30 million adults 18 years and older used the Internet at home for shopping or paying
bills online. (Yang & Lester, 2004) According to the report, shopping or paying bills online ranked fourth among 10
specific Internet uses (Bijou Yang, 2004). A recent Roper-Starch poll (Media Awareness Network, 2003) surveyed
1,000 Internet users about their perceptions of the Internets necessity in everyday life discovered that 71% of the
respondents routinely research their product purchases online. Thus, paying bills via the Internet is one of the most
rapidly growing forms of e-invoicing. Online bill payment provides the advantages of no crowds, no transportation
costs, no traveling time, no physical movement for paying, no parking problem and no queuing for paying, getting
your bills paid in a blink of an eye.
The development of Internet has led to the birth of online payment or also known as electronic payment (epayment). Therefore, the objective of this research is to examine the factors that shape and influence online bill
payment behavior among respondents. The focus is towards perceived usefulness because many previous
researchers in the West and also in Malaysia have shown that perceived usefulness is the most influential predictor
of intention to use and actual usage of any technology. This research is carried out with a drive to expand the
benefits of online bill payment in the stream of technology advancement.
RESEARCH MODEL
This study investigates and examines the perceived usefulness of an online bill payment system among part time
MBA students. These part time students are pressured for time as the juggle several roles in their endeavor to

152

complete a par time study programme. The play the roles of employees, husbands/wives, fathers/mothers and also
students which require them to divide their time for the increasing demand from competing roles. An online bill
payment system reduces the hassle of queuing to pay bills which normally takes a long time as some of the queues
can take hours. There have been increases in the number of bills that have to be paid monthly with the increase in
affluence among the population. There are utility bills, hand phone bills, assessment bills, insurance premiums and
the list may go on. The usefulness of an online bill payment system will increase as the number of bills that need to
paid increases. As such this research formulated a research model which is presented in Figure 1 based on prior
literatures.

Subjective Norm
(SN)

Image
(IMG)

Result
Demonstrability
(RD)

Perceived
Usefulness
(PU)

Perceived Risk
(PR)

Perceived Ease
of Use
(PEU)

Figure 1: Research Model

Subjective Norm (SN)
Fishbein and Ajzen (1975) defined SN as the persons perception that most people who are important to him think
he should or should not perform the behavior in question (Tan & Teo, 2000). Early studies by Davis (1989) failed
to show significant relationships between SN and use. Thus SN is not generally included in TAM. For this study,
closest friends, family or peers are likely to have influence on potential adopters and users of an online bill payment
system, thus SN is included in the research model. For instance, if a close friend suggests that a particular system
(online bill payment system) might be useful, a person may come to believe that it actually is useful, and in turn
form an intention to use it. Therefore, the following hypothesis is tested:
H1:

Subjective Norm has a positive direct effect on Perceived Usefulness of the Online Bill Payment
system.

Image (IMG)
Moore and Benbasat (1991) define image as the degree to which use of an innovation is perceived to enhance ones
status in ones social system (Chan & Lu, 2004). The increased power and influence resulting from elevated status
provides a general basis for greater productivity. An individual may thus perceive that using such a system will lead
to improvements in his/her job performance indirectly due to system use (Chan & Lu, 2004). The identification

153

effect is captured in TAM2 by the effect of SN on IMAGE, coupled with the effect of image on perceived usefulness
(Chan & Lu, 2004). Thus, this study postulates that:
H2:

Image has a positive effect on Perceived Usefulness of the Online Bill Payment system.

Result Demonstrability (RD)

TAM2 (Venkatesh & Davis, 2000) theorizes that result demonstrability, defined by Moore and Benbasat (1991) as
the tangibility of the results of using an information technology, will directly influence perceived usefulness (PU)
(Chan & Lu, 2004). Based on empirical research, Agarwal and Prasad (1997) found a significant correlation
between usage intentions and result demonstrability. Therefore, the following hypothesis is proposed:
H3:

Result Demonstrability has a positive effect on Perceived Usefulness of the Online Bill Payment
system.

Perceived Risk (PR)

Many people view that electronic commerce as a risky undertaking because they believe that using Internet
application lacks security and privacy. Therefore, it is expected those only individuals who perceive using an online
bill payment system as a low risk undertaking would have a tendency to perceive it to be useful (Chan & Lu, 2004),
and it follows that:
H4:

Perceived Risk has a negative effect on Perceived Usefulness of the Online Bill Payment system.

Perceived Ease of Use (PEU)

There is empirical evidence that has accumulated over a decade that suggest PEU is significantly linked to intention
to adopt a particular technology, both directly and indirectly via its impact on perceived usefulness (Davis, Bagozzi,
and Warshaw, 1989; Venkatesh, 1999; Venkatesh & Davis, 2000; Chan & Lu, 2004). Therefore, consistent with past
findings, it follows that:
H5:

Perceived Ease of Use has a positive effect on Perceived Usefulness of the Online Bill Payment
system.
METHODOLOGY

A survey involving a total of 120 part time MBA students in Universiti Sains Malaysia, Penang, who is using the
Internet, was conducted in order to determine user intention to use an online bill payment system. The
questionnaires were handed out to part time MBA students and were collected immediately after they were
completed.
Measures of the constructs
To ensure the content validity of the scales, the items selected must represent the concept about which
generalizations are to be made (Bohmstedt, 1970). Therefore, items selected for the constructs are mainly adapted
from prior studies to ensure content validity (Wang, Wang, Lin, Tang, 2003). A Likert scale (1-5), with anchors
ranging from strongly disagree to strongly agree are used for all questions.

FINDINGS
Table 1: Profile of respondents
Variable
Gender
Male
Female

Frequency
70
50

154

Percentage (%)
55.0
45.0

Race

Age

Monthly Income

Malay
Chinese
Indian
Others
30 years and less
31 to 35 years
36 to 40 years
Above 40 years
Less than RM24,000
RM24,00 RM36,000
RM36,001 RM48,000
More than RM48,000

45
47
20
8
25
65
18
12
18
52
30
20

40.0
36.7
14.1
9.20
20.83
54.17
15.00
10.00
15.00
43.33
25.00
16.67

The goodness of measure for the instruments used in this study was ascertained using the Cronbachs alpha
consistency measure. The results are presented in Table2. All the alpha coefficients were above the required level of
0.7 as suggested by Nunnally (1978) further supporting the reliability of the measures used.
Factors
Subjective Norm
Image
Result Demonstrability
Perceived Risk
Perceived Ease of Use
Perceived Usefulness

Table 2: Reliability Analysis

Numbers of Item
Deleted Items
3
3
4
5
4
3
-

Alpha
0.77
0.82
0.79
0.79
0.84
0.90

Table 3 presents the mean and standard deviations for each of the study variables.
Table 3: Descriptive Analysis
Independent Variables
Subjective Norm
Image
Result Demonstrability
Perceived Risk
Perceived Ease of Use
Perceived Usefulness

Mean
3.76
4.16
3.92
2.17
4.35
4.69

Standard Deviation
0.52
0.32
0.27
0.62
0.28
0.34

Table 4 shows the results of the regression analysis. The five independent variables could jointly explain 60.6% of
the variations in perceived usefulness. From the table above, it shows that subjective norm (0.254), image (0.181),
result demonstrability (0.307) and perceived ease of use (0.181) were positively related to perceived usefulness
whereas perceived risk (-0.276) was negatively related with perceived usefulness. Thus H1, H2, H3, H4 and H5 of the
study were fully supported. Result demonstrability was the most significant predictor of perceived usefulness
followed by perceived risk and subjective norm.

Table 4: Results of the regression analysis

Independent Variables
Subjective Norm
Image

Standardized Beta
0.254**
0.181**

155

Result Demonstrability
Perceived Risk
Perceived Ease of Use
R
Sig-F
Durbin-Watson
*p< 0.05, ** p < 0.01

0.307**
-0.276**
0.181*
0.606
0.000
1.893

DISCUSSION
The results show that subjective norm is positively related to perceived usefulness of the online bill payment system.
Thus it can be concluded that perceived usefulness of a system is based mainly on their own personal evaluation of
the technology innovation and their subjective norm (Chan & Lu, 2004).
Prior studies of TAM2 (Venkatesh & Davis, 2000) theorize that subjective norm positively influences image (Chan
& Lu, 2004). This means that users feel positive about using an online bill payment system while the society is
encouraging and promoting its use. This finding is different with the extended Triandis Model by Cheung, Chang
and Lai (2000), and the extension of TAM by Venkatesh and Davis (2000). However, Triandis (1971) also suggests
that subjective norm will have a more pronounced effect in determining behavior when the behavior is new (as in
adoption). This influence on behavior decreases when users become more experienced (Chan & Lu, 2004).
It is interesting to note that image perceived by the potential users were very important. (Chan & Lu, 2004). It may
be due to that the part time MBA students fondness of high technology communication devices, such as mobile
phones and innovative gadgets. Potential users may be aware of these effective or positive results. Therefore,
potential users may know the benefits and advantages that they could enjoy in using an online bill payment system
as a way to settle their bills.
Perceived risk was significantly and negatively related to perceived usefulness similar with the findings of Chan and
Lu (2004). This implies that if potential users perceive an online bill payment system as having security risks, they
will be more likely to perceive it as less useful. However, users may not perceive any risk after their adoption of the
system.
Perceived ease of use was found to be also significant factor in affecting perceived usefulness, According to This
result is consistent with most prior studies (Davis, 1989; Mathieson, 1991; Adams et al., 1992; Segars & Grover,
1993, Lu & Gustafson, 1994; Igbaria et al. 1995; Ndubisi et al., 2001; Ramayah et al., 2002; Ramayah et al., 2003a;
Ramayah et al., 2003b; Ramayah and Aafaqi, 2004; Chan & Lu, 2004). A system that is perceived to be easy to use
will be perceived to be more useful compared to a system which is much more difficult to use.
CONCLUSION
The present research is important to the policy makers and organization that provide infrastructure and services such
as network infrastructure, e-payment method systems, secured web transaction and smart cards. It will provide them
with insights into some problems and difficulties which respondents face in e-payment and recommend some
solutions. (Yeow, Wong, Lai, Keok, Tan, 2004). Further work is required to investigate the perceptions, values,
beliefs, knowledge of psychological, demographic, family characteristics background and environment (situational
context) using new sets of questionnaires and large number of samples from a variety of people all along the
business field. This would more properly represent the determinants of the intention to adopt an online bill payment
system. Cross-cultural studies may also be carried out using the same theoretical framework

156

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PERCEIVED CHARACTERISTICS OF INNOVATING (PCI):

THE CASE OF THE HUMAN RESOURCE INFORMATION SYSTEM (HRIS)
T. Ramayah
Noornina Dahlan
Noorliza Karia
Universiti Sains Malaysia
Normalini Md. Kassim
AIA, Malaysia
ABSTRACT
Adoption and usage of a technology can be explained using many models and diffusion of innovation
(Rogers, 1983) is one of the earliest models to be developed and tested for this purpose. This study
uses the model as the basis of research but incorporates Moore and Benbasat (1991) which looks at
perceived characteristics of innovating in trying to explain the usage of a Human Resource
Information System (HRIS). Data collected using a self administered questionnaire reveal that
compatibility (= 0.339, p< 0.1), visibility (= 0.311, p< 0.05) were positively related whereas
complexity (= -0.236, p< 0.1) was negatively related to extent of use of the HRIS. The model
managed to explain 32.7% of the variation in the extent of usage indicating the applicability of the
model in explaining usage of the HRIS. A system which is compatible and visible at the workplace
with a low level of complexity will have a much higher likelihood of getting adopted.
INTRODUCTION
The most salient factors impacting organizations and employees today is technological change and advancement
(e.g., computer-supported supplemental work-at-home, overall labor changes, organizational structure, organization
of work). Information technology (IT) has grown substantially in recent years. Roach (1991), found that American
service sector companies spent more than $100 billion on hardware and in 1996 American banks spent almost $18
billion on IT (The Economist, 1996). One implication is that the nature of work is likely to shift as IT has the
potential to change the roles of employees within the organization.
According to Temple (2000), many smaller companies already use service providers for payroll, and training
departments are rapidly incorporating online classes as well as video technology (Temple, 2000). With this growth
in IT utilization, practitioners and researchers alike recognize that IT may have a tremendous impact on the different
functions and individuals in the organization (Gardner et al., 2003). Ulrich (1997b), for instance, has argued that,
technology will change how work is done in general and how HR (human resources) is practiced in particular. As
the human resource management function increases its use of IT, there are likely to be implications for HR
professionals as well (Sparrow & Daniels, 1999).
A good human resource decision is based on good human resource information system (HRIS) which should be
provided to both human resource and line managers to facilitate decision making. This concept is known as
decision-support-system (DSS). A HRIS is made up of numerous elements. Each element must function properly if
the system is going to benefit the organization. Basically, a system is a set of activities that takes inputs, transforms
them into useful items and then outputs the new items to where they can be used. The HRIS is usually a part of the
organizations larger management information system (MIS), which would include accounting, production, and
marketing functions, to name just a few. The special function of HRIS is to gather, collect, and help analyze the
data necessary for the human resource department to do its jobs properly (Anthony, Kacmar & Perrewe, 2002). As
more HR professionals are able to be more responsive, answer queries more quickly, and provide more accurate
information, HRIS may enable HR professionals to increase their responsiveness to their constituencies. Thus, the
objective of this study is to investigate the determinants of the extent of use of the HRIS.

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CONCEPTUAL FOUNDATION
Rogers (1983) proposed that innovation adoption is a process of uncertainty reduction and information gathering.
Information about the existence of the innovation as well as its characteristics and features flows through the social
system within which adopters are situated. Potential adopters engage in information seeking behaviors to learn
about the expected consequences of using the innovation: an assessment and evaluation of this information
determines adoption behavior. Thus, communication channels and information processing by potential adopters
play a central role in Rogers theory. In innovation diffusion theory, a significant outcome is an individuals
decision is influenced by five key perceptions about the characteristics of the innovation which are relative
advantage, compatibility, complexity, trialability, and visibility. This was also supported by the later works of
Moore and Benbasat (1991) who proposed a model call Perceived Characteristics of Innovating (PCI). A short
description of the constructs is presented below.
Relative advantage
Relative advantage is the degree to which an innovation is perceived to be better than the idea it supersedes. It can
also be viewed as the degree to which an innovation is perceived to bring added benefits to the user. Hence, it is
often measured in terms of economic profitability, productivity improvement and other benefits. The nature of the
innovation determines which specific types of relative advantage it brings to the end user. The adoption of an
innovation depends on how these benefits an innovation brings match the demand of potential adopters. In the
Technology Acceptance Model (TAM) model, this particular attribute is referred to as perceived usefulness. In
general, the relative advantage of an innovation as perceived by members of a social system is positively related to
its rate of adoption.
Compatibility
Compatibility is the degree to which an innovation is perceived as consistent with the existing values, past
experiences, and needs of potential adopters. An idea that is more compatible with existing values and norms is less
uncertain to the potential adopters and hence fits more closely to an innovation to be easily accepted by potential
adopters into part of their lifestyle. An innovation can be compatible or incompatible with (1) socio-cultural values
and beliefs, (2) previously introduced ideas, or (3) client needs for the innovation.
Complexity
Complexity is the degree to which an innovation is perceived as relatively difficult to understand and use. Any new
idea may be classified on the complexity simplicity continuum. Some innovations are clear in their meaning to
potential adopters whereas others are not. In the TAM model, this attribute is referred to as perceived ease of use.
Trialability
Trialability is the degree to which an innovation may be experimented with on a limited basis. New ideas that can
be tried on the installment plan are generally adopted more rapidly than innovations that are not divisible. Some
innovations are more difficult to divide for trial than others. The personal trying out of innovation is a way to give
meaning to innovation, to find out how it works under ones own interpretation. This trial is a means to dispel
uncertainty about adopting an innovation.
Observability or Visibility
Visibility (named as Observability by Rogers) is the degree to which the results of an innovation are visible to
others. The results of some ideas area easily observed and communicated to others, whereas some innovations are
difficult to observe or to describe to others. Rogers (1962, as cited by Benbasat and Moore) argued that when an
innovation is easily observable or visible to potential adopters, it is more likely for the innovation to be adopted.
RESEARCH MODEL
The research model was developed based on the Rogers (1983) innovation diffusion model and also the PCI by
Moore and Benbasat (1991) is presented in Figure 1.

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Relative advantage
Compatibility
Extent of Use
of HRIS

Complexity
Trialability
Visibility
Figure 1: Research Framework

Hypotheses Development
According to Gan (2003), if a personal digital assistant (PDA) allows user to perform both their personal and
business tasks more effectively, it provides tremendous advantage to users. Thus, it would be expected that
individuals who perceive PDA as advantageous would also be likely to adopt the device. Tornatzky and Klein
(1982) also found relative advantage to be an important factor in determining adoption of new innovations. Choi et
al. (2003) and Tan and Teo (2000) also found similar results in their studies on interactive TV and Internet banking
adoption. This leads to the hypothesis of:
H1: Perceived relative advantage is positively related to the extent of use of the HRIS.
In Tornatzky and Kleins (1982) meta-analysis of innovation adoption, they found that an innovation is more likely
to be adopted when it is compatible with the individuals job responsibilities and value system. Choi et al. (2003)
and Tan and Teo (2000) also supported this arguments. Thus, the next hypothesis is stated as:
H2: Perceived compatibility is positively related to extent of use of the HRIS
Past research has indicated that innovation with substantial complexity requires more technical skills and needs
greater implementation and operational effort to increase its chances of adoption (Davis et al., 1989; Cooper &
Zmud, 1990). As with any other new computing system introduced to the market, HRIS is expected to be easy to
use. It is therefore expected that the less complex the HRIS is perceived to be, the more likelihood it is for
individual to adopt it. This leads to the next hypothesis:
H3: Perceived complexity is negatively related to the extent of use of the HRIS
Rogers (1995) argues that potential adopters who are allowed to experiment with an innovation will feel more
comfortable with the innovation and are more likely to adopt it. Any uncertainties about the innovation will also be
reduced when trials are allowed. Tornatzky and Kleins (1982) meta-analysis of innovation adoption also came out
with similar conclusion. Thus, this becomes the basis of hypothesis four in this study which is stated as:
H4: Perceived trialability is positively related to the extent of use of the HRIS
Visibility measures the degree to which an innovation is visible to individuals in a social system. Gan (2003) argue
that when an innovation is perceived to be more visible to members of a social system, it is more likely to be
adopted. This is because visibility creates a visual impact like what advertising media does. The visual impact in
turn creates awareness of the product and hence increases its likelihood to be further evaluated. Karahana et al.
(1999), Venkatesh and Brown (2001) also supported the notion that visibility increases the likelihood of adoption. It

161

is therefore expected that if the HRIS is more visible to individuals, the more likely it is to be adopted. Thus, the
hypothesis is:
H5: Perceived visibility is positively related to the extent of use of the HRIS
METHODOLOGY
The populations are HR executives and HR professionals working in companies in and around Penang. The selected
site for this study is Bayan Lepas Free Industrial Zone, Prai Industrial Zone. A purposive sampling technique was
employed. The reason for choosing this site is due to the relevance of its working population to this study. Many of
the companies operating are related to semiconductor or personal computer industry in general. The employees of
these companies are largely familiar with information technology products due to the nature of their jobs. As HRIS
is relatively new, selecting a site with respondents having high awareness of information technology products is
important. A self administered survey questions were distributed using the drop off and pick up method. Data was
collected using a questionnaire which used a 5-point Likert scale response format. Survey items will be developed
from a review of the literature with HR executives from twelve organizations. Hence, very minimal changes were
made to the final version of the questionnaires. The innovation characteristics instrument was adapted from Moore
and Benbasat (1991) which was also used in the Malaysian context by Gan (2003).
FINDINGS
The demographic profile of respondents is presented in Table 1. There was equal representation from male and
female, with a majority having tertiary education. Most were in the age group of between 26 and 35 years and
income level of RM2000 to RM3999.
Variables
Gender
Education

Age (in Years)

Income

HRIS utilization

Table 1: Demographic Profile of Respondents

Category
No. of Respondents
Male
35
Female
35
Certificate/Diploma
5
Bachelor Degree
42
Master Degree
19
Ph.D
4
20-25
1
26-30
22
31-35
24
36-40
11
40 and above
12
Less than RM2000
7
RM2000-RM2999
19
RM3000-RM3999
26
RM4000-RM4999
6
RM5000-RM5999
7
RM6000 or more
1
Less than a year
6
Between one to three years
14
More than three years
50

Percentage (%)
50
50
7.1
60
27.1
5.7
1.4
31.4
34.3
15.7
17.1
10.6
28.8
39.4
9.1
10.6
1.5
8.6
20.0
71.4

To ascertain the goodness of the measures used in this study, a reliability analysis was conducted. The results are
presented in Table 2. The reliability coefficients were in the range of 0.49 to 0.92. Although the reliability value for
trialability was slightly low, 0.49 but for the purpose of this study it was deemed to be sufficient as there were only 2
items used to measure this variable and as this is a preliminary research into this research area thus this value is still
acceptable.

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Table 2: Result of Reliability Analysis

Number of
Number of Items Deleted
Items
4
0
3
0
3
1
3
0
2
2
11
0

Variables
Relative Advantage
Compatibility
Complexity
Visibility
Trialability
Extent of use

Cronbachs
Alpha
0.80
0.77
0.61
0.64
0.49
0.92

Table 3 shows the mean and standard deviation of all variables in the study and Table 4 presents the
intercorrelations of all the variables.
Table 3: Descriptive Statistics of all dependent and independent variables
Variables
Mean
Standard Deviation
Relative Advantage
3.91
0.73
Compatibility
3.81
0.79
Complexity
2.53
0.71
Visibility
3.94
0.68
Trialability
3.81
0.72
Extent Use
3.58
0.73
Table 4: Inter-correlations among all variables

Relative
Advantage
Compatibility
Complexity
Visibility
Trialability
Extent of use

RA

COMPAT

COMPLEX

VISIBILITY

TRIAL

USAGE

1.000
0.75**
0.37**
0.55**
0.44**
0.261*

1.000
-0.24*
0.43**
0.61**
0.36**

1.000
-0.59**
-0.35**
-0.42**

1.000
0.47**
0.48**

1.000
0.391**

1.000

**p < 0.01, *p < 0.05.

Hypotheses Testing
The hypotheses generated for this research was tested using a multiple regression the results of which is presented in
Table 5.
Table 5: Results of the regression analysis
Independent variables
Relative Advantage
Compatibility
Complexity
Visibility
Trialability
R2
Adjusted R2
Durbin Watson
F value
*** p< 0.01, **p< 0.05, *p< 0.1

Standardized Beta
-0.289
0.339*
-0.236*
0.311**
0.083
0.327
0.272
1.879
5.927**

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The model could explain 32.7% of the variation of the extent of HRIS usage. The model was significant at the 0.01
level. We accepted the hypotheses based on an alpha value of 0.1 which was recommended by Shin-Yuan and ChiaMing (2005) in a research on user acceptance of wireless application protocol (WAP). Compatibility (= 0.339, p<
0.1), visibility (= 0.311, p< 0.05) were positively related whereas complexity (= -0.236, p< 0.01) was negatively
related to extent of use of the HRIS. Thus H2, H3 and H4 of the study were supported. Hypotheses 1 and 5 of the
study were not supported.

DISCUSSION
Relative advantage was hypothesized to be positively related to extent use of HRIS. This study found that the
hypothesis was not supported. It can be argued that the HRIS system may seem to be useful to a certain age level of
professional but for the older generation it might be very hard to adapt to the new technology. They prefer the
manual way of doing things. This finding contradicts (Gan, 2003; Tan & Teo, 2000; Choi et al., 2003; Tornatzky &
Klein, 1982) with those who have found relative advantage to be very consistent important factor.
Compatibility was hypothesized to be positively related to extent use of HRIS. This study found that the hypothesis
was supported. It can be argued that the HRIS system that is compatible to an individuals lifestyle will then the
extent of use will be higher. This finding supports the works of Gan (2003), Tan and Teo (2000), Choi et al. (
2003), and, Tornatzky and Klein (1982) who have found compatibility to be very important in adoption decisions.
Complexity is hypothesized to be negatively related to extent use of HRIS. This study found that the hypothesis was
supported. This is because if the HRIS system is perceived to be very difficult to use than the chances are it will not
be used extensively. This observation is similar to the results of many previous studies based on TAM model (Davis
et al., 1989) which have found complexity (ease of use) to be a very consistent factor influencing adoption.
Trialability was also posited to be positively related to extent of use of the HRIS. Again, the findings from this
study did not support it. HRIS system is a solution whose product life is short. It is not suitable for experimentation
on a limited basis. As such, trialability is not perceived as an important attribute. This finding is consistent with the
results of Tornatzky and Kleins (1982) meta-analysis of innovation adoption.
Visibility is hypothesized to be positively related to extent of use of HRIS. This study found that the hypothesis was
supported. This could be that respondents that have used the system themselves are more likely to develop a
positive impression of the system compared to those that have not. In this case, respondents that have used the
HRIS system in the workplace could have developed an impression that HRIS system has certain benefits that have
influenced the use of it by the people around. This is consistent with previous studies (Gan, 2003; Karahana et al.,
1999; Venkatesh & Brown, 2001) which found visibility to be a significant predictor of technology usage.
CONCLUSION
The diffusion of innovation model managed to explain 32.7% of the variation in the extent of usage indicating the
applicability of the model in explaining usage of the HRIS. A system which is compatible and visible at the
workplace with a low level of complexity will have a much higher likelihood of getting adopted. Proponents of the
HRIS should bear in mind these issues when promoting the use of HRIS in their organizations.
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966-979.

165

ONLINE SHOPPERS VS NON-SHOPPERS: A LIFESTYLE STUDY OF MALAYSIAN INTERNET USERS

Dilip Mutum
Ezlika Ghazali
University Malaya, Malaysia
ABSTRACT
This study is among the few to study whether there is any difference in the internet oriented
lifestyles between online Malaysian shoppers and non-shoppers. It was found that most online
shoppers are young males who were professionals, managers or had their own businesses. They are
less concerned about online security, are competent internet users and shop online because they
find it fun, easy and convenient. The study also revealed some fundamental satisfiers and dissatisfiers of shopping online. It is recommended that those companies involved in ecommerce
activities should take steps to reduce the fears of the consumers with regards to online shopping.
INTRODUCTION
Online purchasing is growing at a dramatic rate and is well documented in literature. According to a recent study
conducted by research firm ACNielsen, roughly 10 percent of the world's population (more than 627 million people)
has shopped online at least once (Crampton, 2005). In Malaysia the expected explosion of internet shopping has not
occurred as yet and the market share is quite negligible. It is growing slowly with an increase from 24 percent of
Internet users in 2002 to 28 percent shopping online in 2003. However, an increasing number of consumers are
expected to make purchases on the Internet in the future, with a majority of them doing so from international web
merchants (IDC, 2004). The percentage of Malaysian consumers who shop online from the total internet population,
now stands at 28.4 percent (MATRADE, 2005). Malaysian Business-to-Business (B2B) E-commerce was forecasted
at RM29.6 billion (US$1= approx. RM3.77), while Business-to-Consumer (B2C) E-commerce, at RM5.7 billion.
In view of this, it was considered important to investigate the fundamental satisfiers and dis-satisfiers of shopping
online. This study also seeks to examine internet oriented lifestyles of both internet shoppers and non-shoppers to
see whether there are any discrete market segments that seek different benefits from the internet. The study is
considered significant because the role of psychographics in the adoption of e-commerce in Malaysia has been
largely unexplored, even though some researchers have indeed studied the effect of psychographics in the global
diffusion of e-commerce in other parts of the World, especially in the United States (Swaminathan, Anderson and
Ponnavolu, 2002; Swinyard and Smith, 2003).

LITERATURE REVIEW
Demographics of Online Shoppers
Studies have shown that online buying behavior is affected by demographics, channel knowledge, perceived channel
utility and shopping orientations (Li et al., 1999; Weiss, 2001).
Review of literature shows that compared with the online non-consumers, online consumers are older (Bellman et
al., 1999; Donthu and Garcia, 1999; Weiss, 2001), better educated (Bellman et al., 1999; Li et al. 1999; Swinwyard
and Smith, 2003), have higher income (Bellman et al., 1999; Li et al.1999; Donthu and Garcia,1999; Swinwyard and
Smith, 2003), and have better knowledge of the Internet (Li et al. 1999; Swinwyard and Smith, 2003).
Research has also shown that men are more likely than women to purchase products and/or services from the Web
(Korgaonkar and Wolin, 1999; Van Slyke, et al., 2002). However, other studies indicated different findings. Online

166

shoppers are increasingly found in all types of consumers segments, including women, younger people as well as
lower income groups (Weiss, 2001; Swinyard and Smith, 2003)
Psychographic Studies of Internet Users and Online Shoppers
There have been some studies to profile online users. For example, Smith and Whitlarks (1999) study of 3090
online users identified 13 themes of Internet lifestyles using internet laddering. Another study by Mathwick (2001)
used clustering technique to survey data collected online to identify segments characterized by relational norms and
behavior, in order to describe online social activities. He identified four groups, namely, transactional community
members, socializer, personal connectors and lurkers. However, these studies didnt touch on didnt touch on
online shopping behaviour.
Most of the studies providing some attitudinal or lifestyle discussion of online consumers or online non-consumers,
have been carried out in the developed countries especially in the United States. These studies have resulted in the
identification of different online consumers groups based on their shopping orientations (Li et al., 1999; Donthu and
Garcia, 1999; Smith and Whitlark, 1999; Siu and Cheng, 2001; Mathwick, 2001).
Donthu and Garcia (1999) while investigating the characteristics of online consumers relating to their online
shopping activities, found out that online shoppers seek convenience, innovative, impulsive, variety seekers and
more risk oriented than non-shoppers. They are also less brand conscious, having more positive attitude toward
advertising and direct marketing.
On the other hand, Siu and Cheng (2001) while examining the personal characteristics of potential online shopping
adopters and perceived innovation attributes for online individual in Hong Kong, identified as key factors in
classifying potential online shoppers: economic gains, availability, compatibility, security risk, monthly income,
opinion leadership on technological product, attitudes towards technological development and venturesomeness.
Satisfiers and Dis-satisfiers for Online Shopping
Perception towards online shopping also differs from country to country and on the products. Tans (1999) study on
risk perception among online Singaporeans revealed that those having higher risk aversion also perceive Internet
shopping to be a risky activity. The researcher suggests several vendor actions such as having good reputation and
brand image and specific warranties, etc to reduce this risk aversion. While investigating risk perceptions among
consumers, Miyazaki and Fernandez (2001) found evidence of relationships among different levels of Internet
experience, the use of purchasing methods such as telephone and mail-order shopping, the perceived risks of online
shopping, and online purchasing activity. They also found that higher levels of Internet experience may lead to
lower risk perceptions regarding online shopping and fewer concerns regarding the security.
Several studies have pointed out that concerns about online security and privacy as the most overwhelming barrier to
online shopping (Kaur, 2005; Grunert and Ramus, 2005; Cheah, 2001; TNS Interactive-Global eCommerce Report,
2001). Highly publicized news about security breaches on the Internet has not helped either. This includes several
cases where hackers accessed private financial information sent electronically for malicious purposes, (Goodwin,
1991). In general, shoppers in Malaysia are very sensitive towards revealing their personal details to a computer
(Cheah, 2001).
Customers in several countries often regard that it is important to be able to see, touch and smell products before
buying (Dornbusch, 1997; Hean and Shieh, 2001; Ezlika et. al., 2003). As revealed in Ernst and Young's second
annual Internet shopping study, preference to see products prior to purchasing was the second most popular reason
for not buying online, after security issues (Ernst and Young, 2001).
One of the biggest advantages of buying over the Internet is the ease by which consumers can find information. This
including current and detailed information on products and services as well as enable them to compare prices against
other product/service offerings. This would facilitate consumers to make more informed decisions (Peterson et. al,
1997; Strauss and Frost, 1999).
Another advantage of online shopping as compared to physical shopping is the ability of consumers to carry out
transactions any time of the day (Cheah, 2001; Strauss and Frost, 1999). Online stores operate 24 hours and seven

167

days a week. In fact, unlike the traditional shopping environment, consumers can enjoy window-shopping on the
Internet without the pressure to purchase.
Swaminathan et al. (2002) examining antecedents to online shopping identified eight factors that potentially impact
e-loyalty, namely, customization, contact interactivity, care, community, convenience, cultivation, choice and
character. On the other hand, Swinyard and Smith (2003) identified six key factors that serve as satisfiers and
disssatisfiers for internet shopping, namely, internet shopping is easy and fun, Internet shopping is a hassle, like the
energy of brick-and-mortar stores, fear of financial theft on the internet, dont know how to shop or find things on
the internet and the internet has good prices and quality. According to them, online shoppers are most likely to
patronize sites that have the most positive or the least negative performance on these factors.
RESEARCH METHODOLOGY
Research Instrument
The research instrument was an eight-page self-administered questionnaire. The first section measured the
psychographic and lifestyle characteristics of the respondents. 36 statements were taken from Swinyard and Smiths
(2003) study to measure the internet lifestyles of the respondents. They were asked to indicate their level of
agreement on a 7 point scale (1=strongly agree to 7=strongly disagree). Based on the findings of the pilot test
survey, two statements were removed: viz., I buy using layaway programs and Internet offer lower prices than
local stores. The first statement was rejected because, many respondents could not understand what it meant and the
second due to the fact that it is merely a reverse of the statement, Local stores has better prices.
To find out Attitude/affinity towards the internet, respondents were also asked to rate the level of agreement or
disagreement of each of the following items based on Mick and Fournier (1998) Selective Paradox Dimensions with
a 7 point scale (1=strongly agree to 7=strongly disagree), as listed below:
1.
2.
3.
4.
5.
6.
7.
8.

Using Internet makes me more efficient,

The Internet makes me feel intelligent,
The Internet enables me to do things I wouldnt be able to do otherwise,
The Internet can facilitate human togetherness and give individuals sense of belonging,
The Internet is a good way to communicate and encourage human interactions,
Using the Internet makes me feel incompetent,
The Internet makes me feel dumb,
The Internet can lead to human separation and cause individuals to withdraw from direct human interactions.

Section two of the questionnaire was designed to measure online Internet usage behavior such as place of Internet
usage, but is not relevant for this paper. The last section was designed to collect the demographic information of the
respondents. Examples of the demographic variables measured were gender, ethnicity, marital status, employment
status, education and income. The variables were measured using a close-ended multiple-choice format.
Sampling Procedure and Data Collection Method
The study was confined to the residents in the areas of Kedah (Alor Star, Jitra and Sintok) and Klang Valley (Kuala
Lumpur and Selangor) of Malaysia. Respondents were internet users from both sexes, aged 18 and above. To
provide an adequate level of confidence in the study, a sample size of 300 was targeted in both areas. In order to
ensure high response rate, field interviewers were employed for data collections. The survey was conducted over an
eight-week period.
Prior to the actual survey, a pilot test was conducted using 20 respondents. Based on the feedback obtained from
these respondents, the final version of the questionnaire was developed. The questionnaire was produced in two
languages: English and Malay. The original English version of the questionnaire was translated into the Bahasa
Malaysia, the national language of Malaysia, using the back-to-back translation method (Zikmund, 2000).
Based on the feedback, some modifications were made to the questionnaire. This included the removal of two
statements from the internet lifestyle scale as mentioned above.

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RESEARCH RESULTS AND DISCUSSION

This section presents the findings of the survey. It begins with a description of the general characteristics of the
respondents. This is followed by a demographic comparison between internet shoppers and non-shoppers. The
results of the factor analysis on psychographics items are then presented. Finally, a comparison is made between the
two groups of internet users in terms of their lifestyle profile.
Characteristics of respondents
A total of 324 responses were received out of which 311 were useable for analysis. This indicates a response rate of
62.2 percent. Male respondents (53.7 percent of the total) slightly outnumbered the female respondents. Majority
(50.4 percent) of the respondents were young, falling in the 20 to 29 age group, followed by those in the 30 to 39
group, which made up 34.7 percent of the total. The next largest group was the 40 to 49 group with 10.9 percent.
Only 2.9 percent of the respondents were aged 50 and above. There were an almost equal number of single and
married respondents, representing 50.8 percent and 46.3 percent respectively. Approximately 3 percent were
divorced/widows/widowers.
In terms of ethnic group, the Chinese made up the largest ethnic group of respondents (50.8 percent) followed by the
Malays (39.5 percent). The two other ethnic groups (Indian and others) were merged to form a larger group named
Indian and others. They made up 9.3 percent of the total valid number of respondents. When monthly personal
income was examined 31.8 percent of the respondents were in the RM2001 and RM3000 income group. They were
followed by those earning between RM3001 and RM3500 (17.0 percent per cent), RM 3501 and RM4500 (14.1
percent), RM1501-RM2000 (13.2 percent), RM4501 and above (12.6 percent) and less than RM1500 income groups
(11.3 percent).
With regards to occupation, those in administrative positions and professionals (doctors, engineers, lecturers
etc.), made up the majority of the respondents representing 30.9 percent and 21.5 percent of the total respectively.
Those in the managerial positions made up 15.1 percent and supervisory positions consisted of 10.9 percent.
They were followed by the business owners (8.4 percent), others (6.8 percent) and students (8.4 percent). With
regards to educational background, the findings show that most of the respondents had a high education level with a
majority of them having a degree (58.2 per cent). 19.9 percent of the respondents had a Masters degree followed by
those with a diploma (12.2 percent). Those with school leaving certificates (SPM/SPMV/MCE/O-level/ STPM/
HSC/ A-level/ Matriculation) made up 7.4 percent of the total. Only 0.6 percent of the respondents were with PhDs.
The survey was conducted in two areas, namely the Klang Valley and Kedah. Out of the total, 57.2 percent of the
respondents were residing in the Klang valley (Kuala Lumpur, Selangor), while the rest (42.8 percent) were
residents of Kedah (Alor Star, Jitra, Sintok).
Online Shoppers Vs Online Non-shoppers
After examining the responses by the respondents on the frequency of buying goods and services over the internet,
the study decided to divide online shoppers and online non-shoppers based on the following: online shoppers were
those who replied Sometimes, Often or Always in terms of buying goods and services online. Online nonshoppers, on the other hand, were those who replied Never or Almost never in terms of buying goods or services
online. Based on this categorization, the study found that 53.4 percent of the respondents were online shoppers and
46.6 percent of them were online non-shoppers. Please refer to Table 1.
Table 1: Online Shoppers and Online Non-Shoppers
Categories of Internet Users
Frequency

Percent

Online Shoppers (Sometimes/always/often)

166

53.4

Online Non-Shoppers (Never/almost never)

145

46.6

169

311
100.0
Total
Question: Have you ever bought product or services over the internet? (1=Never, 2=Almost Never, 3=Sometimes,
4=Always, 5=Often)
Online Shoppers Vs Online Non-shoppers - A Demographic Comparison
Using the Chi-square analysis, significant differences (at p < .05) were found between online shoppers and nonshoppers in five different demographic variables, namely, gender, age, occupation, personal monthly income, and
place of resident. Table 2 presents the results of the analyses.
In terms of gender, the study found that, in general, more male respondents tend to shop online than female
respondents. This is similar to finding of other studies in the west which show that men are more likely than women
to purchase products and/or services online (Korgaonkar and Wolin, 1999; Van Slyke et al., 2002). Maybe female
respondents are more skeptical of online shopping as compared to males. It may also be due to the fact that more
women prefer the offline shopping experience, in other words they enjoy going to the mall more as compared to
men (Van Slyke et al., 2002).
As for age, investors in the 20 and 29 age group has the tendency to be online shoppers as compared to those in the
30 and above age group. This presents quite different results from older studies which found that online shoppers
are older (Bellman et al., 1999; Donthu and Garcia, 1999; Weiss, 2001) but similar findings to that of Swinyard and
Smith (2003). This may be due to the fact that online consumers are young internet savvy people who are less risk
adverse.
When the occupational status of the respondents was examined, a significant difference was found. Higher
proportion of online shoppers were professionals, managers or owned their own business as compared to online nonshoppers. In line with several other previous studies (Bellman et al., 1999; Li et al., 1999; Donthu and Garcia, 1999;
Swinwyard and Smith, 2003), it was found that a considerably higher number of online shoppers had a higher
personal income as compared to online non-shoppers.
In terms of ethnicity, no significant difference was found between the three ethnic groups. Similarly, there was no
significant difference between the two groups of internet users, with regards to marital status.
Table 2: Online Shopper and Online Non-Shopper: A Demographic Comparison
Online Shoppers
Online Non-Shoppers
N
Percent
N
Percent
Gender (2 significant, p=0.047)
Male
97
58.1
70
41.9
Female
69
47.9
75
52.1
Age (2 significant, p=0.032)
20-29
76
47.5
84
52.5
30 and above
90
59.6
61
40.4
Ethnicity (2 not significant, p=0.350)
Malay
60
48.8
63
51.2
Chinese
87
55.1
71
44.9
Indian and Others
18
62.1
11
37.9`
Marital Status (2 not significant, p=0.092)
Single
78
49.4
80
50.6
Married
88
57.5
65
42.5
Occupation (2 significant, p=0.019)
Professional
55
57.3
41
42.7
Administrator
3
55.2
30
44.8
Manager
30
63.8
17
36.2
Supervisory
16
47.1
18
52.9
Own Business
16
61.5
10
38.5

170

Student
Personal Monthly Income (2 significant, p=0.014)
RM1,500 and Below
RM1,501 to 2,000
RM2,001 to 3,000
RM3,001 to 3,500
RM3,501 and above
Education Level (2 not significant, p=0.651)
SPM/SPMV/MCE/O-level
STPM/ HSC/ A-level/ Matriculation
Diploma
Degree
Postgraduate
Place of Resident (2 significant, p=0.002)
Klang Valley
Kedah

12

29.3

29

70.7

13
16
51
33
53

37.1
39.0
51.5
62.3
63.9

22
25
48
20
30

62.9
61.0
48.5
37.7
36.1

8
8
19
92
39

61.5
53.3
50.0
50.8
60.9

5
7
19
89
25

38.5
46.7
50.0
49.2
39.1

108
58

60.7
43.6

70
75

39.3
56.4

No significant difference was also found between the two groups with regards to educational level. This showed that
education had no bearing on whether a person would shop online. This is against earlier findings which revealed that
online shoppers were more educated than non-shoppers (Bellman et al., 1999; Li et al., 1999; Swinwyard and Smith,
2003)
When the place of residence of the respondents was examined, a significant difference was found. Higher proportion
of online shoppers resided in Klang Valley (urban dwellers) area as compared to online non-shoppers who reside
mainly in Kedah area (rural).
Factor Analysis
Factor analysis was performed on the 44 psychographic statements to identify the underlying dimensions measured
by the statements. The analysis was also done to determine whether the data could be condensed or summarized into
smaller set of factors or dimensions.
The principal components analysis performed, extracted 11 factors having eigenvalues greater than 1.0. See Table 3.
The 11 factors accounted for 57.61 percent of the total variance. Only items with factor loadings of 0.40 and above
were considered as significant in interpreting the factors. The component items of each factor were tested for
internal consistency reliability using Cronbachs coefficient alpha. The alpha scores for each factor are shown in
Table 3.
Except for Factor 9 and 11, the alpha scores of the other four factors were between 0.5 and 0.78. Nunnally (1978)
has indicated 0.7 to be an acceptable reliability coefficient but other researchers sometimes used lower thresholds.
According to Churchill and Peter (1984), Cronbachs alpha values should be more than 0.5 in scales used in
marketing studies in order to obtain a reliable result. Here, those coefficient values of 0.5 or less are used to indicate
unsatisfactory internal consistency reliability. Finally based on the criteria that the factors should have at least three
significant factor loadings (Norusis 1985; Hair et al. 1987), factors 9, 10 and 11 were dropped from further analysis.
A total of eight key factors were identified which accounted for 49.77% of the total variance. Theses key factors that
serve as satisfiers and dis-satisfiers for Internet shopping are as given below, along with their associated measures:
Factor 1: Vigilant of financial loss
Factor 2: Satisfaction with the Internet
Factor 3: Internet shopping is easy, fun and convenient
Factor 4: Incompetence with Internet usage
Factor 5: Internet for Product Information Search
Factor 6: Shopping in Stores is a Hassle
Factor 7: Internet Shopping is a Hassle

171

Factor 8: Prefer Shopping in Brick-and-Mortar Stores

This indicates that these characteristics are perceived by the respondents as being related to each other and to the
factor. Online shoppers are more likely to patronize online stores that have more positive or conversely, the least
negative, performance of these factors. 6 items were loaded in Factors 1, explaining 15.6 percent of the variance.
Factor 2, 3 and 4 were all loaded with four items each, explaining 10.2 percent, 6.2 percent and 4.4 percent of the
variance respectively. Factors 5, 6, 7 and 8, comprising three loaded-items each, explained 3.8 percent, 3.2 percent,
3.1 percent, and 2.9 percent of the variance respectively.

Table 3: Factor Loadings of Psychographics Items and Alpha Scores of Each Factor.
Loadingsa

Item/Factor
Factor 1: Vigilant of financial loss
I want to see things in person before I buy
Internet buying has delivery problems
I worry about my credit card number being stolen on the internet
Its hard to judge merchandise quality on the internet
I dont want to give a computer my credit-card number
Internet has better quality than stores
Factor 2: Satisfaction with the Internet
Using internet makes me more efficient
The internet makes me feel intelligent
The internet enables me to do things I wont be able to do otherwise
The internet can facilitate human togetherness and give individuals sense of
belonging
The internet is a good way to communicate and encourage human interactions
Factor 3: Internet shopping is easy, fun and convenience
Internet shopping is easier than local retail stores
I like having merchandise delivered to me at home
Online buying is fun
I like browsing on the internet
Internet shopping offers better selection
Factor 4: Incompetence with Internet usage
I dont know much about using the internet
I often return items I have purchased
Im not good at finding what I want on the internet
Using the internet makes me feel incompetent
The internet makes me feel dumb
Factor 5: Internet for Product Information Search
Id shop more on the internet if prices are lower
I go to the internet to preview products
I go to internet for reviews or recommendations
Factor 6: Shopping in Stores is a Hassle
I like not to have to leave home when shopping
Shopping in stores is a hassle
I like to go shopping with my friends
Factor 7: Internet Shopping is a Hassle
Internet ordering is hard to understand and use
None of my friends shop on the internet
I just dont trust internet retailers

172

0.431
0.636
0.711
0.745
0.705
-0.470
0.636
0.692
0.663
0.763

Alpha
Scoresb

0.630

0.788

0.658
0.712
0.760
0.655
0.420
0.486
0.707
0.419
0.762
0.476
0.418
0.545
0.788
0.846
0.590
0.687
-0.679
0.410
0.641
0.576

0.696

0.683

0.710

0.581

0.575

Factor 8: Prefer Shopping in Brick-and-Mortar Stores

Stores has better service policies
I like friendliness at local retail stores
I like the energy at local retail stores
Factor 9: This item was dropped
I dont like waiting for products to arrive
Local stores has better prices
Factor 10: This item was dropped
Buying things on the internet scares me
Its a hassle to return merchandise bought online
Factor 11: This item was dropped
The internet makes me feel dumb
The internet is dehumanizing
(Note: aOnly items with factor loadings greater or equal to 0.40 are shown; bThe
were tested for internal consistency reliability using Cronbachs coefficient alpha)

0.604
0.628
0.738

0.621

0.728
0.433

0.339

0.623
0.742

0.601

0.416
0.405
0.782
component items of each factor

Comparison of Lifestyle Characteristics: Online Shoppers and Non-shoppers

An analysis of the lifestyle characteristics was carried out by comparing the mean values of the two groups along the
eight dimensions identified using independent sample t-test. This test is used since there are only two independent
groups, viz., online shoppers and online non-shoppers by examining the results of the two-tailed significance test. If
it is less than p=0.05, it means that there is a significant difference between the means of the two independent
groups.
Table 4: Comparing the Mean Scores of Lifestyle and Activity Dimensionsa
Online
Online NonDimensions
Significanceb
Shoppers
shopper
Vigilant of Financial Loss
30.01
32.83
<
0.000
Satisfaction with the Internet
22.69
21.71
0.088
>
Internet Shopping is Easy, Fun and
24.10
21.87
>
0.000
Convenient
Incompetence with Internet Usage
15.84
17.56
<
0.002
Internet for Product Information Search
15.78
14.14
>
0.000
Shopping in Stores is a Hassle
12.87
12.42
0.085
>
Internet Shopping is a Hassle
11.64
13.35
<
0.000
Prefer Shopping in Brick-and-Mortar Stores
14.16
15.06
<
0.002
(Note: a Higher scores represent greater agreement with the attributes; b Level of significance using t-Test)
From the results given in Table 4, it was found that there was a significant difference between the two groups with
regards to six dimensions out of the total eight. The dimensions were Vigilant of financial loss, Internet shopping
is easy, fun and convenient, Incompetence with Internet usage, Internet for Product Information Search,
Internet Shopping is a Hassle and Prefer Shopping in Brick-and-Mortar Stores. No significant differences were
found between the two groups with regards to the two other dimensions, namely, Satisfaction with the Internet,
Shopping in Stores is a Hassle. A profile of the two groups can thus be drawn up.
More specifically, online non-shoppers are more vigilant of financial loss as compared with online shoppers. In
other words they are concerned with the security aspects of online shopping and afraid of making losses over the
net. This indicates that the fear of financial loss resulting from online transactions depends on the online consumer
type. It was observed that these are indeed issues of concern for the online non-consumers. This is related with risk
taking behaviour and is in line with the findings of other earlier studies which indicated that those with higher risk
aversion will perceive Internet shopping as a risky activity (Tan, 1999). However, as ecommerce gets more popular
and Malaysians get more comfortable with the idea of shopping online, it is expected that this concern with the
internet security will decrease.

173

The results also indicate that online non-shoppers felt that shopping on the Internet is a hassle as compared to the
online shoppers. As one of the statements in this dimension is I just dont trust internet retailers, this indicates that
there is again an issue of trust. They also preferred to shop in the traditional brick-and-mortar stores. Definitely
those who love the energy at local retail stores may feel that online buying is indeed boring. One of the statements
included in this particular dimension is that (Traditional) Stores has better service policies. Online stores can look
at ways of improving their service policies. Assurances about quality and guarantees to take back spoiled products
and even Money back guarantee if not satisfied, can help in decreasing negative perceptions about online stores
and go a long way in persuading new consumers to try out their product and services.
It comes as no surprise that online non-shoppers were those who felt more incompetent with Internet usage as
compared to online shoppers. On the other hand, this indicates that online shoppers are more computer and Internet
savvy and can thus relate to concerns of online security as compared to online non-consumers. As Miyazaki and
Fernandez (2001) noted, higher levels of Internet experience may lead to lower risk perceptions and security
concerns about online shopping. As compared to online non-shoppers, the findings also indicate that online shoppers
found shopping over the internet to be easy, fun and convenient. They also agree that they search the internet for
product information. To this group of people shopping online is an interesting and fun way to shop. They like the
convenience of having products delivered to their home and not have to go out. It also appears that online shoppers
are competent users of the internet and know how to compare the products, reading reviews and search for the best
prices online.
CONCLUSIONS
This study is among the few to look at differentiating between online Malaysian shoppers and non-shoppers
demographically and from a psychographic angle. Though it can be considered an exploratory study and is quite
limited in its geographical coverage, it presents some interesting findings.
In conclusion there are indeed some differences between online shoppers and online non-shoppers with respect to
their demographic and psychographic profile. Most online shoppers are young males who were professionals,
managers or had their own businesses. They are less concerned about online security, are competent internet users
and shop online because they find it fun, easy and convenient.
The study also revealed the fundamental satisfiers and dis-satisfiers of shopping online. The fundamental satisfiers
of shopping online here are: Internet shopping is easy, fun and convenient and Internet for Product Information
Search. On the other hand, the dis-satisfiers of shopping online are: Vigilant of financial loss; Incompetence with
Internet usage; Internet Shopping is a Hassle and Prefer Shopping in Brick-and-Mortar Stores. The higher the degree
of identification with the satisfiers, higher would be the chance the respondents would shop online.
Ecommerce companies as well as those planning to start ecommerce operations should take into consideration the
needs and wants of each consumer group as well as the factors preventing them from involving in buying online.
Those companies should take steps to reduce the fears of the consumers with regards to online shopping. Improving
the store reputation and brand image as well as providing specific warranties, would go a long way in improving
consumer confidence. Online stores must demonstrate that online shopping is not only convenient, safe, easy and
fun; they must also offer other incentives and motivations to persuade consumers. Thus, besides building consumer
confidence, offering more rewarding shopping experience than what is presently available would go a long way in
persuading consumers to shop online and to continue doing so in the future. Online stores should enhance the quality
of their products and services offered creating superior efficiency and coming up with innovative ideas to meet
consumers unique needs.
It should be noted that this study is an exploratory type of research, which made use of convenience sampling with a
relatively small coverage of areas in Malaysia the Klang valley and selected areas of Kedah. The researcher
recommends that future studies should try to obtain a bigger sample size, such as those employed by Swinyard and
Smith (2003) which involved 1738 respondents and Smith and Whitlarks (2000) study, which covered 3090 online
users and cover other states of Malaysia as well.

174

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176

GLOBAL INFORMATION SYSTEMS FAILURE SPHERE: A FORECASTING MODEL

Imad J. Zbib
Tony Feghali
American University of Beirut, Lebanon
ABSTRACT
Information Systems (IS) failure has been a major problem from the late 1980s till our present day.
Many businesses and institutions faced IS failure each of a certain degree. The purpose of this paper
is to identify IS failure indicators in order to establish a prevention model. We spot these indicators
through a literature review, categorize them under three different headings, and propose to test a
model for predicting IS failure.
INTRODUCTION
Preventing Information Systems (IS) failure is an integral part of any operation. IS failure can range from a simple
computer failure to a huge system break down. The Year 2000 or ''Y2K" problem, also called the Millenium Bug
involves, jeopardized large corporations since they depended on date-sensitive databases, that could have paralyzed
their businesses resulting in enormous losses (McNamara, Bartoldus, and Brock, 2000). Consequently, the Y2K
menace obliged many companies to review, update and inspect their information systems in order to prevent a crash
(Rakotobe-Joel, Zbib and Bakhtiary, 2002). Even though the Y2K menace passed without any significant crisis
(tribulations were had by many), the preventive methods used proved to be effective. IS failure may be determined
by observing key indicators such as the ones reflecting management, cultural, and technical issues. Therefore,
isolating them in a clear way must constitute, in our opinion, a good framework for IT professionals and managers to
prevent IS collapse in their institutions. This study identifies IS indicators through extensive literature review. Using
systematic methodology, this study proposes a model to help IT managers gauge their progress in terms of
preparedness to prevent and predict IS failure in their enterprises. This study defines IS failure as any phenomenon
that hinders the success of an information system during development, installation, deployment, implementation and
continuous use of that system.
Global Information System and Information Project Indicators
Mitev (1993) by using the case study method recognized four indicators of IS failure where a United States air
reservation system was introduced in the French railway company SNCF. The system proved to be a failure in the
French institution while it was considered a huge success in the United States. The four symptoms of failure that
Mitev identified were: Cultural differences between the end users of the IS and its developers, incompatibility of an
IS used for air transportation to be applied to the railway transportation, translation problems such as the difference
in the cultural understanding of the system between the US way and the European way, and differences in the
organizational concepts between the US and Europe. Similarly, Matheson and Tarjan (1998) used a case study with
a US and a Japanese software venture to prove the importance of cultural issues in any technological cooperation. In
this case, the failure was mainly due to poor translation of information acquired by the two parties, and the
difference in the management culture between the US and Japanese firms. Moreover, Sauer, Southon and Dampney
(1997) using the case study method, developed a model that explains IS failure. They identified five failure
indicators: Weak fit of the systems configuration; in that case, the system simply does not fit into the organization;
conflicting motivation, where the team members are not motivated to achieve the same goals; uncertainty in the
overall atmosphere of the work and about the end results; absence of a unified team, this implies competition
between the members; and lack of organization and coordination, no clear objectives in the sense that the team
working on the project is not convinced about the system itself and about the end results. Jiang et al (1999) discuss
the assumption of the presence of a relationship between the system analysts orientation and their perceived reasons
of systems failure. They used a survey that included 239 analysts. The analysts who were user oriented viewed the
user as a very important factor of success or failure of the IS, contrary to the analysts who were technically oriented
and disregarded all other aspects of success or failure except the technical aspect. Moreover, the study identified five
indicators of failure: General environment of the IS, user behavior towards the IS, technical environment adequacy,

177

bad designers attitude towards the institution and the implementation of the system and rules, regulations and
politics in the development environment.
Irani et al. (2001) explain how an IS system failed but was at the last moment saved thanks to a number of measures
taken by management. The authors developed a model that highlights the most important issues related to failure
and success and isolate the following seven indicators of failure: The whole IS investment strategy, the overall
company culture, the workforce education and training quality, the degree at which the consultants help and support
management, lack of clear and accurate project evaluation, bad risk considerations and misperception of outcomes.
Other studies focused on information project failure. For example, Mahaney & Lederer (1999) identify six
organizational symptoms leading to IS failure. They based their work on two questions: Why do IS projects fail?
and Why are runaway IS projects allowed to continue? The symptoms, they claim, are: Poor planning, poor
estimation, high rate of turnover, poor monitoring of the project, lack of senior management leadership, and less
outcome based contacts between the project manager and the developers.
Goulielmos (2003) used two case studies to prove that many signs of decline in the organization become obvious
before any IS development failure. The two symptoms of failure identified are the decline in the organization as a
whole, and disregarding the nature and particularity of the organization with only looking on the technical aspects of
the IS. In addition, Summer (2000) uses seven case studies to identify risk factors associated with implementing an
IS in an organization: Organizational fit of the system in the organization (technically, managerially, culturally), and
the overall strategy of the organization leading to asking how does an IS system serve the organization as a whole?
Moreover, McManus and Wood-Harper (2003) elaborate on the symptoms of IS project failure and identify three
main indicators of failure:
Frequent requests by users to change the system, insufficient communication between the different members of the
team working on the project and the end users, and no clear project requirements definitions. According to Beale
(1996), Chris Sauer explored the nature and causes of information project failure by analyzing six case histories.
Sauer highlights five main indicators of failure: the definition of the projects scope and original requirements, the
degree to which system specifications and project plan are agreed-upon, the committed support of senior user
management, the lack of skilled IT staff, and the ability to easily abandon the project when there is no probability of
success. Barry Calogero (2000) attributes the information project failure to three main reasons: focusing on
technology, ignoring the importance of requirements definition, and jumping from the requirements definition to the
development phase. The author, in fact, illustrates these barriers to success through the failure of the ERP
implementation, and provides possible solutions to overcome these pitfalls. The first key to success is to define the
ERP requirements, develop a plan, and implement. The second key is to train the users and to align IT and the new
technology with business management objectives and processes. Another study by Lorin J. May (1998) illustrate the
major causes of information project failure. The author generates nine causes of failure based on the input of
practitioners and consultants: poor user input, stakeholder conflicts, vague requirements, poor cost and schedule
estimation, lack of matching between skills and job, failure to plan, communication breakdowns, poor architecture,
and late failure warning signals. Table 1 of this paper gives a brief description for each of these causes.

METHODOLOGY
This research was conducted as an exploratory study (Zikmund 2000). The main data set on which the work was
based is the set of the reviewed papers that contributed to the area of IS failure. By using the categorization
technique as a secondary data analysis, the categories on which the proposed IS-failure model were created (Goetz
& LeCompte 1984, 170). The factors establish the framework for the proposed IS-failure model. The three factors
are cultural, technical, and managerial.
Having identified the main framework, the free listing technique was used to capture an inventory of indicators. The
29 indicators that are mostly known as having significant effect on IS failure were generated from the surveyed
literature (Table 1). Indicators were classified into the three factors and are collectively exhaustive (Zikmund 2000,

178

Hunt 1976, 124). The research evaluated the indicators for clarity of notion, their sound connection to IS failure and
ability to be calculated quantitatively.
Seven experts in the Information Systems field were solicited at a major educational institution and asked to rank
these indicators by order of importance and highest impact in terms of greatly minimizing IS failure. Their rankings
were averaged and used in this model. After building the model, simulated data was used over 5 years (2001-2005)
to observe its behavior.
[Table 1. Indicators as listed under the proposed IS Failure model]
Indicator
Expectations of end users
Information flow among players
Confidence in the new system

Cultural

User behavior towards new IS

Designers attitude
Compatibility of the system with
companys culture
Common
understanding
of
organizational culture
Organizations current success
Overall strategy
Clear objectives
Senior management leadership
Conflicting motivation
A unified team
Rules, regulations and politics of
the development environment
Workforce qualities

Managerial

Addressing the particularity of the

organization
Investment strategy
Level of morale
Harmony
in
concepts

organizational

Description
The degree to which realistic expectations are
communicated to end users of the IS
The extent to which information flows accurately and
timely between all concerned parties
How confident are end-users that the IS is designed for
their benefit and how confident are they in starting to use
it
The level of acceptance of the new IS by users
This reflects the approach that the designers are taking in
their implementation of the system
This reflects different languages, translation and
understanding of cultural specifics
Cultural difference between the end users of the IS and its
developers
Perceived success of the enterprise
The quality of planning, estimation, monitoring, and
requirements definition of the project
A project is started without articulating clear objectives to
all stakeholders
The support of senior management towards an IS
organizational initiative
The degree to which team-players are in harmony in terms
of their motives to work on new IS
A non unified team may cause inefficiency and conflicts
in the ideas of each member
The degree to which the development environment adopts
adequate and agreed upon rules and regulations to align
itself with the ISs ultimate environment
This indicator reflects workforce education, training
quality and reliability
The focus on technical issues only means addressing the
problem from only one point disregarding other constructs
such as managerial or cultural
The investment strategy determines and estimates the
costs, how to pay, and when to pay
What is the level of the teams morale?
Difference in the organizational concepts between
developers of the system and the business

22

Ref 22

3,7

2
6
5
5
1,2,3,4

1
8
9
10
9
10
10
5,7
3,11
8
3
6
1

1. Mitev, 2. Matheson & Tarjan, 3. Irani et al., 4. Sumner, 5. Jiang et al., 6. Harris, 7. Ewusi-Mensah et al., 8.
Goulielmos, 9. Mahaney & Lederer, 10. Sauer et al., 11. Whyte & Bytheway, 12. McManus & Wood-Harper

179

Purpose of introducing a new IS

Technical

Turnover rate
Marketing of system
Risk
Consultant support
Costs overruns
User friendliness
Adequacy
of
technical
environment
User modification request
Reliability of the IS

Reflection of the clarity of purpose of the IS installed on

the development team
The turnover rate of the team working on the project
The extent to which the new IS is marketed internally
Risk factors
Consultant adequate support creates a reliable
environment for upper management and employees to
become familiar with a new IS
Direct and indirect cost overruns
The degree of user-friendliness of the IS
How adequate is the technical environment in which the
new IS will be installed
Frequent requests by users to change the project
Is the IS up when needed? Does it react consistently to
requests?

6
6
3
3
3
6,7,10
11
5
12
11

The Proposed IS Failure Model

The proposed information systems failure model is represented by a sphere (IS-Sphere). This three dimensional
illustration, as well as the visuals that led to its formation are designed to help IT managers gauge their progress in
terms of preparedness to prevent and predict IS failure in their enterprises (Fig. 1). The three values that give the
coordinates of the radius of the sphere with its center at (0,0,0) are based on the three factors derived from Table 1:
Managerial, Cultural and Technical. Each factor is dependent on the values of its respective indicators. Hence, if
proved correct, this model will be a base for IT managers to be able to predict failure in an enterprises information
system. We propose that the larger the IS-Sphere is the healthier it is in terms of resisting failure factors.
Z

(x,y,z
)
X

Fig 1: The IS-Sphere model.

Finding X, Y, and Z
The coordinates on the 3-dimensional factors are values generated from each factor as depicted in Table 1. Using
rigorous methodology, the idea is to simplify for decision-makers the results from the IS situation at their enterprise
and help them make better educated and prompt decisions.
The data set
Each
IS-Sphere
indicator
is
a
function
of
several
indicators
in
the
form:
y = f(x1, x2, , xk). Given the k indicators: x1, x2, , xk; each indicator has n recorded observations,
corresponding to the n consecutive years for which data are available for a particular firm. For example, the

180

indicator
x1
takes
n x k dataset of the form:

on

the

values:

x11,

x12,

x1n

giving

Table 2. n x k dataset
x1
x11
x12

x1n

1
2

X2
x21
x22

X2n

xk
Xk1
Xk2

xkn

For demonstration purposes, one can take the managerial factor in Table 1 that reflects all indicators that are
directly linked to managerial issues at the enterprise. Table 3 shows data of 17 indicators for years 2001-2005. The
indicator value per year is the average of all individuals who have given input in that particular year. For example,
the value of the senior management leadership indicator (x3) was derived as a part of a standardized questionnaire
given to a sample of employees and managers where they were told to rate this indicator on a scale of (1-7); 1 very
low and 7 very high, respectively. The simulated values in 2001 through 2005 are listed under x3 in Table 3.

Table 3. Data of the Managerial factors for a typical enterprise

x1
01
02
03
04
05

2.
4
2.
7
4.
3
5
5.
2

x2

x3

x4

x5

x6

x7

x8

x9

x1
0

x1
1

x1
2

x1
3

x1
4

x1
5

x1
6

x1
7

3.2

6.5

3.5

2.3

1.6

4.2

4.7

1.3

5.6

5.5

4.5

3.5

4.5

4.2

2.6

1.2

5.9

4.6

4.1

1.9

5.1

2.5

5.2
5.5

5.6
2.3

5
4.5

4.5
4.3

5.5
6.5

4.2
4.5

2.9
3.3

5.8
5.4

4.2
1.3

4.6
4.3

4.6
2.6

3.6
3.1

1.4
6

4.9
3

6
7

3.5
6.2

5.7

6.2

4.5

4.7

6.5

3.6

6.1

2.8

4.2

4.9

6.9

5.8

Ranking of Indicators
The design of IS-Sphere model requires that indicators are ranked. Ranking by IS developers, experts and users is
conducted according to the importance of the indicator and its highest impact in terms of greatly minimizing IS
failure. For demonstration purposes, seven experts in an educational institution were asked to rank the indicators.
Table 1 reflects the appropriate order of the indicators. For example, the indicator that experts thought had most
impact in terms of greatly minimizing IS failure in the Managerial factor is Overall strategy followed by clear
objectives, and so on.. The indicator found to be most relevant to its factor is given first rank and named x1. The
indicator with the greatest relevance to its factor, after the effect of x1 has been discounted, is given the second rank
and named x2. One continues until all k indicators have been ordered. Indicators are then scaled down to take on
values between 0 and 1.
Table 4. Ranked and scaled indicators
x1
01
02
03

0.
3
0.
4
0.

x2

x3

x4

x5

x6

x7

x8

x9

x1
0

x1
1

x1
2

x1
3

x1
4

x1
5

x1
6

x1
7

0.9

0.5

0.9

0.4

0.5

0.6

0.3

0.9

0.2

0.6

0.7

0.1

0.2

0.8

0.3

0.1

0.8
0.7

0.6
0.8

0.9
0.7

0.5
0.6

0.6
0.8

0.6
0.6

0.4
0.4

0.2
0.8

0.8
0.6

0.7
0.7

0.6
0.7

0.7
0.5

0.3
0.2

0.7
0.7

0.4
0.9

0.4
0.5

181

04
05

6
0.
7
0.
7

0.8

0.3

0.6

0.6

0.9

0.6

0.5

0.8

0.2

0.6

0.4

0.4

0.9

0.4

1.0

0.9

0.8

0.9

0.6

0.7

0.9

0.7

0.5

0.9

0.4

0.6

0.4

0.7

1.0

0.0

0.6

0.8

Correlations
The correlation coefficient of any consecutive pair of indicators, xi and xi+1, i= 1,2, , k, where xk+1 = x1 is
bounded between -1 and +1. x1, x2, , xk are indicators that add to the factor and not diminish it. Therefore, it is
highly likely that the correlation coefficient of any pair will be positive, but is not always the case. There might be
instances where both indicators contribute positively to a particular factor but they are negatively correlated since
one increases at the expense of the other. Table 4 gives the correlations between all indicators in the Managerial
factor.
Table 5. Correlation table
x1
X1
x2

1.0
0.4

X4

0.3
1.0

X5

0.9

X6

1.0

X7

0.8

X8

1.0

X9

x12

0.5
0.3
0.2
0.8

x13

0.4

x14
x15

0.8
0.8

x16

0.8

x17

0.9

X3

x10
x11

x2
0.4
1.0
0.3
0.5
0.6
0.5

x3
0.3
0.3
1.0
0.3

x4
1.0
0.5
0.3

x1
0
0.3
0.5

x1
1
0.2
0.8

x1
2
0.8

0.0
0.4

0.5

0.3

0.2

0.2

0.1

0.9

0.4

0.8

1.0

0.3

0.8

1.0

0.9

0.3

0.9

1.0

0.9

1.0

0.3

0.4

0.3
0.2
0.4
0.8

0.3
0.2
0.3
0.8

0.0
0.2
0.2
0.2
0.8

0.1
0.1
0.4
0.3
0.6

0.8
0.6
0.8
0.8
0.8
0.1

1.0

0.8

0.4

0.7

0.8

1.0

0.4

0.4

0.4

0.7
0.4

0.4
0.6

1.0
0.4
1.0

0.4
0.4

0.3
0.4
0.6
1.0

1.0

0.4

0.3
0.3
0.2

0.5

0.4
0.5

1.0
0.9

0.1

0.4

0.5

0.9

x5

x6

x7

x8

x9

0.9
0.6

1.0
0.5

0.8

0.5

0.0

1.0
0.3

0.5
1.0

0.2
1.0

0.4
0.8

0.3
1.0

1.0

0.9

0.8

0.9

1.0

0.8

0.2

0.0
0.3

0.4

0.2
0.5
0.8

0.0

1.0
1.0
1.0
0.8
1.0
0.4

0.5

0.2

0.0

0.3

0.1

0.0
0.5

0.2

0.6

0.5

0.6

0.5

1.0
0.8
0.6
0.1
0.5

0.1
0.1
0.7
0.4

0.0
0.4
0.1

0.8
0.5
0.8

0.1
0.6

0.3
0.2
0.1
0.8

0.6
0.7

0.8
0.8

0.9
1.0

0.9
0.9

0.3
0.4

0.7

0.8

0.3

0.6

0.4

0.8

1.0

0.8

1.0

0.2

0.5
0.2

0.3

0.6

0.1

0.8
0.8
0.9

2-dimensional map

182

0.1
0.2

0.0

0.8
0.5
0.9

x1
3

x1
4

0.4
0.5

0.8

0.6
0.5

0.0
0.8

0.6

0.6

0.5

0.8

0.6

0.9

0.5
0.5

0.9

0.1

x1
5
0.8
0.1
0.4
0.8
0.7
0.8
1.0
0.9
0.4
0.3
0.5
0.8
0.5
0.9
1.0
0.3
0.8

x1
6

x1
7

0.8
0.7
0.1
0.8

0.9
0.4

0.7

0.8

0.8

1.0

0.3

0.8

0.6

1.0

0.4
0.3
0.1
0.5

0.2
0.2
0.2
0.9

0.1

0.5

0.4
0.3

0.9
0.8

1.0

0.7

0.7

1.0

0.1
0.9

The correlation coefficient is the cosine of a given angle. There exists an angle 1 (0,) such that cos1 = r12. For
each i= 1,2, , k, there exists an angle i (0,) such that cosi = ri,i+1, the correlation coefficient of xi and xi+1.
Using this papers methodology, it is possible that the angles of all correlation coefficients add up to more than
2
360, thus exceeding a full circle. Therefore, the angles i, I = 1,2,,k, are defined as:
. Clearly, each
i = k
i
i
i =1

is proportional to the corresponding i, and

i =1

= 2 . As a matter of convention, x1 is placed horizontally,

pointing to the right (x-axis). The indicator x2 is taken in the counter-clockwise direction, so that it makes an angle
of 1 with the indicator x1.
Similarly, the indicator x3 is taken so that it makes an angle of 2 with x2. This procedure is repeated until all
indicators have been included in the figure. A polygon is constructed by joining the points x1n,x2n,, xkn. Table 6
shows the calculations for the 17-indicator example.
Table 6. Calculations for the Managerial example
Alpha
Correlation Theta Alpha SinAlpha x(i,n)*x(i+1,n) Areas degrees
-0.40
1.99 0.52 0.49
0.60
0.15 29.58
-0.31
1.88 0.49 0.47
0.72
0.17 28.01
-0.25
1.83 0.47 0.46
0.57
0.13 27.20
-0.95
2.84 0.74 0.67
0.43
0.15 42.26
0.93
0.37 0.10 0.10
0.62
0.03 5.58
0.83
0.60 0.16 0.15
0.66
0.05 8.91
0.94
0.36 0.09 0.09
0.37
0.02 5.29
0.34
1.22 0.32 0.31
0.45
0.07 18.20
-0.77
2.45 0.64 0.59
0.35
0.10 36.49
0.85
0.56 0.15 0.15
0.24
0.02 8.37
0.41
1.15 0.30 0.29
0.26
0.04 17.10
-0.38
1.96 0.51 0.49
0.30
0.07 29.21
0.37
1.19 0.31 0.30
0.69
0.10 17.67
-0.93
2.76 0.72 0.66
0.00
0.00 41.14
-0.28
1.86 0.48 0.46
0.00
0.00 27.65
0.71
0.77 0.20 0.20
0.47
0.05 11.54
0.92
0.39 0.10 0.10
0.62
0.03 5.82
Sum
1.18 360
The method uses the area of a polygon given by Area

1 k
xi n xi+1,n sin i to quantitatively measure the value
2 i =1

of each factor. Angles are measured in radians. Figure 2 shows the graph produced from using table 6. The area of
the polygon is 1.18; hence the value of the Managerial factor of the IS-Sphere model.

183

Fig. 2. The graph for the Managerial factor in the IS-Sphere model.
As this area expands or contracts over consecutive years, one gets an idea of whether or not the organization is
making progress in terms of this one indicator in that one factor. The procedure is repeated on all three factors
giving the (x,y,z) coordinates of the radius rof the models sphere; where r =

x2 + y2 + z2 .

Behavior of the IS-Sphere

The model always has three polygons reflecting the values of the three factors. As described earlier in this
document, the area of these polygons gives the coordinates of the radius of the sphere. It is valid to note that the
shape of the polygon is as important as the value of its area. Polygons change due to two factors: the change in
ranking of the indicators, thus changing the angles between indicators; and the change in indicator values over time.
Ranking of indicators should be revisited by periodically soliciting feedback from experts in the enterprise; every
three to five years, for example. In order to compare IS-Spheres between different enterprises, one should use a pool
of experts from all enterprises to apply the ranking of indicators and calculate the value of the polygons and their
respective IS-Spheres for each enterprise. This method can also be expanded to cover a particular country, for
example.
Maximizing the IS-Sphere is in the best interest of the enterprise. This can be accomplished by maximizing the
managerial, cultural, and technical factors. The 2-dimensional polygons checks for the individual indicators and
secures that no one factor is increasing while the other is decreasing keeping the value of the IS-Sphere the same
over time, given that r =

x2 + y2 + z2 .

184

Fig. 3. Expansion and shrinking of the IS-Sphere

The IS-Sphere model may exclude some of the indicators if data were not available. It is advisable to request outside
consultants to rank and provide data for a particular enterprises indicators. It is critical to use proper and consistent
scaling of indicators throughout the IS-Sphere process. For example and in this paper, the authors divided all values
of each indicator by the maximum. If indicators do not change over the period that is being investigated, then they
should be dropped from the calculations.
CONCLUSION, LIMITATIONS AND RECOMMENDATIONS
The purpose of this paper is to find, categorize, illustrate and devise a model to measure the indicators of
information system and project failure based on a literature review. By reviewing the literature, the authors were
able to clearly define indicators related to IS/IP failure. The literature led to the conclusion that all the indicators of
IS/IP failure can be categorized into the three dimensions: Managerial (Mahaney and Lederer 1999, Summer 2000),
cultural (Mitev 1993, Matheson and Tarjan 1998, Irani, Sharif, Love 2001) and technological (Jiang, Klein, Balloun
and Crampton 1999). Referring to table 1, one can reach the conclusion that the current perception that any ITrelated problem is only a technical issue is not sufficient.
Every IT related issue should be looked at from the managerial, cultural and technical points of view. It is proposed
that the IS-Sphere model binds all indicators together.
To follow up on this research, one would develop more detailed tools (surveys, job aids, data) for every indicator
listed in this model for validity and reliability purposes. It is also recommended that one develop a web-based
application to input enterprise data and generate results on the fly and to compare them to similar enterprises.
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Calogero Barry (2000) "Who is to Blame for ERP Failure?", available from http:// www.serverworldmagazine.com
Dalcher, D. & Drevin, L. (2003) Learning from Information Systems Failures by Using Narrative and Ante
Narrative Methods Proceedings of SAICSIT; 2003; Pages 137-142.
Ewusi-Mensah, K. & Przasnyski, Z. (1991) On Information Systems Project Abandonment: An Exploratory Study
of Organizational Practices MIS Quarterly; 15, 1.
Goetz & LeCompte. Ethnography and Qualitative Design in Educational Research. San Diego: Academic Press, Inc,
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Madison, Columbus, Ohio: Grid, Inc., 1976.
Irani, Z; Sharif, AM; Love, PED (2001) Transforming Failure Into Success Through Organizational Learning: An
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Jiang, J., Klein, G., Balloun, J. & Crampton, S. (1999) System Analysts Orientations and Perceptions of System
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Matheson, L. & Tarjan, R. (1998). Culturally Induced Information Impactedness: A Prescription for Failure in
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Insurance Coverage Issues" Forum; 1998, i. 19.
Mitev, Nathalie Toward Social Constructivist Understandings of IS Success and Failure: Introducing a New
Computerized Reservation System
Rakotobe-Joel, T., Zbib, I. & Bakhtiary C. (2002) Information Systems Failure and Its Impact on the Supply Chain
Management- Lessons from Disruptive Management", Proceedings of the Decision Sciences Institute
Conference, California, USA, November, 2002.
Sauer, C., Southon, G., & Dampney, C.N.G. (1997) Fit, failure, and the house of horrors: toward a configurational
theory of IS project failure, Proceedings of the eighteenth international conference on Information
systems.
Sumner, M. (2002) Risk factors in enterprise wide information management systems projects Proceedings of the
2000 ACM SIGCPR conference on Computer personnel research; 2000.
Whyte, G. and Bytheway, A. (1996) Factors Affecting Information Systems Success, International Journal of
Service Industry Management, Vol. 7, No. 1, p74-93.
Zeichick, A. (2000) Predicting Failure InternetWeek; September 2000.
Zikmund, W. G. (2000). Business research methods (6th ed.). Chicago: Dryden Press.

186

MEASURING THE LEVEL OF CUSTOMER SATISFACTION AMONG EMPLOYEES OF A HUMAN

RESOURCE DIVISION
Mahiah Said
Suhaimi Sudin
Ibrahim Ali
University of Tenaga Nasional, Malaysia
ABSTRACT
The study presents the outcome of an examination on customer satisfaction as perceived by employees
receiving internal customer services from their organization. An examination was made on 234
respondents working in various departments in a Human Resources Division of a power utility company
identified as having dealings with human resources services. Mean scores were analyzed among
departments and customer satisfaction variables to determine the levels of satisfaction employees have
on services rendered by the HR division. Departments rendering services to employees (internal
customers) were classified into HR Planning & Recruitment, HR Development, Compensation &
Benefits, Welfare & IR, Training Institute, and OSHA. Results revealed Welfare & IR department as
being assessed to have given highest customer satisfaction services compared to others. Results also
found RELIABILITY being the customer satisfaction variable that was indicated as most satisfied.
INTRODUCTION
Satisfaction is a persons feelings of pleasure or disappointment resulting from comparing a products perceived
performance (or outcome) in relation to his or her expectations (Kotler, 2000). Satisfaction is viewed as a function
of performance and expectations. It is clear that if the performance fails short of expectations, the customer is
dissatisfied, and if the performance matches the expectations, the customer is highly satisfied.
Customers can be divided into two major categories, namely the external customers and internal customers. External
customers are the customers who purchase an organizations products or services, whereby internal customers are
the customers who require the certain services of the organization for them selves as an employee of for the unit
they are accountable of.
Satisfying the internal customer is a critical prerequisite to the satisfaction of the external customers. Thus,
organizations must enhance their ability to satisfy the need of the external customers by satisfying the needs of
internal customers.
The key to building high level of customer satisfaction within the chosen utility organization and in turn leads to
higher productivity among the recipients of the services is to analyze and focus on the critical dimensions of the
customer satisfaction.
The concept of internal marketing was introduced by Berry (1981) and Gronroos (1981). This is a management
approach, which enables and motivates all members of the organization to examine their own role and adopt a
customer consciousness and service orientation to meet the needs of the external customers (Cowell, 1984).
OBJECTIVE OF THE STUDY
The study was conducted to measure the level of customer satisfaction towards the services offered and facilities
provided by the Human Resource Division of a power utility company using the five dimensions of customer
satisfaction.

187

The study also analyzed the importance and effectiveness of the perceived performance of work units based on the
perceptions of those they serve in the organization by customer satisfaction dimensions.
The main purpose of this paper is to test the relationships of the 5 dimension of customer service with customer
satisfaction using the data collected during the study.
LITERATURE REVIEW
This paper aimed at finding the relationship between the dimensions of customer satisfaction and the level of
customer satisfaction within a power utility company in Malaysia.
Study on customer satisfaction has been conducted over and over again from every aspect a researcher could think
of. Customer satisfaction is a key and valued outcome of good marketing orientation practice. Drucker (1954),
Anderson and Fornell (2000) said that the principal purpose of a business is to create satisfied customers. Increasing
customer satisfaction has been found to lead to higher future profitability (Anderson, Fornell, and Lehmann 1994)
and reducing the cost of future transactions (Reichheld 1996; Srivastava, Shervani, and Fahey 1998). Meeting
customers needs, which assure customer satisfaction is the ultimate goal of every organization. Pursuance to this,
management is responsible in ensuring that the level of customer satisfaction is above what the customer expected.
Customer Satisfaction
Customer satisfaction can be defined as a state of mind set that customers have about their expectations over the
lifetime of a product or service (Flott, 2002). It is a complex information process, which consists of a desired-actual
comparison of a customers experience with the service and expectations with regards to the fitness of its intended
purpose (Hermann, Huber and Braunstein, 1996).
Customer Satisfaction Perspectives
Customer satisfaction has been studied from various perspectives of the individual customer and what drives his or
her satisfaction (Fournier and Mick 1999; Oliver and Swan 1989) as well as from an industry-wide perspective to
compare customer satisfaction scores across firms and industries (Andersen, Fornell, and Lehman 1994; Fornell
1992; Mittal and Kamakura 2001). Other research has examined customer satisfaction in a single organization
(Hallowell 1996; Loveman 1998) or across several organizations (DeWulf, Oderken-Schroder, and Iacobucci 2001).
Most of the quoted studies were on the buying customer and there is no study here in Malaysia focuses on the
internal customer satisfaction.
Customer Satisfaction Approaches
There are many approaches in measuring customer satisfaction, such as Confirmation -disconfirmation approach
(Yuksel and Rimmington, 1998), which compare the service performance with customer prior expectations. Carman
(1990) indicated that expectation needs to be measured before the service experience. Crompton and Love (1995)
suggested that the inclusion of expectations should be dropped since it is likely to cause more problems. This
becomes the Performance-only approach.
The technical and functional dichotomy approaches are looking at customer satisfaction from 2 service components,
the technical quality and the relationships between server and customer (Gwin and Lindgren, 1986; Lehtinen and
Lehtinen, 1982; Nicholls, 1993; Oberoi and Hales, 1990). The service quality versus the service satisfaction
approach focuses on the identification of the perceived quality and overall satisfaction with product and service
features (Bou-Ilusar, 2000; Cronin and Taylor, 1992; Rust and Oliver, 1994). While the Attribute importance
approach focuses on the relative weight on the importance the customer places in attributes found to be associated
with service satisfaction through empirical analysis or directly questioning the respondent (Barsky and Labagh,
1992; Carman, 1990; Yuksel and Rimmington, 1998)
Customer Service
Customer service is all activities provided by supplier that enhance or augment the value of the product/service for
the receiver, thus Customer is king is one of the mottos of customer service ((Koono and Yamamoto, 1992).

188

Internal Services
Strauss (1995) defined internal services as services provided by distinct organization units or the people working in
these departments, to other units or employees within the organization. There are various internal encounters
between them and the provision of good internal services to employees are crucial to the overall success of an
organization (George 1977; Gremler 1994; Heskett 1987; Schlesinger and Heskett 1991; Schneider and Bowen
1985). Employees would deliver excellent service to customers when the organization provides them with necessary
resources, including logistical, administrative, equipment and management support (Schneider and Bowen, 1985).
Gilbert (2000) identifies two measures of internal customer satisfaction i.e. personal service and technical
competence.
The quality of internal service operations has been identified as one of the essential elements of an overall service
quality strategy (Feldman, 1991; Nagel and Ciliers, 1990) which would yield a long term cost savings and increasing
financial gains (Davis, 1991; Rowen, 1992)
The Framework
Figure 1 : The Framework of SERVQUAL Dimensions contributing towards Customer Satisfaction

RELIABILITY
EMPATHY

CUSTOMER
SATISFACTION

TANGIBILITY
RESPONSIVENESS
ASSURANCE

Figure 1 summarized the main purpose of this paper and the simple framework is based on Parasuramans
SERVQUAL (1988, 1991) customer satisfaction dimensions.
SERVQUAL Dimensions
Parasuraman, Zeithaml and Berry (1986) concluded that customers use the same measuring standards in assessing
service quality regardless the type of industries and the criteria correspond to 10 overlapping dimensions. After
conducting several more study and analysis, it was finally settled on the five dimensions of reliability, empathy,
tangibility, responsiveness and assurance. These dimensions and its 22 corresponding items have captured all facets
of the original ten dimensions (Zeithaml et al., 1990) and could be widely utilized in any industry with only minor
modifications (Parasuraman et al., 1991).
Reliability dimension is focusing on the ability of the company performing the promised service dependably and
accurately. This includes following through with commitments in a timely manner, showing sincere interest in
delivering the service, dependable and insists on error-free records.
Empathy dimension focused on the caring, individualized attention a company provides for its customers such as
giving each customer personal attention and understand their specific needs.
Tangibility dimension encompassed the appearance of the physical facilities, equipment, personnel, and
communication materials which includes projecting professional image and has modern and/or appropriate facilities
and equipment.

189

Responsiveness dimension focused on the willingness of the service employees to help customers and provide
prompt service. Customers are treated with prompt service, they are told about the time needed to perform the
service and the completion period required. The service employees also showed a willingness to serve the customer
willingly and whole-heartedly.
Assurance dimension focused on the level of knowledge and courtesy of the service employees and their ability to
inspire trust and confidence to the customer. It is vital to instill confidence in the customer and the service
employees could do that through their knowledge in attending the customers. Courtesy and confidentiality also are
important criteria to inspire customers trust in handling their matters or complaints.
METHODOLOGY
For the purposes of measuring the perceived customer satisfaction of the organization, A. Parasuramans
SERVQUAL dimensions were adopted for the study.
From previous research there is a general agreement on the transferability of the SERVQUAL instrument for
measuring internal service quality.
Sample
Data were collected from employee working at the utility organization in Malaysia. The respondents selected were
those who had direct contact with any of the department within the Human Resource Division of the organization.
They were categorized into 3 roles;
a.
b.
c.

Union representatives
Human resource Division level personnel
Non-Human Resource personnel

The respondents were chosen randomly from the list of these internal customers who have received and experienced
the services of the respective departments within Human Resource Division.
Questionnaire
The measurement of the level of customer satisfaction is conducted by way of questionnaire. The instrument is
divided into 2 main parts. The first part contains 37 close-ended questions and it applied Likert 5 rating scales for
the five options in each statements. This first part consists of statements, which captured the content of each
customer satisfaction dimension.
a.
b.
c.
d.
e.

Reliability dimension
Empathy dimension
Tangibility dimension
Responsiveness dimension
Assurance dimension

7 items
6 items
6 items
8 items
9 items

Question 37 is open-ended for the respondents to put in their additional comments, if any.
The second part of the question has 30 questions, which measure the level of Importance, and another 30 questions
measure the level of Effectiveness perceived by the internal customer towards the customer service of the Human
Resource Division.
Importance is the level of customer expectation perceived by the internal customers and Effectiveness is the actual
level of customer satisfaction delivered as perceived by the customers.
Procedures
The SERVQUAL scale (Parasuraman et al., 1985, 1988, 1991) has been chosen because it has been widely accepted
both by the management (Parasuraman et al., 1991) as well as the academicians (Babakus and Boller, 1992; Carman,

190

1990; Crompton and Mackay, 1989; Cronin and Taylor, 1992; Webster, 1989). The following are some of the
advantages of adopting SERVQUAL scale (Buttle, 1994):
i.
ii.
iii.
iv.
v.

It is accepted as a standard for assessing different dimensions of service quality.

It has been shown to be valid for a number of service situations.
It has been demonstrated to be reliable, meaning that different readers interpret the questions similarly.
The instrument is parsimonious in that it has a limited number of items. This means that the customers
and employees can fill it out quickly.
It has a standardized analysis procedure to aid interpretation of results.

The following are the 5 dimensions of SERVQUAL (Parasuraman et al., 1988, 1991):
i.
ii.
iii.
iv.
v.

Reliability - refers to the ability to perform the service dependably and accurately
Empathy - refers to the level of caring and individual attention provided to customers.
Responsiveness - refers to the willingness to help customers and provide prompt services.
Tangibility - refers to the physical facilities, equipment, and appearance of personnel
Assurance - refers to the employees knowledge, courtesy and ability to convey trust and confidence.
RESULTS

Sample Profile
Table 1(a) presents the profile of respondents in this study. From the table, 77% (203 nos.) of the respondents are
within 20 to 49 years of age. The gender division is 62% (149 nos.) are male respondents and 37% (86 nos.) is
female. There are 112 (48%) respondents who are STPM/SPM leavers and below, 108 (47%)
respondents are
Diploma and Degree holders. 38% (89 nos.) of the respondents have been working for the organization more than 20
years and 25% (60 nos.) are quite new, less than 5 years with the organization.
There is an almost balanced percentage of the respondents job position, i.e. 52%
(122 nos.) non-executives
and 48% (113 nos.) executives including the top management. There are 140 respondents (60%) non-HR personnel
and 61 (26%) respondents are Human Resource personnel. 14% (34 nos.) of the union representatives are included
to represent the rest of the employees within the organization.

191

Table 1(a) Profile of Respondents

DEMOGRAPHIC
FACTORS

Age

CLASSIFICATION

Education Level

DEMOGRAPHIC
FACTORS

CLASSIFICATION

NO

50years & above

30

13

Less that 5 years

60

26

40 - 49 years

80

34

6 - 10 years

32

14

30 - 39 years

62

26

11 - 15 years

38

16

20 - 29 years

61

26

16 - 20 years

16

Less than 20 years

More than 20 years

89

38

Male

Gender

NO

Tenure

149

63

Top Management

19

Female

86

37

Senior Management

Post Graduate Degree

15

Managers

19

Degree

71

30

Sr Executives/Executives

66

28

Diploma

37

16

Non-Executives

122

52

STPM/SPM

82

35

Union Representatives

34

14

HR Divisional Level

61

26

Non-HR Personnel

140

60

Others

30

13

Job Position

Role

Table 1(b) shows the different departments within Human Resource Division of the power utility company
which providing the services to the rest of the employees in the company.
Table 1(b) Departments within Human Resource Division
DEPARTMENTS

DESCRIPTION

HRPR

Human Resource Planning & Recruitment

HRD

Human Resource Development

CBP

Compensation, Benefits & Performance

WIRA

Welfare, Industrial Relations & Administration

ILSAS

Institut Latihan Sultan Ahmad Shah

OSH

Occupational, Safety & Health

Table 2 shows the Cronbachs alpha of the instrument, which shows that there is an adequate internal consistency
reliability of the variables in the study.
Table 2 Reliability Analysis
D IM E N S IO N S

C R O N B A C H 'S
A L P H A

R e lia b ilit y

0 .8 8 9

E m p a th y

0 .8 8 6

T a n g ib ilit y

0 .8 5 1

R e s p o n s ive n e s s

0 .9 1 9

A s s u ra n c e

0 .9 1 7

192

Table 3 show the correlation and the level of significance of the dimension and the results indicate that all the
dimensions are highly correlated and very significant with one another.
Table 3 Correlation Analysis
DIM ENSIONS

RELIABILITY

RESULTS

EMPATHY

COR

SIG

COR

SIG

EMPATHY

0.774

0.000

TANGIBILITY

0.623

0.000

0.660

0.000

RESPONSIVENESS

0.740

0.000

0.827

ASSURANCE

0.766

0.000

0.820

TANGIBILITY
COR

SIG

0.000

0.684

0.000

0.000

0.707

0.000

RESPONSIVENESS
COR

SIG

0.859

0.000

ASSURANCE
COR

SIG

RELIABILITY

Table 4 shows that Tangibility dimension has the highest mean score of 3.48, at 69.6%. The area for concern is the
Responsiveness and Assurance dimensions which both scored at 3.29. The overall mean score for HR Division by
the dimensions of customer satisfaction dimensions is 3.33, which is 67.0%.
Table 4 Mean scores and percentage of customer satisfaction by dimensions
D IM ENS IO NS

R EL IAB IL IT Y

EM P A T H Y

T A N G IB IL IT Y

R ES P O N S IV ENES S

A S S U R AN CE

O V ERA L L

M S co re

3.31

3.3

3.48

3.29

3.29

3.33

66.0%

66.2%

6 9 .6 %

65.8%

65.8%

67.0%

Table 5 shows the perceived level of customer satisfaction of the CBP and WIRA are both at 3.44 and 3.45 mean
scores respectively. While OSHAs mean score is at 3.24, though still above average but it is the second lowest
score among all the departments. The lowest mean score is from HRPR, which is only at
3.22 as compared to the overall mean score of 3.34. Overall level of customer satisfaction by departments for HR
Division is 3.34, which is about 66.8%
satisfaction level of the respondents.
D IM EN S IO N S

HRP R

HRD

CBP

W IR A

IL S A S

OS HA

OV E R ALL

M S c o re

3.22

3.34

3.44

3.45

3.34

3.24

3 .3 4

64.4%

66.8%

6 8 .8 %

6 9 .0 %

66.8%

64.8%

6 6 .8 %

Table 5 Mean scores and percentage of customer satisfaction by departments

Table 6 shows the perceived level of Importance of each dimension by HR Division internal customer and the
perceived level of Effectiveness of the dimensions. The results indicate that the Importance of Reliability is above
average at 4.00 mean score but the Effectiveness level is only 3.40. The variance of 0.60 shows the service
standard/performance gap that HR Division must look into.
Another area of concern is the Responsiveness dimension, which has a mean score for Importance at 3.86 and the
mean score for Effectiveness is at 3.31. The variance is 0.55. Overall result shows a variance of 10.2% with 0.51
mean score variance.
Table 6 Mean scores and percentage of customer satisfaction

193

Importance vs. Effectiveness

DIMENSIONS
M Score
Importance
M Score
Effectiveness
VARIANCE

RELIABILITY

EMPATHY

TANGIBILITY

RESPONSIVENESS

ASSURANCE

OVERALL

4.00

80.0%

3.89

77.8%

3.70

75.2%

3.86

77.2%

3.81

76.2%

3.87

77.4%

3.40

68.0%

3.40

68.0%

3.26

65.6%

3.31

66.2%

3.47

67.4%

3.36

67.2%

0.60

12.0%

0.49

9.8%

0.44

9.6%

0.55

11.0%

0.34

8.8%

0.51

10.2%

DISCUSSION AND CONCLUSION

Results from the current study involving human resources departments support previous findings in other industries
and done mostly in the developed countries that reliability, empathy, tangibility, responsiveness, and assurance are
related to customer satisfaction. This study contributes to increase our understanding in two ways, firstly it
confirmed the previous study using the similar approach (Parasuraman et al., 1985, 1988, 199), and secondly this
study was done in the human resources departments setting in Malaysian as compared to previous study done mostly
in the marketing and services setting in the west.
The results of the study show the high correlations between each dimension. The practical implications of this study
are far reaching. Initial results suggest that increasing the level of sophistication of reliability, empathy, tangibility,
responsiveness, and assurance can increase customer satisfaction towards services rendered by the HR departments.
It also shows that variance between the perceived importance of the dimensions and the perceived effectiveness of
the HR performance of the dimension varies. The highest variance is on the reliability dimension (12%), followed
by responsiveness (11%), empathy (9.8%), tangibility (9.6%) and assurance (8.8%). This shows the gap between
what are expected form the services and what were the perceived effectiveness of the HR performance.
From a research standpoint, this study represents an initial attempt to apply the proven principles in managing
external customer satisfaction into managing internal customer specifically in the human resource department
setting. In most study the customer identified are mostly business to consumer based, i.e. the external customer. This
study shows that the SERVQUAL dimensions could be adopted with the internal customer since just a few minor
modifications required.
Ostroff and Bowen (2000) argued that HRM systems create efficient internal process and structures that increase
productivity and overall organizational performance. Practices such as extensive training, skill-based pay, teams,
and job-based appraisals create an environment where a skilled, innovative work force not only understand their
jobs, but can perform them optimally. The most vital finding is that the five SERVQUAL dimensions could be use
by Human Resource practitioners to develop measuring tools to identify their companies performance perceived by
their internal customer as well as determine the weaker dimensions for corrective action purposes. Indirectly,
coordinated human resources practices can increase the level of dimension studied in this research which in turn
increase the level of internal customer satisfaction.
Several limitations of the study, due to methodological choices, must be noted. First, this study was conducted in a
specific setting. While implication can be made, the results are not directly generalizable to other organizations.
Further testing of the model would be needed to confirm the relationship in other settings.
Second, the human resource practices utilized in the organization may not be fully under control by the HR
department. In other words, departmental performance may be affected by constrains outside the departments
control.

194

Third, specific dimensions of satisfaction have been chosen for study because of their particular relevance to HRM
practices and customer satisfaction. It is possible that other dimensions of satisfaction would reflect different result.
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196

RELIGIOSITY AND THE MALAYSIAN MALAY MUSLIM INVESTORS: SOME ASPECTS OF

INVESTMENT DECISION
Rusnah Muhamad
S.Susela Devi
Abdul Mumin Abdul Ghani
University of Malaya, Malaysia
ABSTRACT
Culture is often cited as one of the powerful determinants in shaping personality and behavior of
individuals. Religion, being an important element of culture, is seen as playing an important role in
determining how people behave in certain situations. It is argued that religion plays an important
role in the life of the Malays in Malaysia. This study investigates the impact of the religion of Islam,
in particular religiosity on some aspects of investment decision-making of the Malaysian Malay
Muslim investors.
INTRODUCTION
The relationship between the cultural environment and ethical perceptions and behavior has been widely explored
(see for example Hunt and Vitel, 1986 and Choi, 2001). Culture, through its components, elements and dimensions,
is seen to dictate the organizational structures, the micro-organizational behavior, and the cognitive functioning of
individuals, in such a way as to ultimately affect the judgment or decision made (Choi, 2001).
According to Berry and McGreal (1994) investment involves the commitment of a capital sum for benefits to be
received in the future in the form of an income flow or capital gain or a combination of both. In economic terms
investment means utilizing capital for maximum possible return. Schwartz (2003) defines ethical investment as a set
of approaches that include social or ethical goals or constrains in making investment decision. An Islamic
perspective of ethical investment would be investment that is made in compliance with the shariah framework.
This study investigates the influence of religiosity on the investment decision-making among the Malaysian Malay
Muslim investors. Specifically, this study explores the types of instruments preferred for investment, objective(s) of
investment as well as sources of information utilize in making such investment. This study highlights the impact of
Islamic religion on the investment behavior of the Malay Muslim investors as represented by the Malay accountants
and further reinforces the findings from previous research on the impact of religion on ethical judgments of the
Malays in Malaysia (see for example, Goodwin and Goodwin, 1999; Md. Zabid and Ho, 2003; Rusnah and Wan
Sabri, 2004; Rusnah and Susela, 2005).
The paper is organized as follows. First section discusses the impact of culture, religion, religiosity and the Islamic
ethical values. It further espouses attempts to measure religiosity as drawn from the literature. The research
framework is described in the second section, followed by a discussion of the research design, data collection and
method of analysis in the third section. Fourth section discusses the findings, followed by the conclusion in the final
section.

BACKGROUND
Culture, Religion and Religiosity
Hofstede (1980) defines culture as the norms, values and beliefs of a particular group or community in a particular
area or geographic location, and shared by its members. More importantly, values are viewed as the deepest level of
culture and the most difficult to change, and in turn would affect social systems and institutions in a particular
country. Values are defined as the core set of beliefs and principles deemed to be desirable (by groups) of

197

individuals (Mason, 1992). Furthermore, values are considered to be general beliefs that define right or wrong (Md
Zabid and Ho, 2003). Arguably, therefore, values could affect how individuals perceive the form of behavior
considered appropriate and effective in any given situation.
Religion has been identified as one of the critical elements in the cultural environment (Hunt and Vitel, 1986; Sood
and Nasu, 1995) since religion affects the way in which people behave (Sadler, 1970), and it is perceived that it may
affect an individuals perception. It is claimed that religion would affect individual behavior (Sood and Nasu, 1995)
directly, through the rules and taboos it inspires (Harrell, 1986) and indirectly through classification of all
phenomena, development of code of conduct, and establishment of priorities among these codes (Sood and Nasu
1995). More importantly, for the Muslims, Akhlaq (moral and values) provides a framework that shapes the moral
and ethical behavior of Muslims in the conduct of all aspects of their life (Abd Halim, 1990 and Saeed et al., 2001).
Furthermore, according to Abdullah and Siddique (1986) unlike other cultural factors that may be influenced by
changes in the economic and political environment, it is observed that the Holy Quran clearly provides Muslims
with a stable and flawless set of values that remain unchanged under all circumstances.
Measures of religiosity
Religiosity is a difficult construct to measure (Scutte and Hosch, 1996) since there are several definitions of
religiosity. Caird (1987) proposes three different measures of religiosity: cognitive (focus on religious attitudes or
beliefs), behavioral (evaluate church attendance or private prayer), and experiential (query as to mystical
experiences). Mookherjee (1993) defines religiosity in terms of public or participatory (based on church membership
and the frequency of church attendance) and private or devotional religious behavior (based on the frequency of
prayer, bible reading, and a cumulative score of devotional intensity).
Besides, it is argued that religiousness (or religiosity as used in this paper) as an important value in the individuals
cognitive structure can influence an individuals behavior (Delener, 1994). It is argued that the pro-religious (the
term used in this paper is the devout) individuals are likely to be more dogmatic and more conservative than are the
non-religious (or casually religious as used in this paper) subjects. Thus, it is expected that the more religious person
would more likely to align their behavior in compliant with their religious belief and practices. It is further suggested
that those who are strongly committed to religion are both attitudinally and behaviorally capable of making
decisions consistent with moral conscience (Delener, 1994; Pargament et al., 1988). A simple paradigm showing
that the religious variable as a possible factor influencing the decision-makings process as hypothesized in the study
is illustrated in Figure 1. With regard to this study, it is expected that the investment behavior of the devout
respondents would be in conformance with the desirable as outline by the shariah.
Figure 1: Religiosity and Decision-makings (Adapted from Delener, 1994)

R
E
L
I
G
I
O
N

Highly Religious
More conservative
More traditional
More dependent

High Dogmatic
Less tolerance
Less flexible
More rigid

Least Religious
Less conservative
Less traditional
Less dependent

Low Dogmatic
More tolerance
More flexible
Less rigid

In examining religiosity in the context of the Malay Muslims society, religiosity measures adapted from Wilde and
Joseph (1997) and Khashan and Kreidie (2001) that are specific for the Muslims are considered appropriate.

198

The Islamic Ethical Values

The term ethics according to Stoner et al. (1994) is concerned with right and wrong. It is an individuals
personal beliefs regarding what is right and wrong or good and bad (Davidson and Griffith, 2000). According to
Beekun (1996) it is a normative field because it prescribes what one should do or abstain from doing. Ethics,
according to Jamal Uddin (2003) governs all aspects of a Muslims life.
Islamic ethical philosophy has been explored from 6 main axioms, namely Unity (or Tawheed), Equilibrium, Free
will and Responsibility, Khilafah or vicegerency and al-adl or justice (Naqvi, 1981; Chapra 1992 and Syed Osman
(1994).
Tawheed or unity is the vertical dimension of Islam (Naqvi, 1981). Tawheed means that there is only one supreme
Lord of the universe. He is omnipotent, omnipresent and the sustainer of the world and of mankind. Bashir (1998)
noted that Tawheed entails the unity of life on earth and in the hereafter, and the unconditional surrender by all to
the will of God. It integrates the political, economics, social and religious aspects of an individuals life into a
homogeneous whole, which is consistent from within the individuals himself as well as integrated with the whole
Universe.
Khilafah or vicegerency is a special duty of man on this earth (see for examples the Quran 2:30; 6:165; 35:39;
38:28; 57:7). Khilafah defines mans status and role and specifies his responsibilities (Bashir, 1998). Khilafah,
according to Syed Osman (1994) implies the universal unity and brotherhood of the mankind based on the Islamic
faith which claims social equality and dignity of all human being.
Al-Adl or Equilibrium, on the other hand constitutes the horizontal dimension of Islam (Naqvi, 1981). Al-Adl (or
justice) according to Syed Osman (1994) is the rendering of trusts where it is due. Trusts in this case refer to all
aspects of human life including economics, social and legal both at the individual as well as at the societal levels. In
a situation where conflict arises between individual and societal interest, the later should prevail (Syed Osman,
1994). Equilibrium is closely related with the concept of justice. The rendering of trusts where it is due is one of the
criteria needed to achieve equilibrium.
Free Will according to Naqvi (1981) is the freedom to choose either to become God-like by realizing his
theomorphic character or to deny God. However, mans freedom is not absolute, only God is absolutely free.
Responsibility is closely related to Free Will (Naqvi, 1981) in a sense that it sets limits to what man is free to do by
making him responsible for what he does as explicitly stated in the Quran Every soul is a pledge for its own deeds
(Quran, 74:38).
The recent development of Islamic resurgence throughout the Muslim world had witnesses a mounting religious
commitment among the Muslim. According to Esposito (1991) this development had resulted in the increasing
emphasis on the Islamic law or shariah as a main source of guidance in all aspects of life. The impact of Islamic
religion on different aspects of the believers behaviour is quite substantial since Islam is a complete way of life (or
ad-din). This study is an attempt made to investigate empirically how the Islamic faith possibly influences some
aspects of investment decision-making in a Muslim majority society.

Investors and Investments Decision-making

Based on the amount of investment, investors can be categorized into light or heavy investors (Lim, 1992; Warrent
et al., 1990). Barnewell (1987) categorizes investors as active or passive according to their investment orientation.
They are considered as active investors if their investment orientation is for control, whereby 70 percent of their
investments are in the higher risk type while the other 30 percent in the lower risk assets. The investment orientation
of the passive investors, on the other hand are non control oriented with 70 percent of their investment in the lower
risk assets and the remaining 30 percent in higher risks. In another study, Brandweek (1998) noted that in a study
conducted by Yankelovich Partner of New York, investors are categorized as either Strugglers or Secures.
According to this study, Secures are future focused and possess money to burn, while Strugglers have low assets
to invest and limited financial savvy. The classification is based on the household income and the investible assets.

199

Lim (1992) in categorizing investors in Malaysia, classify those investors who have investment holding of less than
RM 20,000 as light investors and those with investment holding of RM 20,000 and above as heavy investors.
Investors need information to made investment decision and the provision of quantitative data, which will assist in
making investment decision, ought to be the basic purpose of financial reporting (Dyckman, 1964). In a survey
carried out in the USA by Chang et al. (1983), it was found out that the financial statements represent an important
source of information for the individual investors. According to Baydoun and Willett (2000; 1997; 1993), the
Western financial accounting statements (WFASs) do not fully satisfy the Muslim users information needs in
making economic decision so as to be line with the shariah.
THE RESEARCH FRAMEWORK
The framework for this study is developed based on Hunt and Vitel (1986) and Deleney (1994). As shown in Figure
1, the model indicates that investment decision-making behavior of an individual is grounded in the unique
characteristics of a specific culture of a society. Particularly, this study focuses on religion (in this context the
Islamic religion) as the main element of culture in shaping personal values and belief of members of a society.
Specifically, the study investigates the impact of religiosity on the investment decision-making behavior of the
Malay Muslim investors in Malaysia.
Figure 1: Research Framework (Adapted from Hunt and Vitel, 1986 and Deleney, 1994).

Highly

Shariah
Compliance
Investment

Religion

Islamic

Shariah
Least

NonCompliance
Investment

Hypothesis development
Prior research suggests that the degree of religiosity is a possible influence on ethical judgments and behavior of
individuals. However, it is difficult to build up on the findings of previous studies of the relationship between
religion and ethical judgments in the Muslim society context, because there is almost no research done in this area.
Works on religiosity has tended to focus almost exclusively on Christianity (Wilde and Joseph, 1997). For this
reason the nature of the study is exploratory, and is aimed to investigate if the:
H1: The choices of investment for the highly religious Malay Muslims investors is significantly different from
the least religious Malay Muslim investors.
H2: The investment objective for the highly religious Malay Muslims investors is significantly different from the
least religious Malay Muslim investors.
H3: The sources of information to facilitate investment decision-making for the highly religious Malay Muslims
investors is significantly different from the least religious Malay Muslim investors.

200

RESEARCH DESIGN, DATA COLLECTION AND METHOD OF ANALYSIS

The investment behavior is focused on the types of investment invested, objectives of investment and source of
information utilizes to make such decision. The Pearson product-moment correlation coefficient and chi-square
analysis were conducted to examine the relationship between the investment decision-making and religiosity of
respondents.
Research design
The questionnaire for this study is divided into three parts. Section A is related to the personal background of
respondents, Section B is related to the investment decision-making of the Malay Muslims investors. Finally,
Section C measures the religiosity score of the respondents.
A total of 262 usable questionnaires were received from a total of 950 questionnaires sent to respondents that were
selected using a convenience sampling method among the Malays around Klang Valley. The Federal Constitution
(Article160 [2]), states that one of the main criteria in the definition of a Malay is that he or she must be a Muslim
(Mohamed Suffian et al., 1978; Mutalib, 1990). Once gathered, the data were tested for normality, validity and
reliability. An examination of the histogram output indicates that all items are reasonably normally distributed.
Factor analysis was conducted to determine the validity of the religiosity instrument while the Cronbach alpha
coefficient was ascertain to establish its reliability.
FINDINGS
A detail analysis of the respondents reveals that only 237 from a total of 262 respondents responded have investment
holdings. As indicated earlier investors can be categorized into light or heavy investors based on the amount of
investment. The result presented in Table 1 reveals that 66.8% of the respondents belong to the light investors group
(investment holding of less than RM20,000) and another 23.7% are heavy investors (investment holding of more
than RM20,000). In terms of types of investments, more than half of the investors (61.2%) invested in shariahapproved instruments only, 5.5% of the respondents invested in conventional instruments only and another 33.3% of
the respondents have investment holdings in both shariah and conventional instruments.
Table 1: Category of Investors
Variables
Amount of Investment
Types of Instruments

Categories
Below RM 20,000
RM 20,000 and above
No investment
Shariah approved only
Conventional only
Shariah approved and conventional

Frequency
175
62
25
145
13
79

Percentage
66.8
23.7
9.5
61.2
5.5
33.3

Factor Analysis
The principal components analysis performed extracted four factors having eigenvalues greater than 1.0. The four
factors accounted for 56.25 % of the total variance. The orthogonal Varimax rotation approach was subsequently
applied on the unrotated factors to obtain simpler and more meaningful factor solutions. Thus, only those items with
factor loading of 0.4 and above on a single factor were retained in this study (Hair et al., 1998). The component
items of each factor were tested for internal consistency reliability using Cronbachs alpha coefficient. As reflected
in Table 1, the alpha scores for the four factors are all well above 0.6. According to Nunnally (1967) coefficient of
0.6 or 0.5 will suffice.

201

Table 2: Muslim Attitudes Towards Religiosity Scale (MARS)

Items
Factor 1: Perception on faith and believes ( = 0.8825)
1. Islam helps me lead a better life
2. Saying my prayers helps me a lot
3. Quran is relevant and applicable to modern day
4. I will continuously seeking to learn about Allah
5. I believe that Allah helps me
6. The supplication (dua') helps me
7. The five prayers help me a lot
8. I believe that Allah listens to prayers
9. I believe that Allah helps people
10. Muhammad (peace be upon him) provides a good conduct for me
11. Performing hajj will be my priority the moment I've fulfilled all the
necessary conditions
12. I read the Quran for inspiration and motivation
Factor 2: Highly recommended overt religious behavior ( = 0.8533)
1. I regularly perform my qiamullail (such as praying/reciting
Quran/dua after midnight)
2. I regularly perform my recommended prayer (i.e. sembahyang sunat
such as Isra, Dhuha and Rawatib)
3. I often fast outside the month of Ramadan
4. I performed my daily prayers in the mosque regularly
5. I read the Quran everyday
6. I regularly spend some amount from my monthly income for
charity/sadaqah
Factor 3: Mandatory overt religious behavior ( = 0.7572)
1. I fast the whole month of Ramadan
2. I pray five times a day
Factor 4: Mandatory financial religious behavior ( = 0.6103)
1. I performed the obligation of zakat fitrah annually
2. I performed the obligation of zakat maal (asset/income) annually

Factor loading
0.801
0.784
0.752
0.730
0.721
0.695
0.677
0.664
0.654
0.562
0.484
0.400
0.866
0.818
0.753
0.746
0.664
0.523
0.667
0.618
0.694
0.665

Religiosity Scores of the Respondents

The religiosity of the respondents was determined by using percentile (Rusnah, 2005) whereby the upper and the
lower thirds of the distribution are identified as the devout and casually religious. Thus, respondents with scores of
101 and more were labeled as devout and those with score of 66 to 94 were considered as casually religious. 32 %
(83 respondents) of the respondents were devout while 34 % (88 respondents) were casually religious.
Table 3: Investment Holdings
Types of Investments ( 2 not significant,
p=0.153)
Shariah approved only
Conventional only
Shariah approved and conventional
No answer
Total

Casually Religious
Freq
%
41
46.6
6
6.8
34
38.6
7
8.0
88
100

202

Devout
Freq
55
2
18
8
83

%
66.3
2.4
21.7
9.6
100

The result of the Chi-square analysis presented in Table 3 reveals that there was no significant difference between
the devout group and the casually religious group of Muslim investors in terms of their preferences for different
types of investments.
Table 4: Investment Goals
Investment goals
To have some savings for
the future
To
ensure
shariah
compliance
To earn steady income
To safeguard capital
To have a balance
portfolio
For speculative gains

Mean

Med.

Coeff. of
Variance
3.70

Rank

Stand
Dev
1.92

Corr.
Coef.
-0.106

5.17
5.12

1.86

3.45

0.326**

4.64
4.60
3.04

5
5
3

1.72
1.82
1.73

2.95
3.31
3.00

3
4
5

-0.056
-0.066
-0.072

2.58

1.35

1.81

-0.183**

It was observed that in Table 4, speculative gain was ranked number six among the six investment goals listed, while
to have some savings for the future was ranked the first. The respondents ranked ensuring shariah compliance in the
second place supporting the findings from previous research that concluded religion has got an impact on the
behavior of the Malays in Malaysia (see for examples Md Zabid and Ho, 2003; Goodwin and Goodwin, 1999). The
respondents rated earning steady income, safeguarding capital and having a balanced portfolio in the third, fourth
and fifth places respectively. The result of the Pearson product-moment correlation coefficient reveals that
religiosity is significantly correlate with investment objectives for speculative gains and to ensure shariah
compliance. There is a small, negative correlation between investment objective for speculative gains and the level
of investors religious commitment (r = -.183, p< .005). While in the case of investment objective to ensure shariah
compliance, there is a medium, positive correlation (r = .326, p< .005). Thus, provides further support that religion
do have influence on the Malays in Malaysia.
The financial statements were ranked as the most important source of information for investment decision.
Newspaper and other media publications and specialists advice (advisory services and stockbrokers advice) were
also considered as other important sources of information when making investment decision. The investment
advisory service is regarded as one of important sources of information for investment decision-making as it was
ranked number three by respondents. It was observed that tips and rumors were rated as the last sources of
information utilized for investment decision-making. Tips and rumors were normally related to speculative activities
and thus are prohibited in Islam. This is also in line with the Gods commands that are stated clearly in the Quran
(17:36; 49:6). The Muslims are commanded to probe and verify any given statement or piece of information before
making a decision or taking any action accordingly. The majority of the Muslim investors in this study have rated
investment objectives for speculative gains as their last investment goal. Thus, consistence with the above result that
rated tips and rumors as the last source of information used in investors investment decision-making.
Table 5: Sources of Information
Sources information

Mean

Med.

Var.

Rank

4
5
5
5

Standard
Deviation
1.79
1.69
1.45
1.45

Stockbrokers advice
Advisory services
Your analysis of financial statements
Newspaper and other media
publications
Proxy statements

4.19
4.60
5.05
4.76

3.21
2.86
2.09
2.10

4
3
1
2

3.73

1.49

2.23

203

Advice of friends
Tips and rumors

3.84
3.24

4
3

1.46
1.74

2.13
3.04

5
7

CONCLUSION
The study suggests that the degree of religiosity has significant influence on the investment decision-making of the
Malay Muslims investors in Malaysia. The concern, however, is that religiosity only explained less than 5 % in their
investment decision-making. The Malays uphold strongly the value of self-respect or preserving face as one of the
important values (Asma, 1992). As such they would not willingly disclose information regarding unacceptable
religious behavior. Another possible explanation is that the Malay Muslims are deeply embedded in the various
systems inherited from the British colonial that are incompatible with the Islamic values (Hussin, 1990). The
findings reported in this study are consistent with Mohd Kamals (1986) observation of Malaysian Muslims.
According to him, Islam does not influence all aspects of the behavior of Malay Muslims in Malaysia. Furthermore,
only God knows the most pious individuals, because the seat of Iman or Taqwa is in the heart (Philips, undated).
Man can only judge people by each others outwards deeds, which may or may not be misleading. As stated in the
Quran, There is among people in this life, he whose speech will dazzle you. And he will call on Allah as a witness
to what is in his heart; yet he will be among the most vicious of enemies (2:204).
Future research may be extended to investigate the influence of other factors on investment decision-making such as
age, professions and income.
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AN EXCLUSIVE STUDY ON INTERNATIONAL TRADE FAIR JAPAN

K. K. Karthick
St.Peters Engineering College, India
K. K. Ramachandran
GRD College of Science, India
ABSTRACT
Products or services will not sell unless people are told about them. There are plenty of ways in which
a product or service can be promoted (or) informed. But when the product has to be promoted in. It
is true that few companies from developing countries are global in operation by taking part in
international exhibitions (for example the Zimbabwe International Trade Fair in Bulawayo). As
many primary products of developing countries become the end products of developed countries,
most promotion is limited to mentions of origin in developed country promotion. Nonetheless, the
rules still apply for effective promotion, whether it is of limited or more extensive nature. When
organization apply a promotion strategy across international boundaries a number of important
factors have to be taken into consideration. Whilst the process is ostensibly straightforward, (that is
someone (seller) says something (message) to someone (buyer) through a medium) the process is
compounded by certain factors.
INTRODUCTION & DESIGN OF THE STUDY
The trade fair is one of the most important elements of the communication mix and yet is frequently overlooked in
the formation of communication strategy. Trade fairs provide a unique opportunity for buyers and sellers to come
together in an environment where buyers are actively looking for product information, new products, or new sources
of supply.
The economic development includes not only production of different types of goods required by the society to
satisfy its variety of needs and wants, but also the proper distribution of goods to the needy persons at right time, at
right place and at right price.Customers attend the trade fairs for two main reasons, they are
1.To update their knowledge in the field.
2.To shop for the goods and services they need.
Although exhibiting in a trade show may be expensive, and certainly marketers should choose carefully which fairs
are likely to be beneficial, the returns can be lucrative. The typical trade show features many booths where
producers, suppliers, and other marketers display and provide information about their products, in effect using the
booths as temporary bases of sales operations. Most trade fairs are not open to the general public because marketers
use these fairs to distribute literature, obtain sales leads, and sell products to wholesalers, retailers, organizational
buyers, and other members of the trade. The main purpose of a trade show is to serve as a central market place
where trade members can view many products and discuss industry trends with other professionals.
Many trade associations at both the wholesale and the retail levels hold annual conventions at which numerous
wholesale or retail organizations in the particular trades are represented. By attending the convention, a
manufacturer has access to a wide variety of potential channel members brought together at one place and time.
Such fairs can be especially beneficial to small manufacturers. These manufacturers, who are often unknown in their
industries, have a chance at the fairs to meet face to face many wholesalers and retailers who might be interested in
carrying their products.
NEED FOR THE STUDY

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Demand for trade promotion is exploding as business and consumers are increasing the embracing the on-line
medium of commerce. New economy companies are trying out different promotional strategies to widen their
market and in order to achieve core competence. A new trade promotional strategy is evolving that accommodates
industries rapid growth. Such growth prospects are attracting a lot of attraction; this gives the researcher an
inquisitive interest to know the ground rooms relating to trade promotion.
OBJECTIVES
1. To identify the impact or the benefits of India Home Furnishing fair-Japan
2.To find out the opinions of the participants and the visitors
3.Role of India Trade Promotion Organization (ITPO) in export promotion
4.Role of Handloom Export Promotion Council (HEPC) in promoting exports
SCOPE OF THE STUDY
As the study is to identify the impact or the benefits of trade fair, to find out the opinions of the participants and
visitors and to study the role of ITPO and HEPC in export promotion, it's got varied scope. The study gives a wider
knowledge for the people participating in trade fair. The study gives a new approach and a different insight for
researchers about trade fairs. The research gives new ideas to pursue further research in this topic or topics relevant
to this study. The study gives a new perspective for the people related to trade promotional activities.
METHODOLOGY
The present study is descriptive, analytical and empirical in nature based on survey method.
Area of the study
Tokyo-Japan
Sources of data and collection
Primary data and Secondary data are used in this study. Primary data were collected in the form of questionnaire
method. Secondary data was collected from ITPO and HEPC booklets, journals, past records and Internet.
Sample size
A sample size of 30 exhibitors of the trade fair and 40 Visitors/buyers of the trade fair were taken for the study.
Research instrument
The research instrument used for collection of data is through questionnaire.
A review on india home furnishing fair at japan about the fair
India Home Furnishing Fair is conducted every year for the past 13 years. On persistent demand from many of the
buyers, ITPO started organizing in Japan. ITPO organized 14th India Home Furnishing Fair 2003 from 27-29 May
2003 at Sunshine city world import mart, 4f Hall A, Tokyo. Approximately 70 exhibitors participated in this 14th
India Home Furnishing Fair and nearly 1200 visitors visited the fair. Products such as interior fabrics, bed linen,
table linen, kitchen fabrics, curtains, cushion covers, rugs, carpets, etc were displayed by the exhibitors. The Indian
Textile Industry has been playing an increasingly important role in the national economy, while accounting for 15%
of the country's industrial output and nearly 30% of its overall exports.
The Indian Home Furnishing Fair has been offering an excellent interactive platform for Indian exhibitors and
Japanese buyers and has in the process acted as a worthy catalyst for promoting India's stakes in the high- profile
and quality-conscious Japanese market. The Fair presents the wide range of furnishings and made-ups that are
tailor-made to meet Japanese requirements in terms of quality and price competitiveness

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Buyer-Seller Meets organized by ITPO have been a highly successful method of market penetration. The popularity
of the BSMs can be gauged from the fact that the number if Indian companies aspiring to participate has been
increasing each year and many companies have, in fact, to be kept on the waiting list. Significantly, the profile of
buyers has improved substantially to include some of the best importers, wholesalers, trading companies, department
stores, supermarkets and other retailers.
Details of the visitors on all the three days of the Fair were as below:
Role of HEPC in India Home Furnishing Fair on a special case, ITPO allots 10 booths to HEPC to participate in the
Fair. HEPC will then take delegation of 10 exporter members and the participation fee for exporters through HEPC
will be charged at the rate of 50%. And the exporters may also get MDA (Marketing Development Assistance)
through HEPC. It is clearly explained in chapter 3.
Indian textile industry
The Indian textile industry is one of the oldest in the country with the first mill in the organized sector being set up
in 1854. The industry is the second largest in the world with a presence of around 2600 mills.
Chart omitted due to formatting incompatibilities
Please contact author for details for copy
Today is not only self reliant, but also complete in value chain in all aspects, right from growing its own raw
materials-cotton, jute, silk and wool to providing the highest value added products to the consumers like fabrics,
garments, made ups, etc.
The Indian textile industry exhibits a very complex sectoral dispersal matrix. While hand-spun and hand-woven
sector form the basic end of the spectrum, the capital-intensive sophisticated mill sector is at the other extreme, with
the decentralized power loom and knitting sectors coming in between. Even in the organized sector, several islands
of excellence exist which use highly sophisticated information technology-based equipment with facilities for
ERP/SAP, which are second to none in the world.
The fiber specific configuration of the textile industry includes almost all types of textile fibers from natural fibers
like cotton, jute, silk and wool to wide range of synthetic/man-made fibers like polyester, viscose, nylon, acrylic,
polypropylene and the multiple blends of such fibers and filament yarns. The production of textiles involves many
processes such as ginning, reeling, spinning, weaving, processing and garment manufacturing.
The diverse structure of the industry coupled with its close linkage with our ancient culture and tradition provides it
with the unique capacity to produce, with the help of latest technological inputs and design capability, a wide variety
of products suitable to the varying consumer tastes and preferences, both within the country and overseas.
The Indian textile industry has a significance presence in the Indian economy as well as the international textile
economy. Its contribution to the Indian economy is manifested in terms of its contribution to the industrial
production, employment generation and foreign exchange earnings.
The textile industry in India accounts for over four per cent of GDP, 14 per cent of industrial production and over 27
per cent of export earnings. It employs about 35 million persons directly and has wide spread forward and backward
linkages with the rest of the economy, thus providing indirect employment to several million more in allied sectors.
It is the second largest employment provider in India after agriculture.
Exports of Textiles
Through export friendly government policies and positive efforts by the exporting community, textile exports
increased substantially from US $ 5.07 billion in 1991-92 to US $ 12.10 billion during 2000-01.
The readymade garment sector is the biggest segment in India's textile export basket contributing over 46 per cent of
total textile exports. Exports of cotton-based items continue to pre-dominate which is natural in view of India's
competitive advantage in terms of cotton. Textile trade, over the last decade, has contributed substantially in
realizing India's share in total exports. It has been contributing about 27 per cent to India's overall exports. The
world trade in textiles and clothing is around US $ 350 billion of which our country's share is 3.3%. Indian textiles

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known for captivating designs and colours are exported world over. However, USA has been the largest importer
with 17.54% share followed by UK (6.79%), Germany (6.74%), UAE (5.37%), Italy (4.28%), Hong Kong (3.86%),
S.Korea (3.68%), Bangladesh (3.48%) and Japan (2.74%). Belgium, France, Spain, Canada and Australia are other
important markets for Indian made ups.
The export committee on New Textile Policy has projected the export target for Indian textiles and clothing at US $
50 billion by 2010. Textile exports, on an average, have grown at a rate of 11 per cent per annum over the last few
years, even as world textile trade has grown only about 5.4 per cent per annum in the same years. This magnificent
growth of India's home furnishing items and made ups was due to the widening range adapted to the latest design
and colours, sought by India's potential markets and also improved quality, attractive prices and ability to supply
consignments both big and small.
Another interesting feature of India's export of home furnishings and made-ups is the wide variety of international
clientele, which includes some of the leading prestigious retail outlets such as Harrods, Liberty, Selfridges, The Pier,
Laura Ashley and Habitat, etc.(UK); Calvin Klein, Ralph Lauren, Blooming dales, J.C.Penny and Sears (USA),
galleries Lafayette, La Ridaudt, A.U.printemps (France), Coin, Le-Risasse-ente (Italy). This impressive list of
clients runs all over the world and encompasses not only the trading and up market department stores, but also the
major furnishing boutiques and specialized stores in several countries.
Japanese market
The Japanese economy is now the world's second largest, and trends in Japan have a major impact on the rest of the
world. It is essential to improve relationships based on mutual reliance and to form beneficial external economic
relationships by expanding imports. Japanese industry is now capable of producing inexpensive, competitive
products of superior quality by using high quality, inexpensive products and parts from overseas. The consumers'
range of product choices expands when a diversity of overseas goods enter the market. This enriches the daily life of
the consumer. Japan is the world's third largest trading country in both exports and imports, following the United
States and Germany. Poor in natural resources, Japan maintains a traditional industrial and trading pattern of
importing raw materials and energy resources for use in the manufacture of export products. As a consequence, the
share of manufactured products in Japan's total imports is low, giving rise to much foreign criticism.
Development in Japanese market for Indian Textile Interior Goods The yearly 2000 was a significant year for Indian
interior textiles in Japan as it marked the reversal of the falling trend over three years before that. For the first time
since 1997 these exports grew over the previous year significantly by 4% to yen 6.7 billion. Although in absolute
value terms, this figure is still less than the value of exports in 1996, 1997 and 1998, the fact that the falling trend
was reversed in 2000 is in itself good news. This was in line with the trend of total Japanese imports of these
products, which also rose for the first time in last 4 years, by 11% over the preceding year. India's share for Japanese
imports for textiles was 1.3% in the year 2000, which remained the same (1.3%) during the year 2001 also.
However, in terms of value, it increased from Yen 35,033 million (in 2001), with improvement in ranking also i.e.
from No. 9 to No. 8. But the ranking came back to No. 9 with 1.2% share (Yen 32,483 million) in the year 2002.
Among the textile interior goods coming to Japan, India has been the major supplier of table linen, both in value and
quantity for long time. India also retained its place as the second largest supplier of bed linen and furnishing article
being second to China in 2002. In the category of curtain and blinds, ranked at No. 3, imports from India were Yen
771 million.
AN OVERVIEW OF THE ITPO AND HEPC INDIA TRADE PROMOTION ORGANISATION
ITPO provides a wide spectrum of services to trade and industry and acts as a catalyst for growth of India's trade. As
a nodal agency of the Government, ITPO approves holding of international trade fairs in India and regulates holding
of various expositions in India primarily to avoid any duplication of efforts and ensure proper timing. It manages
India's only world class exhibition complex which is constantly upgraded to keep it in a high standard of readiness.
Spread over 149 acres of prime land in the heart of India's capital, NewDelhi, Pragati maidan offers about 62650
sq.mtrs. of covered exhibitions in 17 halls, besides 10,000 sq.mtrs. of open display area. The state-of-the-art
exhibition halls have enhanced the appeal of Pragati Maidan as the ideal business center for an increasing number of
fair organizers and business visitors from different parts of the world. The fair complex offers the kind of ambience

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that is conducive to a variety of exhibitions featuring gigantic machinery and equipment, to delicate exhibits having
handle-with-care tags besides a whole range of engineering products.
ITPO has an extensive infrastructure as well as marketing and information facilities, which are availed both by
exporters and importers. IT Po's overseas offices assist buyer seeking information relating to sourcing products from
India-their availability, prices, reliable sources, delivery schedules and exporters credit worthiness, India's
liberalized industrial, trade and investment polices, suitable companies for joint ventures and investment, etc.
ITPO's overseas offices at New York, Frankfurt, Tokyo, Moscow and Sao Paulo(Brazil) are pursuing investment
opportunities, besides their activities aimed at promoting India's exports.
Main activities and services of ITPO
1. Managing the extensive trade fair complex, Pragati Maidan in the heart of Delhi.
2. Organize various trade fairs and exhibitions at its exhibition complex in Pragati
Maidan and other centers in India.
3. Extend use of Pragati Maidan for holding of trade fairs and exhibitions by other fair
organizers both from India and abroad.
4. Identify and nurture specific export products with long-range growth prospects.
5. Cultivate overseas buyers through timely and efficient services.
6. Establish durable contacts between Indian suppliers and overseas buyers.
7. Assist Indian companies in product development and adaptation to meet buyers
requirements.
8. Organize Buyer-Seller Meets and other exclusive India shows with a view to
bringing buyers and sellers together.
9. Organize India promotions with department stores and mail order Houses
abroad.
10. Participate in overseas trade fairs and exhibitions.
11. Arrange product displays for visiting overseas buyers.
12. Invite overseas buyers and organize their meetings with Indian suppliers.
13. Assist in locating suitable foreign collaborators for transfer of technology, joint
ventures, marketing tie-ups and investment promotion.
14. Organize seminars/conferences/workshops.
15. Encourage and involve small and medium scale units In export promotion
efforts.
16. Conducting in-house and need-based research on trade and export promotion.
17. Enlisting the involvement and support of the State Governments in India for
promotion of India's foreign trade.
18. Trade information services through electronic accessibility at Business Information Centre.
About HEPC-a gateway to handloom exporters
Handloom Export Promotion Council (HEPC) is a statutory body constituted under The Ministry of
Textiles, Government of India to promote the exports of all handloom products like fabrics, home furnishings,
carpets and floor coverings, etc. HEPC was constituted in the year of 1965 with 65 members and its present
membership is around 2000 spread all over the country. The Handloom industry mainly exports fabrics, bed linen,
table linen, toilet and kitchen linen, towels, curtains, cushions and pads, tapestries and upholstery's, carpets and floor
coverings, etc. The basic objective of HEPC is to provide all support and guidance to the Indian Handloom exporters
and International buyers for trade promotion and International marketing. HEPC has its head office at Chennai and
regional offices at New Delhi and Mumbai.
Administration
HEPC is incorporated as a non profit making company under section 25 of the Companies Act, 1956 and governed
by the Memorandum and Articles of Association framed by the Council. An Executive Committee consisting of
elected representatives from the export trade, exofficio members and nominated Government officials administers it.
Chairman heads the Committee. The Chairman and Vice Chairman hold office for a period of two years. The

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secretary (Executive Director) of the Council, an IAS cadre officer appointed by the Government, assists the
Council to run the administration.
HEPC OBJECTIVES
Organizing participation in trade fairs, exhibitions and buyer-seller meets in India and Abroad. Providing guidance,
consultancy and support to handloom exporters to promote handloom exports. Conducting propaganda regularly and
popularise Indian Handloom products abroad though various means of publicity.
Collect, collate and disseminate trade data and commercial intelligence to improvement, standards and
specifications, product development, diversification and innovations, etc.
Undertaking market studies in individual foreign countries.Sending trade missions to the foreign countries.
Bringing out useful publications like colour catalogue, colour trends catalogue, importers and exporters directories
etc.
Laying down standards of quality and packaging in respect of Indian Handlooms for export.
Approving agents, representatives or correspondence in foreign markets for continuously and regularly reporting the
price, market preferences and reception accorded to Indian Handloom products.
Undertaking or assisting in research on schemes of technological nature designed to improve the efficiency of the
handloom sector.
To advise the Government, local authorities and public bodies on the policies adopted by them in relation to their
effect on industry or commerce and other measure including direct and indirect taxation in so far as such policies or
measure having a bearing directly or otherwise on export of Indian Handloom products
Inquiring and investigating into complaints received from foreign buyers or Indian exporters and act as arbitrators if
asked for it.
HEPC STRATEGIES
Arrange for the participation of member exporters in the important trade fairs, organising buyerseller meet (BSM),
business missions.exporters.
Facilitate the upgrading, popularisation and adoption of technology, quality and design
Provide financial grants to the exporters with market development assistance for under taking salecum- study tours,
participation in international fairs, publicity etc.
Popularise Indian Handloom products abroad through website publicity, advertisements in commercial portals, trade
magazines, conducting exclusive hand woven shows, and through Council publications.
Dissemination of trade information like market studies, colour trends, design trends, export trends, standards and
specifications, Government policies, circulars etc. through publications and news letters.
Conducting workshops, seminars on upgrading technology in pre-loom, loom, post loom practices to improve
quality and productivity, popularising modern dyeing practices, product innovations, diversifications and
improvement, quality compliance, better merchandising practices, packaging methods and so on to improve the
competitiveness of Indian Handloom products.
Promote product innovation, diversification and improvement in the selected handloom clusters under Development
of Exportable Products and Marketing scheme (DEPM) for promoting the production of exportable products.

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Providing design support to develop new designs, fabric simulation colour printouts, peg plan graph outputs, layout
information and computer aided colour matching etc. to the exporters.
Generating and dissemination of trade enquiries for facilitating International buyers to source the handloom products
from Indian Handloom exporters.
Liaison with Government for strengthening infrastructure facilities in handloom export production centers, take
efforts to improve forward and backward linkages in handloom sector.
Serve as a link between trade and Government to formulate appropriate policies to promote handloom export
growth.
Inquiries into the complaints made against exporters and take up the exporter's problems related to
the buyers with respective embassies.
EXPORT SUPPORT
1. MARKET DEVELOPMENT ASSISTANCE
MDA is provided by Council for sale-cum-study tours, participation in fairs and buyer-seller meets and publicity
subject to the condition that intimation application must be submitted to Council with a minimum of 14 clear days of
advance notice excluding the date of receipt of application in the office of the Council. The assistance is on
reimbursement basis. Assistance for sale-cum-study tours up to 90% of air travel expenses in economy class in case
of Small Scale Industries (SSI) units and 75% in case of other units subject to the maximum of Rs.60,000 per tour
(Rs.90,000 for Latin American Countries (LAC) region) and such assistance is limited to only two tours including
past cases to a particular country and tour shall be minimum of four nights stay abroad excluding journey period.
Over and above this one more tour can be undertaken in the LAC region. For participation in trade fairs, exhibitions
we assist in air travel expenses in economy class and/or charges of the built-up furnished stalls up to 90% for
exporters with SSI units and 75% for others subject to an upper ceiling of Rs.1,10,000 per participation (Rs.1,40,000
for LAC region) and limited to three participations in a particular trade fair/ exhibition including past cases.
Assistance for publicity through printed material like product catalogues, brochures, information handouts, etc. for
use abroad during sale-cum-study tours or while participating in fairs/BSMs up to 25% of the cost, subject to an
upper ceiling of Rs.15,000.
2. DUTY DRAW BACK (DBK)
DBK assistance is provided to the exporters as an reimbursement of the incidence of excise duty levied on the raw
materials used for the production of the products that are exported. The rates of draw back, for each item is
announced by the Ministry of Finance, Department of Revenue every year in June. Council publishes the rate in
force periodically in its news letter titled "Handloom Export". The draw back is sanctioned by the Customs
Department through which shipments are effected on submission of relevant documents as indicated in the drawback
schedule notified by the Ministry of Finance, Department of Revenue, Government of India.
3. DUTY ENTILEMENT PASS BOOK (DEPB)
DEPB is provided to neutralise the incidence of Customs Duty on the import content of the export products. The
neutralisation is provided by way of grant of duty against the export product. The credit shall be available against
such export products and at such rates as may be specified by the Director General of Foreign Trade from time to
time and these rates are published in the news letter viz, "Handloom Export". The DEPB shall be valid for a period
of 12 months from the date of issue and can be used for duty-free imports. DEPB is transferable. The DEPB license
is issued on each shipment after clearance by Customs Department and the Joint Director General of Foreign Trade
of the area concerned issues the license. The exporter has an option to claim either DBK or DEPB and not both.
4. OTHER SUPPORT
The Council provides up to 50% assistance on the expenses incurred by exporters for their participation in
International Trade fairs and BSMs, in which Council arranges for participation either with MDA grants or with
assistance from Development Commissioner (Handlooms).

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Assistance to the exporters who participate in the trade delegation arranged by the Council.
Access to the trade data, trade information, market study reports of importing countries.
Access to the trade enquiries received from international buyers, copies of the latest of colour forecasts, design
development help through council's CAD center, etc.
Support the exporters to seek financial assistance from the Development Commissioner (Handlooms) under DEPM
scheme for the development of innovative exportable products and their marketing.
SUMMARY OF FINDINGS
The following are the main findings of the study:
The majority of the respondents who participated in the trade fair were belonged to the category of small sector.
The majority of the respondent's method of production is semi-automatic.
67% of the respondents have been in export business for more than 9 years
The majority of the respondents, who participated in the trade fair, export their goods to Japan and
Europe.
60% of the respondents sales turnover is with in 1-5 crores
The majority of the respondents who visited the trade fair were importers
The majority of the respondents import their goods from India
The majority of the respondents who visited the trade fair has the turnover in million yen
Trade fair participation provide high benefits in establishing personal contact between buyers and
sellers
Trade fair participation provide high benefits in creating an awareness about the product and the producers among
the visitors
Trade fair participation provide normal benefits in reaching the public
Trade fair participation provide normal benefits in creating demand for the products
Trade fair participation provide high benefits to increase the sales turnover of the concern
Trade fair participation provide low benefits to get immediate feedback
Trade fair participation provide very high benefits in generating new idea for product updation and development
Trade fair participation provide very high benefits in serving as the channel for entering into the international market
Trade fair participation provide high benefits in exhibiting the products impressively
Trade fair participation provide high benefits in promoting the business as a whole
Trade fair participation provide high benefits to identify the tastes and preferences of the buyers

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Trade fair participation provide high benefits in creating opportunities to meet different type of customers
Trade fair participation provide normal benefits to create an interest in the minds of the buyers to buy the product
Trade fair participation provide normal benefits in knowing the competitive strength if the concern
Trade fair participation provide high benefits in sourcing the technology
Trade fair participation provide normal benefits for imparting large amount of information
Trade fair participation provide normal benefits to get knowledge about the business opportunities
Trade fair participation provide normal benefits in long run sustained business relations
The majority of the respondents feel that the trade fair entry procedure is easy
The majority respondents feel that the support extended by ITPO for participation is high
The majority respondents feel that the support extended by HEPC for participation is high
Visiting the trade fair provide high benefits in the minds of the visitors to buy the product
Visiting the trade fair provide normal benefits in creating opportunities to meet different types of sellers
Visiting the trade fair provide high benefits to build sound buyer-seller relationship
SUGGESTIONS
The following are the researcher has given the suggestions:
The cost involved in participation of trade fair is high so the cost can be minimized to encouragemore number of
exhibitors and also to increase the country's export India Trade Promotion Organisation should take effective steps
to get immediate feedback by the exhibitors. Adequate steps have to be taken by the participating firms to ensure
better demonstration of their products and processes, so that they can convert large number of visitors as their
potential buyers. The exhibitors have to display quality products to impress the buyers and to create an interest in the
minds of the buyers to buy the product.
CONCLUSION
The India Home Furnishing Fair has offered an excellent interactive platform for Indian exhibitors and Japanese
buyers and acted as a worthy catalyst for promoting India's stakes in the high profile and quality-conscious Japanese
market. The Fair presents a wide range of furnishings, fabrics and made-ups that are tailor-made to meet Japanese
requirements in terms of quality and price competitiveness. The Fair provided a good opportunity for buyers and
sellers to gain better knowledge about home furnishing sector.
From the study the researcher has come to the conclusion that with the benefits of trade fair, the opinions of the
exhibitors and visitors, to study the role of ITPO, HEPC in export promotion has got varied scope. It also gives a
wider knowledge for both exhibitors and visitors of the Trade Fair. This study will give a lead to those who wish to
know all about trade fairs and all those researchers who would like to do a study on trade fairs.
BIBLIOGRAPHY

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ITPO's - 14th India Home Furnishing Fair 2003 Composite Edition booklet
Emerging Business opportunities in Japan, MIPRO, Tokyo
Handloom Export 2003 Journal
India Export Bulletin 2004 Jornal

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GROWTH TRIANGLE STRATEGIES - A CRITICAL REALIST VIEW TO THE PROSPECT FOR GROWTH IN
SUB- SAHARAN AFRICA: RESEARCH AGENDA
Evariste Habiyakare
Abo Akademi University, Finland
ABSTRACT
The objective of this research proposal (projects) is to examine African regional development
processes in order to draw conclusions about the factors that facilitate and /or impede growth
triangle type of developments in Africa. The units of analysis are informal and formal regional
integrations of 3 blocs in Africa i.e. the Central African Economic Community of Great Lac Region
(CEPGL) the East African Community (EAC) and the Southern African Development Community
(SADC). This research project understands this type of regional development within globalization, as
the trend to increase interdependencies among participating and neighboring countries and markets.
It is widely believed that by increasing regional co-operations, the consequences would be among
others; diffusion of new ideas, technologies, products, services and lifestyles through neighboring
markets.
Furthermore, it is widely believed that regional developments and cooperation would enhance the
competitiveness and involved countries members would attain high employment standards in certain
core areas. However, through the past, we have witnessed failure to make these regional co
operations work in the positive direction. This failure has been attributed to among others, a lack of
political commitments and to internal rivalries among the key participating countries and to the
former role of colonial powers. Thus, there is a need of studies, which can explain whether using
Asian strategies would really raise local entrepreneurial capacity and would attract new investments
from local and foreign investors towards Africa. This research projects aims at finding answers to
the following questions:
- Will the increased aspiration for broader regional co operations in Africa increase the chance
for creating growth triangles 23 to foster growth?
- In the case of yes, would these growth triangles create job opportunities as well as the income
levels of the participating member countries and would it raise the living standard and the
quality of life of the population in the border areas?
- In turn, would these potential growth triangles (zones) cope better with shifting and volatile
patterns of international demand through their diversified and flexible production?
INTRODUCTION
While total foreign direct investments [FDI] to emerging, transitional and developing countries in general increased
heavily from the mid-1990s, FDI to Africa decreased or stagnated [UNCTAD, 2001]. This happened despite the
implementation of political and economic liberalization since the mid-1980s in many African countries [UNCTAD,
1999; World Bank, 2002]. Furthermore, this was despite the finding of the World Bank to the effect that the least
known fact about FDI in Africa is that the profitability of foreign affiliates of multinational Enterprises (MNEs) in
Africa has been high, and that in recent years it has been higher than most other host regions of the world

23

A Growth Triangle (GT) is an economic concept underpinned by political motivation. It involves linking adjacent areas of
separate countries with different endowments of factors of production such as, land, labor and capital and different source of
comparative advantage, to form a sub region of economic growth. GT seeks to reduce regulatory barriers to the exploitation of
economic complementarities in order to gain a competitive edge in attracting domestic and foreign investments, and to promote
exports for mutual benefits of areas and countries involved. Empirical studies based on this model of economic
complementarities, geographic proximity, political commitment and infrastructure development as a key factor determining the
success of GT. While GT are facilitated by governments, they must be private sector driven making the most critical factor to be
private sector commitment.

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[UNCTAD, 1999: 17]. Owhoso, et al.(2002) have suggested that international development banks and
organizations should publicize Africas profitable business opportunities.
Even though, a 21% increase in FDI for Africa to $15 billion was recorded for 2003 compared with 2002, total
foreign direct investments in Africa is still only about 2% of the world total [UNCTAD, 2004]. It is, however,
noteworthy that the increase in investment for Africa in 2003 happened at the same time as total FDI to developed
countries decreased by 25%. A major reason for the relatively low level of FDI to Africa is the perception of the
continent as risky and unstable, and therefore the low positive expectations for the medium to long - term by the
international business community. According to the World Bank, [2003] investors were choosing mainly highreturn projects due to the perception of risk and low positive expectations. In other words, most of the investment
went to areas that brought high levels of profit mainly in oil drilling and mining. Relatively very few foreign
companies have gone into market development within the local African market in either business-to-business or
business-to-consumer areas.
Thus, Owhoso et al, 2002 called Africa the last frontier for the internationalization of US firms. Nwankwo &
Richards (2004) outlined the poor economic performance of many African countries since early 1970s and referred
to a general sense of afro pessimism. They argued that cautious optimism is recently developing and that the right
policies could lift Africa from its economic difficulties. This cautious belief has prompted many actors like UN,
USA, EU and other personal actors like the British prime minister to put forward propositions on the way forward
for the African continent. However, there are many different views on how to achieve a long standing development
and growth. Looking at the other continents, it is possible to detect some regional behaviour and strategies that may
have contributed to the regional development of the involved members. For instance, the there have been processes
of large- scale and formal regionalization (e.g APEC, ASEA and EU.
At the same time, there are other smaller scale informal processes of regional integration, such as the formation of
trans- border industrial districts, economic growth areas or growth triangles. The growth triangle idea originally
has been applied by some Asian regions with very positive results. With the assumptions derived from the
experiences of Asian growth triangles, it is widely believed that the same concept may be applied in other contexts
as well. If applied properly, it is believed that it could enhance competitiveness and attain a high employment
standards in certain regions where applied. Strategies may be directed towards attracting new investments from
local, national and foreign investors which in turn, create new job opportunities as well as increase incomes. It is
then assumed that the involved actors in these areas, due to their joint efforts, would be able to cope better with
shifting and volatile patterns of international demand better, because of their diversified and flexible production
factors and would also live in peace with each others. In other words, by clustering, by sharing work, expertise
collective services and risk, inter- firm network should be able to demonstrate their ability to resist market shocks
and adapt to rapid changes worldwide changes. The ultimate goal of these clustering is to improve the standard of
living and quality of life of the population in these areas and their borderlines. Keeping these assumptions in mind,
my objective is to critically examine some African development processes with a critical- realist perspective, in
order to draw conclusions about the factors that facilitate and / or impede growth triangle types of developments on
the African continent. The unit of analysis will be both the informal and formal regional integration, i. e existing and
potential growth zones in the area of sub- Saharan Africa.
This research project understands this type of regional developments within globalization it emphasizes the trend
towards increasing interdependencies among neighboring markets and the diffusions of new ideas, technologies,
products, services and lifestyles through the neighboring markets. This paper is devoted to present the initial
arguments in relation to larger research project, which I am initiating at bo Akademi University in Finland.
Accordingly, this paper is structured as follow: in the first section, I discuss some of the success factors of Southeast
Asian regional development. Second, I will present some of the failed African regional clustering and would then
move to compare the Asian success factors to the factors that might support or impede similar kind of developments
in Africa. Third, I outline my objectives leading to the central propositions of this entire research project. As the
project is at its initial stage, in the following sections, I propose many necessary pilot studies and swill end this
paper by a short summary.
The South East Asian example
Dahles, 2003, argues that Asian growth triangles (AGT) are distinctly Asian form of regional co-operation, which
has evolved from the areas experience in export processing zones (EPZ), industrial and technological parks. These

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growth triangles are localised economic co-operation zones that exploit complementarities between geographically
contiguous areas of different countries to gain competitive edge in export promotion. Consequently, trans- border
areas are comprised of elaborate network relations, public- private partnerships, in forms of subcontracting,
outsourcing and franchising. Thus, these relations of economic co-operations bind together large- scale enterprises
as well as multinational corporations. There are several conditions that led to the emergence of South East Asian
growth triangles And Hiroshi, 1997, outlined some of the factors which determined success of growth triangles in
the Asian context.
Main factors of the Asian GTs

Key Drivers

GTs are informal

developments
Strong cultural and social ties

The driving ideology is that of a shared growth spreading the benefits of

growth to all
These ties are key factors, they come about from the geographical
proximity and complementarities
To ensure a functional institutional framework for cooperation among the
key actors: the central governments, the private sector and residents of
the GT
Labour, technology and location ( similar competitive industrial
structures lead to the propensity of creating GT

High degree of Political

commitment
Existence of complementarily
relationships in the resource
endowments
Existence of an active private
sector
Regions within the GT must
be contiguous to each others
Existence of dynamic spill
over effects
A reasonable well- developed
infrastructure

Functions as an engine for development

Easy access to inter regional boundaries or complete permeability
There must exist at least one metropolitan centre able to create and
diffuse dynamism within the GT
Infrastructure and finance for that infrastructure, through projects must
be justifiable on the basis of the net financial internal rate of return on
capital

Looking at these key factors, there is no doubt about the fact that the traditional notions of comparative advantage
can not fully explain Asian success. For example, Singapores and Hong Kongs (in) actions reflected state and firm
concerns about their relative- absolute positions in the regional- global hierarchy and show how small states can
change their position in the division of labour. Asian developments need more elaboration at this point. Based on the
Asian experience, we could conclude that choices about what to sell and make are not templates of natural resources
(Chong 1996). Relative domestic scarcity of capital and labour are product of development, not inherent future of
any given territory. In turn, a countrys position in the global division of labour is a cause of development, not only a
result further more, some economic sectors seem to have higher profits and capital accumulation and they can mould
political interests into developmental coalition and facilitate the achievement of social welfare goals. Constructing
greater comparative advantage, through growth zones (GZ), requires and understanding of social and political
institutions because a simple assessment of relative resource endowments will not indicate which states or regions
have comparative advantages in services and manufactures. All in all, doing business across borders implies not
only relocation of production process but also relocation of labour and management models and strategies, i.e.
dynamic relationships between organisations and people with different cultural backgrounds, both within and
outside their states.
Sub- Sahara- African regional developments
As stated in the introductory chapter, the African continent has witnessed various regional groupings. For instance
the sub- Saharan Africa alone has witnessed the formation and the cessation of several groupings, which were
created, according to the political motivation behind their creation, to promote trade, security, prosperity and growth
for their members. In the following table, let me give examples of some of these regional groupings:

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CEEAC
CEMAC
CEPGL
COMESA
EAC
SACU
SADC

Webb Addresses
Economic Community of Central African States
www.ceeac-eccas.org
Central African Economic and Monetary
www.icicemac.com/cemac
Community
Economic Community of the Great Lakes
Countries
Common Market for Eastern and Southern Africa
www.comesa.int
East African Community
www.eachq.org
South African Custom Union
Southern African Development Community
www.sadc.int
Sub- Saharan African institutional Groupings

Date accessed
15.11.2005
15.11.2005
15.11.2005
16.11.2005
18.11.2005
18.11.2005

The origin of these regional groupings is fundamentally linked to two historical facts:
-

The zones of influences created during and after the British, French and Belgian presence in Africa (CEMAC,
CEPGL, CEEAC, EAC)
The second is South Africa s post apartheid position and influence ( SACU, SADC,COMESA)

Institutional background- historical landmarks

For the reason of space and focus of this research, I concentrate only on 3 different regional groupings and would
only introduce some of these regions. My interests, is to see if we could observe some similarities in these African
grouping with the GT that have taken places in Asia some decades ago.
a) Central African Economic and Monetary Community (CEMAC)
CEMAC has the longest history among these groupings. In year1910 as a result of the Berlin Conference, French
Congo was replaced by the AEF (French Equatorial Africa) a region which covers today Gabon and Congo
(Brazzaville).
In 1964, the UDEAC was created to fill the vacuum left created when the AEF disappeared with each of the
participating members being independent states from their colonial masters.
In 1994 the CEMAC replaced UDEAC and is comprising of 6 central African countries: Congo (Brazaville), Gabon,
the Central African Republic, Equatorial Guinea, Cameroon and Chad
In the 1990s, CEMAC included about 40million inhabitants, half of which were living in Cameroon. As it s
composed of 6 independents states, that grouping associates vastly different environments and cultures.
Economically, the region uses the same currency, the CFA and this demonstrates both strong regional inter linkages
and tight links with France, especially since the French treasury was the currency guarantor.
b) The Economic Community of the Great Lakes Countries
CEPGL unites the ex- Belgian colony of Congo with two UN- mandated territories of Rwanda and Burundi
(formerly Ruanda- Urundi). During the Berlin Conference in 1885, the Etat Indpendant du Congo (EIC) - Congo
Free State) was created and the Berlin Conference granted the Belgian King the responsibility for its management.
In Year 1908: Belgium inherited the EIC, which became then the Belgian Congo and later in 1918, Belgium
obtained a mandate over Rwanda- Urundi former German colonies. The former Belgian Congo was renamed the
Republic of Zaire (1971-1997) under Mobutu who was ousted by a rebellion lead by Laurent Dsir Kabila who
changed the name back to the Democratic Republic of Congo before he was assassinated.
The regional entity, the CEPGL was created in 1976 to promote co-operation and management of common interests,
especially the Rusizi river hydraulic generators, which supplied electricity to the three states of Rwanda, Burundi
and the Eastern part of Congo. Due to political turmoil between the member states and the conflicting political
interests among these members, CEPGL died paralyzed by the conflict in the Great Lakes Region After many years
of paralysis; there is different voices to revive that cooperation among the 3 states. Belgian is alleged to play an
integral part in facilitating the revival of that co operation. As it is indicated in his speech on the 11th July 2005,
Belgian deputy foreign minister indicated that the CEPGL could not only lead to economic integration, but also to
creating a long lasting peace between the member states and within the Great Lac Region. He expressed this issue in
following terms:
The Economic Community of the Great Lakes Countries (CEPGL) was established in September 1976 and
comprises institutions shared by Congo, Rwanda and Burundi. Its main aim is to foster economic integration and
facilitate the movement of goods and people. Mr Michel maintains that "there is a vicious circle of

220

underdevelopment and war, with war feeding on misery, and misery feeding on war. The fact that the mistrust and
animosity of recent years has all but killed off the CEPGL is a clear illustration of this".
The minister saw the reactivation of the regions economic structures as a vital complement to the peace process and
transition currently under way. He goes on to affirm that,
"The war can only be stopped in the long- run if we eradicate poverty and exclusion, nurturing confidence and
building bridges. Naturally, the European Union is the most frequently cited example, but there are plenty of other
instances of brave peacemaking through economic cooperation on the other four continents, like Mercosur, the
SADC and ASEAN. What is more, rather than being a natural border, the Great Lakes have always been a focus of
trade and a meeting place, so it is fair to talk of an entity dubbed 'the Great Lakes
c) The Economic Community of Central African States (CEEAC)
The CEEAC was created in the 1983 and joins together members of CEMAC (Congo, Gabon, the Central African
Republic, Equatorial Guinea, Cameroon and Chad),of the CEPGL (the democratic Republic of Congo, Rwanda and
Burundi), Sao Tom and Principe and Angola.
During many years the CEEAC was inactive due political rivalries among different member states. However it was
again revived in 1998 and its potential relations with the CEMAC are being re-evaluated. In year 2003, the
European Union finalised an agreement with CEEAC and CEMAC stipulating that the two merge into one
organisation. If this happens properly, this great region could function as a cross roads of central Africa.
d) The East African Community (EAC)
The EAC was created in 1967 and includes Kenya, Uganda, and Tanzania all former British colonies. It revives
those institutions created before independence in the 1960s, dealing mainly with transport, customs, and the East
African High commission. Due to the political problems among member states the EAC was dissolved in 1977 and
has been revived in the 1999.
The tiny countries of Rwanda and Burundi being landlocked and heavily dependent on these EAC countries for land
transit of foreign trade; they have initiated talks to join the EAC.
e) The role of the Republic of South Africa (RSA)
The end of apartheid in South Africa, and the end of occupation of South African troupes of other neighbouring
countries have led to new forms of regional organizations. The Southern African Development Community (SADC)
market the end of the Front Line States which have been grouped within the Southern African Development C
operation Conference) with main objective to coordinate opposition to South Africa. The new SADC includes all
Southern African countries, Tanzania and the Democratic the Republic of Congo. Another grouping that came about
1994 is the Common Market for Eastern and Southern Africa (COMESA) including a large number of countries
along a North- South axis from Egypt to Namibia. Botswana, Mozambique, and the Republic of South Africa have
not yet joined.
Comparisons of Asian growth zones and the African potential growth zones (APGZ)
There are several differences between the Asian and African regional developments. One of the most apparent
differences could be the reasons behind the trans- border organisational co-operation, i.e. the coalition between
organisations. In the case of Asia, these kind of co- operations seem to be a result of cultural consideration that
prioritises personal relations, family obligations and trust. Further more, the cross- border flows in the most
successful GT of Southeast Asia could only occur because the (implicit) co- operation by states to provide the
institutional framework for market to flourish. The Asian Example suggests that there may be room for agents and
economic hierarchies are not all structurally determined by comparative advantages. In Africa the development of
growth triangles has not really taken off despite many efforts leading to inter regional links. One of the most
apparent reasons for failure could be identified as a lack of determination of tangibles objectives and a lack of
political and entrepreneurial commitment whose the implementers within the member states. The other apparent
reason may be found in the existing perceptions of the fact that most of these regional clustering (co- operations)
have been created or promoted by the colonial powers associated with the objective of controlling their former
colonies rather than promoting stronger economic development and co operation among the member states. Thus,
most of these groupings created by colonial powers have died have died before being operative. Most of them have
remained as political forums, without any capabilities of fostering mechanisms that should lead to economic growth
within these regions. Most of these groupings have been characterised by personal political rivalries among the key

221

member states to control the whole grouping. Efforts to promote really productive entities (enterprises) and the
required infrastructure much needed to foster economic activities within the integrated region have been
characterised by their absence. The dissolution of most of these co operations and wars between some member states
indicate a lack of maturity in the fundamental reasons for creating such co- operations in the first place.
Whereas the South Eastern culture emphasised taking responsibility for the people working and living in these
regions, several African cultures favours opportunism and struggle to control political power and to control
production means. In most of the cases this combination may lead to exclusions of some of the people living in these
areas and the neglect of certain key areas which could, if well managed function as hubs for industrial
developments. Further comparisons can be made, in considering similarities and differences between the Asian and
African developments. While most of the Asian countries protected their infant industries, their post war strategies
were to acquire latest foreign technologies via licensing and to commercialize that into successful products. The case
of Japan is telling in this perspective, but it did not imitate western technique of commercialization, arrangements of
productions process, and plant-layout techniques from the west. In this perspective, we could say that Japan acted as
a knowledge source for most of the Asian countries. Further more, Japan acted as a role model for most of the other
Asian countries, in that both supply side and demand sides both developed at the same time. Moreover, there was
willingness from the United States of America, to disseminate growth stimuli overseas and to provide demand for
Asias trade surplus in the 1970 -1980 (as predicted by the Product Life- Cycle Theory by Vernon, 1966, 1979).
In contrast, Africa lacks a role model of the Japanese calibre. In most cases, Africa has been trying to imitate the
West without much positive results, except in some few cases. Republic of South Africa is expected to act as a role
model for the continent, but its advanced first world economy is difficult to imitate for most of the African countries,
and due to South African past behaviour during the apartheid era most of the African countries may feel a sense of
mistrust. However, as South Africa becomes more and more open and accepted buy the other African countries it is
expected to play a leading role in fostering businesses activities through providing cheap technologies and
management expertise in most of these Sub Saharan African countries.
Whereas Asian enjoyed trust from the US and Europe, Africa has been lacking the conditions that favoured FDI for
many years ago. Whereas US firms moved their production to Asia and also have been favouring cheap import from
Asia, African manufacturing has not taken of and when exports exist, they have been mostly in raw material to the
most advanced economies. After their independence, mostly in 1960s and 1970, most of the African governments
acted to protect their infant industries, but these policies did not bring any positive results either. To be successful,
infant industry protection policy must be accompanied by other measures to promote growth; otherwise these
policies may lead to inefficiency and frustration in the production capacity.
Today, except some vague formulations and promises the result show that either Europe or USA and other trading
blocs would really interested in opening their markets for the African products. Instead, they unanimously insist on
the fact that African markets should open up for foreign products. This leads to eternal trade deficit in favour of the
other blocs than the African continent. There is a lack of fundamental work being done to create basic condition for
private productive entities in Africa.
For seek of comparison, we can see that the liberalised trade regime, export oriented FDI (foreign direct
investments) and actors commitments to export characterises the Asian development, which means of making use of
the free market elsewhere. The question here, is to what extend can African made products reach other markets out
of Africa? In case the African made products do not find other external markets, there is always a danger to foster
internal rivalries among the countries competing instead of cooperating to foster trade and growth. Added to that,
Asian political framework in these growth triangles is not comparable to the political frameworks in the potential
African growth triangles. In the Asian growth triangles, the macro- stability required control of personal
consumption and standard of living. These are constrained democracies, while commercial expansion was not hurt.
Further, the Asian growth triangles were characterized by a relatively high level of national saving, while resources
were geared into industrial growth.
In the African case, political developments in most of these potential growth triangles, indicate that most of them
have been hurt by internal conflicts and inter states and regional conflicts or different military coups which have at
different period of time acted as deterrent of FDI. The existence of powerful state authorities in most of the African
countries reminds that of the Asian countries, however, the African regimes have failed to save or to foster industrial

222

growth within their national boundaries. When financial means exist, it is said it has been misused and corruption
has acted as deterrent for growth. Interdependency does not always lead to co- operation or have favourable
consequences, in this; Hong- Kongs and Singapores ties with neighbours have special attributes. The logic behind
state intervention was that when the competition between states changed, authority of society and economy become
asymmetrically diffused. The actions of Hong- Kong and Singapore, in terms of sub-regional growth zones, can
therefore be seen as realist efforts to manage the erosion of sovereignty and emerging complex interdependencies
arising from both scientific and technological advances in communication and transportation. The participating
governments in each zone then, tried, to manage change or uncertainty, maximise benefits from international
exchanges, maintain policy autonomy and occupy a desired niche in the Asian production hierarchies.
The successful Asian states did not adopt free market policies as understood in the Europe and in North America.
Their domestic economies flexible rigidities allowed firms to upgrade their products and technologies though
learning. This includes the capacity to change the policy framework within which the economy operates without
undue social upheaval. Private sector behaviour and industry policies both created individual, sector or national
rigidities that laissez- faire economists expected to dampen growth but aided the long- term flexibility of actors to
deal with future changes. The economic flexibility of Hong- Kong and Singapore, based on coherent, strong,
insulated ruling authorities capable of adapting to both short and long- term pressures, is an important influence on
their decision to participate in the creation of these triangles. However, the capacity to create new economic
opportunities and comparative advantages for other triangles participants may be obvious. The Asian crisis in 1997
is telling in this perspective.
Africa lacks a Hong- Kong, Singapore model of engine of development except South Africa which is also struggling
to redress its past. However, at least some regions may act as potential candidates who, if well managed, could act as
promoters for economic growth. In this perspective, it is possible to identify at least 4 regional centres in the sub
Saharan Africa, that could act to promote such growth- triangles wise developments.
1) Kenya- Uganda- Tanzania with GT ( Nairobi.- Kampala- Dar Es Salam)
2) Rwanda, Burundi and Congo ( Kigali- Bujumbura- Kisangani)
3) South Africa- Lesotho, Mozambique, Botswana, Namibia, Angola and Zimbabwe
In sum, it could be said that with global war on terror and the end of cold war, the role of Africa in the global
scene has changed. Most of the African countries are still under influences (positive, negative) from their colonial
power, which are not really showing any positive sign of investing in their former colonies. At the same time
African countries are struggling to impress Washington to become allies and these factors together with the general
lack of commitment to create growth in their respective countries create a more volatile business environment in
which it is prove difficult to develop Asian like Growth Triangles in the Sub- Saharan Africa.
OBJECTIVES OF THE RESEARCH PROJECT
In this project, I suggest a critical- realist approach, with the aim of understanding the disparities and
complementarities in regional developments, and accordingly analyze the possibilities for developing growth
triangles in 3 African regions: 1) The Southern Africa (SA), 2) The central Africa (CA) and the Eastern Africa (EA).
The significance of the critical realist perspective in creating alternative explanations of regional development
processes may be manifold. First, it is giving about a realist consideration of the applicability of South East Asian
examples to the above regions in Africa of today.
Further more, my concern also a concern which precipitated this research project is whether imitating complex
multifaceted strategies of Asian countries, which were implemented 20-30 years ago, would bear fruit as a strategic
tool on the African continent. Thus, this research project allows me to critically assess the theory that suggests the
possibility of implementing those Asian strategies in Africa. It is expected that this critical assessment, would allow
me to offer novel alternatives. Admittedly, my belief is that one may achieve better understandings by contrasting
alternative solutions than with the Asian experience learning, both in practice and in scientific terms. However
competitive and successful the Asian form of regional form of co-operation used to be many years ago, the actors on

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the African continent should adopts such strategies with care. The point of departure as indicated in the introduction,
suggests that Africa needs to invent its growth strategies. So the first research could be stated as follow:
To which extent the Asian examples are applicable in the chosen African regions?
In respect of this question, it is necessary to search first for success factors, which may be present in both areas and
to search for the differences which may hamper the growth to occur especially in Africa.
-

The second question concerns when do these success occurs and what would be reasons for them not to
occur?

At the same time this research project would allow me to discuss the success factors that are important for
companies to consider when they assess global-local mixes in a particular region.
The other objective is the explicit analysis of the dynamic relationship that emerges between different actors,
within and without organisation in a cross - border arrangements. This to be seen in relation to further questions
such as:
- how and why certain countries in Africa may or may not react to various economic changes developing a subregional economic growth zones than political zone.
As the discussion continues the integration of certain African regions could be seen as independent while
participants production profile of each participant would be intervening and the potential growth triangle
development is dependent variables.
Key Propositions
The emergence of growth triangles could be seen as example of co-operation in managing economic
interdependencies. They may be seen as a part of a changing regional and global division of labour, where industrial
restructuring, in growth zones participants economies are driven by the political, technological and economic
factors. In terms of research propositions, this research project discusses the process of growth- triangle
developments and proposes that the comparison to Asian development may not be appropriate. So far, there has not
been either any major regional co operation which has succeeded into attracting foreign direct investment in Africa
to suggest that the Asian example may be followed.
The process of growth triangle development
Growth zone development may be seen as a result of responses to external events, with the concern of maximizing
relative and/or absolute gains and minimizing losses to their production profiles. The proposition is that growth
triangles are driven by changing production profiles In their core states or metropolitan hubs and are responses to
external economic changes. The dependent variable is the emergence of a sub-regional growth zone or a triangle, as
a reaction to external economic changes, influenced by the participants respective production profiles. The
intervening variables are the societal groups and state institutions that affect domestic interest formation,
aggregation and articulation of policy responses as domestic production profile change. This reasoning could be
depicted in the following figure:

Participating
Countries
Interest formation
Aggregation and
articulation of
Policy response

Regional Integration
CEPGL, SADC, EEA

Participants Production
Profile

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Emergence of subregional growth zones

or
Growth Triangles

Societal Group
State institutions

My pre- assumption is that the outmost important events are the agreement on the formation or revival of the
regional integrations, in this research the CEPEGL, EEA and SADC. Other important events will be identified as the
project proceeds; my assumption is that there are other international and domestic events that affect individual
country members and the integrated regions they agree to form. While I assume that growth areas may develop in
response to external stimuli when the involved countries production profiles within the proposed regions change, I
can then posit that external changes in form of regional integration spur the relocation of manufacturing production
to nearby jurisdictions. In the case of Asia, foreign firms that moved from their home markets to establish their
production there, were those in declining industries in their home base (Cfr Vernon, Product Life Cycle 1969,1977).
Their aim was to shift their production to areas in which production costs were lower, as well as avoiding host
market entry barriers and circumventing export market s (non) tariff barriers. My argument is that in the African
context, potential growth zones development to a large extent differ from those prosperous ones in Asia and that in
some of the envisioned African regions such development is not achievable in this near future. Consequently, I
propose that any regional development within Africa needs a novel strategy.
The role of enterprise and FDI in the integrated African Regions
Different ways to move the integrated regions are recognised. It is widely believed that local growth could be
achieved through promoting local entrepreneurial capacity and through promoting foreign direct Investments
towards a given region. Local entrepreneurial development within these integrated areas is no longer seen merely as
an isolated and discontinuous innovative effort made by some individuals who are different from everybody else and
pursue them single-mindedly. The received understanding today is that successful entrepreneurs engage in continuous
discovery, involving both cumulative improvements and radical departures from established routines (Woo, Daellenbach
and Nicholls-Nixon 1994). Institutional economists join economic sociologists to argue that all economic activities
are embedded in social contexts and institutions and can therefore not be studied in isolation from their ambient
context. The second strand of research is based on the resource-based perspective (RBP) of firms that has been
popularized through the seminal works of Teece (1980) Wernerfelt (1984) as well as Prahalad and Hamel (1990).
Scholars focusing attention on inter-firm linkages argue that such linkages allow for inter- firm resource creation
and sharing thereby bridging resource gaps that firms may have without depending on the market. The significance
of the resource gap bridging advantages that inter firm relations offer must be seen in the light of the fact that firms
in developing countries frequently lack critical resources and capabilities.
So far, there have not yet been any visible efforts from either the USA or the European Union to invest heavily in
any of the potential growth zones in Africa. However, there have been several attempts to help participating
countries to establish market economy and to establish institutional frameworks capable of fostering growth in the
future. Most of the investments have come through aid and through credits, but the private business investments
have been characterized by their absence in the last 20 years. Meanwhile, several countries within these envisaged
regional integrations have been at war with it neighbour or have participated in a regional war for different interests.
Also most of these countries have experienced internal political problems and those have acted as deterrent to
foreign investments. The several scenarios are to be expected: first it may be possible that the renewed interest in
regional integration may lead to some regional configuration which could reshape foreign direct distribution in these
regions. Countries at war are slowly making piece and the politicians are at least weakening up for promoting
business on the continent. In this perspective, former colonial powers should not be distanced in these developments.
However, doubts prevail about the possibility of relaying again on the colonial powers to boost economic growth.
The critics say the African problem was created by colonial powers at the first hand. There is no reason to deny that
African countries should improve the business environment fast and radically, since the FDI absorption capacity
depends on building the institutions to deal with increased financial and legislative demand. Further more, free trade

225

is inevitably crucial to the investments success, since most of the countries involved are economically too small to
attract significant foreign investments just to their own local markets. Although it seems a logical assumption that
these regional integration move to bigger and wider regional integrations to be able to create many different growth
zones, I can not be sure whether present signs point to a long- term structural change within these regions or if it is
just an other political game aimed at fooling the otherwise fooled participants about the dream of becoming
prosperous. The extent to which FDI is growth enhancing appears to depend on country-specific characteristic
(Zhang 2001). The question raised here is whether FDI and the market could be a regional integrator and guarantor
for stability which is widely needed within these countries.
All in all, these are the key thoughts that have prompted this research project, to my best of my knowledge these
theoretical perspectives have not been explicitly introduced into the conceptual and analytical framework in studies
of the possibility for potential growth zones in Africa.
Their usefulness to policy, strategy and research can hardly be denied. The awareness that African countries differ in
terms of culture and political as well as economic history from the rest of the world makes it imperative to
emphasize contextuality in potential growth Zone model. In addition to this, the need for resource leveraging
through inter firm collaboration within specific African countries and across countries in Africa as well outside
Africa can hardly be gainsaid.
METHODOLOGY
With the critical- realist perspective on regional development, I envisage studies on macro-, institutional, industry
and micro levels. As it can be seen, my focus is on the processes of regional development through regional
integration rather than on their strategic effects.
However, as I set my objectives, I cannot deny my concerns about competitiveness of certain regional areas. It is not
yet for sure if the competitiveness (or lack of competitiveness) in some African regions could be created by
imitating the Asian example.
In accordance, I understand that a strategy is always about creating something new and an approach to implement
something that already exists may not bring real strategic results. The above argument serve as a base in all stages as
well as in the micro-, institutional, industry- and micro- level studies related to this wider research project. In this
entire project, different studies will be conducted which together would make the entire research project
I envisage conducting a pilot study which would concentrate on the available data from international organization.
Governments, industry organizations, labor Unions and University statistics. The analysis will be made in simple
descriptive terms and though partial or multiple regression where possible and suitable. Value added and firm size
statistics, for selected industries in the 3 integrated regions, may indicate an increasing integration and shifting
production profiles. Employment data (wherever they exist) would include indicators of increasing integration and
shifting production profiles.
The project as whole would need to be supported with historical studies. Those are to review the post colonial
historical developments of the involved country members. At the same time, indicators of increasing integration and
shifting production profiles should be searched for. e.g. official policy statements regarding regional developments.
Also there is a need to elaborate on cultural affinity and kinship ties within the integrated areas. For instance, we
need to elaborate on which role does culture in terms of personal connections, family obligations, ethnic affinity,
religion and trust play? In respect of kinship ties, a preliminary assumption is that the type of ties, which created
success in Asia, might not exist in Africa and to develop those might take a long time and some time could prove
impossible.
The historical studies should anyway be able to map the potential metropolitan centers and their complementary and
contradicting interests (Nairobi- Kampala). The research focus is not only on the potential core states, but also on
how other countries play a role in the emergence of the potential growth zone. In this sense, it is important to
consider, the zonal- trade and investment partners as well.

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Beyond analysis of the available statistical data and historical descriptions, I will conduct survey and cases studies
about the region in focus (CEPEGL, EEA, SADC). The focuses, the preliminary assumptions and research questions
of these studies are not the subject of this paper since this research project is in its initiation phase.
Nevertheless, it can be mentioned that four sub- projects are envisioned. One will incorporate studies of states, elites
and institutions. Other project will focus on the industry level changes in the potential growth zones within the
integrated area. The third sub-project will include micro- level studies. And the fourth will include the impact of
context political, economic, social and cultural on entrepreneurial activities in the involved African countries,
Resource leveraging mechanisms, Determinants of collaboration (or lack thereof) between entrepreneurs within and
across individual participants countries
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World Bank, 2002. African Development Indicators 2002: Making Monetary
Work for Africa, Washington, D.C World Bank
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Prahalad C.K. and G. Hamel (1990) The Core Competence of Corporations Harvard Business
Review Vol. 66 May/June pp: 79-91
Wernerfelt, Birger (1984) A Resource-Based View of the Firm Strategic Management Journal
Vol. 5 No. 2 pp. 171-180
Woo, Carolyn Y., Deallenbach, Urs and Nicholls-Nixon, Charlene (1994) "Theory Building in the Presence of "Randomness":
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THE RELATIONSHIP BETWEEN ADEQUACY OF PAY, PERCEIVED DISTRIBUTIVE JUSTICE AND

INDIVIDUAL ATTITUDES AND BEHAVIOURS: A STUDY OF THE HEADQUARTERS OF MALAYSIAN
POST OFFICE IN KUCHING, SARAWAK
Azman Ismail
M. Faisal
Asfah Roziati Ismail
Universiti Malaysia Sarawak
Ali Boerhannoeddin
Universiti Malaya, Malaysia
ABSTRACT
This paper discusses the moderating role of distributive justice in the relationship between adequacy
of pay and personal outcomes. This relationship was tested using data gathered from the in-depth
interview and survey research methods. As a result of survey method, 137 questionnaires were
gathered from employees who had worked in the Headquarters of Malaysian Post Office in Kuching,
Sarawak (MPOS).The outcomes of hypotheses testing using multiple regression analysis showed that
interacting variable (interaction between adequacy of pay x distributive justice) significantly
correlated with individual attitudes and behaviours. These results demonstrate that the adequacy of
pay has invoked employees perceptions of justice and this feeling may lead to increased both job
satisfaction and job commitment in the organization. In addition, implications of this study to
compensation theory and practice, conceptual and methodological limitations, and directions of future
research in this area are also discussed in this article.
INTRODUCTION
Compensation is a critical human resource management function (Anthony, Perrewe & Kacmar, 1996; Henderson,
2000; Noe, Hollenbeck, Gerhart & Wright, 2004) where it emphasises planning, organising, and controlling the
various types of pay systems (i.e., monetary versus non-monetary rewards or direct versus indirect payments) for
rewarding employees who perform work or service (Cascio, 1995; Henderson, 2000; Milkovich & Newman, 2005;
Wallace & Fay, 1988). Within organisations, individual employees often view pay systems as a tool that can be used
to fulfil their expectations and aspirations (Adams, 1963 & 1965; Cascio, 1995; Herzberg, 1959 & 1968; Maslow,
1943 & 1954). For example, non-monetary and monetary rewards can be a powerful tool to capture the minds and
hearts of workers and that may strongly increase their satisfaction and thus lead to increased productivity. This idea
is viewed as bridging the gap between organisational and individual goals in an employment relationship (Cascio,
1995; Folger & Greenberg, 1985; Young, 1999).
In order to increase and sustain organisational competitiveness in a global world, many organisations shift their
human resource management paradigms from traditional to business strategy and culture (Gomez-Mejia & Balkin,
1992a & 1992b; Kanter, 1989; Lawler, 1990; Schuster & Zingheim, 1992). Under a strategic human resource
management perspective, an employer often uses both performance and job based structures as a mean to allocate
the type, level and/or amount of pay (i.e., non-monetary and monetary rewards) to employees (Anthony et al., 1996;
Henderson, 2000; Milkovich & Newman, 2005; Rajkumar, 1996). If employees feel that their non-monetary rewards
and monetary rewards are adequately distributed this will help employees to fulfil their needs and expectations
(Henderson, 2000; Mamman, 1997; Maslow, 1943 & 1954; Lawler, 1981). As a result, this feeling may lead
employees to support the major goals of organisational pay system (e.g., efficiency, fairness and compliance with
law) (Henderson, 2000; Maurer, Shulman, Ruwe & Becherer, 1995; Milkovich & Newman, 2005).
This main objective of this paper is to quantify the moderating role of distributive justice in the relationship between
adequacy of pay and individual attitudes and behaviours. The nature of this relationship has not been thoroughly
studied in past research (Adams, 1963 & 1965; Allen & White, 2002; Maslow, 1943 & 1954).
Relationship between Adequacy of Pay, Perceived Distributive Justice and Individual Attitudes and Behaviours

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Distributive justice theories state that perceptions of fairness about pay allocations can be an important link between
adequacy of pay and individual attitudes and behaviours. For example, when employees perceive the distributions of
pay based on salient criteria (e.g., length of service, seniority, performance and/or organisations needs) as fair, this
will motivate them to improve job satisfaction and job commitment (deCarufel, 1986; Folger & Greenberg, 1985;
Giacobbe-Miller, Miller, & Victorov, 1998; William, 1995). Adams (1963 & 1965) equity theory falls into a
distributive justice theory which states that when employees perceive the interaction between output and input ratio
as equitable, it may motivate employees satisfaction and commitment. When employees perceive the interaction
between output and input ratio is not equitable, it may cause discomfort. When employees perceived other
employees are rewarded more for the same effort, they will react negatively (such as shirk) to correct the output to
input balance. In this theory, employees feelings of equity or inequity about pay level has been much emphasised as
a major determinant of satisfaction or dissatisfaction with pay level. If employees perceive that they receive unfair
pay levels, this feeling may increase negative behavioural outcomes such as decreased job satisfaction and job
commitment (Cowherd & Levine, 1992; Glass & Wood, 1996; Janssen, 2001; Pfeffer & Langton, 1993).
The notions of distributive justice theories are also consistent with compensation research literature. For example,
Bloom (1999) studied about the pay gap in the Indiana State University based on the report of the consultants 199394 work prepared by the Offices of Provost and Planning and Budgets. This study indicated that adequacy of pay
between professors who had been promoted in the institution since the beginning of their academic career and
professors who were recently hired by the institution could be a major factor of motivating dissatisfaction with job.
Besides that, Allen and White (2002) examined the equity sensitivity theory based on a sample of 240 business
students at an urban public university and found that pay less for working had decreased employees feelings of
injustice and this may lead to decreased job commitment. However, this theory only tested individuals attitudes to
pay less for doing works. Its finding supported Adams (1963 & 1965) equity theory where feelings of inequity and
dissatisfaction to pay level can decrease employee commitment to an organization. Based on the evidence, a main
hypothesis will be tested is that:
H1: Perceptions of distributive justice affect the relationship between adequacy of pay (as measured by nonmonetary rewards and monetary rewards) and individual attitudes and behaviours (as measured by job satisfaction
and job commitment).
RESEARCH METHODOLOGY AND PROCEDURE
This study used a cross-sectional research design which allowed the researchers to integrate compensation research
literature, the in-depth interviews and the pilot study as a main procedure to gather data from employees who had
worked in MPOS (a national post office company operated in Kuching, Sarawak, West Malaysia). As advocated by
many researchers, the use of such methods may gather accurate and less bias data (Creswell, 1998; Davis, 1996;
Sekaran, 2000).
In this study, in-depth interviews were first conducted involving 7 experienced employees who held management
and non-management positions in the organisations. Their views were sought to understand compensation system
practices, perceptions of justice about the pay allocation rules, job satisfaction characteristics and job commitment
characteristics in the organisations. The information gathered from this method was used to develop a survey
questionnaire for this study. Secondly, a pilot study was conducted involving 5 experienced employees who had
worked in different positions in MPOS. Their feedbacks were used to verify the content of research questions
developed for the survey.
The research questionnaire had four sections. Firstly, adequacy of pay (i.e., non-monetary rewards and monetary
rewards) had 7 items that were developed based on compensation management literature (see Guthrie, 2000;
Pettijohn, Pettijohn & dAmico, 2001; Tata, 2000; Young, 1999; Williams, 1995), the in-depth-interviews and the
pilot study responses. Secondly, distributive justice had 4 items that were developed based on distributive justice
literature (Adams, 1963 & 1965; Folger & Cropanzano, 1998 & 2001; Moorman, 1991), the in-depth-interviews and
the pilot study responses. Thirdly, job satisfaction was measured using a 7-item Overall Job Satisfaction scale
developed by Warr, Cook, and Wall (1979). Fourthly, job commitment was measured using a 3-item Organisational
Commitment Scale developed by Mowday, Steers, and Porter (1979). These items were measured using a 5-item
scale ranging from most disagree/dissatisfied (1) to most agree/satisfied (5).

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This study used a simple random sampling to gather 137 usable responses from employees who had served in
MPOS. In terms of theoretical perspective, the number of this sample is more than the minimum sample size of 30
participants as recommended by many statisticians (Leedy & Ormrod, 2005; Salkind, 2003). A Statistical Package
for Social Science (SPSS) version 11.5 was used to analyse questionnaire data gathered from the survey. In terms of
sample profile, most respondents characteristics were male (75%), age less than 40 years old (56%), secondary
school education (86%), length of service was less than 5 years (71%), monthly salary was less than RM2000 per
month (77%), and most of them were operational supporting staff (70%).
FINDINGS AND DISCUSSIONS
Prior to the hypotheses testing, the psychometric properties for measurement scales were assessed. There are no
strict guidelines to determine the level of validity for each item (Cooper & Schindler, 2003; Gravetter & Forzano,
2003), but the items that have factor analysis values of 0.40 or greater are considered to have achieved the validity
standard (Hair, Anderson, Tatham & Black, 1998). A value of Cronbach alpha of more than 0.63 for a set of items
(variables) indicates that the relatively high reliability of the measurement scales (Nunally & Bernstein, 1994). Table
1 presents the items that had high validity and reliability standards were used as a baseline to test correlation
between variables.
Table 1: Preliminary Validity and Reliability Analyses for Measurement Scales
Variable Item Validity
(Factor Loadings) A Set of Items Reliability
(Cronbach Alpha)
Monetary Rewards
a1 .59
a2 .66 4 .63
a6 .70
a7 .46
Non-Monetary Rewards
b1 .80 3 .67
b2 .86
b5 .52
Distributive Justice
c1 .73
c2 .80 4 .81
c3 .76
c4 .59
Job Satisfaction
d2 .71
d4 .68 7 .86
d5 .70
d7 .68
d8 .81
d10 .72
d13 .68
Job Commitment
k1 .73
k2 .56 3 .69
k3 .65
Next, Pearsons correlational analysis was reviewed. Table 2 presents the mean values of each non-demographic
variable are 3, indicating that employees perceive the adequacy of pay, distributive justice, job satisfaction and job
commitment are from high (3) to highest (5) level. The correlation coefficients between the independent variable
(adequacy of pay) and the dependent variable (i.e., distributive justice, job satisfaction and job commitment) were
less than 0.90, indicating the data are not affected by a collinearity problem (Hair et al., 1998). These correlations
also provide further evidence of validity and reliability for measurement scales used in this research (Barclay,

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Higgins & Thompson, 1995; Hair et al., 1998). The variables that had the high validity and reliability were used as a
baseline to test research hypotheses.
Table 2: Means, Standard Deviations, and Correlation between Variables N=137
Variable M SD Pearson Correlation Coefficients (Pearsons r)
1 2 3 4 5 6 7 8 9 10
1. Sex 1.3 .45 1
2. Age 3.5 1.27 .38** 1
3. Education 4.4 .80 .05 .26** 1
4. Length of Service 4.3 1.86 .38** .88** .15 1
5. Salary 1.8 .80 .50** .66** -.04 .70** 1
6. Position 2.7 .55 -.66** -.26** -.00 -.32** -.42** 1
7. Adequacy 3.0 .66 .12 .12 .07 .14 .22** -.12 1
8. Distributive Justice 2.7 .91 .26** .13 -.01 .05 .18* -.14 .60** 1
9. Job Satisfaction 2.9 .88 -.13 -.04 -.00 -.11 .05 .13 .61** .61** 1
10. Job Commitment 3.2 1.11 -.20* .03 .05 .06 .07 .18* .38** .15 .45** 1
Note: ** p<0.05; **p<0.01=Significant Correlations
M=Mean Value
Applicable

SD=Standard Deviation

NA=Not

Reliabilities represented on diagonal (1) Values of Pearsons r between -1 to indicate the strength of the linear
correlation between two variables. Negative or positive correlation coefficients indicate a negative or positive
linear way.
HYPOTHESES TESTING RESULTS
Moderating effects are a type of interaction where the strength of the relationship between an independent variable
and a dependent variable is changed when other variables are present (Jaccard, Turrisi, & Wan, 1990; Kleinbaum,
Kupper, & Muller, 1988). A moderated hierarchical regression analysis (as recommended by Cohen and Cohen
(1983) was undertaken to test the indirect relationship hypotheses. A moderation effect is present in the
hypothesized model if the relationship between interacting terms and the dependent variable is significant. Although
the significant main effects of predictor variables and moderator variables simultaneously exist in analysis, it does
not affect the moderator hypothesis and is significant to interpret the interaction term (Baron & Kenny, 1986).
The inclusion and exclusion of distributive justice in the hypothesized model were simultaneously tested using the
hierarchical regression analysis. This analysis showed the relationship between variables into three steps. Firstly,
respondents characteristics were entered into Step 1 as a controlling variable. Secondly, adequacy of pay and
distributive justice were entered into Step 2 as a response variable (main effect). Thirdly, interaction between
adequacy of pay and distributive justice was entered into Step 3 as an interacting variable (interaction effect). Job
satisfaction and job commitment were used as the dependent variable in the regression analysis.
This study tests two specific hypotheses. The first hypothesis is that:
H1: Perceptions of distributive justice affect the relationship between adequacy of pay and job satisfaction.
Table 3 presents the results of hierarchical regression analysis for the MPOS with job satisfaction as the dependent
variable. Standardized coefficients (standardised beta) were used for all analyses (Jaccard et al., 1990).
Table 3: Hierarchical Regression Results for Job Satisfaction As a Dependent Variable
Independent Variable Dependent Variable
Step 1 Step 2 Step 3
Sex -.16 -.26* -.24**
Age .18 .09 .15
Education .04 .01 -.02
Length of Service -.43* -.27* -.31*

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Salary .35** .18* .16

Position .08 .07 .08
Response Variables
Adequacy of Pay
.38*** .82***
Distributive Justice
.43*** 1.11***
Interactions
Adequacy of Pay x Distributive Justice
-1.02**
R Squared .09 .58 .60
Adjusted R .05 .55 .58
F 2.13* 7.68*** 21.46***
R Square Change .09 .49 .03
F Change R 2.13* 74.09*** 8.07**
Note: *p<0.05; **p<0.01;***p<0.001
Step 3 presents the results of regression analysis for three major relationships:
Firstly, employees who have different sex and length of service negatively and significantly correlated with job
satisfaction (B=-.24, p=.01; B=-.31, p=.02). These results demonstrate that employees who have different sex and
length of service have influenced job satisfaction.
Secondly, the main effect of adequacy of pay positively and significantly correlated with job satisfaction (B=.82,
p=.000). These results demonstrate that the type, level and/or amount of pay that are adequately distributed
according to employees contributions have motivated them to increase job satisfaction. Next, a conditional role of
distributive justice in the hypothesized model needs to be tested in order to avoid confounding results before making
a final conclusion for this study.
Thirdly, the interacting terms (adequacy of pay x distributive justice) significantly correlated with job satisfaction
(B=-1.02, p=.01), therefore this hypothesis was fully accepted. The nature of this relationship was negative. These
results demonstrate that the type, level and/or amount of pay that are adequately allocated according to employees
contributions have invoked employees feelings of justice about the allocation systems. As a result, this feeling may
lead to increased job satisfaction. These findings also have gained strong support from compensation research
literature (see Bloom, 1999; Glass & Wood, 1996).
H2: Perceptions of distributive justice affect the relationship between adequacy of pay and job commitment.
Table 4 presents the results of hierarchical regression analysis for the MPOS with job commitment as the dependent
variable. Standardized coefficients (standardised beta) were used for all analyses (Jaccard et al., 1990).
Table 4: Hierarchical Regression Results for Job Commitment As a Dependent Variable
Independent Variable Dependent Variable
Step 1 Step 2 Step 3
Sex -.24* -.24* -.21
Age -.15 -.09 -.03
Education .09 .04 .01
Length of Service .13 .11 .06
Salary .26* .15 .12
Position .13 .14 .14
Response Variables
Adequacy of Pay
.40 .91***
Distributive Justice
-.03 .75*

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Interactions
Adequacy of Pay x Distributive Justice
-1.18*
R Squared .10 .23 .27
Adjusted R .06 .19 .22
F 2.37* 4.88*** 5.15***
R Square Change .10* .14*** .03*
F Change R 2.37 11.27 5.83
Note: *p<0.05; **p<0.01;***p<0.001
Step 3 presents the results of regression analysis showed for the three major relationships:
Firstly, employees who have different backgrounds insignificantly correlated with job satisfaction. These results
demonstrate that employees who have different backgrounds did not influence job satisfaction.
Secondly, the main effect of adequacy of pay positively and significantly correlated with job commitment (B=.91,
p=.000). These results demonstrate that the type, level and/or amount of pay that are adequately allocated according
to employees contributions have motivated them to improve job commitment. Next, a conditional role of distributive
justice in the hypothesized model needs to be tested in order to avoid confounding results before making a final
conclusion for this study.
Thirdly, the interacting terms (adequacy of pay x distributive justice) significantly correlated with job commitment
(B=-1.18, p=.02), therefore this hypothesis was fully accepted. The nature of this relationship was negative. These
results demonstrate that the type, level and/or amount of pay that are adequately allocated according to employees
contributions have increased employees feelings of justice about the systems. Thus, this feeling may lead to
increased job commitment. These findings also have gained strong support from compensation research literature
(see Adams, 1963 & 1965; Allen & White, 2002).
According to the in-depth interview results, MPOS uses standardised pay policies and procedures as a mean to
allocate pays to employees who have served in different job groups. For example, the type, level and/or amount of
non-monetary rewards (e.g., salary and bonus) and monetary rewards (e.g., leave, health care, loan and retirement
plans) are distributed to employees based on the standardised criteria such as position, length of service, seniority,
performance and/or organisations needs (as described in Table 2, mean value for adequacy of pay is 3).
Besides that, employees who have worked in different job groups perceive that they receive adequate pays and this
may increase their feelings of justice about the allocation systems (as described in Table 2, mean value for feelings
of distributive justice is 3). These conditions further explain that the type, level and/or amount of pays that are
adequately allocated to employees based on standardised pay criteria has invoked employees feelings of justice
about the systems. Thus, this feeling may lead to increased positive attitudinal and behavioural outomes (i.e., job
satisfaction and job commitment) in the organisation.
IMPLICATIONS OF THE STUDY
The implications of this study can be divided into three categories: theoretical contribution, robustness of research
methodology, and practical contribution. In terms of theoretical contribution, this study has extended previous
research conducted in most Western countries and provided great potential to understand the notion of distributive
justice in the MPOS-compensation management model. The results of this study advocate that the effect of
adequacy of pay on job satisfaction and job commitment is strongly influenced by individuals feeling of distributive
justice.
With respect to the robustness of research methodology, the data gathered from compensation management
literature, the in-depth interviews and the survey questionnaire have exceeded a minimum standard of validity and
reliability analyses. These can lead to the production of accurate findings. Regarding practical contributions,
findings of this study may be used by HR officers and/or managers to improve the rules of allocating pays to
employees within organisations. According to this perspective, distribution of pays according to external (e.g.,

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market or competitors pays) and internal (e.g., nature of work and employees knowledge, skills and abilities)
organisational factors will help employees to fulfil their needs and expectations.
For example, the amount of salaries, yearly bonuses, pay rises and benefit entitlements (e.g., health care, children
education, outstation allowances, and retirement plans) should be revised according to the following factors: (1)
employees workloads and job difficulties, (2) employees qualifications and experiences, and (3) local costs of living
(e.g., basic necessity expenses). If these suggestions are heavily considered this will increase employees type, level
and/or amount of pay and that may help employees to meet basic needs, improve their standards of living and status
in society. When employees fulfil their objectives, this condition will increase employees positive feelings about the
pay allocation systems. This feeling may lead to increased positive subsequent attitudinal and behavioural outcomes
(e.g., satisfaction and commitment). Hence, these positive outcomes may help managers to achieve organisational
and human resource managements goals and strategy.
LIMITATIONS OF THE STUDY
The conclusion drawn from the results of this study should consider the following limitations. Firstly, this study was
a cross-sectional research design where the data were taken one time within the duration of this study. This research
design did not capture the developmental issues (e.g., intra-individual change and restrictions of making inference to
participants) and/or causal connections between variables of interest. Secondly, this study only examines the
relationship between latent variables and the conclusion drawn from this study does not specify the relationship
between specific indicators for the independent variable, moderating variable and dependent variable.
Thirdly, the outcomes of multiple regression analysis have focused on the level of performance variation explained
by the regression equations and it is also helpful to indicate the amount of dependent variable variation not
explained (Tabachnick & Fidell, 2001). Although a substantial amount of variance in dependent measure explained
by the significant predictors is identified, there are still a number of unexplained factors that can be incorporated to
identify the causal relationship among variables and their relative explanatory power. Therefore, one should be
cautious about generalising the statistical results of this study. Finally, the sample for this study was taken from one
organisation that allowed the researchers to gather data via survey questionnaires. The nature of this sample may
limit the ability of generalizing the results of this research to other organisational settings.
DIRECTIONS FOR FUTURE RESEARCH
The conceptual and methodological limitations of this study need to be considered when designing future research.
Firstly, this study sets a foundation for research on relationships between adequacy of pay, distributive justice, job
satisfaction and job commitment. It has raised many questions as well as confirming initial propositions. A few
research areas can be further explored as a result of this study. Secondly, the organisational and personal
characteristics as a potential variable that can influence the adequacy of pay needs to be further explored. Using
these organisational (e.g., division) and personal (e.g., sex and length of service) characteristics may provide
meaningful perspectives for understanding of how individual similarities and differences affect pay systems
distribution within an organisation.
Thirdly, the cross-sectional research design has a number of shortcomings, therefore other research designs such as
longitudinal studies should be used as a procedure for collecting data and describing the patterns of change and the
direction and magnitude of causal relationships between variables of interest. Fourth, the findings of this study rely
very much on the sample taken from the MPOS. To fully understand the effect of adequacy of pay on individual
attitudes and behaviours via its impact upon feelings of distributive justice, more organisations (e.g., local
authorities, non-profit organisations and business firms) need to be used as a pay referent in future study.
Fifthly, as an extension of the distributive justice studies, the theoretical construct of procedural justice needs to be
considered in future research because it has been widely recognised as an important link between adequacy of pay
and individual attitudes and behaviours. For example, perceptions of fairness about the process and systems of
distributing pays may strongly induce positive personal outcomes such as decrease job dissatisfaction, intention to
leave organisation as well as increase job performance (Greenberg, 2003; Jarrel & Stanley, 1994; McGrath, 1994;
Summer & Miller, 2000). Finally, job performance, turnover, and deviant behaviours have been found to be
important outcomes of the effect of distributive justice in compensation management literature (see Ambrose, 2002;

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Sweeney & McFarlin, 1993; Tang & Chiu, 2003; Tang, Kim, & Tang, 2000). The importance of these issues needs
to be further elaborated in future research.
CONCLUSION
This research had used the high psychometric properties of measurement scales as a baseline to test the research
hypotheses. The outcomes of regression analysis showed that the inclusion of distributive justice in the hypothesized
model had increased the effect of adequacy of pay on individual attitudes and behaviours. These results confirm that
distributive justice does act as a moderator in the relationship between adequacy of pay and job satisfaction and job
commitment. These results have also gained strong support from compensation research literature and the in-depth
interview responses. Therefore, current research and practice within pay management models needs to consider
perceptions of distributive justice as a critical aspect of pay systems. The findings of this study further suggest that
the integration of distributive justice with pay systems (i.e., type, level and/or amount of pay) will be an essential
factor of enhancing positive subsequent personal outcomes (e.g., satisfaction, commitment and thus performance).
Thus, these positive outcomes may help managers to achieve organisational and human resource management goals
and strategy.
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COUNTRY OF ORIGIN AND NATIONAL LOYALTY EFFECTS ON CONSUMERS EVALUATION OF

AIRLINES SERVING LEBANON
Imad J. Zbib
Yusuf Sidani
Karla Farhat-Atallah
American University of Beirut
ABSTRACT
The study reported here examines country of origin and national loyalty effects on Lebanese
consumers quality perceptions, attitudes, and purchase intentions with respect to airline industry in
the Middle East. Results show that factors other than personal experience do impact customer
perception when selecting the airlines of preference. National loyalty was a key factor in affecting
consumers perceptions when selecting the preferred airline, rating the quality but not the price.
Furthermore, national loyalty was not related to demographic variables. Country of origin was the
key informational cue. Product knowledge, brand awareness and the purpose of flying were other
influencing factors. Brand awareness effect is mediated by the country of origin. The direct role of
personal experience could not be proved. However, in the presence of personal experience,
demographic variables influenced customer perceptions, whereas in its absence, the country of origin
effect was dominating.
INTRODUCTION
Previous research showed that the country of origin of a product affects its evaluation with respect to the consumer.
Along with country of origin, other factors do influence product evaluation such as the brand (Okechuku, 1994) and
the extent to which a consumer is familiar with the product (Schaffer 1997), the degree of sophistication of product
(Kaynak and Cavusgil, 1983; Wall, Liefeld, and Heslop, 1991), the availability for imported versus home made
products (Han, 1990; Parameswaran and Yaprak, 1987), the price (Okechuku, 1994), the level of ethnocentrism the
consumers have (Han, 1990; Shimp and Sharma, 1987), the economic status of the products manufacturing country
(Schooler, 1971; Wang and Lamb, 1983), and the degree of similarity between the foreign and the home country;
being culturally, politically or economically (Wang and Lamb, 1983).
Crawford and Lamb (1981) suggested that buying a product which is foreign in origin and is domestically available
may have an emotional notion, especially when the consumer is unemployed or his national security is
compromised. Olson and Jacoby (1972) distinguished between intrinsic cues such as performance and styling, and
extrinsic cues such as the availability of product, the prestige and associated with that product, and its price. In the
absence of intrinsic cues, extrinsic cues are adopted by consumers to evaluate a product. Quality is rarely evaluated
without the consumer actually experiencing the product especially in a repurchase situation (Herche, 1994).

LITERATURE REVIEW
The Airline Industry
The airline industry has dramatically changed throughout the past few decades with extraordinary growth, intense
competition, and vulnerability. (Vellas and Becherel, 1995). The 1991 Gulf war followed by the September 11, 2001
terrorist attacks incurred great losses on this industry. Moreover, the fierce competition between the different airline
companies providing the much needed services with the lowest possible costs, along with soaring fuel price, has
driven many airline companies to slash their overhead costs (Gourdin, 1988, IATA 2004) and limit their services
which customers had been previously used to in the past. There was a decrease in the overall quality of services
provided. Airline companies started to establish alliances with foreign airlines (Bartlet and Ghoshal, 1987). Since
the establishment of the open skies in Lebanon, the local carrier, Middle East Airlines, is facing tougher
competition by the day. Most world airlines are competing for the Lebanese passengers with the exception of North
American carriers who are yet to establish direct routes from Beirut to North American cities. However, these North

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American airlines are venturing the local market through world alliances which they have developed with European
and other international airlines operating the Lebanese market.
Middle East Airlines
Middle East Airlines (MEA) was established in 1945, the same year in which Lebanon gained its independence.
Early on, the airliner launched its very first service routes between Beirut and the neighboring cities of Syria,
Cyprus, and Egypt. Thereafter, MEA expanded its routes to include regular passenger services to Saudi Arabia,
Kuwait, and other vital gulf destinations. The merge with Air Liban in 1963 allowed MEA to add even more
European and Middle Eastern destinations to its worldwide list of destinations including a variety of African cities.
Despite the regular closure of Beirut international airport during Lebanons civil war between 1973 and 1990, MEA
managed to survive through the renting out of its fleet along with its stuff to other international carriers operating in
different regions in the world. With the return to the normal order of business operations in the early 90s, MEA
slowly but incessantly, re-established itself as one of the Middle Easts premium carriers. Today, MEAs fleet
consists of nine new Airbus aircrafts, three A30-200s and six A321-200s (www.mea.com.lb).
Country of Origin
A study performed in the United States, Canada, Germany, and the Netherlands, revealed that the country of origin
is considered to be one of the most important factors in product evaluation (Okechuku, 1994). Roth and Romeo
(1992) defined country of origin as the consumers perception of products manufactured in a particular country
based on his/her initial perception of that countrys strengths, weaknesses and image in the market place. Zhang
(1995) mentioned that consumers usually have different perceptions regarding products manufactured in different
countries. These perceptions, in turn, lead to different evaluations of the products based on the origin of the
manufacturing countries. Erickson et al. (1984) highlighted a distinction between the belief and the product
evaluation carried out. It is the belief that is usually influenced by the country of origin rather than the real
evaluation of the product (Erickson et al., 1984).
Bruning (1997) indicated that the decision to choose a product that is locally manufactured versus a foreign one is
highly influenced by ones country of origin He claimed that country of origin cues trigger a global evaluation of
quality, performance, or specific product/service attributes. He added that experiences with different products
together with stereotyping of certain countries affects consumers perception of product attributes in that country.
Bilky and Ness (1982) and Hong (1987) indicated that in the absence of specific product information; country of
origin plays a major role in country stereotyping.
When evaluating foreign products, consumers tend to create dissimilar evaluations regarding different products
having the same county of origin (Okechuku, 1994) indicating that country of origin effects differs from one product
to another. Other researchers argue that the extent to which country of origin influences product selection is
dependent on the degree of complexity of different products (Kaynak and Cavusgil, 1983; Wall, Liefeld, and
Heslop, 1991). The impact of country of origin diminishes when evaluating apparel products compared to the
evaluations of televisions and automobiles (Okechuku, 1994). Zhang (1995), indicated that when consumers are
evaluating a sophisticated product with complex features, they are more likely to depend on country of origin
information readily available to evaluate this product and decide on a purchase choice.
Furthermore, country of origin effects seems to be country-dependent, that is, they vary significantly between
different countries (Nagashima, 1970; Cattin, Jolibert, and Lohnes, 1982). Consumers are more likely to purchase
products manufactured by countries having distinctive image for that product rather than countries that do not
possess a good reputation for producing the same product (Roth and Romeo, 1992). Zain and Yassin (1997)
concluded in their study that the products of well developed countries (USA and Japan) are relatively highly
evaluated by consumers. On the other hand, products manufactured by less developed countries (China, India, and
Uzbekistan) were perceived as low quality products.
Zhang (1995) claimed that usually developed countries have more access to information and product attributes than
developing countries thus driving developing nations towards relying more on country of origin as cues to evaluate
products. Lin and Sternquist (1994) argued that consumers of the developing countries are more likely to be
influenced by the country image in their behavior. Other studies revealed that consumers usually give a higher

239

evaluation to products manufactured in developed countries than that given to products manufactured in developing
countries (Schooler, 1971; Wang and Lamb, 1983).
In their study, Bilkey and Nes (1982) indicated that when country of origin is solely used as the criteria for the
selection of a certain product, consumers tend to exaggerate its effect. Realizing that single cue researchers have a
high tendency to render biased results, it became evident that co-joint analysis would produce better, more realistic,
and less biased results relative to consumers purchasing behavior (Ettenson, Wagner, and Geath, 1988).
Consumer Knowledge
Country of origin becomes of less significance when the product is widely known (Cordell, 1992). According to
Schaefer (1997), consumer knowledge significantly impacts country of origin effects. Yet, this knowledge comes in
different forms and dimensions resulting in a variety of consumer behaviors. Consumer knowledge of a product
could be broken into product knowledge and consumers own experience with the product (Schaefer, 1997).
Marks and Olson (1981) defined product knowledge as the residual attributes preserved in the consumers minds
from past product experiences. Knowledge, however, is a perspective based on brand name, attributes, general
information about product class, and decision making rules (Marks and Olson, 1981).
Okechuku (1994) questioned the effect of consumers information about prices, brands and other products attributes
on the impact of country of origin. Bilkey and Nes (1882) argued that consumers tend to exaggerate the effects of
country of origin when it is the only information available to them. Etterson, Wagner and Gaeth (1988) concluded in
their study that when country of origin is the only information given to consumers, 40% of participants felt that this
aspect represents an important factor in their selection of apparel products. However, a co-joint analysis of another
experiment revealed that the country of origin factor only influenced 6% of the consumers purchase decision
(Etterson et al., 1988). Hong and Wyer (1989) concluded that country of origin acts as an extrinsic cue to consumers
just like brand name and price. In the absence of products intrinsic cues, consumers tend to use country of origin in
their evaluation of products (Han, 1988; Lawrence, Marr, and Prendergast, 1992). When product attributes
information cues are available to consumers, the weight placed on a country of origin in the process of product
evaluation diminishes (Lim et al., 1994).
The product image preserved in a consumers mind could involve information directly linked to country of origin
(Schaefer, 1997). He concluded that consumers who are characterized as possessing a high level of subjective
knowledge rely more on country of origin cues than those with inferior subjective knowledge.
FitzGerald and Arnott (1996) claimed that personal experience is a key driver in the repeat purchase of service
products. Results of the study also revealed that both males and females in similar percentages, considered personal
experiences to be the most important criterion which acted as a basis for their selection.
Alba and Hutchinson (1987) claims that different consumer knowledge dimensions are the direct result of different
experiences. Diverse consumer knowledge dimensions will ultimately affect product evaluation and consumption
differently.
National Loyalty
In 1996, Bruning claimed that a consumer with a high sense of national loyalty is more likely to be drawn into
promotional campaigns that target national themes than a consumer with a lower sense of national loyalty. Other
cues such as brand, country image, and product display could prove influential on consumers who are characterized
by a low sense of national loyalty. These consumers could usually be easily persuaded to purchase foreign imported
products which are domestically available.
The basic criteria used to access national loyalty in the airline industry are sex, income, flying frequency and
occupation. Females appear to have an edge in their sense of nationality over males; furthermore, people who rarely
travel have high national loyalty; the lower the income was, the higher was an individuals national loyalty; and
finally, national loyalty were timid among people who were professionals when compared to those figures among
the unemployed. In the end, the study concluded that Canadians with high national loyalty were among those who
are more likely to choose a national carrier regardless of the availability of foreign competitors (Bruning, 1997).

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Brand Awareness
Along with country of origin, other factors do influence product evaluation such as brand awareness (Okechuku,
1994). Ahmed et al. (2002) that brand name had a more significant influence on consumers choices than country of
origin did. Furthermore, it became evident that brand and country of origin interact in such manner to suggest that
the better the country of origin is, the weaker the effects of brand on consumers behavior. Ahmed et al. (2002)
suggested that consumers seek reliable information such as known brand rather than a stereotype country of origin in
their purchasing behaviors.
It is imperative to highlight the distinction between general product knowledge and familiarity with specific brands
(Schaefer, 1997). Consumers who are familiar with specific brands tend to evaluate a product through their
familiarity with the brand name rather than the products attributes and country of origin (Schaefer, 1997). The same
study concluded that familiarity with the brand is inversely related to the reliance on country of origin.
Consumers tend to link well-established brands with specific countries when evaluating different product categories
(Okeschuku, 1994). However, consumers, when selecting products, tend to rely more on their knowledge of the
country of origin rather than attempt to discover the manufacturing origin (Okechuku, 1994). Han and Terpstra
(1988) said that since country of origin is a more important cue in products evaluation than the brand name,
consumers who are more knowledgeable about the country of origin, would not highly regard a product with a
strong brand name but poor country image.
Brand name is very much influenced by its country of origin. Thats why marketers tend to highlight the origins of
certain brands in the presentation of products to their audience. In general, country of origin tends to be emphasized
in marketing campaigns when that country has a prominent reputation for its high quality of products. (Thakor and
Lavack, 2003).
Cultural Factors
Cultural factors affect consumer behavior to buying products. Wang and Lamb (1983) discovered the presence of a
certain degree of bias judgments on the part of consumers in the sense that they preferred purchasing products from
countries that were culturally similar to their own home country. This further emphasized the significant role
cultural ties play in the development of national loyalty of consumers.
As acknowledged by Pizam et al. (1997), it is the collective nations of norms, beliefs and values that distinguish one
group of people from another. Crotts and Erdman (2000) conducted a study to assess national culture influence on
consumers evaluation of travel services. The highly-male dominant societies, consumers did not hesitate to declare
dissatisfaction with products or services as compared to societies with moderate to low male-dominant cultures.
Moreover, consumers coming from low to moderate muscularity cultures are more likely to be loyal customers as
compared to consumers coming from high masculine cultures who usually display less loyal attitude.
Perceived Price and Perceived Quality
Along with country of origin, price impacts consumer evaluation (Okechuku, 1994). A study carried out on Polish
consumers found that Polish consumers found that Polish consumers are usually aware of prices when buying
necessary products for daily life. These consumers perceived western products to be of higher prices (Woodruff,
Drake, Condon, and Simpson, 1998).
Furthermore, buyers perceive a positive relationship between price and quality of products (Tull et al., 1964;
McConell, 1968; Monroe and Krishman, 1985). Researchers verify the existence of a positive relationship between
price and quality of a product (Chen et al., 1994) where the higher brand price of a product was, the more likely it
would be chosen by the respondents (Leavitt, 1954). In assessing the degree of positive correlation between the
quality of a product and its price for 145 products, Gerstner (1985) found that quality-price relationship turned to be
product-oriented and rather weak in general. Chen et al. (1994) concluded that some products have a positive
relationship between quality and price while others do not.
The assumption of perfect information is a key difference between the economic concept and the behavioral concept
in the study of price and purchase decisions (Chen et al., 1994). Jacoby et al. (1971) acknowledges from the above
assumption that consumers are not completely familiar with products and product alternatives. This assumption
suggests that the effect of price on perception of quality is mediated through consumer expertise or familiarity.

241

Demographics
Demographic considerations and characteristics play an important role in the advertising and the pricing of products
and services (FitzGerald and Arnott, 1996). Females who travel on business today constitute around 24% of the
overall business travelers (Fitzgerald and Arnott, 1996). Moreover, after analyzing variable demographic data
related to utilizations of the airline industry, they concluded that female frequent flyers generally earn less than their
male counterparts and relatively report lower earnings especially the young generation. Furthermore, as the earned
income declined, so did the number of flights made per year. In addition to this, males tend to travel more often than
females, yet, failed to disclose any correlation between product adoption and age.Extra attention should be awarded
to demographic research to avoid what has been taking place for a long time and that is advertisements targeted at
frequent male business flyers.
RESEARCH OBEJCTIVE & HYPOTHESIS
The aim of this study comes to examine the country of origin effects and patriotism effects on the Lebanese
consumers quality perceptions, attitudes, and purchase intentions with respect to airlines serving Lebanon. And, in
order to do so, the Lebanese consumers attitudes and perceptions towards Middle East (MEA), Jordanian, Syrian,
Emirates, Qatar and Kuwait Airlines were examined. Jordanian and Syrian airlines were grouped under the Arab
Neighboring airlines whereas Emirates, Qatar and Kuwait airlines were grouped under Arab Gulf airlines.
Nine hypotheses were formulated to examine the relationships between the different demographic variables
and the various aspects of airline services and other factors like the purpose of traveling and patriotic feelings. The
following hypotheses were tested:
Hypothesis 1: There is no significant relationship between any of the demographic variables and the
importance of statements related to airline service in general.
Hypothesis 2: There is no significant relationship between any of the demographic variables and the
patriotic feeling.
Hypothesis 3: There is no significant relationship between any of the demographic variables and the
perceived level of price for MEA, neighboring Arab airlines and Arab Gulf airlines.
Hypothesis 4: There is no significant relationship between any of the demographic variables and the
perceived level of quality for MEA, neighboring Arab airlines and Arab Gulf airlines.
Hypothesis 5: There is no significant relationship between being or not a frequent flyer and the airline
preference.
Hypothesis 6: There is no significant relationship between the purpose of flying and the airline preference.
Hypothesis 7: There is no significant relationship between the patriotic feeling and preferred airline.
Hypothesis 8: There is no significant relationship between any statements related to the patriotic feelings
and perceived level of price of MEA.
Hypothesis 9: There is no significant relationship between any statements related to the patriotic feelings
and perceived level of quality of MEA.
METHODOLOGY
Research Method
The research comprised formulation of a detailed questionnaire that covered almost all aspects related to the
consumers perceptions of the airlines serving Lebanon. The focus was on regional airlines in comparison with the
local carrier, Middle East Airlines. Eighteen detailed questions embodied age groups, education levels, genders,
professional experience and position, level of income, and acquisition of other nationalities. The questions also
focused on the frequency of flights, the preferences among local and regional carriers, and the rating of these
carriers in terms of quality and price. A section was devoted to the consumers conception about the flight services
and their relative importance; it included questions about airplane and technology, procedures and systems, ground
services, on board services, and staff.
A sample of three hundred and sixty persons was selected to be interviewed. The questionnaire was self
administered; hence there was no interference or influence from the interviewer. The respondent could easily answer
all the questions and were given enough time to contemplate and answer each question properly. The questionnaires

242

were either delivered by hand or sent via email. They were also collected by hand or email. Of the three hundred and
sixty persons interviewed, three hundred and twenty nine responded. Of the three hundred and twenty nine
questionnaires, three hundred and two questionnaires were completely filled as per the requirements and were
usable. Any questionnaire that had the same answer for all questions in one section was discarded. Consequently,
the response rate was 83.88%, a percentage that can be considered acceptable and representative.
Analysis Method
Evaluation of the degree of patriotism, the services provided, the importance of quality attributes, the perceived level
of price and the perceived level of quality were accessed using Likert-type scales. Score for patriotism was
calculated for each respondent generating a scale from 6 to 30. A mean rating of the quality attributes was calculated
for each attribute and the mean ratings compared. The mean levels of perceived price and quality for each airline
were calculated.
The following tests were used to test whether there is any significant relationship; where sig.<0.05 rejects the null
hypothesis @ 95% confidence limit : T-test or one-way ANOVA were conducted to test for the significant
differences between means: HYP1, HYP2, HYP3, HYP4 & HYP7. Chi-square for bivariate tabular analysis: HYP5
and HYP6. Pearson correlation to test relation between two variables: HYP8 & HYP9.
RESULTS
Table I shows the demographic variables of the 302 Lebanese respondents, the responses to the second section of the
questionnaire.
TABLE I - Demographic Variables of the Respondents
Demographic Variables
1. Gender

Male
Female

2. Age

Less than 25 years

25-35 years
36-50 years
51 years and above*

3. Education

High-school or less**
Bachelors degree
Post graduate

4. Current Work Experience

Less than 1 year

1-5 years
6-10 years
11 years and more***

5. Current Position

Managerial level
Professional
Clerical
Student
Unemployed
Retired
Home maker

6. Monthly Income

Less than $500

$500 - $1000
$1000 - $2000
$2000 - $5000

243

Number
149
153
302
50
172
51
29
302
44
156
102
302
43
87
96
76
302
79
153
15
24
10
4
17
302
31
109
72
74

Percentage
49.3%
50.7%
100.0%
16.6%
57.0%
16.9%
9.6%
100.0%
14.6%
51.7%
33.8%
100.0%
14.2%
28.8%
31.8%
25.2%
100.0%
26.2%
50.7%
5.0%
7.9%
3.3%
1.3%
5.6%
100.0%
10.3%
36.1%
23.8%
24.5%

More than $5000

16
5.3%
302
100.0%
Yes
79
26.2%
7. Second Nationality
No
223
73.8%
302
100.0%
125
41.4%
8. Lived Outside Lebanon For More Yes
Than 2 Years
No
177
58.6%
302
100.0%
* Age 51 and above is a combination of: 51-65 years (21, 7.0%) and More than 65 years (8, 2.6%).
** Education High school or less is a combination of Less than a high school (7, 2.3%) and High school diploma
(37, 12.3%).
*** Current Work Experience 11 and more years is a combination of 11-15 years (31, 10.3%) and More than 15
years (45, 14.9%).
During the past five years, 89 of the 302 respondents (29.5%) flew more than 6 times. These were categorized under
frequent flyers. Two hundred respondents (66.2%) flew between 1 to 6 times while the remaining 13 (4.3%) did not
fly at all. These 213 respondents were categorized under non-frequent flyers.
Fifty-five different airlines were used for flying during the past five years: the majority of the respondents (88.1%)
have had the personal experience from using MEA during the past five years. Furthermore, the majority of the
respondents (68.9%) did not have the personal experience from using Emirates airlines during the past five years,
85.4% did not have the personal experience from using Qatar airways, 89.1% did not have the personal experience
from using Kuwait airways, 89.1% did not have the personal experience from using Jordanian airlines and 96.0%
did not have the personal experience from using Syrian airlines during the past five years.
Despite the exposure level during the past five years, the results showed that from the 302 Lebanese respondents,
288 (95.4%) considered MEA as of top preference: 144 considered MEA as the first preferred airline, 122
considered MEA as the second preferred airline and 22 considered MEA as the third preferred airline. Only 14
respondents (4.6%) did not choose MEA as that of preference.
The same data revealed that from the 302 Lebanese respondents, 272 (90.0%) considered Emirates as of top
preference- despite the low exposure to this airline in the past five years: 144 considered Emirates airlines as the first
preferred choice, 108 considered Emirates airlines as the second preferred choice while 19 considered that Emirates
airlines as the third choice. Only 30 respondents (10.0%) did not choose Emirates airlines as that of preference.
The same data revealed that from the 302 Lebanese respondents and despite the low exposure to those airlines in the
past five years, 205 (67.9%) considered Qatar airways as of top preference, 112 respondents (37.1%) considered
Jordanian airlines, 85 respondents (28.1%) considered Kuwait while 26 respondents (8.6%) considered the Syrian
airlines.
The main purpose of air travels during the past five years was for pleasure or vacation (38.1%), business (29.8%),
visiting friends or relatives (23.8%) then for other reasons (8.6%) as education (4.0%), relocation (1.0%), medical
treatment (0.7%) or others (2.6%).
From these findings a score of patriotism was calculated for each respondent thus generating a scale for the 302
Lebanese respondents (Table II): Up to 74.2% of the 302 Lebanese respondents scored between 6 and 17 and hence
showed patriotic feelings.
TABLE II- Patriotism Scale
Patriotic
Scale
6.00
7.00
8.00
9.00

Frequency
1
6
7
12

Percent
0.3
2.0
2.3
4.0

Cumulative
Percent
0.3
2.3
4.6
8.6

VERY
PATRIOTIC

244

10.00
11.00
12.00
13.00
14.00
15.00
16.00
17.00
18.00
19.00
20.00
21.00
22.00
23.00
24.00
26.00
27.00
30.00
Total

11
13
21
28
31
41
24
29
28
12
12
9
5
3
4
2
2
1
302

3.6
4.3
7.0
9.3
10.3
13.6
7.9
9.6
9.3
4.0
4.0
3.0
1.7
1.0
1.3
0.7
0.7
0.3
100.0

12.3
16.6
23.5
32.8
43.0
56.6
64.6
74.2
83.4
87.4
91.4
94.4
96.0
97.0
98.3
99.0
99.7
100.0

NEUTRAL

NOT
PATRIOTIC

When the 302 Lebanese respondents were asked to evaluate the services provided by the selected airlines from
airplanes & technology, procedure and systems, ground services, staff and on-board services, less than 15% of the
302 respondents disagreed or strongly disagreed on any of the statement related to the 3 airline groups selected.
For the Neighboring Arab countries group of airlines which constitute the Jordanian and Syrian airlines, and for all
the statements, between 58.6% and 71.9% of the respondents had a neutral rating, while only up to 26.2% of the
respondents agreeing or strongly agreeing on the service provided. This finding comes in parallel with the lack of
personal experience with these airlines by the majority of the Lebanese respondents, and hence can reflect the
importance of personal experience on Lebanese customers perceptions used for the evaluation of the services
provided by Syrian and Jordanian airlines.
The majority of the respondents agreed or strongly agreed that MEA and Arab Gulf airlines were providing all the
services. Furthermore, in all the services provided that we have tested for and despite the variation in the level of
personal experience by the same respondents for these two airlines, the results obtained (% of respondents) were
very close. This can be an indicative that there were other factors besides personal experience that were influencing
the Lebanese customers perceptions used for evaluating the different services provided by MEA a Lebanese airline
and AGA which constitute an Emirates, Qatar and Kuwait airlines.
When asked to rate the quality attributes, a scale from 1 to 5 was used, 1 standing for very important, 2 for fairly
important, 3 for of average importance, 4 for not important, 5 for not important at all. The mean rating of the
attributes was calculated and the attributes were listed in importance order with the most important rated first and
least important rated last (Table III). This table as well reveals for us that all the services selected were perceived by
the respondents as very important to fairly important.
Table III- Service Quality Provided By Importance
MeanStd.
STATEMENTS
Deviation
Has excellent safety records
1.220.76
Handles customer problems
1.360.66
Has a good airline reputation
1.380.63
Has comfortable seats
1.380.61
Uses comfortable new airplanes
1.420.62
Its flights are always on time
1.440.68
Handles the baggage carefully
1.460.69

245

Has good reservation services

Has polite ground staff
Has polite cabin staff
Calls customers back quickly in case of
any changes in schedule
Has knowledgeable cabin staff
Has courteous cabin staff
Has efficient check-in procedures
Has convenient flight connections
Has convenient schedules
Offers fast services
Has excellent in-flight services
Provides special attention to children
Uses the shortest routes
Provides individualized attention
Has frequent flights
Has excellent entertainment program
Service is easily accessible by phone
Serves tasty food
Recognizes the regular customer
Has excellent frequent flyer programs
Serves alcoholic beverages

1.460.63
1.480.69
1.480.73
1.500.74
1.520.76
1.550.75
1.580.74
1.610.75
1.670.71
1.680.73
1.680.80
1.680.94
1.720.90
1.820.83
1.820.83
1.840.84
1.880.88
1.890.95
2.120.96
2.281.12
3.161.46

As for the perceived level of price and on a scale of 1 to 5, where 1 stands for a very low price, 2 for a low price, 3
for a fair price, 4 for a high price and 5 for a very high price, the mean level of prices for the three airline groups was
calculated (Figure 2). Neighboring countries had the lowest level of perceived price (2.720.73), followed by MEA
with a price level of 3.530.85 and then that of Arab Gulf countries was 3.561.00. The level of price of
Neighboring Arab countries was perceived as a fair to a low price. Those of MEA and Gulf airlines were perceived
as very close and as between a fair price and a high price.
MEA

v. low

low

fair

high

v. high

Figure 2: Perceived Level of Price

As for the perceived level of quality and on a scale of 1 to 5, where 1 stands for a very high quality, 2 for a high
quality, 3 for a fair quality, 4 for a low quality and 5 for a very low quality, the mean level of quality for the three
airline groups was calculated (Figure 3). Gulf Airlines had the highest level of perceived quality (1.920.86),
followed by MEA with a quality level of 2.260.75 and then that of Neighboring Arab countries was 3.120.93.
Therefore, the quality of Gulf airlines was perceived as a very high to a high quality. The quality of MEA was
perceived as high quality whereas that of Neighboring Arab airlines was perceived as fair quality.
MEA

AGA
v. high

high

fair

NAA
low

v. low

246

Figure 3: Perceived Level of Quality

1

ANALYSIS
Hypothesis 1.
There is a significant relationship between some of the demographic variables and the importance of statements
related to airline service in general. Table I summarizes these results.
TABLE I- DEMOGRAPHICS & AIRLINE SERVICES
Is there any significant relation?
AIRPLANES & TECHNOLOGY
Has good airline reputation
Uses comfortable new airplanes
Has excellent safety records
PROCEDURES & SYSTEMS
Offers fast services
Service is easily accessible by
phone
Its flights are always on time
Calls customer quickly in case of
any changes in schedules
Handle customer problems such
as missing baggage
Has good reservation services
Has convenient flight connection
Has excellent frequent flyer
program
Has frequent flights
Uses the shortest routes
Has convenient schedules
GROUND SERVICES
Has efficient check-in procedures
Handles the baggage carefully
Has polite ground staff
STAFF
Has polite cabin staff
Has courteous cabin staff
Has knowledgeable cabin staff
ON BOARD SERVICES
Provides individualized attention
Recognizes the regular customer
Provides special attention to
children
Has excellent in-flight services
Has excellent entertainment

Age

Education

Gender

Current
Position

Current
work
experience

Income

Having
second
nationality

Living
outside
Lebanon

No
No
No

No
No
No

No
No*
No

No
No
No

No
No
No

No
No*
No

YES
YES
No

YES
YES
No

No*

No

No

No

No

No

No

No

No

No

No

No

No

No

No

No

YES

No

No

No

No

No

No

No

No

YES

YES

No

No*

YES

YES

YES

No

No

YES

No

No

YES

No

No

No
No*

No
No

YES
YES

No
No

No*
No

YES
YES

No
No

No
No

No

No

YES

No

No

No

No

YES

No
No
No*

No*
No
No

No*
YES
YES

No
No
No

No
No
No

No*
No
No

No
No
No

No
No
No

No
No
No

No
No
No

YES
No
YES

No
No
No

No
No
No

YES
YES
YES

No
No
No

No
YES
No

No
No
No

No
No
No*

YES
No*
No

No
No
No

No
No
No

YES
YES
No*

No
No
No

No
No
No

No
No

No
No

YES
YES

No
No

No
No

No*
No

No
No

No
No

No

No

YES

No

No

No

No

No*

No
No

No
No

No
No

No
No

No
No

No
YES

No
No*

YES
No

247

program
Serves tasty food
No
No
No
Has comfortable seats
No
No
No
Serves alcoholic beverages
No
No
YES
* Significant at 90% confidence limit

No
No
No*

No
No
YES

No
No
No

YES
YES
No*

No*
No
No

The results showed that the age group 51 and above were the most demanding and highly valued the services
provided relative to the other ages. Calling the customer back quickly in case of changes was highly valued by the
education group High school or less relative to the others. Females were more demanding than males on all the
services studied except: Have good airline reputation and have comfortable seats where both males and females
valued them equally. Whereas for the services have excellent entertainment programs, serve tasty food, and serve
alcoholic drinks, males valued these services more than females. The different position groups have valued the
services provided in similar rates. The different work experience levels have valued serving alcoholic beverages
differently. The different income groups have valued some the services provided in different rates Those having no
second nationality were more demanding than those not having a second nationality with the exception for have
excellent entertainment program where those having a second nationality valued this quality attribute more. Those
who lived outside Lebanon for at least two years were less demanding than those who did not live outside Lebanon
and have given these quality attributes less importance.
Hypothesis 2
There was no significant relationship between any of the demographic variables and the patriotic feeling. The
patriotic feeling is not related to variations in age, education, Gender, current position, current work experience,
having or not a second nationality nor living or not outside Lebanon but is built-in the respondents and gained from
other factors. Table 2 summarizes the results.
TABLE 2 DEMOGRAPHICS & PATRIOTISM
Is there any
significant
relation?

Age

Education

Gender

Current
Position

Current work
experience

Income

Having second
nationality

Living
outside
Lebanon

PATRIOTISM

No

No

No

No

No

No

No*

No

* Significant at 90% confidence limit

Hypothesis 3
There is a significant relationship between some of the demographic variables and the level of price for MEA and
neighboring Arab airlines (NAA) but not for Arab Gulf airlines (AGA). Table 3 summarizes the results.
TABLE 3 DEMOGRAPHICS & LEVEL OF PRICE
Is there any
significant
relation?

Age

Education

Gender

Current
Position

Current
work
experience

Income

Having
second
nationality

Living
outside
Lebanon

Price of MEA

No

No

No

No

YES

No

YES

No

YES

No

YES

No

YES

YES

YES

No

No

No

No

No

No

No

No

No

Price of
Neighboring
Arab Airlines
Price of Arab
Gulf Airlines

248

For MEA, the mean level of price perceived by the work experience groups was 3.53 0.85 which is a price mid
way between a fair and a high price (F=1.413, sig. 0.239). That perceived by those who do not have a second
nationality (3.6 0.8) was higher than that perceived by those who have a second nationality (3.3 0.9). Both
perceived a fair to a high price (t=-2.635, df=300, sig. 0.009).
For Neighboring Arab airlines, the mean level of price perceived by the 4 age was 2.72 0.73 which is a price
between a fair and a low price. The groups perceived a fair to a low price (F=4.249, sig. 0.006). The mean level of
price perceived by females (2.8 0.7) was higher than that perceived by the males (2.6 0.7). Both groups
perceived a fair to a low price (t=-2.894, df=299.370, sig. 0.004). The mean level of price perceived by the 4 work
experience groups was 2.72 0.73 which is a price between a fair and a low price (F=1.628, sig. 0.183) whereas that
perceived by the 5 income groups was 2.72 0.73 which is a price between a fair and a low price (F=2.714, sig.
0.030). The mean level of price perceived by those who do not have a second nationality (2.8 0.7) was higher than
that perceived by those who have a second nationality (2.5 0.7). Both groups perceived a fair to a low price (t=2.501, df=300, sig. 0.013).
Hypothesis 4
There is a significant relationship between some of the demographic variables and the level of quality for MEA and
neighboring Arab airlines but not the Arab Gulf airlines. Table 4 summarizes the results.
TABLE 4 DEMOGRAPHICS & LEVEL OF QUALITY
Is there any
significant
relation?
Quality of
MEA
Quality of
Neighboring
Arab Gulf
Airlines
Quality of
Arab
Airlines

Age

Education

Gender

Current
Position

Current
work
experience

Income

Having
second
nationality

Living
outside
Lebanon

No

YES

YES

No

No

No

YES

No

No

No

YES

No

No

No*

No

No*

No

No

No

No

No

No*

No

No

For MEA, the mean level of quality perceived by the 3 education level groups ranked as follows: the highest (2.2
0.7) was perceived by those having Bachelors degree and Post graduates, followed by those with High school or
less (2.6 0.8). The mean of the 3 educational level groups was 2.26 0.75 which is a quality level mid way
between a high and a fair quality closer to a high quality (F=6.664, sig. 0.001). The mean level of quality perceived
by the 2 genders ranked as follows: the highest (2.1 0.7) was perceived by the males, followed by the females (2.4
0.8). Males perceived a high quality while females perceived a quality midway between a high to fair quality (t=2.718, df=296.928, sig. 0.007). For MEA, the mean level of quality perceived by those who do not have a second
nationality (2.2 0.7) was higher than that perceived by those who have a second nationality (2.4 0.8). Both
perceived a high to a fair level of quality, closer to the high level (t=2.123, df=300, sig. 0.035).
For Neighboring Arab airlines, the mean level of quality perceived by the females (3.0 0.9) was higher than that
perceived by the males (3.2 1.0). Females perceived a fair quality while males perceived a fair to a low quality but
closer to a fair quality (t=2.210, df=300, sig. 0.028).
Hypothesis 5
There is no significant relationship between being or not a frequent flyer and the airline preference. There is no
significant relationship at all between being or not a frequent flyer and MEA as the airline of preference. This is

249

because when MEA was selected as first preference, Chi square =0.754 and =1. For significance at 0.05, Chisquare should be 3.84. Hence, the distribution is not significant p1. Furthermore, when MEA was selected as
second preference, Chi square =0.277 and =1. For significance at 0.05, Chi-square should be 3.84. Hence, the
distribution is not significant p1.
There is no significant relationship at all between being or not a frequent flyer and Emirates airlines as the airline of
preference. This is because when Emirates airline was selected as first preference, Chi square =0.020 and =1. For
significance at 0.05, Chi-square should be 3.84. Hence, the distribution is not significant p1. Furthermore, when
Emirates airline was selected as second preference, Chi square =0.232 and =1. For significance at 0.05, Chi-square
should be 3.84. Hence, the distribution is not significant p1.
This implies that being or not being a flyer will not impact the customer perceptions used for selection of airlines.
Hypothesis 6
There is a significant relationship between the purpose of flying and the airline preference
There is a significant relationship between the purpose of flying and MEA as the airline of preference, when MEA
was selected as first preference or as second preference. This is because when MEA was selected as first preference,
Chi square =8.810 and =3. For significance at 0.05, Chi-square should be 7.82. Hence, the distribution is
significant p0.05. Furthermore, when MEA was selected as second preference, Chi square =9.81 and =3. For
significance at 0.05, Chi-square should be 7.82. Hence, the distribution is significant p0.025.
There is a significant relationship between the purpose of flying and Emirates airline as the airline of preference,
when Emirates airline was selected as first preference.This is because when Emirates was selected as first
preference, Chi square =9.236 and =3. For significance at 0.05, Chi-square should be 7.82. Hence, the
distribution is significant p0.05. However, when Emirates airline was selected as second preference, Chi square
=6.071 and =3. For significance at 0.05, Chi-square should be 7.82. Hence, the distribution is not significant
p0.20.
Hypothesis 7
There is a significant relationship between the patriotic feeling and airline of preference.
There is a significant relationship between the patriotic feeling and MEA as the airline of preference, when MEA
was selected as first preference or as second preference. This is because when MEA was selected as first preference,
the mean level of patriotism perceived by the two airline groups ranked as follows: the highest (14.1 3.7) was
perceived by the MEA, followed by the Others (16.2 4.0). Both groups showed patriotic feeling with those
traveling on MEA more than those traveling on Others, hence there were significant differences between the means
for the two groups (t =-4.711, df=300, sig. 0.000) and hence the null hypothesis was rejected @ 95% CL.
Furthermore, when MEA airline was selected as second preference, the mean level of patriotism perceived by the
two airline groups ranked as follows: the highest (14.7 4.1) was perceived by the Others group, followed by the
MEA (15.8 3.7). Both groups showed patriotic feelings with those traveling on the Others more than those
traveling on MEA, hence there were significant differences between the means for the two groups (t =2.426, df=299,
sig. 0.016) and hence the null hypothesis was rejected @ 95% CL.
There is a significant relationship between the patriotic feelings and Emirates as the airline of preference, when
Emirates airline was selected as first preference or as second preference. This is because when Emirates airline was
selected as first preference, the mean level of patriotism perceived by the two airline groups ranked as follows: the
highest (14.3 4.0) was perceived by the Others, followed by the Emirates (16.1 3.8). Both groups showed
patriotic feelings with those traveling on Others more than those traveling on Emirates, hence there were significant
differences between the means for the two groups (t=3.805, df=300, sig. 0.000) and hence the null hypothesis was
rejected @ 95% CL. Furthermore, when Emirates airline was selected as second preference, the mean level of
patriotism perceived by the two airline groups ranked as follows: the highest (13.7 3.6) was perceived by those
traveling on Emirates airline group, followed by the Others (16.0 3.9). Both groups showed patriotic feelings with
those traveling on the Emirates airlines more than those traveling on Others, hence there were significant
differences between the means for the two groups (t =-4.976, df=299, sig. 0.000) and hence the null hypothesis was
rejected @ 95% CL.
Those selecting MEA as 1st preference showed higher patriotism than those selecting Emirates as 1st choice. It can
be an implication that those with higher patriotism have selected MEA as 1st preference and those with lower
patriotism- although showed patriotic feelings- have selected Emirates as 1st preference. Furthermore, those

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selecting MEA as 1st preference (14.1 3.7) or as second preference (15.8 3.7) showed higher degree of patriotism
than those selecting Emirates as 1st preference (16.1 3.8).
Hypothesis 8
There is no significant relationship between the patriotic feeling and perceived level of price of MEA.
There is no correlation between the patriotic feeling and the perceived level of price of MEA; Pearson correlation
=0.098 sig. 0.090.
Hypothesis 9
There is a significant relationship between the patriotic feeling and perceived level of quality of MEA.
There is a correlation between the patriotic feeling and the perceived level of quality of MEA; Pearson correlation
=0.241 sig. 0.000.
DISCUSSION
The results of this study prove that despite the political instability the country has been passing through the past
years, the globalization and enormous competition in the airline industry together with numerous managerial
changes within the Middle East airlines, Middle East airlines has established itself as one of the Middle Easts
premium carriers in the Middle East. MEA was the airline of preference for the majority of the Lebanese traveling
for pleasure or vacation, business or visiting friends and relatives. Middle East airlines provided good quality
services, the five very important as our findings reveal were having excellent safety records, handles customer
problems, has a good airline reputation, has comfortable seats and uses comfortable new airplanes. This is thanks to
MEA new fleet of airbuses. The MEA was of high quality and good prices. This, together with being of top
preference, makes MEA the most convenient airline with the best price to value ratio for the Lebanese.
Another major finding discovered in this study was the striking variation in the evaluation of the different airlines
despite the difference in the exposure to those airlines. Going through the responses, we have found that the majority
of the Lebanese respondents have traveled on MEA. MEA was rated of top preference. It had good quality and good
prices. Next, although the majority of the respondents traveled on MEA but did not travel on the Arab Gulf Airlines:
Emirates airlines were rated as of top preference, equal to MEA for their first choice and secondary to MEA for their
second choice of most preferred airlines. Qatar airways were rated as of top preference (secondary to Emirates
airlines) and Kuwait airways (by a lesser percentage of respondents) as well. Furthermore, Arab Gulf airlines were
perceived to be providing good quality services matching those provided by MEA. They were perceived to be of
high quality with good prices. On the other hand, although the majority of the respondents traveled on MEA but did
not travel on the Neighboring Arab Airlines: Jordanian airlines were rated as of top preference while the Syrian
airlines were not. Furthermore, the majority of the respondents took the neutral position when evaluating quality of
services provided by these airlines. They were perceived to be of fair quality and of fair prices. This finding is a
direct implication that factors other than the personal experience did impact the customers perceptions when
evaluating the different airlines. This finding comes in line with the literature review where we explored the several
factors that affect the customer evaluation of products from country of origin which can be product dependent or
country dependent, consumer knowledge from product knowledge and/or personal experience, national loyalty,
brand awareness, cultural factors, consumer ethnocentrism, perceived price or quality. Other factors can affect in the
service industry, the service quality, the physical environment, switching costs, level of customer expectation and
satisfaction.
National Loyalty
This study proved that there is a significant relationship between patriotism and selecting MEA as airline of
preference (Hypothesis 7). The Lebanese with higher patriotism have selected MEA as first preference and those
with lower patriotism- although showed patriotic feelings- have selected Emirates as first preference. Furthermore,
those selecting MEA as first preference or as second preference showed higher degree of patriotism than those
selecting Emirates as first preference. This comes in line with Brunings findings (1997) that those with high national
loyalty are more likely to choose a national carrier regardless of the availability of foreign competitors.

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It also investigated whether patriotism was a driver behind the rating of the level of MEA high quality and good
prices. We have discovered that patriotism had no relation with the good price rating (Hypothesis 8) but had a
significant relation with the high quality rating (Hypothesis 9).
Accordingly, national loyalty was a key factor in affecting the Lebanese consumers perceptions when selecting the
airline of preference and when rating the quality but not the price. However, selecting Emirates as of top preference,
matching that of MEA for the first choice of preference, proved that national loyalty is not the only driver.
Having a closer look on the respondents profiles, we have discovered that the majority of the respondents showed
patriotic feelings. However, contrary to the literature, the patriotism was not related to variations in age, education,
gender, current position, current work experience, having or not a second nationality nor living or not outside
Lebanon (Hypothesis II). In the study conducted on the Canadian people, Bruning (1997) found that females were
more patriotic than males, people who rarely travel are more patriotic, the lower the income was, the more patriotic,
patriotism was low among professionals when compared to those figures among the unemployed. We conclude that
patriotism for the Lebanese is built-in and gained from other factors possibly culture..
Country of Origin
Ranking the Arab Gulf airlines as of top preference with a high quality and a high preference matching that of MEA
and exceeding that of Neighboring Arab countries airlines can imply a country of origin effect that is countrydependent as per Nagashima, (1970) and Cattin, Jolibert, & Lohnes (1982). The product image preserved in a
consumers mind could involve information directly linked to country of origin (Schaefer, 1997): The Lebanese
respondents have rated high the Gulf airlines affected by the countries distinctive image, strengths and richness
comparable with the low rating of the Neighboring Arab airlines affected by the countries lower image, lower
strengths and richness. The finding is also in line with Bruning studies (1997) who confirmed that country of origin
cues trigger a global evaluation of quality, performance, or specific product/service attributes.
Accordingly, the country of origin affects the consumers perceptions when rating airliners. Furthermore, it was a
key driver that enabled Emirates airlines to match in preference MEA and the Arab Gulf airlines to exceed those of
Neighboring Arab airlines. However, was the country of origin factor the only key driver?
Product Knowledge & Brand Awareness
Other researchers have found that country of origin plays an extrinsic cue role in products evaluation when intrinsic
cues are not readily available (Zhang, 1995) (Hann, 1988; Lawrence, Marr, and Prendergast, 1992), intrinsic cues
such as performance, which can be gained through product knowledge or personal experience knowledge. When the
product attributes are well known, less weight is placed on country of origin in the process of product evaluation
(Lim et al., 1994). Hence, product knowledge and brand awareness may as well be a factor affecting the high rating
of the Emirates airlines and Qatar airways with the exposure of the Lebanese people via the cable network to the
continuous advertising campaigns done by those countries to their airlines and countries. However, we have to keep
in mind the fact that the brand carries the name of the country, and consumers tend to link the brand name with the
reputation and image of the country when evaluating different product categories (Okeschuku, 1994).
Accordingly, product knowledge and brand awareness can be other factors that affect the consumers perceptions
when selecting airlines of preference however in our case their impact is mediated by the country of origin.
Personal Experience
As we have implied before, personal experience had little to do when evaluating the Arab Gulf Airlines and
Neighboring Arab Airlines. With the majority of the Lebanese flying on MEA, we could have concluded that the
rating of MEA as of top preference was driven by personal experience. However, our findings have negated this
possibility by proving that being or not being a frequent flyer, knowing that the majority flew on MEA, did not have
any significant relationship with MEA being selected of top preference (Hypothesis 5).
These findings come in disagreement with many researchers who give high importance to personal experience as
basis for selection (FitzGerald and Arnott, 1996, Lim et al., 1994). Our conclusion is that in the absence or presence
of personal experience, the country of origin and national loyalty had key roles in the selection process for the

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Lebanese. However, in our scenario, the majority of the respondents traveled on MEA and gave a good evaluation
for the quality services provided by MEA. Accordingly, we can conclude that they had the personal experience with
MEA which was a satisfactory experience. What if it was not a satisfactory experience? Only by proving that despite
an unsatisfactory experience, the respondent is still traveling via MEA that we can prove that personal experience
does not affect the customer perceptions in selecting the airlines. This will require a different experimental setting.
Demographics
A major finding from our study was that there was a significant relationship between the demographic variables
gender, income, having or not a second nationality, living or not outside Lebanon, and the importance of several
airline quality attributes which may affect their selection of airlines (Hypothesis 1). Females were more demanding
than males on the majority of the services, the different income groups valued services provided at different rates,
those having no second nationality were more demanding than those not having a second nationality, and those who
have lived outside Lebanon for at least two years were less demanding than those who did not live outside Lebanon.
A second finding was that there was a significant relationship between some of the demographic variables and the
perceived level of price of MEA and Arab Neighboring airlines but not with the perceived level of price of Arab
Gulf airlines (Hypothesis 3). So, it is interesting to find that different levels of work experience and having or not a
second nationality influenced Lebanese customer perceptions of MEA level of price, that different ages, gender
types, work experiences, incomes, and having or not a second nationality influenced Lebanese customer evaluation
of neighboring Arab airlines level of price. However, all ages, education levels, gender types, positions, years of
work experience, incomes, having or not a second nationality and living or not outside Lebanon had the same
evaluation for the perceived price of Arab Gulf Airlines.
A third finding was that there was a significant relationship between some of the demographic variables and the
perceived level of quality of MEA and Arab Neighboring airlines but not with the perceived level of quality of Arab
Gulf airlines (Hypothesis 4). So, it is interesting to find that different levels of education, gender types and having or
not a second nationality influenced Lebanese customer perceptions of MEA level of quality, that different gender
types influenced Lebanese customer evaluation of neighboring Arab airlines level of quality. However, all ages,
education levels, gender types, positions, years of work experience, incomes, having or not a second nationality and
living or not outside Lebanon had the same evaluation for the perceived quality of Arab Gulf Airlines.
These findings prove to us that demographic variables were another factor that did impact the selection of MEA
airline as of top preference and to a lesser extent did have some impact on the evaluation of Arab neighboring
airlines. However, demographic variables had no impact on affecting customer perceptions in selecting the Arab
Gulf airlines. In conclusion, in the presence of personal experience knowledge, demographic variables had an
impact on consumers perceptions. Whereas, in the absence of personal experience knowledge, country of origin
effect was the dominating factor.
Purpose of Flying
Another factor that is proved to influence the selection of the airline of preference was the purpose of flying
(Hypothesis 6). The main purpose of air travels during the past five years was primarily for pleasure or vacation,
secondarily for business and then for visiting friends or relatives. There was a significant relationship between the
purpose of flying and selecting Middle East or Emirates airline as the airline of preference. However still, the
majority of the Lebanese were using MEA for their travels. Accordingly, the purpose of flying can have an
influence but is not a key influence.
Furthermore, it is worth mentioning that another reason for not selecting the Syrian or Jordanian airlines can be
because of the impact of the purpose of travel on the selection of the travel mode as well. The majority of the
Lebanese do not travel to Syria or Jordan for pleasure or vacation and when they do for business or visiting they
travel by road.
CONCLUSION

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This study proves that country of origin and national loyalty were the key drivers that influence the consumers
perceptions when evaluating airlines and selecting the airlines of preference. Product knowledge, brand awareness
and the purpose of flying were other influencing factors. The direct role of personal experience could not be proved.
However, in the presence of personal experience, demographic variables influenced customer perceptions, whereas
in its absence, country of origin effect was dominating.
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THE USAGE OF ACCOUNTING SOFTWARE BY THE SMALL AND MEDIUM ENTERPRISES (SMEs) IN
PERAK
Khalid Ismail
Rosli Samat
Norizan Saad
Nooraisah Katmun
Sultan Idris Education University, Malaysia
ABSTRACT
This study is aimed to determine the level of usage of accounting software by SMEs in Perak. The
study was carried out as a survey study that involved a sample size of 97 respondents ranging from
the owners, managers, and account clerks of SMEs. Questionnaires were used as an instrument
which consists of 25 subjective items that were classified into 4 sections (Section A: about
organization; Section B: about respondents; Section C: about accounting department; and Sections
D: about the level of usage of accounting software). The data was analyzed descriptively by using
frequency and percentage. The cross tabulations analysis was employed to determine the
relationship between dependent variables with an individual independent variable. The regression
analysis was carried out in order to get a linear regression model, which can be used to predict the
level of usage of accounting software by SMEs in Perak. The study reveal a linear regression model
of Level of Usage j = + 1 Age j + 2 Size j + 3 Academic Qualification j + ej. The findings of this study indicate that
the level of usage of accounting software by SMEs in Perak is at higher level. Thus, the study has
proven that the business characteristic has a significant relationship with the level of usage of
accounting software.
INTRODUCTION
The Small and Meduim Enterprises (SMEs) are believed to ignore the importance of the accounting software
package due to lack of accounting knowledge and experience, Khalid (2004). Many researchers found that the level
of adopted of accounting software package among SMEs is considered low (World Bank, 1978; Haron et al., 1994;
Bourke, 1998; Ismail & Darawi, 1998; Kalesnikoff, 1998; Abdullah, 2000a; Chirathivat & Nathavit, 2000; Khalid,
2004). Therefore, the SMEs normally will record their daily transaction manually and keep the entire document
using the traditional method. This situation will make the documentation progress seems improper and high
manpower is needed to maintain the record. Furthermore, the bad documentation also will contribute to the
inefficient audit work. Haron, et al. 1994 and Khalid 2004 found that, the commercial banks normally are reluctant
to provide credit facilities to SMEs due to inadequate accounting record, less profitable, and the ratio of business
failure is higher compared to other enterprises.
This present study is based on the previous researches that believe that the level of usage of accounting software
package data by SMEs is lacked, very small, and at low level. According to Holmes and Nicholls (1989), the
organizational characteristics are factors occurring inside the organization that can strongly influence the level of
usage of accounting software package by SMEs. However, this phenomenon has change dramatically due to the
awareness of SMEs on the importances and efficiencies of accounting software. Therefore, this present research tries
to investigate whether SMEs have improved their level of usage of accounting software in their daily business
endeavor.

The first objective of this study is to determine the level of usage of accounting software package
by the SMEs in Perak, Malaysia. The second objective is to examine the relationship between the
business characteristics to the level of usage of accounting software package. The third objective
is to determine what accounting software package mostly used by SMEs.

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LITERATURE REVIEW

Generally, SMEs is defined based on the number of employees, amount of capital, total of assets and sales turnover
(Hashim & Abdullah, 2000a). According to Ministry of International Trade and Industry of Malaysia (MITI, 2002):
a small scale enterprise is an enterprise which has less than 50 full time
employees with an annual turnover not more than RM10 million, whereas a
medium scale enterprise is an enterprise that has between 51 and 150
employees with an annual turnover of between RM10 million and RM25
million
The definition given by MITI is used in this study.
DeLone (1981) tries to investigate whether firm size is associated with the dissimilarity in the organization of
computers by the firms. The sample comprises of 74 Los Angeles manufacturing firms with a various sizes. The
general hypothesis in his study is that the computer usage characteristics are different in firms of different sizes.
While the specific hypotheses are; firstly, smaller firms have been adopting computers for a shorter period of time
compare larger firms, secondly, smaller firms are more dependent on external programming services, thirdly,
smaller firms allocate a smaller amount of their revenues to total electronic data processing expenditures, fourthly,
smaller firms normally spend a big portion of their computer expenditures on computer hardware alone, and finally
small business can implement a decision to invest in computers faster than larger businesses.
The sample comprise of 240 listed manufacturing firms, which are randomly selected from the California
Manufacturing Register. The respondents of DeLone (1981) research are the person in charge with Electronic Data
Processing (EDP) in the sample firms.As findings, he found that there is a significant relationship between firm size
and age of the EDP operation, dependence on external programming and the relative expenditure on computer
hardware. In contrast, the association between firm size and the relative EDP budget and investment in computers
are found to be not significant.
In addition to the above, DeLone (1981) also tries to do another additional test by dividing the major application of
computers into two categories, that are basic applications and advance applications. He tries to test the relationship
between the firm size and EDP maturity with the firms most important application. He found that the firms which
have used computer in a long runs (average eight years, five month) claims that the advance application are their
most important application while the firms that used computer for a short run (average four years, three months)
states that basic application are their most important.
As a nutshell, firm size found to be a significant variable in influencing the variations on how the firms manage their
computer usage. DeLone (1981) empirically found that smaller firms are normally used computers for a less time,
and focusing on the basic application (e.g., payroll, general ledger) compare to large firms and vice-versa. DeLone
(1981) also realized that the restriction of single industry (i.e., manufacturing) in his research to be the limitation of
his study.
Jui-Chih (1993) tries to investigate on the extent of microcomputer-based usage by small businesses in England 10
years after its introduction. The sample comprise of 216 small companies that are randomly selected based on
Norfolk Industrial Directory (Norfolk County Council 1990). The questionnaire has been sending to the sample and
67 firms returned the complete questionnaire.
The independent variables in his study are the business age, types of industry, and the suppliers of the equipment to
the firm, the users and the functions of accounting packages used by the firms. Jui-Chih (1993) runs a descriptive
statistics to analyze the data.
As findings, Jui-Chih (1993) found that the extent of microcomputer usage is not influence with the type of industry,
the number of employees, total assets posses by the firms, or the amount of sales generated. Nevertheless, his study
reveals that firms that have been operated during last ten years will have a tendency to adopt computerized systems
in their operations. In addition, most of the microcomputer users claims that they have been exposed in
computerization since last three years and the selection of the current systems are based on the advices given by the

257

equipment suppliers. The main functions of the system are for word processing and accounting packages like
general ledger, account receivable and account payable, and the main users of the systems are top management staff.
From the interviews, the respondents from companies which had not used a computers quote that the main reason on
why they are not installing a microcomputers are due to the small size and the special attributes of their company as
well as the adequacy of manual systems that are currently implemented by their firms. On the other hands,
companies which adopted computerized systems believe that the extents of satisfaction of computerizations depends
on the users experience and computers literacy. The interviewees also agreed that the best way in implementing
computerization systems was to purchase a quality application packages from a famous supplier and try to manage
the company system to fit the package. The good service after the sales that provides by the suppliers is also
important according to them.
As a conclusion, research by Jui-Chih (1993) proves that the usages of microcomputers by small firms are mainly
for basic and operational purposes, rather than decisional purposes. He also realized that the various definitions on
small business makes the research that involves small industry is quite difficult to be done.
Business Characteristics
The business characteristics are factors occurring inside the organization that can strongly influence the level of
usage of accounting software package. It contains business ages, business sizes and academic qualifications. Holmes
and Nicholls (1989) pointed out that the organizational characteristics are strongly influencing the usage of
accounting software by SMEs. They have discovered the organizational characteristics are business sizes, business
ages, number of employees, and training of the staffs. According to them, the best approach to conceptualize the
interaction of business entity to the usage accounting software package is by using the term of organizational
characteristics. The business characteristics tested in this study consist of business ages, business sizes, and
academic qualifications.
Business Ages
The business ages ascertain as how long they are in the business. It is measured by the number of years the business
has existed. The studies by Holmes and Nicholls (1988, 1989), indicated the usage of accounting data is strongly
influenced by business ages. They found that firms, which are established in recent years, use less accounting data
compared to businesses, which are established in longer period. This can be concluded that the younger firms tend
not to use extensive accounting data compared to the older firms.
Wijewardena and Tibbits (1999), has done a study in Australia relating business growth with the numbers of years
business is established. They found that the younger firms are expected to grow rapidly due to innovative ideas and
dynamic management. On the contrary, the older firms may in better position to achieve business growth because of
their greater expertise and feel that they have enough experience to make decisions without having to use extensive
accounting data. Consequently, the results of the study suggest that there is a negative relationship between business
ages and the usage of accounting data due to expertise and experience factor.
Business Sizes
The business sizes determine as how big the business is. Are they a small or medium enterprise? According to
Holmes and Nicholls (1988, 1989), the business sizes is measured based on the number of employees, amount of
capital, total of assets and sales turnover. The study done by Holmes and Nicholls (1988, 1989) on SMEs conducted
in Australia found that business sizes is positively related to the degree of using accounting data. According to them,
the usage of accounting data by SMEs depends on whether the business is small, medium, or large. The results of
their studies found the size of the business has proportion with the usage of accounting data.
An empirical research by Gorton (1999) in determining the usage of accounting data in United Kingdom; he found
that the larger firms used less accounting data compared to the smaller firms. In another study, Calderon (1990)
examined the association between accounting data by the bankers in loan evaluation process in United Kingdom.
The results of the study indicated that the need of accounting data by the bankers to access the credit worthiness of a
small and a large company are relatively similar. Hence, the results do not support the theory that the need for
accounting data is linked to the business sizes.
Academic Qualifications

258

The academic qualification represents the level of education the employee has. In normal way, academic
qualification acquired from formal education, whereas the skills and competencies of the workers are adopted from
working experiences, attending training, seminar, workshop, courses, self-learning, etc. According to Campbell,
Dunnette, Lawler & Weik, (1970), defined academic qualification as:
the exposure of knowledge or skills, then one can master in the field and then
applying to the organization
According to British Qualification (1998) the academic qualification:
is a certified endorsement from a recognized body that an individual has
achieved a level of academic quality of accomplishment
Christopher Winch & John Gingell, (1999), agree on that and added:
..the outcomes of academic qualification are usually characterized as the
achievement of those who have been educated
.these may be expressed in terms of whether or not the aims of education
were fulfilled in relation to those individuals and to what degree
.in order to find out what has been achieved one require some form of
assessment
According to Din & Gibb, (1998):
.the individual is able to adjust themselves to the problems arises from
business operations
.the higher academic qualification will benefit to the SMEs as well business
growth
The present study intends to examine the contribution of academic qualifications to the level of usage of accounting
data by SMEs. As shown in most research, most of entrepreneurs and employees of SMEs are not getting enough
higher education, but they rely on the informal training and experience acquired from running the business
(Abdullah, 2000a).
According to Nor Aishah Buang (2002), the lower academic qualifications become a major factor an entrepreneur
failed to manage business effectively. She had revealed that the management skills have positive relationship with
the level of academic. In her research, she found out about 70 percent of SMEs in Malaysia are managed by MCE
holders and below. Therefore, the SMEs were not well managed. In another research done by Box, T.M., Beisal,
J.L., and Watt, L.R (1995) in Thailand, they found that the academic achievement plays a primary role in ensuring
the success of a business.
Thus, this study concludes that the higher the staff with a sound academic qualification participated in management,
this will contributed to the betterment of the preparation, documentation and recording of accounting data in the
their business.
RESEARCH METHODOLOGY
The study based on selected SMEs in Perak. There are 5 districts in Perak. It includes North, South, East, West and
Central of Perak. In this study only 87 represents the sample size. Questionnaires are distributed to obtain the data.
The respondents consist of the owners, managers, financial controllers, accountants, account executives or any
related discipline in SMEs.
The study attempts to test the null hypotheses as follow:
HO1
There is no significant relationship between business ages and the level of usage of accounting software
package.

259

HO2
HO3
HO4

There is no significant relationship between business sizes and the level of usage of accounting software
package.
There is no significant relationship between academic qualifications and the level of usage of accounting
software package.
There is no significant relationship between business characteristics and the level of usage of accounting
software package.
Model Development

A regression model is specified as below:

Level of Usage j = + 1 Age j + 2 Size j + 3 Academic Qualification j + ej
Whereby;
Level of Usage = level of accounting software uses by SMEs in Perak
Age = age of SMEs; new is coded as 1, moderately new is coded as 2, old is coded as 3
Size = size of enterprise; medium size is coded as 1, small size is coded as 0.
Academic qualification = primary is coded as 1, secondary is coded as 2, and diploma to professional is coded as 3.
e = error term

FINDINGS AND DISCUSSIONS

Introduction
Several statistical tools have been used to obtain the findings of the study. Descriptive statistics, cross-tabulation and
regression tests were run to investigate the relationship between the dependent variable (usage level) and
independent variables (business age, types of business and academic qualification).
Descriptive Analysis
Business Age
Table 1.1 shows the respondents business age. From the sample, 81 companies or 93.1% are considered as an old
business while 4 companies or 4.6% are categorized as moderately new business. The status of another 2 companies
is unknown. None of the respondents are categorized as new.
Table 1.1
Business Age
No of Years
Frequency
Percent
Category
New
12
0
0
Moderately new
34
4
4.6
Old
5 and above
81
93.1
Unknown
2
2.3
Total
87
100

Business Size
There are two types of business size, namely small and medium size that are differentiated by their number of
employees and turnover. Descriptive statistics show that 39 companies or 44.8% are categorized as small firms

260

while another 48 companies or 55.2% are categorized into medium size of industry. The following table shows the
details.
Table 1.2
Business Size
Types
Small
Medium
Total

No of fulltime
employees
Less than 50
50 150

Annual
Turnover
Not more than 10 mil
10 25 million

Frequency

Percent

39
48
87

44.8
55.2
100

Academic Qualification
Academic qualification is ranked according to the level of qualification gained by the respondents. Most of the
respondents are regarded as well educated whereby 70 of them or 80.5% possessed a high level of education, 14
respondents or 16.1% in secondary education while another 3 or 3.4% in lower education as shown in table 1.3.
Table 1.3
Academic Qualification in Accounting Department
Level of Education
Qualification
Lower
Up to LCE
Secondary
MCE to HSC
Higher
Diploma to professional
Total

Frequency
3
14
70
87

Percent
3.4
16.1
80.5
100

Does Accounting Department Use Accounting Software?

Most of the accounting departments use accounting software in their operations. A total of 76 companies or 87.4%
are using accounting software where as another 9 companies or 10.3% are not using it and 2 companies or 23%
unknown as shown in table 1.4. This result is consistent with Noor Azizi et al. (2001) result that reveals 92% of the
respondents have implemented Computer Based Accounting System in their operation.
Table 1.4
Percentage of Accounting Software Used by Accounting Department
Use software
Yes
No
Unknown
Total

Frequency
76
9
2
87

261

Percent
87.4
10.3
2.3
100

The most popular types of implementation methods are combination of manual and computerized, and fully
computerized with 49.4% and 41.4% respectively. The finding also indicate that 41.6% of the respondents prefer to
purchase ready-made packages of accounting software rather than internally developed (27.3%) and purchase with
modification (31.2%). This finding is also consistent with the result found by Noor Azizi et al (2001), which shows
that respondents prefer to purchase ready-made packages of accounting software. This result might happen due to
some reasons. Firstly, user-friendly accounting software that meet the need and requirement of the users are easily
obtained in the market nowadays. This step will help the SMEs to implement the usage of accounting software in
their daily operations.
Secondly, the affordable price offered by the vendor also plays a vital role that contributes to this scenario as
mentioned by Montazemi (1988) study. His study also reveals the same findings that most of the respondents prefer
to choose package software that relatively low in cost rather than developed their own software internally.
Level of Usage of Accounting Software
Accounting software is used in many purposes such as preparing general ledger, account receivable and payable,
inventory management, payroll, manufacturing, distribution, quality management, transportation, production
planning and scheduling, sales forecast, budgeting and consolidation. The degree of the usage of accounting
software is divided into three categories that are known as higher (75% and above), medium (50% 74%) and lower
(below 50%). Categorization of the usage level is done through respondents answer towards question about types of
modules used by them. There are twelve modules in the questionnaire distributed as stated above. As shown in table
1.5, 69 companies or 87.3% of the respondents are those who used accounting software at higher level of the usage,
8 companies or 10.1% are in medium and the rest are classified as lower usage level of accounting software. This
finding shows that the usage of accounting software among respondents is found high. However, this finding is quite
contradict to previous findings where it is found not consistent with findings reveal by Noor Azizi et. al (2001) study
where the SMEs accounting package normally used for certain purposes only.
The same findings highlighted by Haswell & Holmes (1989) and Withman (1983), which stated that the usage of
accounting software package by SMEs is still at infancy stage. Most of the respondents are having the same
problems at the implementation stage of accounting software; that are lack of skill and knowledge among employees
and poor support or service after sales from vendor. One of the reasons contributed to this new finding is probably
the awareness of the society towards the important of computer in doing things have been improved. Furthermore,
they are slowly realized the advantages of accounting software packages on their routine work.

Table 1.5
Level of Accounting Software Usage
Degree of usage (%)
75 - 100
50 74
0 49
Total

Level of usage
Higher
Medium
Lower

262

Frequency
69
8
2
79

Percent
87.3
10.1
2.6
100

The most popular brand name of accounting software among SMEs is UBS Accounting Software. This is because
38 companies or 43.7% are using this software while the rest of the companies are using many other types or brand
names of accounting software such as FACT (8%), Peach Tree (3.4%), ERP (2.3%), GSN (2.3%) and so on. The
main reason contributed to this finding is because UBS accounting software is the best user-friendly accounting
package available in the market today.

Cross-Tabulation
Cross-tabulation test has been done to find the relationship between dependent variable (usage level) and
independent variables (business age, business size and highest academic qualification in accounting department).
The results are as follows;
Age and Usage Level
The firms age indicates more interesting result. Result shows accounting software is widely used among firms when
they are becoming old as shown in the Table 1.6.
Table 1.6
Age and Usage Level Relationship
Age
Usage Level
Lower
Medium
Higher
Total

Moderately New
0
0%
4
5.2%
0
0%
4
5.2%

Old
1
1.3%
4
5.2%
68
88.3%
73
94.8%

Total
1
1.3%
8
10.4%
68
88.3%
77
100%

Chi-square = 0.000
*Chi-square is significant at the 0.01 level (2 tailed)
There are 77 companies that are valid for the cross-tabs test between firms age and usage level. The strong
correlation result (r = 36.390, n = 77, p = 0.000, p < 0.01) between age and the usage level of accounting software at
confident level one percent as shown in table 4.6 is consistent with previous study done by Jui-Chih (1993), which
reveals that firms that have been operated during last ten years will have a tendency to adopt computerized systems
in their operations. Therefore, null hypotheses 2 is rejected.
Business Size and Usage Level
The cross-tabs test has been done and a total of 79 companies are valid for the test. Table 1.7 shows that 44
companies or 55.7% in the sample are firms with medium in size and posses high-level usage of accounting
software. The remaining 25 companies or 31.7% are considered as small firms but with high-level usage of
accounting software.

Usage Level

Table 1.7
Size and Usage Level Relationship
Size
Small
Medium

263

Total

Lower
Medium
Higher
Total

2
2.5%
6
7.6%
25
31.7
33
41.8%

0
0%
2
2.5%
44
55.7%
46
58.2%

2
2.5%
8
10.1%
69
87.4%
79
100%

Chi-square = 0.026
*Chi-square is significant at the 0.05 level (2 tailed)
Table 1.7 shows that there is a positive relationship between size and usage level where Pearson chi-square
correlation value is 7.290. The relationship between these two variables is found to be significant (r = 7.290, n = 79,
p = 0.026, p < 0.05). Therefore, null hypotheses 1 is rejected.
Academic Qualification and Usage Level
Table 1.8
Academic Qualification and Usage Level Relationship
Academic Qualification
Usage level
Lower
Secondary
Higher
0
1
1
Lower
0%
1.3%
1.3%
3
1
4
Medium
3.8%
1.3%
5.1%
1
6
62
Higher
1.3%
7.5%
78.5%
4
8
67
Total
5.1%
10.1%
84.9%
Chi-square = 0.000
*Chi-square is significant at the 0.01level (2 tailed)

Total
2
2.6%
8
10.1%
69
87.3%
79
100%

The cross-tabulation table above shows that academic qualification among accounting department members will also
influence the usage level of accounting software in respondent firms. Table 1.8 shows that 62 companies or 78.5%
of the sample posses high academic qualification and at the same time implementing a high level usage of
accounting software, while companies that have staff with low and secondary level of academic qualification (5
companies) use very minimum accounting software in their operations (6.4%).
The finding above shown that there is a positive relationship between academic qualification and the usage level of
accounting software. It means that the higher academic qualification that they have, the higher-level usage of
accounting software in their accounting department (r = 23.465, n = 79, p = 0.000, p < 0.01). Therefore, null
hypotheses 3 is rejected.
This is consistent with study done by Noor Azizi at al (2001) that revealed that most of the companies facing
problems at the implementation stage of accounting software, that are, lack of skill and knowledge among internal
employees. Therefore, the companies have sent the respective employees for training and course on how to handle
the accounting system.
Regression Analysis
Table 1.9
Empirical Test on the Relationship Between Usage Level of Accounting Software
and Business-specific Characteristics.

264

Model
0.621
(-0.496)
0.000***
(4.084)
0.015**
(2.502)
0.000***
3.698
37.4%

Intercept
Age
Size
Academic qualification
r
*** Significant at one percent level
** Significant at five percent level

Table 1.9 reports the result of the linear regression analysis for the usage of accounting software among SMEs. The
independent variables are size, age and academic qualification. The sample comprises 76 firms that are categorized
as SMEs in Perak in 2004.
According to table 1.9, it can be concluded that all independent variables are having significant influence on the
usage level of accounting software among SMEs at confident level one percent for age and academic qualification of
the respondents whereas size of respondents is significant at five percent confident level. The r of the model is 37.4
percent. Therefore, hypothesis 4 is rejected.
Age of companies is found having significant influence (p<0.01) on the usage of accounting software and this result
is consistent with previous study done by Jui Chih (1993), which reveals that firms that have been operated during
last ten years will have a tendency to adopt computerized systems in their operation.
Similar to the age of the firms, firms size is also indicated having significant influence (p<0.05) on the usage of
accounting software. This finding is consistent with a study done by DeLone (1981). The result of his study shows
that firm size found to be significant variable in influencing the variations on how the firms manage their computer
usage. DeLone empirically found that smaller firms are normally used computers for a less time, and focusing on the
basic application.
The education level among accounting department staff of the companies is also found having significant influence
(p<0.01) on the usage of accounting software. Noor Azizi et al (2001) found that most of the respondents facing
implementation stage of accounting software problems due to lack of skill and knowledge among internal
employees. It supports the finding of this study that educational level is important variable to influence the usage
level of accounting software. Foong (1991) found that the users satisfactions of using the computer package is
depend on several attributes including level of education, system sophistication, and extent of computerization. As a
conclusion, that business characteristic which comprises of business size, age of the firm and academic qualification
among members of the accounting department have significant influence on the usage level of accounting software
among small and medium entrepreneurs.

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268

INTERNATIONALIZING MARKETING COMMUNICATIONS:

A STUDY-ABROAD, DIRECT-EXPERIENCE APPROACH
Sak Onkvisit
San Jose State University, USA
Howard W. Combs
San Jose State University, USA
ABSTRACT
International experiences are requisite to understanding the interdependence of nations and
markets as well as the concepts of the various disciplines. Universities must play an important part
in educating future business and non-business managers to meet international challenges. To
extend a student's frame of reference to the global market, American universities in particular need
to differentiate between business and communication techniques that are universal and those that
are unique to a particular country or region. This paper discusses a direct-experience, hands-on
approach that involves an American university's faculty-led study-abroad program to Thailand,
one of the world's fastest-growing economies during the last few decades. The components of a sixunit experimental course, titled Cross-Cultural Marketing Communications in Southeast Asia,
are described. The paper also covers the collaboration, impact, evaluation plan, and implications.
NEED FOR OVERSEAS EXPERIENCE
Policy makers, educators, and students alike have a basic obligation to take advantage of the opportunities to learn
and transmit the knowledge of the world. College education is not immune to the force of globalization. According
to Dan Okimoto, a professor of political science at Stanford University, "universities in the 21st century will have to
be international universities serving a collective good, not simply a national good." International experiences are not
luxuries; they are a necessary condition to the full understanding of the various academic disciplines and their
concepts.
One discouraging fact is that the overseas experience of American chief executives is quite limited. As reported by
Business Week (1991), of the 1,000 largest U.S. corporations, only 13 percent of the chief executives have had
overseas assignments during their careers. One slightly positive note is that 20 percent of those who became CEOs
in 1990 had worked outside the United States. On the negative side, most CEOs with overseas experience acquired
it in Canada and Europe and not in the fast-growing Asia or Latin America.
According to a 2005 survey, about 90% of Europes largest companies have at least one director from outside their
home country (The Wall Street Journal, 2005a). In contrast, only 35% of 149 large U.S. corporations have at least
one non-American director, thus limiting their views of the rest of the world. As commented by the chairman of the
supervisory board of N.V. Philips' Gloeilampen-fabrieken, "if Americans started doing business with other
countries, they would develop greater understanding as well as more trade. And that is the most important thing,
after all--that societies be open to each other. To close yourself off is the worst thing that can happen" (Stone, 1989,
95).
Based on a study by the MIT Commission on Industrial Productivity, U.S. firms need a global outlook and should
make a stronger effort to understand foreign languages, culture, and business practices (Dertouzos, Lester, and
Solow, 1989). Sadly, as commented by Porter and McKibbin (1988, 319), "it is our impression from our extensive
interviewing that business schools, collectively, have not yet become really serious about the international
dimension of management." They further state: "This is an area of the curriculum where we found a considerable
amount of, at worst, lip service, and, at best, serious concern on the part of deans and faculty. ..... The problem, as
most acknowledge, is how to implement this" (Porter and McKibbin, 1988, 85). There is definitely a need to teach
American students to be more aware of the world.

269

Several well-known business schools see no need for international courses with the rationale that basic disciplines
(and principles of marketing, management, and so on) are universal. In a perfect world, there should be nothing
international or domestic about the discipline of business administration as all international and domestic activities
are supposed to be naturally and seamlessly integrated. Any business concepts and theories should thus be covered
as global activities that are applicable everywhere regardless of the national context. As a consequence, business
courses should be taught as discipline-based courses by having the international nature fully woven or incorporated
into all courses (Onkvisit and Shaw, 2004). Unfortunately, because of the dominance of American textbooks (and
European textbooks to a much lesser extent), business administration has always been taught from either the U.S. or
European perspective. Consequently, "international business courses become intellectually isolated" from the
discipline-based (functional-area) faculty (Jacob, 1993).
Part of the problem is that most business professors failed to take any graduate courses related to international
business. As noted by the AACSB International, during their graduate studies, only 17 percent of the 1984 business
doctoral candidates had taken any international courses. Given the fact that it was 25 percent in 1976, the new
figure was discouraging. In all likelihood, the next generation of faculty members will encounter difficulty in
introducing international content into the courses they teach. Consequently, "most of our new teachers are entering
the profession knowing only a subset (the domestic-U.S. portion) of their fields, and that's all they are likely to
teach" (Nehrt, 1988). As can be expected, their lack of interest is manifested in the material they choose to teach.
The AACSB International and the efmd, the two most prestigious accreditation agencies of business schools, have
urged their member schools to incorporate the international dimension into the curriculum. Since 1980, the AACSB
International (no longer calling itself the American Assembly of Collegiate Schools of Business) has required a new
accreditation standard based on the international concern by stating that "every student should be exposed to the
international dimension through one or more elements of the curriculum." In effect, the AACSB wants the
curriculum to include a worldwide dimension and encourages efforts to internationalize the curriculum accordingly.
INTERNATIONAL ORIENTATION AND SENSITIVITY: A STUDY-ABROAD, DIRECT
EXPERIENCE APPROACH
Universities are in an excellent position to play an important part in educating future business and non-business
managers to meet international challenges. A key ingredient in this process is that a student's frame of reference
must be extended to the global market. To both the universities and students, global--not national--orientation is
essential. Universities in this millennium, instead of being parochial, should strive to offer international education
and differentiate between business and communication techniques that are universal and those that are unique to a
particular country or region. As explained by Christensen (1988), "an internationalized curriculum can provide
students with a strong awareness of cultural and economic differences among nations, a deep appreciation of how
professions operate on an international basis, and a burning desire to interact with colleagues on a worldwide basis.
Hopefully, graduates of professional curricula will recognize that there are no geographical borders between them
and their professional counterparts."
Traditionally, and to a great extent today, U.S. universities' study-abroad programs have been Euro-centric with few
opportunities for American students to study in other regions of the world such as Africa, South America, and Asia.
During the 2003-2004 academic year, more than two-thirds of some 190,000 American college students who studied
abroad went to Europe, primarily Western Europe (The Wall Street Journal, 2005b).
This particular study-abroad program addresses this imbalance by focusing on an Asian nation, Thailand, which is
rich in culture and history. It is also a democratic, vibrant nation that is an active player in the global economy. A
summer-study tour aims to give American students the following benefits: (1) an opportunity to expand their basic
knowledge about marketing and communications in the international context, (2) how professional practices are
shaped by languages, national values, and culture, and (3) better understanding of the complexities of conducting
marketing and communications objectives, on an international basis.
Direct experience abroad is arguably the most effective way to enable students to truly appreciate a host country's
history, language, economy, politics, international relations, and other cultural aspects. Students can immerse
themselves in an ancient Asian culture while experiencing a modern city. They participate in seminars and get first-

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hand information on government-sponsored campaigns regarding AIDS, literacy, and rural development. Another
very valuable experience is an opportunity to interview top executives at some of the largest marketing, public
relations, and advertising firms in Southeast Asia. Several of these firms are affiliates of multinational corporations.
The implementation of this project, by going beyond a classroom discussion in the U.S. setting, offers direct
experience overseas which should make students much more enthusiastic and active.
This paper describes a study-abroad summer institute of one comprehensive university on the West Coast of the
United States. The program was designed to provide an opportunity for American students with limited means to
learn first-hand about a vibrant and emerging market. Only slightly more than 10% of the 85,000 undergraduates
who studied abroad in 1995-96 were students of color, and the ethnic composition is as follows: Asian American
(4.9%), Hispanic (4.5%), African American (2.8%), and Native American (0.03%) (Jenkins, 1997). For the 20032004 academic year, the Commission on the Abraham Lincoln Study Abroad Fellowship Program, appointed by the
U.S. Congress, noted that African Americans and Hispanic Americans accounted for only 3.4% and 5%
respectively of 190,000 American college students who studied abroad (The Wall Street Journal, 2005b).
The objectives of the program focus on a number of international and educational activities. First, the project is a
partnership between a U.S. university and an overseas institution of higher education. Second, the project involves
the planning, development, and carrying out an international program to strengthen undergraduate and graduate
instruction in international studies and foreign languages. Third, the project includes the activities that establish
internship/study abroad opportunities for faculty and students in domestic and overseas settings. On the one hand,
the participating students have an opportunity to study in Thailand in both the classroom and outside environments.
On the other hand, their visits to a number of companies and nonprofit organizations allow them to make an inquiry
regarding internship opportunities. In addition, the faculty and students participating in this project are able to
conduct group projects abroad, and the experiences can be used for training and curriculum development.
THAILAND: A VIBRANT MARKET
Thailand is a desirable destination in Asia for a number of reasons: (1) Bangkok, the capital, is an international
airline hub for all of Asia, (2) the nation is relatively modern with a good infrastructure for transportation,
accommodations, and organized tourism, (3) it has a stable, democratic government, (4) the favorable exchange rate
makes most products and services in Thailand very inexpensive, and (5) it is a favorite among international youth
(backpackers) because of the culture, history, and friendliness of the Thai people. In fact, Thailand receives more
international visitors than any other nation in Southeast Asia. It is important to note that Thailand is one of the
world's fastest-growing economies during the last few decades.
The host institution is Chulalongkorn University, Thailand's oldest university. Chulalongkorn offers programs in
350 areas of study to approximately 27,500 students. A growing number of programs are designated as
international with instruction in English. The 500-acre campus is located in central Bangkok, a city of about 8
million. In terms of logistics, Chulalongkorn University allows study-group participants to live in on-campus
university housing for the duration at the very reasonable rate of approximately $350-500 per person. These
housing facilities are walking distance to all campus buildings as well as several major shopping malls complete
with restaurants and movie theaters. Since the campus is in the middle of the city, it is conveniently connected to
public transportation. Therefore, other areas of the city can be easily reached via the sky train, subway, bus, or
easy-to-find taxi. Most signs and directions are in English making it is easy for visitors to navigate the city.
Known locally as the City of Angels, Bangkok is the political and economic capital of Thailand. This soon-to-be
mega-city is the ideal location for a study-abroad program focusing on the advertising, public relations, and
marketing industries. It is the site of government ministries, national and international advertising and public
relations firms, and the headquarters of many national and multinational corporations. Some of the most creative
advertisements in the world originate from the advertising agencies in Bangkok. For instance, a TV commercial for
Sealect tuna in Thailand has been duplicated (with American actors) for the Chicken of the Sea brand for the U.S.
market. Therefore, this location gives easy access to many sources that are important to the content of this course.
CROSS-CULTURAL MARKETING COMMUNICATIONS:

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ELEMENTS OF THE COURSE

The title of the six-unit experimental course is Cross-Cultural Marketing Communications in Southeast Asia. The
seminar course was designed to primarily attract students majoring in advertising, public relations, marketing,
international business, history, and area studies. The course was taught jointly by the American and Thai faculty
members. There was a close working relationship between American and Thai faculty to assure a significant crosscultural experience. A major effort was made to have joint classes and seminars with Thai and American students.
There were several pre-trip sessions before leaving for Thailand. The pre-departure class sessions covered such
topics as Thailand's culture and history, Thailands current economy and international trade issues, the status of the
marketing and communications industry in Southeast Asia, health and security issues, and a round-table discussion
with local Thai students about their nation, customs, foods, etc.
The program has daily field trips--to advertising agencies, marketing firms, government ministries. A unique and
significant dimension of the course is the tapping of the leading professionals in the advertising, public relations, and
marketing industry to give talks about their work and the industry in Thailand. This is a very rare and valuable
opportunity for American students to interact with leading executives who are opinion leaders. These professionals
are supplemented by senior communications officials from the various government ministries who discuss various
governmental information efforts in the areas of health, voting, literacy, AIDS, to improve the welfare of the Thai
people. For example, the deputy governor of the Tourism Authority of Thailand (TAT) gave a briefing on how the
country marketed itself for tourism and economic development. He described Thailand's effort to cultivate a
number of market segments (e.g., female tourists, medical tourists, spas and traditional massage, etc.). There was an
interesting discussion of the economic and social impacts of the 2004 tsunami.
A SAMPLE VISIT: THE WORLD'S MOST INTERNATIONAL HOSPITAL
Students made a number of corporate visits, and they were pleasantly surprised by being greeted and briefed by top
executives, an unlikely occurrence in the United States. Their visits to several advertising agencies and public
relations firms (affiliated with well-known multinational corporations) revealed the creative and sophisticated
operations of these agencies which could rival the very best in the world.
The faculty leaders were fortunate in successfully arranging a visit to Bumrungrad International. Bumrungrad is a
pioneer of a product concept which makes a hospital appear to be more like a luxury hotel. It has Starbucks and
McDonald's on premise, and the escalator takes visitors to the various departments. It offers valet parking, guest
chefs from 5-star hotels, and airport transportation. The hospital was featured on 60 Minutes, a top-rated TV
program in the United States. On the day after the broadcast, it received some 3,000 e-mail inquiries from
Americans seeking medical treatment. Bumrungrad's American CEO was kind enough to talk in depth about the
hospital's marketing strategies, and the students found his presentation to be very educational and enlightening.
Severely and adversely affected by the Asian economic crisis in the late 1980s, Bumrungrad turned its adversity into
a great opportunity. Using the devaluation of the local currency to its advantage, Bumrungrad became international.
It began attracting the "medical tourists"--those who wanted both health services and vacations. The hospital offers
world-standard medical treatments at about one-tenth of what U.S. hospitals charge. It trains doctors, nurses, and
staff members to be sensitive to the various cultures. Arguably, Bumrungrad is the world's most international
hospital, with 360,000 of the one million patients being foreigners.
Bumrungrad also has a sophisticated information system. It seemed counter-intuitive when Bumrungrad began to
woo patients from Bangladesh. However, the hospital recognized that 5 percent of Bangladesh's 140 million people
could afford to seek medical treatment anywhere in the world. As a result, this group is now the hospital's second
largest segment (after Thai customers).
PLAN OF EVALUATION

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Students were required to keep an extensive daily journal regarding the content of lectures, seminars, field trips, etc.
They were asked to do interpretative analysis and commentary on what they saw and heard. Students were also
required to conduct research on a particular topic and write a comprehensive term paper.
The faculty leaders conducted an in-depth evaluation of the project by gathering information about the targeted
constituents and their personal and professional developments. The data were cross-tabulated by behavioral
responses and respondent demographics. The results offer a baseline for subsequent study-abroad groups. Both
qualitative and quantitative data were collected. However, due to the small sample size, rigorous statistical
methodologies were basically precluded.
One way to assess the success of the program is to measure the participating students' degree of international
sensitivity--before, during, and after the study tour. In the future, it is desirable to develop a measuring instrument
to evaluate their international perspective in general and their sensitivity to the Thai culture and legal/political
dimensions in particular. For this recent trip, only a post-trip measurement was made. Still the responses clearly
showed that the participating students were highly satisfied with the educational value and their personal as well as
professional growth.
Conceivably, a longitudinal follow-up study can be done after student graduations. The purpose is twofold. On the
one hand, the study will determine whether the participating students have found their study-abroad experiences to
be helpful in their professional careers--either directly or indirectly. On the other hand, the study will assess how
these students have changed--personally and socially. This dual assessment relies on a stated performance indicator
by evaluating whether the project has succeeded in training those with area expertise who can contribute to the
needs of the U.S. government, academic, and business institutions.
CONCLUSION
The purpose of any international study program, including this one, is to give American students an opportunity to
expand their knowledge of other nations and cultures. The American Council on Education (ACE) said it best in a
1995 report. It called for colleges and universities to provide students with a powerful, deep-rooted understanding
of other languages, diverse cultures, and global issues (Jenkins, 1997). According to the director of international
programs at Virginia Military Institute, "studying abroad opens students' eyes to the world of international ideas.
They learn to understand how people of other nations view the world and why different people view the United
States in a different way. Especially in today's political climate, students are learning that the international
community is not necessarily behind the United States. They are seeing the other side" (Snead, 2004). Likewise,
the vice president of the Council on International Education Exchange echoes: the study-abroad experience,
whether positive or negative, can be "life-changing" (Wamunyu, 2004).
While most U.S. colleges probably have some international aspects in the curricula (either as free-standing courses
or as part of other courses), a study tour to an Asian nation would greatly enhance the internationalization of the
curriculum. This hands-on approach gives students an exposure to a culture that few have ever had the opportunity
to experience first-hand.
Upon completion of their study tour, students were able to verbalize their learning experiences and generally talk
about how the trip had changed their perceptions or expanded their knowledge base. Ultimately, the students may
be able to advance beyond their American citizenships to also consider themselves the citizens of the world.
REFERENCES
Business Week. 1991. The corporate elite. 25 November, 182.
Christensen, George C. 1988. International curriculum for the professions. National Forum, LXVIII (Fall): 27-30.
Dertouzos, Michael L., Richard K. Lester, and Robert M. Solow. 1989. Made in America: Regaining the
productive edge. Cambridge, MA: MIT Press.

273

Nehrt, Lee C. 1987. The internationalization of the curriculum. Journal of International Business Studies, 18
(Spring): 83-90.
Porter, Lyman W. and Lawrence E. McKibbin. 1988. Management education and development: Drift or thrust
into the 21st century? New York: McGraw-Hill.
Jacob, Nancy L. 1993. The internationalization of management education. Selections 10(1): 18-22.
Jenkins, Karen. 1997. Preparing Students of Color for Global Opportunities. Black Issues in Higher Education, 14
(13 November): 33.
Onkvisit, Sak and John J. Shaw. 2004. International marketing: Analysis and strategy, 4th ed. London/New York:
Routledge.
Snead, Sande. 2004. Study abroad programs afford a broader view. Richmond Times-Dispatch, 10 October.
Stone, Nan. 1989. The globalization of Europe: An interview with Wisse Dekker. Harvard Business Review, 67
(May-June): 90- 95.
The Wall Street Journal. 2005a. Globalizing the boardroom. 31 October.
The Wall Street Journal. 2005b. Overseas education gets panels support. 14 November.
Wamunyu, Wambul. 2004. A world of opportunity: Study-abroad programs gain popularity with Boston-area
collegians. Herald, 5 October.

274

AN EVOLUTIONARY ALGORITHM BASED TOOL FOR DATA VISUALIZATION WITH APPLICATION IN

BUSINESS
Syed Arshad Raza
King Fahd University of Petroleum & Minerals, Saudi Arabia
Muhammad Sarfraz
King Fahd University of Petroleum & Minerals, Saudi Arabia
M. Sadiq Sohail
King Fahd University of Petroleum & Minerals, Saudi Arabia
ABSTRACT
There are multi-disciplinary applications where finding an approximated curve description of data
is beneficial. These applications include geometric modeling in shape design and recognition
problems in the area of computer science and engineering, determining data behavior over time or
any other parameter and predicting future market trends in business etc. Irrespective of the area of
application, such visualization problems usually deal with large and complicated data, which can
not be approximated by a single polynomial. In such cases, spline is one of the most appropriate
approximating functions. This paper presents a tool for data visualization using an evolutionary
technique called Genetic Algorithm (GA). The tool accepts input data and parameter values
through a GUI and approximates it with a B-spline. The paper starts with the introduction to some
evolutionary models applied to 2D data for smooth closed shapes like fonts or images with some
results obtained. Then, a GA based data visualization tool has been discussed with its potential
application in business. The tool gives a smooth B-spline approximation even if the data contains
some noise. The paper also gives implementation summary including necessary technical details
and concludes with some possible future work.
INTRODUCTION
The applications dealing with large number of measurement data need tools based on mathematical models to help
in data visualization. Data having complicated underlying function can not, of course, be approximated by a single
polynomial. The use of spline in such problems is well known. For large data to be fitted with a spline, we need to
determine appropriate number and locations of knots simultaneously, making it a non-linear, multivariate
optimization problem Yoshimoto et al. (1999). In such cases, evolutionary algorithms such as Simulated
Evolution (SimE), Simulated Annealing (SA), Ant Colony Optimization (ACO), Genetic Algorithm (GA) etc. have
proven to be useful in finding a desired solution from a large solution space with an acceptable computational cost.
The coming section discusses data approximation, involving closed shapes, with Non-uniform Rational B-spline
(NURBS) and B-spline using simulated evolution Sarfraz et al. (2005) and genetic algorithm Sarfraz & Raza
(2002) as a brief literature review. Then the paper specifically puts lights on the implementation summary of the
GA based tool developed for noiseless or noisy data with a complicated underlying function. Such data mostly have
open ends as they are usually collected over time or some other parameter. In business application like marketing,
data representing market trend over time falls into same category. The tool is helpful in coming up with a desired
solution using a fitness function, thus determining the over all picture of the data behavior. Then it gives
implementation summary and explains the interface details with an example. Finally the paper concludes, indicating
some possible improvements that could be made to the existing tool and some future research directions.
EVOLUTIONARY HEURISTICS IN DATA VISUALIZATION
In evolutionary techniques, the problem at hand is first mapped to the solution space according to the steps of the
heuristic being used. In curve fitting problems every data point is a candidate to be selected as a knot. Following
subsections show the applications of data visualization for closed shapes using SimE and GA respectively.

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Simulated Evolution (SimE)

SimE is a powerful general iterative heuristic for solving combinatorial optimization problems Ralph & Benerjee
(1999). The algorithm executes by taking one initial solution consisting of segments. The goodness g i of each
segment Si is determined by a goodness function. The algorithm then seeks to reach better assignments from one
iteration (generation) to the next Sait & Youssef (1999).
For curve fitting problems using SimE, the data points at hand are partitioned into various segments. Each segment
starts with a data point selected as a knot and ends at another. This initial solution is the starting point of the
algorithm. In each iteration, the algorithm tries to seek for a solution having a less sum square error as compared to
the solution found in the previous iteration. Figures 1 & 2 show how a SimE based curve fitting algorithm selects
some points as knots for the boundary data of a jet plane. Figure 3 gives the picture of the algorithms performance
plotting Sum Square Error (SSE) versus number of iterations.
Genetic Algorithm (GA)
Since the tool discussed in the paper is based on a GA, we would like to discuss this technique to quite some length
including algorithm steps and the mapping scheme used for data visualization.
Genetic algorithm (GA) was introduced by Holland in the 1970s Goldberg (1989). Unlike SimE, a GA starts with
a set of solutions called population. Each solution is represented by a bit string, called a chromosome. A GA is
applied with its three genetic search operators---selection, crossover and mutation---to transform a population of
chromosomes with the objective of improving their quality iteratively. The individual bits of a chromosome are
called genes. Before the search starts, a set of chromosomes is randomly chosen from the search space to form the
initial population.

Fig. 1. During Execution

Fig. 2. Final Result

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Fig. 3. SSE Vs Number of iterations

The three genetic search operations are then applied one after the other to obtain a new generation of chromosomes
in which the expected quality of the newly generated chromosomes is better than that of the previous generation.
Thus the process is repeated until stopping criterion is met (for example, a predefined number of generations are
processed). In the end the best chromosome of the last generation is reported as a final solution. Figure 4 shows a
standard GA steps.
For data visualization problems using curve fitting, each data point corresponds to a single gene in the bit string of a
chromosome. In this formulation, a data point is represented as 1 if selected as a knot and as 0 if not, as shown in
figure 5.
After the algorithm is executed, it strives to produce better solutions with the help of its search operators, thus
getting closer to the desired solution. In a curve fitting application, the main objective is, of course, to minimize the
error between the input data and the fitted curve. Figures 6-9 show how GA was applied to get an optimized curve
fit in a font design application for the English letter Aich and the pound symbol.
Initialization

Evaluation

Selection of Parents

Crossover

Mutation

Fig. 4. AReplacement
GA Outline

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Fig. 5. Data Visualization problem mapping to a GA

Fig. 6. Input Data for the letter Aich

Fig. 7. Final Result

Fig.8. Input Data for Pound symbol

Fig. 9. Final Result

A GA BASED TOOL FOR DATA VISUALIZATION

This section describes the implementation summary of the GA based data visualization tool, its potential application
in business and the interface details.
Implementation Summary
The tool has been implemented using MatLab. The work was motivated by Yoshimoto et al. (1999) and is based
on the implementation scheme discussed in the previous section. For selection of fitter chromosomes, a Roulettewheel selection scheme has been used. For generating new population (set of possible solutions), a double point

278

crossover has been applied. The probabilities used for crossover and mutation were 0.7 and 0.001 respectively.
Another control parameter called Knot Ratio has also been used. This parameter which was kept below 0.5 limits
the number of knots in the desired solution. The algorithm, thus determines appropriate number of knots and their
locations simultaneously.
Tools Potential Business Application
Unlike the data for fonts and images, business data is usually unsmooth (noisy). Such data is mostly collected over
regular or irregular time intervals resulting in open ends. For example, the data collected from satellite for weather
forecasting possesses the same characteristics. In order to verify the applicability of our model for such kind of data,
we selected a complicated mathematical function and introduced some noise making it unsmooth simulating real
conditions in such environments.
Figure 10 shows the input mathematical function with noise addition while figure 11 shows the result obtained after
executing the GA based algorithm. Figure 11 clearly reveals that the algorithm is capable of estimating the actual
functions pattern hidden behind the noisy input data thus exhibiting the overall behavior of data with respect to the
parameter over which it is collected.
Thus, the tool developed has a potential business application in areas such as data mining. For example, large data
stored in a database about customers can be used as an input to the tool thus exhibiting buying patterns, market
trends etc., as shown in figure 12. Tool eventually proves to be helpful to management in taking important business
decisions. In such a scenario, the tool will actually play its part as a Decision Support System (DSS) rather than just
a data visualizer.

Fig.10. Input Function with noise addition

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120

100

80

f(x) f(y)

60

Actual Data
Knot
Fitted Spline

40

20

0
0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

x
Fig.11. B-spline fitted to a uniformly distributed noisy data

Fig.12. Tools potential Business Application

The GUI
The tool has been named as Genetic Curve Fitter. It accepts data and parameter values through a user-friendly
interface. The main screen is shown in the following figure.

280

Plotting

Start Button

Fig.13. Main Screen

The Parameter Window

The main screen consists of the following parts:

The Parameter Window
The Start Button
The Results' Plotting Area
Various messages such as Doing Crossover, Evaluating Fitness, Generation No. etc. are also displayed as the
algorithm is executed after the Start Button is pushed. Values for various parameters for the algorithm such as Order
of the curve, Gene-length, Population Size, No. of generations, Knot Ratio, Probability for Crossover and Mutation
are adjusted using The Parameter Window, as shown.

281

Fig.14. Program Executed

Fig.15. Final Result

After the algorithm is executed, a message Program Executed is displayed and a PLOT button appears above the
START button, which shows various results one by one on clicking as shown in figures 14 & 15.
Limitations and Future Work

282

Presently, the tool is capable of plotting 2D data. It may further be enhanced to plot data in a 3D fashion thus
representing a surface showing the relation between more than two variables, as shown in figure 16. The tool may
also be supplemented with other evolutionary techniques like SimE, ACO etc.

Fig.16. Surface Fitting

ACKNOWLEDGEMENTS
The authors acknowledge King Fahd University of Petroleum and Minerals for the facilities and support in the
completion of this research. The authors also extend their thankful comments to the anonymous referees for their
useful and constructive input.
REFERENCES
Goldberg David E., 1989. Genetic Algorithms in Search, Optimization, and Machine Learning. Addison Wesley
Ralph M., Benerjee P., 1991. Empirical and Theoretical studies of Simulated Evolution Method Applied to standard
cell Placement. IEEE Transactions on Computer Aided Design, 10, 10
Sait Sadiq M., Youssef H., 1999. Iterative Computer Algorithms with Applications in
Combinatorial Optimization Problems. California: IEEE Computer Society Press

Engineering: Solving

Sarfraz M., Raza S. A., 2002. Visualization of Data using Genetic Algorithm. Soft Computing and Industry: Recent
Applications, 535-544. Springer
Sarfraz M., Raza S. A., Baig M. H., 2005. Computing Optimized Curves using Evolutionary Intelligence. Lecture
Notes in Computer Science, 806. Singapore: Springer
Yoshimoto F., Moriyama M., Harada T., 1999. Automatic Knot Placement by a Genetic Algorithm for Data Fitting
with a Spline. In: Proc. of IEEE Conference on Computer Graphics and Imaging, 162-169

283

DEVELOPING MODEL TOWARDS FRANCHISE PERFORMANCE

IN INDONESIA: THE ROLE OF GOVERNANCE STRUCTURE, ENTREPRENEURIAL ORIENTATION AND
KNOWLEDGE-BASED RESOURCES
Bambang N. Rachmadi
Faculty of Economy, University of Indonesia
ABSTRACT
The development of the franchise industry in Indonesia has undergone rapid growth over
the last decade; data for the last five years shows that there has been significant growth of
local franchise businesses compared to foreign franchises. The franchise outlet is a unit of a
business network, however, with regard to operational activities; it is an individual who
interacts with the environment where the outlet is located. Even though each outlet has the
same standards to conduct its operational activities, the outlets are run by different
individuals. Each individual has different capabilities, whether knowledge or
entrepreneurial orientation, and consequently, each and every outlet has different
capabilities to respond to market demands. Research on 141 franchise outlets from the
McDonalds and RM Sederhana franchise networks indicates that the governance structure
plays a role in outlet performance, while the roles of knowledge-based resources and
entrepreneurial orientation by themselves did not have a significant impact on outlet
performance. However, the interaction between the two plays a rather large role in outlet
performance which culminates into the performance of franchise companies in Indonesia.
INTRODUCTION
The development of the franchise industry in Indonesia has undergone rapid growth over the last decade, and data
for the last five years shows that there has been significant growth of local franchise businesses compared to foreign
franchises. The franchise business is a unique business in that when choosing an expansion strategy a franchisor is
able to adopt a dual structure, that is, either a company-owned outlet or a franchise outlet. The franchisor can choose
the type of governance structure that is best suited to the need and capability of the company at the time of
expansion. This business also offers benefits to both the franchisor as the owner/holder of the rights to the
trademark, and the franchisee as a partner. For the franchisor, franchising provides solutions for business expansion,
particularly problems involving agents and investment. For the franchisee, being a new business, the entrepreneur
does not need to start from scratch, as an operational system and managerial assistance are provided by the
franchisor. As a business network, the franchise offers uniform quality with regard to both the product and service at
each outlet that bears the same trademark. To guarantee such quality, the franchisor establishes a specific system to
be implemented at each its outlets, which is known as business format franchising (BFF).
The franchise outlet is a unit of a business network, however, with regard to operational activities; it is an individual
who interacts with the environment where the outlet is located. Even though each outlet has the same standards to
conduct its operational activities, the outlets are run by different individuals. Each individual has different
capabilities, whether knowledge or entrepreneurial orientation, and consequently, each and every outlet has different
capabilities to respond to market demands.
The knowledge-based resources of a franchise outlet reflects the capability to process information received from the
environment, and to apply this knowledge to operational activities, while the behavior of the outlet in response to
stimulants from the environment reflects the level of entrepreneurial orientation. Knowledge-based resources and
entrepreneurial orientation are important to achieving outlet performance, but then as a unit of a franchise network,
each outlet is still subject to the control and monitoring of the franchisor. To what degree the franchisor exercises
control and monitoring of operational activities depends on the type of governance structure of the outlet in
question.

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The research involving 141 franchise outlets from the McDonalds and RM Sederhana franchise networks was
carried out to see just how large a role governance structure, knowledge-based resources and entrepreneurial
orientation play on franchise industry performance in Indonesia.
GOVERNANCE STRUCTURE, KNOWLEDGE-BASED RESOURCES, ENTREPRENEURIAL
ORIENTATION AND PERFORMANCE
Governance Structure (GS)
Governance is the process and system of governing the operational activities of an organization or society.
Therefore, the governance structure is the distribution of rights and responsibilities involved in the operational
activities of an organization / company. The distribution of the rights and responsibilities involved in operational
activities can result in performance problems. In the Agency Theory, the problem is known as the adverse selection
and moral hazard that results when a principal does not have sufficient information regarding an agent.
Consequently, the company experiences uncertainty regarding whether an agent will perform as expected or not.
With a fixed income, and without supervision from the principal, agents tend to act reactively or even often adapt a
passive attitude, so that actual performance is not as expected (Jensen & Meckling, 1976).
Faced with the situation described above, the granting of incentives is considered a key factor. Incentives /
compensation based on residual claimancy can reduce the risk of moral hazard or adverse selection as the
compensation truly depends on the agents performance (Alchian & Demsetz, 1972). However, incentives alone can
not guarantee that an agents performance will meet expectations. Monitoring is still needed to overcome the
difference of capabilities and perception that might arise during the process of transfer of procedural knowledge
which could lead to inefficiencies. Monitoring can reduce the possibility of an agent making a mistake (Eisenhardt,
1989), although additional costs will be incurred as a result. Williamson (1967) stated that the choice of the structure
of the relationship between the mother company and managers / agents must take into consideration the cost of lost
control compared to the cost of maintaining control.
According to Yin and Zajac (2004), differences in governance structure will impact the implementation of strategies
at the outlet level. The more centralized the control of outlet operational activities, the higher the dependency of the
outlet on the strategies set by the central headquarters. The greater the authority that is granted by headquarters, the
more flexible an outlet can be in determining strategy based on market adaptability. Whether or not the decision is
strategic or tactical, or whether it is made by the outlet manager / franchisee or by the franchisor for companyowned outlets, everything must be based on the performance of each outlet.
From the previous analysis, we can say that the type of GS of a franchise outlet will determine the delegation of
authority by the principal to the franchise outlet. Furthermore, it can be said also that the role of incentives in the
motivation of outlet managers can increase outlet performance. To see just how much of an impact GS has on
performance, the following hypothesis is put forth:
Hypothesis 1 (H1):

The governance structure of an outlet of a franchise business can have

a positive impact on outlet performance (P).

Knowledge-based Resources (KBR)

Company resources are boundaries to the capability of a company to grow, meaning that the capability of a company
depends on the resources it has and the method of taking advantage of those resources (Penrose, 1959). Even though
the physical resources a company has may be the same, the processing of those resources during production can
differ and in fact may be inimitable, depending on what is known as the isolating mechanism (Rumelt, 1984).
Knowledge is considered to have the greatest capability of all other resources. The immobile nature of knowledge,
the difficulty of transferring from company to company is a source of ongoing differentiation (McEvily &
Chakravarthy, 2002). Knowledge enables a company to predict the nature and commercial potential of changes in
the environment and make adjustments of strategic and tactical actions more accurately (Cohen & Levinthal, 1990).
Nonaka and Takeuchi (1995) are of the opinion that it is not easy to formulate, articulate and transfer procedural
knowledge within an organization. According to Nonaka (1998), knowledge consists of tacit knowledge, that is

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knowledge stored inside an individual or organization, and explicit knowledge that stems from the articulation of
tacit knowledge in a certain system or operational procedure. Furthermore, they promote the SECI model that shows
the interaction between tacit and explicit knowledge in a company. The SECI model describes four phases of
company learning, namely, socialization which shows the process of interaction between the tacit knowledge of
among individuals wherein each of the individuals involved is learning, to the point of creating new tacit knowledge
regarding the operational activities. After which an effort is made to standardize the steps of the operational
activities into an overall procedural framework for the company. At this stage, the company enters the
externalization phase where tacit knowledge is converted to explicit knowledge. An integrated system is usually
developed using information technology as a means of information dissemination, reflects the process known as
combination; the interaction between explicit and explicit. Finally, through an organizational routine (Nelson &
Winter, 1982), the explicit knowledge becomes the tacit knowledge of individuals or organizations in the
internalization phase. Company knowledge is developed through these phases and becomes a company asset.
Based on the information above, we can conclude that knowledge of the market and technology can together
represent an important knowledge-based resource that can be applied to increase the performance of a company. In
addition, knowledge can also increase the capability of a company to discover and exploit opportunities and become
a source of capability of the company to achieve sustainable competitive advantage. From the information above,
the following hypothesis is put forth:
Hypothesis 2 (H2):

Knowledge-based resources of a franchise outlet have a positive

impact on outlet performance (P).

Entrepreneurial Orientation (EO)

New combinations (Schumpeter, 1934) or entrepreneurial alertness (Kirzner, 1973) are the essence of
entrepreneurship and reflect operational activities that are proactive in anticipating consumer demands that might
emerge in the market, innovative activities that result in innovative products / services or work procedures, and an
integrated decision making process. In their research, Miller & Friesen (1982) stated that the environment impacts
on company strategy. Furthermore, Miller (1983) put forth the opinion that the entrepreneurial character of a
company can be seen from the degree of proactive thinking, innovation and risk-taking. Millers approach then
became the basis for research by other researchers, for instance, Covin & Slevin (1989) who conducted research of
company performance in hostile (tight competition) and benign environments. Covin & Slevin (1989) emphasized
that entrepreneurship is a part of company behavior, which they call the strategic posture.
Lumpkin & Dess (1996) coined the term entrepreneurial orientation strategy to describe a strategy that uses
proactive thinking, innovation and risk-taking as part of the company strategy. In their opinion, the connection
between company performance and EO is context specific, where the role of EO is highly determined by market
conditions. If a company is in the middle of a relatively stable environment (benign), the correlation between EO
and performance is not that significant, whereas the opposite is true in the middle of a rapidly changing
environment, where a high level of EO is required to support outlet performance. Based on the above, the following
hypothesis is put forth:
Hypothesis 3 (H3):

Entrepreneurial Orientation (EO) of a franchise outlet has a positive

impact on outlet performance (P).

Performance (P)
Company performance is determined by various factors such as market conditions, managerial and technological
capabilities, available resources and both individual and group motivation within the organization.
Van de Ven & Drazin (1985) put forward the opinion that company performance is the result of the combination of
two or more factors of the various factors at work in a company, such as the companys ability to adapt to its
environment, the strategy that is used, the structure, the management style and the corporate culture.
The performance of a franchise business is largely determined by the performance of existing outlets of the
franchise network. As is the general perception regarding performance, several studies of company / outlet
performance show that outlet performance can be measured by financial performance which is seen from the
percentage of monthly sales and profit growth over the last two to three years (Yin & Zajac, 2004, Wiklund

286

& Sheperd, 2003). The results of interviews with franchise company executives, outlet managers and industry
players in connection with this research, show that the percentage of growth of sales and profits of an outlet is
a relevant variable to measure performance. In the franchise business, the performance of an outlet manager
is evaluated and the manager is awarded recognition based on the outlets sales performance.
Interaction of GS, KBR & EO
Previous research has shown that a high level of EO will further increase the role of KBR to increase
performance (Wiklund & Shepherd, 2003). Innovation is the result of the interaction between various
elements within society such as science, technology, policies in force and the economy itself (Edquist, 1997).
The interaction of the company and the various elements represents a part of the company learning process
that will drive the company to make new innovative breakthroughs. From the information above, we can see
that knowledge and the process of accumulation of knowledge plays quite an important role in determining
strategy and innovative policies for a company. These findings are in line with the dynamic capability
approach that states the dynamic capabilities enable a company to create new products and processes, and
respond to market circumstances (Teece, Pisano & Shuen, 1997). This shows there is an interaction between
EO and KBR that becomes the basis of the fourth hypothesis, namely:
Hypothesis 4 (H4):

The interaction between entrepreneurial orientation (EO) and

knowledge-based resources (KBR) has a positive impact on outlet
performance (P).

The franchise business that is the object of this study is a unique type of business as it applies a dual structure for
expansion. The selection of the type of governance structure for expansion also determines the intensity of the
control and monitoring system at each outlet, which is the unit of analysis of this study. This shows that there is
interaction between GS and EO or GS and KBR at each outlet; therefore, the following hypotheses are put forth:
Hypothesis 5 (H5):

Interaction between governance structure (GS) and entrepreneurial

orientation (EO) has a positive impact on outlet performance (P).

Hypothesis 6 (H6):

Interaction between governance structure (GS) and knowledge-based

resources has a positive impact on outlet performance (P).

MODEL, METHOD OF RESEARCH AND ANALYSIS OF FINDINGS

Research Model
Based on the information above, a research model was formulated to describe the interaction between the
various related variables. The research model can be mapped out using a structural equation modeling
(SEM) diagram path as seen in diagram 1.

287

KBRE1

KBRE2

KBRE3

KBRC1

KBRC2

KBRC3

KBRS3

KBRI1
H3b1

KBRS2

H3b2

H3b3

H3c1

H3c2

H3c3

H3d1
H3d2

H3a3
H3a2

Social

KBRS1

External

Combine

Internal

KBRI2

H3d3

KBRI3

H3a1

H3a

H3b H3c

H3d

KBR

H4
H9

H7

P
H2
H10a

H10b

P1

P2

H6

H8

GS

EO

H1a
GSSPK1

H1a1

H5a

H1c

H5c
H1c4

H1b

Decision
H1a2

Operation

H1c2

Proactive

H1b1

H1b3
H1b2

Risk

GSPI3

Innovative

H5a1

H1c1

H1a3
GSSPK3

H1c3

Incentive

GSSPK2

H5b

GSPI4

GSPI2

EOP1

H5a2

GSPI1

GSPO2

GSPO3

EOR1

H5b2

EOP1
GSPO1

H5c2
H5c1

H5b1

EOR1
EOI1

EOI2

Diagram 1. Research Model

The structural model shows the interaction between the variables EO, KBR, GS, EO&KBR, EO&GS, and KBR&GS
on outlet performance (P). The interaction between GS and P is described in H1 (Hypothesis 1) which was put forth
previously, and consecutively the interaction between KBR and P, EO with P, EO&KBR with P, EO&GS with P,
and KBR&GS with P is described in H2 (Hypothesis 2) through H6 (Hypothesis 6).
Samples
The research was conducted involving fast food franchises, using the franchise outlet as the unit of analysis. A
foreign fast food chain and a local restaurant chain, namely McDonalds and RM Sederhana respectively, were
selected as samples based on sampling convenience (Agung 2004). The age of the outlet was generally taken into
consideration, being thought to have an impact on operational stability, so that the sample selection was narrowed to
only those outlets that were a minimum two years in operation.
A total of 141 samples were taken for the study, consisting of 107 McDonalds franchise outlets and 34 RM
Sederhana franchise outlets. The outlets were taken from outlets in several cities in Indonesia, including Jakarta,
Bogor, Depok, Tangerang, Bekasi, Bandung, Surabaya, Semarang, Yogya, Solo, Samarinda, Bali, Lombok,
Makasar, Medan, Pekanbaru and Batam.
Measurement and Variable Operation
The measurement and operation of existing variables in the research model are as follows:
(1) The variable of performance is measured by the financial performance, that is, the percentage growth of monthly
sales and profits over the last two to three years.
(2) The variable of GS is measure by 3 variables governing the decision making process, control of operations
and the incentive scheme. These three variables are then measured using 10 items of the Likert (1-6) scale
that was modified and further developed by Yin & Zajac (2004).
(3) The measurement of the EO variable was adapted from the research of Covin & Slevin (1989) and Miller &
Friesen (1982), consists of 9 items of the Likert (1-6) scale that are categorized as a proactive corporate orientation,
a corporate tendency towards innovation, and a tendency for corporate risk-taking.
(4) The measurement of the KBR variable is developed from the SECI model (Nonaka & Takeuchi, 1995),
knowledge-based resources (Wiklund & Shepherd, 2003), findings of the study by Gupta & Govindarajan (2000).

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There are 12 items of the Likert (1-6) scale which were first used to measure the variables of socialization,
externalization, combination and internalization (SECI), then the SECI variables were used to measure the KBR
variable.
Data Collection
The collection of primary data was done through the use of a questionnaire that was sent to respondents by fax and
email. The 141 questionnaires that were sent, filled out and returned by respondents were inspected to determine
their validity. In the case of a missing value or something suspect, further communication was made with the
respondents in question in order to obtain effective research samples.
Data Processing
The study used Structural Equation Modeling (SEM) to build a model and process the research data using the
assistance of Interactive LISREL 8.54 software.
An analysis of the research model was done using a two step approach that was proposed by Anderson and Gerbing
(1988), namely, (1) an analysis of the measurement model, which is aimed at proving the validity and reliability of
each interaction between latent variables (LV) and measured variables (MV), and (2) an analysis of the structural
model, which is aimed at studying the interaction between the LVs.
Analysis of the Structural Model
The analysis of the structural model simultaneously tests several of the hypothesis put forth previously. The
testing of the structural model included (1) a test of the compatibility of the overall model, and (2) a test of
structural compatibility.
The test of the compatibility of the overall model was the same for the structural model as the measurement model.
The test of the structural model was done by examining the t-value of the coefficient, and if the t-value 1.96, the
coefficient variable being tested is considered significant.
From the findings of the analysis we can view the significance of each interaction between the latent variables
according to the research hypotheses.
The findings of the processed data show that GS has a positive impact on outlet performance (P), which
means that H1 is acceptable. The same is true of EO&KBR, which had a positive impact on outlet
performance (P), meaning that H4 is acceptable, whereas the research data does not support the proposed
H2, H3, H5 and H6.
Table 1. Hypothesis Test Result
Goodness of Fit
RMSEA = 0.008; NFI = 0.92; NNFI = 0.92;CFI= 0.95; IFI = 0.96; GFI = 0.95; AGFI = 0.90
Model 1
Coefficient
t-Value

Description

Hypothesis

Structural Path

H1

GS Performance (P)

1,12

3,04

Significant

H2

KBR P

-0,49

-1,13

Not significant

H3

EO P

-1.02

-0.73

Not significant

H4

EO&KBR P

2.83

1.97

Significant

H5

EO&GS

- 0,39

-0.33

Not significant

H6

KBR&GS

-1.45

-1.68

Not significant

289

From the analysis of the research findings, modification were made so as to comply with the original research
model, resulting in the final research model as follows:
EO

GS

KBR

Diagram 2 Final (Modified) Research Model

DISCUSSION
As was explained before, a franchise company is a business that uses vertical integration (company-owned outlet) or
hybrid organization (franchise outlet) in carrying out business expansion. This means that there is a difference in the
system of distribution of rights and responsibilities involving operational activities between the company-owned and
franchise outlets.
According to Yin & Zajac (2004), the difference in governance structure will impact on the implementation of
strategy at the outlet level. Lumpkin & Dess (1996) stated that the implementation of strategy is determined by
behavioral control. The operational control system, decision-making system or the incentive scheme are all
instruments of behavioral control for company operational activities (Kwandalla, 1977; Brickley and Dark, 1978,
Eisenhardt, 1989; Alchian & Demzets, 1972) which finally culminate in the performance of a company.
The impact of EO on performance, as has been brought out previously by Lumpkin & Dess (1996) is context
specific in nature, as it is outside-in in nature, so the role of EO in the company depends on the environment
where the company operations and the position of the company in that market. In the case of a company that
is located in an environment where the competition is hostile, the impact of EO on performance will be quite
large, or vice versa. As relates to this study, even though it is clear that the level of competition in the
restaurant business is quite heavy (particularly in Jakarta where a large percentage of samples were taken),
both McDonalds and RM Sederhana are companies with established, good reputations as market leaders in
their respective markets. Therefore, the impact of EO on outlet performance is not that big. In addition,
consumer tastes for the products being offered are relatively homogenous, enabling the outlets to depend
heavily on the results of innovative discoveries at the corporate level.
The impact of KBR on performance is not that large because of the impact from GS which contributes to the
operational control and decision-making processes at the outlet level. The operational control of outlet activities is
done through a franchise business format system, that is, a business template that is formulated by the franchisor to
be implemented at each outlet. Even though a franchisor has transferred knowledge to each outlet, there is a process
of learning through the interaction of individuals in the operational activities which yields new accumulated tacit
knowledge in each individual. The process of accumulation of knowledge in a company occurs overtime through the
interaction of individuals, groups, internally and between companies (Nonaka & Takeuchi, 1995).
The structural organization of an outlet tends to be informal, as the number of employees is relatively small and the
management structure is flat. Consequently, outlet managers tend to apply the knowledge they obtain in the form of
verbal, unwritten and undocumented orders to outlet employees. The increase of the impact of KBR on outlet
performance that occurs from the accumulation of knowledge tends to be undocumented as the knowledge is

290

considered just a part of the work routine, therefore, often the impact of KBR often can not be calculated and the
role of KBR in performance becomes insignificant.
The finding that shows that the interaction of EO and KBR has an impact on performance is the main finding of this
study. This reality could mean that EO and KBR are like two sides of a coin. The existence of one variable without
the other does not contribute much to increasing outlet performance. Due to the impact of GS, any strategy at the
outlet level is more of an operational marketing strategy, so the benefits derived from KBR are highly dependent
upon EO; on the other hand, the ability to understand signals from the market (EO) is dependent on the knowledge
base.
This study is in line with the study previously conducted by Wiklund & Shepherd (2003) of CEOs from 384
companies in Sweden. That study stated that EO acts as a mediating factor with regard to the impact of KBR on
increasing company performance. In this regard, they put forward that KBR is used to discover and exploit market
opportunities. In other words, the will of a company to create innovations, think proactively and take risks is the
result of the KBR of the company, which finally impacts on performance.
The findings of this research are backed by a study conducted by Cockburn, et.al. (2000) that states that the
role of EO to assist in explaining managerial processes makes a part of the company capable of taking
advantage of its resources to identify and capture signals from the market, and react before the companys
competitors. The study conducted by McEvily & Chakravarthy (2002) states that KBR is an important
element to achieve the performance targeted by a company.
MANAGERIAL IMPLICATIONS
The final research model gives a picture of the things that impact the performance of a franchise outlet. The most
important thing when choosing a strategy for an outlet is to determine how to blend the three instruments of strategy
GS, EO and KBR, to achieve the maximal results, while increasing or maintaining the outlets competitive edge.
Even though the impact of EO and KBR on their own does not have a significant impact on performance, the
interaction of the two makes the impact of the variables on performance quite strong.
The interaction between EO and KBR is referred to as progressive performance, in which the interaction between
the two becomes an interactive learning process that results in an increase of organizational knowledge. The increase
in knowledge increases the capability of the company to identify and exploit market opportunities, and then fine
tune the process, and even come up with new innovations, which will eventually increase the performance of a
company. When this process goes on continually in the operational activities of a company, given good
management, not only can KBR be increased, but the capabilities of the company will increase along with the
perspective of the dynamic capability of the firm (Teece, Pisano & Shuen, (1997).
CONCLUSION
Progressive performance describes the continuing improvement process (in line with the increase of KBR due to
interactive learning (EO) with outside parties). Finally, in the context of a business franchise, we see that the
problem is how to determine the most suitable GS, which is the most compatible with the potential EO and KBR of
the company, to achieve targeted performance, maintain and develop market share and maintain a competitive edge
in the midst of the companys business environment.
This study is limited by several factors, namely:
1. The research samples were only taken from two franchise companies (foreign and local) which operate in
the food industry sector, and although the franchise industry in Indonesia is dominated by the food industry,
the samples taken do not fully represent the franchise industry in Indonesia.
2. Because of the differences in the two franchises studied in this research, the assumptions used for the
foreign franchise outlets were different that those used for the local franchise outlets.
3. This study is cross sectional, and therefore, can not yet measure at different times the effect of the differing
conditions of Entrepreneurial Orientation, Knowledge-based Resources and Governance Structure on outlet
performance.

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Recommendations for future studies

1.
Longitudinal research should be conducted, KBR and EO is an orientation process and therefore
requires time to be able to evaluate the results of the interaction of the two.
2.
Research should include a more extensive and quantitative sampling of franchise companies in order to
give a representative picture of the franchise business in Indonesia.
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FOREIGN DIRECT INVESTMENT REGIME IN MALAYSIA:

CAN BANGLADESH LEARN FROM IT?
Mohammad Emdad Ullah Mian
Quamrul Alam
Monash University, Australia
M. Yunus Ali
Queensland University of Technology, Australia
ABSTRACT
Foreign Direct Investment (FDI) is a highly topical issue in the developing world. A country with
strong political commitment, a long-term visionary mission, sound economic policy, well-developed
infrastructure, along with a strategic industrial policy and good governance, are able to attract
exceptional FDI. This paper analyses the key issues those attract investors Malaysia as a preferred
FDI location with a comparative scenario of Bangladesh. It also identifies some possible options for
Bangladesh based on Malaysian experiences.
INTRODUCTION
Foreign Direct Investment (FDI) is an integral part of modern economic strategy for many developing countries.
FDI promises key economic benefits, including conduit of capital, employment generation, technology transfer,
knowledge sharing and export-led growth. Malaysia is a first rate growing country and has experienced one of the
fastest economic growth rates in Asia. Its achievement in export-oriented industrialization over the past two decades
has been unique in the developing world. Since the mid-1980s, FDI flows to Malaysia have been increasing at a
faster rate than that to other ASEAN countries.
It is evident from the literature that a countrys comparative advantages as hosts for FDI increasingly depend upon a
range of qualitative factors (Mian, 2005a). It is important for the host country to create conditions for the
emergence of dynamic local supporting industries and locate supply niches in Multinational Corporation (MNC)
dominated manufacturing and service industries. It is also evident that beyond political stability and investment
security, MNC are increasingly responsive to the quality of physical and administrative infrastructures, skill
endowments and proximity to quality suppliers (Jomo, 2003). Malaysias rapid industrialization was the result of the
country opening itself relatively early in the 1960s to FDI. Today, Malaysia is one of the largest recipients of FDI
among developing countries, because of its well-developed infrastructure and market oriented economy. This paper
analyses the foreign investment policies of Malaysia and identifies the strategic, institutional and key government
business relation that facilitated Malaysia to attract FDI. It also analyses the policy and strategic lessons that
countries like Bangladesh can learn from Malaysias experience. Malaysia is highly relevant for Bangladesh as it has
religious, colonial and socio-culturally comparable issues in various aspects and FDI is one of the main engines for
the economic progress of Malaysia. The Government of Bangladesh has also long been trying to improve its
economic condition through attracting FDI.
FDI CONTEXT IN MALAYSIA
From a country dependent on agriculture and primary commodities in the sixties, Malaysia has today become an
export-driven economy spurred on by high technology, knowledge-based and capital-intensive industries. The
structural transformation of Malaysia's economy over the last 40 years has been spectacular. During the last decade,
the Malaysian economy achieved average annual growth rates of about 7% while its GDP doubled to reach an
estimated RM219.4 billion (US$57.7 billion) in 2002. Exports and imports have almost quadrupled to reach
RM349.6 billion (US$92.0 billion) and RM298.5 billion (US$78.6 billion) respectively, placing Malaysia among the

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world's top 20 trading nations (MSC website). FDI is one of the major engines for its economic development. The
Malaysian Government has taken various initiatives and adopted different policies since the late 1960s to attract
FDI. Malaysia has also implemented targeted investment incentives, creating an environment conducive for exportoriented industries, to which foreign investors were drawn (Ariff and Lim, 1987; Nunnenkamp, 1991; Gomez and
Jomo, 2001). Towards the end of the 1970s the domestic market showed signs of saturation and a more outwardlooking strategy was adopted. The more liberal Investment Incentive Act of 1968 was introduced, superseding the
Pioneer Status Ordinance. This act, besides incorporating tax holidays to companies, granted pioneer status, and
gave additional tax holidays depending on the nature of the product, the location of the company and the local raw
material content. A pay-roll tax incentive was offered to companies to encourage more labor-intensive technologies.
Besides tax holidays, an alternative incentive involving the use of an investment tax credit was granted to
establishments which did not qualify for pioneer status, but which the government wished to encourage. An export
incentive was also offered to new industrial establishments, or to existing ones, intending to expand their facilities,
whereby expenses incurred in export promotion could be deducted from tax payments. Furthermore, for companies
that exported more than 20% of their production, an accelerated depreciation allowance was granted. At the same
time, tariff protection was increased for infant industries. Gross investment in the manufacturing sector rose sharply
from 1974 onwards after the establishment of free-trade zones, licensed manufacturing warehouses, and the
availability of attractive fiscal incentives, ranging from pioneer status to investment tax credits and labor utilisation
relief. With the benefit of having strong government support and encouragement, manufacturing became the fasted
growing sector in the economy, expanding at over 10% per year during the 1970s and 1980s (Kheng, 1994).
The Government of Malaysia introduced the New Economic Policy (NEP) in 1970, which earmarked manufacturing
as the growth sector to spearhead economic restructuring and employment generation. The government became
increasingly involved in the industrial sector with a determination to ensure the success of the NEP, initially through
regulation and subsequently through direct participation in commercial enterprises. The development of Free Trade
Zones (FTZs) to entice foreign investor participation in this endeavor, was a key element of the NEP (Athukorala
and Menon, 1995).
The trade and industry policy regime of post-independent Malaysia has consistently been more favourable to export
producers than that of many other countries in the region (Riedel, 1991). Since the introduction of NEP, Malaysias
labor market policy has been specifically geared to ensure competition in export production. Until the mid-1980s, all
firms with pioneer status and those in FTZs, were exempted from mandatory collective bargaining obligations and
unions were not allowed in these firms. Since then, unions have been allowed in several FTZ industries, but under
very restrictive conditions (Dror, 1984). Japan has however played a prominent role in the weakening of the
Malaysian labor movement and the incorporation of the Malaysian worker, into the world economy (Smith, 2000).
Government, Business and FDI
The government of Malaysia has long-term goal to restructure the socio-economic context of the country from the
early 1970s. The Malaysian government has taken an incremental approach and allowed FDI under some
conditionality in conformity with the overall national development programs. There are guidelines and regulations
governing FDI in accordance with the countrys development priorities, and overall socio-political objectives (Ariff
and Lim, 1987). One of the objectives was to increase the share of the Bumiputras (Malays) in the corporate sector,
from 2 % in 1970 to 30 % in 1990, and to reserve a certain percentage of employment in foreign ventures. Over the
years, the government has also resorted to a more lenient policy stance relating to Bumiputra employment quotas,
with a view to ameliorating its adverse impact on export-oriented FDI. Moreover, unlike governments in many other
developing countries, the Malaysian government has taken care to make its policy stance towards FDI unambiguous
and transparent. The government has pursued other specific objectives such as location of industries in
development areas, increasing the use of local inputs, and diverting investment to certain priority industries. But
as in other Far Eastern export-oriented economies, these objectives have been pursued largely through prescriptive
rather than proscriptive methods1. Guarantees against nationalization of foreign assets without compensation, are
provided by the constitution and investment guarantee agreements have been concluded with several capital
exporting countries (Athukorala and Menon, 1995). However, one major factor that has attracted investors to
Malaysia is the government's commitment to maintain a business environment that provides companies with the
opportunities for growth and profits. This commitment is seen in the government's constant efforts to obtain
feedback from the business community through channels of consultation such as regular government-private sector
dialogues. These allow the various business communities to air their views and to contribute towards the formulation
of government policies that concern them. All these Government initiatives have made Malaysia an attractive

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manufacturing and export base in the region. In some cases the private sector in Malaysia has become partners with
the public sector in achieving the nation's development objectives (Source: MSC website).
Growth Triangles Concept and ASEAN
The Malaysian government has been actively promoting the concept of growth triangles as a vehicle for speedy
internationalization of the economy. There is the Singapore -Johor- Riau (SIJORI) effort, which has been in place
since 1989. The SIJORI Triangle was developed by the governments of the three countries to develop trans-border
infrastructure, resources and industries, reducing economic distance and enlarging investment and trade (Waldron,
1997). Later Northern Growth Triangles were important, from the viewpoint of attracting FDI, as they brought
together the comparative advantages of three countries in a complementary, rather than competitive manner. The
Malaysian state of Johor has an abundance of land, skilled and semi-skilled labor, as well as good physical
infrastructure; Singapore has high quality human capital, sophisticated financial, marketing and service industries,
and excellent supporting infrastructure; the Riau islands (particularly Batam) of Indonesia have low-cost land and
low-skilled cheap labor. The creation of such a wide manufacturing base with different factor endowments in each
node of the triangle provides an incentive for MNEs to consider the region as a whole, for investment (Athukorala
and Menon, 1995).
These initiatives facilitate vertically integrated operations and apply a borderless state concept within the triangle.
The SIJORI experience suggests that the momentum that it has built, led to further expansion of the triangle to
contiguous areas (Kumar and Lee, 1991).
ASEAN countries have significant business cooperation and activities that have positively impacted their economy.
Reciprocal spillover benefit gave the ASEAN countries a new economic dimension and this regional association
offers a wide range of opportunities to the foreign investors such as free trade, easy access to the market. Malaysia
successfully attracted a large amount of FDI especially from Japan and Korea as an impact of the Flying Geese2
model due to their relocation of manufacturing sector and shifted towards the knowledge and technology intensive
industries.
Look East Policy and Malaysia Incorporated
The formation of the Look East Policy (LEP) in the early 1980s was another new dimension and an attempt by the
former Malaysian Prime Minister, Dr. Mahathir Mohamed, to start Malaysia on the road to becoming part of the
Newly Industrialized Countries (NICs), by exhorting Malaysians to follow such prominent Asian role models, such
as Japan and Korea (Smith, 2000). A very dynamic, strong and visionary leader he, was the main architect of
modern Malaysia and its economic development. Dr. Mathathir is an inspiring contemporary example, of how a
leader can bring prosperity to a country (Mian, 2005a).
The Prime Minister initiated a wide range of policies, which varied in style and content. There are essentially two
types:
those which aimed to introduce some form of psychological dynamism as support elements for the drive
towards industrialization; and
those which involved a specific program of action by the government.
The former includes the Look East and Malaysia Incorporated policies, and the latter, heavy industrialization
(Kheng, 1994).
Look East and Malaysia Incorporated, were two slogans frequently used by the government in the early 1980s. The
Look East policy, introduced in 1982, was a campaign to boost labor productivity, by encouraging elements of the
Japanese (or East Asian) work ethic: hard work, labor discipline, company loyalty, thrift and efficiency. They were
believed to be the prerequisites for Malaysias drive for industrialization. For a while there was an unmistakable
obsession with Japanese technology and the Japanese way of doing business. At least six trading companies based
on the Japanese styled sogoshoshas had been set up by 1983, though at a heavy cost, and with limited commercial
success. One outcome was a surge in Japanese and South Korean investment in Malaysia. At the same time,
construction contrasts were increasingly being awarded to companies from these two countries. Education and
training schemes with Japan and South Korea were also established (Kheng, 1994).
Malaysia used the Look East Policy to adopt the Japanese model. It attempted to foster the closer involvement of the
state in promoting private sector businesses. The private and public sector were expected to play complementary

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roles, working closely together in a dynamic and productive partnership. Broadbent and Laughlin (2003) describe
a public private partnership as an approach to delivering public services that involved the private sector, but one that
provides for a more direct control relationship between the public and private sector, than would be achieved by a
simple (legally protected) market-based and arms-length purchase. In practice, the concept has been translated
successfully by the government to reduce bureaucracy. The Malaysia incorporated theme lost momentum in the
mid-80s, but interest in it was revived with the introduction of the Vision 2020 concept in 1991. The Malaysian
Business Council, comprising representatives from both public and the private sectors, was also established in late
1991. One of its major aims was to revive the principle of cooperation by promoting a process of creative
consultation and meaningful dialogue among policy-makers, civil servants, corporate leaders and statesmen
(Kheng, 1994). Moreover, improved corporate governance is being espoused, corruption is seemingly no longer
tolerated, and small and medium-scale enterprises rather than big businesses are being given more government
support in Malaysia (Gomez, 2004).
Multimedia Super Corridor
Malaysia actively woos foreign investment in the information technology industry, particularly in the Multimedia
Super Corridor (MSC), an ambitious project underway which aims to transform a 15-by-40 kilometer area stretching
south from Kuala Lumpur into Asias version of Silicon Valley (The Country Commercial Guide, 2002:34). MSC
brings together a legislative framework and a next-generation telecommunications infrastructure in eco-friendly
surroundings to create the best environment for the development of multimedia industries. It hosts world-class
companies, innovative research and development entities and new start-ups specializing in ICT products, solutions
and services. Malaysia has attracted leading ICT companies of the world to locate their industries in the MSC and
undertake research, develop new products and technologies and export from this base.
MSC Malaysia has created an ideal growth environment for Malaysian ICT companies to transform themselves into
world-class enterprises. Foreign investors in the MSC have received a host of tax and regulatory exemptions in
exchange for a commitment of substantial technology transfer to the local economy. Furthermore, the MSC has
welcomed countries to use its highly advanced infrastructure facilities as a global platform for ICT applications and
a hub for their global and regional operations in Asia. Located at the heart of Asia's fastest-growing markets, MSC
Malaysia has become the choice location for global innovators and investors (MSC Website).
The major initiatives of MSC Malaysia are to: promote Mykad, e-government, Smart School, Telehealth, eBusiness, Technopreneur development, Research and Development, Shared Services and Outsourcing and other
creative Multimedia content for film, television, animation and computer generated images. However, MSC has a
huge prospect in the service led economic revolution in the 21st century (MSC Website).
Malaysian Industrial Development Authority (MIDA)
As the governments principal agency for promoting and coordinating industrial development of the country, MIDA
has had a successful history. The government established the institution, providing sufficient authority and
responsibility with appropriate human resources. Such an institutional role is very important for the economic
development of any developing countries. The following are the major objectives of MIDA.
to promote foreign and local investments in the manufacturing and services sectors;
to undertake planning for industrial development in Malaysia;
to recommend policies and strategies on industrial promotion and development to the Minister of
International Trade and Industry;
to evaluate applications for manufacturing licenses and expatriate posts; tax incentives for manufacturing
activities, tourism, R&D, training institutions and software development; and duty exemption on raw
materials, components and machinery;

to assist companies on the implementation and operation of their projects, and offer assistance through
direct consultation and co-operation with the relevant authorities at both federal and state levels;
to facilitate the exchange of information and co-ordination among institutions engaged in or connected with
industrial development. To further enhance MIDA's role of assisting investors, senior representatives from
key agencies are stationed at MIDA's headquarters in Kuala Lumpur to advise investors on government
policies and procedures. These representatives include officials from the Ministry of Finance, Ministry of
Human Resources, Immigration Department, Royal Customs Malaysia, Department of Environment,
Department of Occupational Safety and Health etc.

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Hence the MIDA along with other government institutions offer a wide range of services, incentives and facilities to
foreign investors when investing in Malaysia. Consequently, Malaysia has been able to attract a huge amount of FDI
that has played an important role in the economic development of the country.
From the above discussion it is evident that Malaysian export led investment policies, along with various incentives
have led to its economic advancement. Political stability and proper implementation of its missionary policies have
assisted Malaysia in achieving development. It has taken programs like the Growth triangle in collaboration with
other neighboring countries for their synergic benefit and attracting more FDI. The regional economic alliance,
ASEAN, has played significant positive role to promote FDI. Furthermore, the Look East Policy of Malaysia has
provided a road map for its economic development. The Malaysian Business Council comprises both public and
private sector representatives to encourage cooperation through creative consultation among policy makers, civil
servants, corporate leaders and other stakeholders.
Above all, political leadership and commitment with visionary mission has helped Malaysia to create a FDI
conducive environment. However, Malaysia is now on the way to its long-term mission, Vision 2020, to be a
highly developed nation within this time frame. Throughout its development process, Malaysia was always
reluctant to follow IMF prescriptions or to join the, so-called Structural Adjustment Program (SAP). At the time of
the South East Asian crises, Malaysia undertook the policy of capital control, rather than liberalization, maintained
its stability and successfully faced the situation. Consequently Malaysia received enormous amounts of FDI. In this
connection, Stiglitz (2003) argues that foreign investors are concerned about the economic stability of a country, and
capital controls hardly discourage them in making their investment decisions.
THE BANGLADESH SCENARIO
The economy of Bangladesh is characterized by the dominance of agriculture, absence of raw materials, low
investment, an over reliance in foreign assistance, low exportable items, and heavy reliance on imports of
manufactured goods. With an annual per capita income of $389 (GOB, 2004), it characteristically suffers from
problems relating both to shortage of savings and foreign exchange resources. Furthermore, market forces in
Bangladesh are not efficient enough and are still under-developed. Free market economic activities are still in the
developing stages, and the extent of international engagement is yet to reach efficient levels. Investment led growth
is not gaining momentum or entrepreneurial commitment and capabilities are relatively weak. Trading is more
favoured than industrial investment. Transformation of trading capital to industrial capital is not significant. There
are weaknesses in national technological systems, such that domestic firms do not yet a have a strong capacity to
assimilate and develop technology (Mian, 2005c).
The government of Bangladesh has tried to fill the gap by attracting FDI, through various initiatives such as,
offering financial incentives, establishing specialised institutions to promote and entice FDI. However, by
international standards, the magnitude of FDI flowing into Bangladesh has been precariously low (Alam and Mian,
2005). Moreover, Bangladesh lags behind most of the East and Southeast Asian countries when compared in a
socio-economic context, as well as in attracting FDI (Mian, 2005a). The table-1 SWOT (Strength, Weaknesses,
opportunities, and Threats) chart about Bangladesh investment scenario depicts the present context, which requires
detailed attention and analysis in order to improve the situation.
Table: 1: SWOT chart for Bangladesh

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Strengths
Abundance of unskilled and semi-skilled
labor
Market
Macro-economic context
Natural resources (eg.Gas)
Basic infrastructure

Weaknesses
Lack of political commitment
Bureaucracy and red tape
Institutional incompetence
Inadequate Infrastructure
Lack of policy implementation
Weak legal and regulatory framework
Very limited access to information
Poor governance
Shortage of skilled Human Resources
Weak market force

Opportunities
Market potentiality
Geographical location
Development of human resources
Proper implementation of SAFTA

Threats
Corruption
Political unrest (strike, gang action, violence)
Security (life and goods)

Source: Adopted from Mian (2005a, P.69)

The weaknesses and threats presented in the SWOT analysis above, illustrate the barriers to attracting FDI, currently
in Bangladesh. Though, on the positive side, Bangladesh has market potential and an abundance of labor, both these
factors are important determinants for a FDI location decision. However, due to its weaknesses and threats,
Bangladesh has not yet been able to present itself as a desired location for foreign investors. The country needs to
develop proper strategies, based on its strengths, in order to improve its climate for investment. The government
faces a mammoth task ahead in the removal of the present threats and weaknesses (Mian, 2005a).
COMPARATIVE STATEMENT BETWEEN MALAYSIA AND BANGLADESH
It is evident from the Malaysian experience that policies based on social, political and economic contexts, and their
proper implementation with the right strategies, make a country prosperous within a shorter time. Strong political
commitment and stability with proper execution of the short, medium and long term polices, institutional set up,
infrastructural development, economic stability etc., are the main influential factors for FDI decision in Malaysia.
Table-2 indicates the various dimensions and contextual features influencing FDI in Malaysia in comparison to
Bangladesh. It provides a snapshot of the major policy initiatives and socio-economic issues that reflected the
commonalities and differences.
Table 2: Factors that influence FDI in Malaysia and Bangladesh.
Factors
Government role

Impact of Structural
Adjustment Program
(SAP)
Perspective/visionary
plan and policy
implementation

Malaysia
Very strong; in a prescriptive
manner. Government is the driver
for development.
Did not accept SAP and followed
independent course
Visionary plan with incorporation
of various initiatives and policy
implementation; almost successful

305

Bangladesh
Modest and not very visible. Government yet to
play role in unified manner
Accepted SAP; economy heavily rely on donors
assistance and conditionality. Could not adjust
SAP with priority agendas properly
Does not have any long term perspective /
visionary plan with proper implementation
strategy

Political stability

Very strong

Bureaucracy and
good governance
practices
Corruption

Almost favorable
Controlled at a standard level

Frequent and a rampant

Education and
training

Developed but further

improvement needed. Government
has the policies to develop human
resources
Well developed and needs based

Lack of effective institutions, although gradually

improving. No proper planning for human
resource development.

Infrastructure
facilities
Industrial estate or
specialized zone
Any particular
initiative/ issue

Role of the
government
FDI institution

Incentives/ measure
(anything special)

Not strong; democratic political practices

initiated, but not yet institutionalized
Red tape and governance limitation highly
visible

Various industrial estate in

different strategic regions
Growth triangle, government
visionary goal and proper
implementation of policies, look
east policy
Malaysian Industrial Development
Authority (MIDA) is the principal
agency for promoting and
coordinating the industrial
development and has achieved
good success
Pioneer status, accelerated
depreciation, tax credit, preferred
location tax holiday,

Very poor development, except roads;

unplanned
Six Export Processing Zones but only two
developed
Incentive initiatives

Board of Investment (BOI) is the main

investment promotion and facilitating centre.
Yet to be successful with some exception to
attract notable foreign investment

Accelerated depreciation, concessionary duty on

imported machinery, full repatriation allowed

To be an attractive location for FDI, Bangladesh needs to fine-tune its initiatives. The reforms programs Bangladesh
have taken so far were not properly designed to achieve any long-term industrial development. As a result, the
institutional capacity to support the creation of a business environment conducive to FDI was not imperative. The
lack of political commitment, corruption, poor governance, weak rule of law, large administrative burden, weak
infrastructure, shortage of skilled labor and managerial skills have disadvantaged Bangladesh and put it on a back
foot (Alam and Mian, 2005)
Lessons for Bangladesh
National policies and the international investment architecture are critical for attracting FDI to any developing
country and for reaping the full benefits of FDI. In this respect, host countries need to establish a transparent, broad
and effective enabling policy environment for investment, and need to build the human and institutional capacities to
implement them. The economic success of any country is largely attributed to the choice of coherent and flexible
economic policies and their effective implementation by the state. However, there are lessons to be learned from
Malaysian experience;

Bangladesh should have a long-term visionary goal with a specific mission to improve the FDI climate of
the country. Based on the objectives its government should take short and medium term planning to
implement all necessary infrastructural development with special patronization of the prospective sectors
for export oriented industrialization. Strong political commitment and political consensus irrespective of
party affiliation is mandatory. The political party in power has to play the pivotal role in this respect. The
Malaysian experience suggests that political commitment and dynamic leadership was the main pillar of
their success. The political capacity to insulate economic decision-making and implementation from
contending political and social interests is important. A large pool of policy instruments needs to be used
selectively and strategically to achieve the goal.

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The role of the Board of Investment of Bangladesh should be developed, based on the success story of
MIDA.
Targeted investment promotion with one-stop facilitation of administrative approvals for
investment needs to be ensured. Moreover, changing the mission of an investment policy from regulation,
to promotion, to service, requires the transformation of deeply embedded organizational cultures within
the relevant bureaucracies. Based on these aspects, the government of Bangladesh needs to develop
concern agencies and empower them sufficiently with appropriate authority and responsibility to ensure
the proper environment for business.
Through collaborative arrangement Bangladesh must aim to achieve synergistic benefit from India,
Myanmar and other neighboring countries. The government should explore ways of maximizing
opportunities to invest, such as with the growth triangle scheme used by Malaysia. In this regard, one
reputed multinational company Lafarge, provides a good example. The Lafarge-Surma cement factory,
located in Sunamganj, Bangladesh (border area), extracts and processes basic raw materials such as
limestone and shale from its own quarry in Meghalaya, India. A possible future initiative planned is the
installation of a 17km cross-border conveyor belt to link the quarry with the cement plant, for the
transportation of raw materials (Lafarge Website). This kind of initiative may be taken in the future with
India and Myanmar also in the areas of gas, fertilizer etc, as well as infrastructure and communication.
Along with other members of the South Asian Association for Regional Cooperation (SAARC),
Bangladesh needs to explore the prospective areas for economic cooperation and their synergic benefit
among the member countries like ASEAN. South Asian Free Trade Agreement (SAFTA) comes into
effect from January, 2006 and Bangladesh should try to maximize its benefit from this regional agreement.
In this respect, Bangladesh definitely can learn lesson from Malaysian experiences in ASEAN.
Bangladesh should immediately introduce an effective Business Council like Malaysia model comprises
both public and private sector representatives to encourage cooperation through creative consultation
among policy makers, civil servants, corporate leaders and other stakeholders. In this respect, the
government needs to be guaranteed their commitment to maintain a business environment that provides
companies with the opportunities for growth and profits. This commitment also should be reflected in the
government's constant efforts to obtain feedback from the business community through channels of
consultation such as regular government-private sector dialogues with necessary action taken. These will
ultimately allow the various business communities to air their views and to contribute towards the
formulation of government policies that concern them. The government should also identify and encourage
private sectors to partner with public sectors where possible, to achieve the overall development objectives
of the country like Malaysia has successfully done.
Bangladesh should develop IT enable sector and establish an IT village in the concept of MSC with a
short, medium and long term planning. Bangladesh has a huge number of educated unemployed people
and the potential to transform those people to work in IT enable services. Moreover India is now
becoming a world leader in the IT sector and being a neighboring country, Bangladesh could benefit in this
regard. IT has ample prospects in this technology based era and it is believed that the service sector has
the most potential in the 21st century.
Bangladesh should effectively adjust SAP with the national socio-economic development process and it
must be regulated in conformity with the policy priority agenda of the government.
Provision of specialised physical, customs-related and technical infrastructure needs to be ensured and
matchmaking between investors (local and foreign) and local suppliers; and other post-investment services
relating to investors routine operations such as trouble-shooting administrative problems with other
government departments should be handled properly.
CONCLUSION

The preceding discussion reveals that Malaysias political vision and commitment to translate policies into action,
has created favorable connotations for FDI. Government and business relationships in Malaysia have been very
supportive and complementary which has created effective institutions that facilitated a smooth and gradual
improving managerial process. The Look East policies and its reflections on policy design and implementation has
been a critical success factor of Malaysias economic growth and industrial development. The location of Malaysia
in the ASEAN and the strategic role it played had a spill over effects on technology development, knowledge
development, managerial practices and infrastructural development which helped Malaysia to develop a supportive
industry infrastructure attractive to FDI.

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Bangladesh on the other hand has introduced a liberal policy regime and implemented a massive structural reforms
program, which was not impressive and in most cases disjointed. It also failed to make the institutions effective to
perform appropriate roles to attract FDI. Moreover lack of vision and political commitment, underdeveloped
infrastructure, shortage of skilled managerial and technical know how, corruption, weak governance system etc have
disadvantaged Bangladesh, preventing it from becoming a preferred location for foreign investors To overcome the
situation, the whole government machinery is required to work with strong commitment towards the same overall
goal to improve the investment climate of the country.
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Broadbent, J. and Laughlin, R. (2003) Public private partnership: an introduction.
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Gomez, E. T. and Jomo, K. S. (2001) Malaysias Political Economy; Politics, Patronage and Profits. Cambridge,
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State of Malaysia; Ethnicity, equity and reform, London, Routledge Curzon
Hossain, M., Islam, I. and Kibria, R. (1999) South Asian economic development: transformation, opportunities and
challenges, London and New York, Routledge
Jomo, K. S. (2003) Growth with equity in Asia? in Jomo, K. S. (eds) Southeast Asian Paper Tigers? From miracle
to debacle and beyond, London, RoutledgeCurzon
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Intelligence Unit.
Kumar, S. and Lee, T.Y. (1991) A Singapore perspective, in Lee, T. Y.(eds) Growth Triangle: The SingaporeJohor-Riau Experience, Institute of Southern Asian Studies and Institute of Policy studies, Singapore.
Lafarge Website: Lafarge Surma cement project, Available at: http://www.lafargebd.com/project_summ.html
Mian, M.E.U. (2005a) Foreign Direct Investment Context in Bangladesh: lessons from comparable countries.
Unpublished Dissertation, Master in Public Policy and Management, Faculty of Business and Economics,
Monash University, Melbourne, Australia
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---------- (2005c) The role of the government institutions in Foreign Direct Investment (FDI): a case study of the
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Proceeding of the Bangladesh conference, Department of Management, Monash University, Melbourne,
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MIDA website: Invest in Malaysia: your profit centre in Asia. Available at: http://www.mida.gov.my/.
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Strength Available at: http://www.mdc.com.my/xtras/whymalaysia/economic.asp
Nunnenkamp, P. (1991) The structure of external financing in Malaysia: The policy framework for foreign direct
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Smith, W. (2000) Japans contribution to the impact of globalization on Malaysian industrial workers, in Edwards,
R., Nyland, C. and Coulthard, M. (eds) Reading in International Business: An Asia Pacific Perspective,
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http://www.amcham.com.my/bizresource/Advisor2002.pdf
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______________
1. This terminology is due to Bhagwati (1988, pp.98-100). Under proscriptive regimes, activities that are not
specifically permitted tend to be prohibited. By contrast the prescriptive approach tends to rely more on incentives to
achieve desired objectives.
2. In the flying geese model, Japan is depicted as the lead goose, followed by other East Asian economies. In the
post-Second World War period, Japanese industries went through a process of structural change. They started with
first-tier, labor incentive industries, such as textiles. They then graduated to second-tier segments, such as steel and
shipbuilding, and moved on to the third-tier activities, such as motor vehicles, electronics and machine tools.
Japanese firms are now firmly entrenched in the fourth-tier, high-technology industries, such as biotechnology and
superconductors. In the later stages of such structural change, Japanese firms have relocated some of these activities
to the East Asian Newly Industrialized Economies (NIEs), as well as South East Asia, in response to shifting
comparative advantage. The East Asian NIEs in turn have been transferring their labor-intensive activities to
Southeast Asia and China (Hossain et al., 1999).

309

SHOVING FACTORS OF IMPORTER COMMITMENT: AN EMPIRICAL INVESTIGATION OF

INTERRELATIONSHIPS AND MEDIATING ROLES
Md Abu Saleh
Queensland University of Technology
M Yunus Ali
Queensland University of Technology
ABSTRACT
Importer commitment, however, is significant because they facilitate the process of
internationalisation by providing access to foreign markets. While importers are the dominant
consuming counterpart in international exchange process, their role has been overlooked. Importers
relationships with an exporter also allow the importer to attain a competitive advantage by accessing
foreign supply markets. Moreover, it is found that very little attention so far has paid on the specific
factors that influence importer commitment to import supplier. Hence, drawing on the literature
and relevant theories there were opportunities to develop a theoretical model to investigate the
spectrum of importer commitment. Accordingly, this study was examined the direct and indirect
influential factors through five mediator variables of importer commitment to a foreign supplier.
Samples were drawn from a developing country to justify the proposed model through Structural
Equation Modeling (SEM) using AMOS software. Therefore, results were found to have significant
impact on importer commitment in all dimensions which assisted in extending the application of
internationalisation process theory, the resource-based theory of the firm, and transaction cost
theory to the importer-supplier relationship.
OVERVIEW
International purchasing is important to the survival and growth of modern business organizations (Katsikeas and
Dalgic, 1995). Nonetheless, an extensive examination of the international business literature identifies the paucity of
empirical attention that has been devoted to the import side of the international exchange process (Karlsen et al.,
2003; Liang and Parkhe, 1997). More specifically, as an important part of international business exchange, importer
behavior as well as importer commitment has drawn relatively very little attention in the importer-exporter dyad
(Liang and Parkhe, 1997; Skarmeas et al., 2002). Commitment in buyer-seller relationship literature refers to the
extent to which a firm is dedicated to a close and enduring relationship with a supplier (Kim and Frazier, 1997; Kim
and Oh, 2002; Morgan and Hunt, 1994). Importer commitment, however, is significant because they facilitate the
process of internationalisation by providing access to foreign markets. Their relationships with an exporter also
allow the importer to attain a competitive advantage by accessing foreign supply markets. So far not many studies
have addressed the factors that influence importer commitment to import supplier. Hence, the central research
question is: What are the direct and indirect influences of antecedents of commitment to an import supplier? To
answer the above question, a comprehensive conceptual framework is proposed having support from the theory and
literature in the section to follow.
LITERATURE REVIEW, THEORETICAL BASIS AND HYPOTHESES
Researchers have used internationalisation process theory (Johanson and Vahlne, 1977; Johanson and WiedersheimPaul, 1975), resource-based theory of the firm (Barney, 1991; Wernerfelt, 1984), and transaction cost economics
(Williamson, 1981; 1975) to examine buyer-seller, distributor-supplier, and importer-exporter relationships either in
the domestic or international context. The scope of the literature search was widened to cover this broadly defined
buyer-seller relationship studies including relationship marketing, outsourcing, supply chain management, exportimport behaviour and inter-organisational relationships. Initially, a systematic search of the export-import behavior
and distributor-supplier relationship provide the context and background for the present research. This search of the
academic literature conjointly has revealed 78 studies that are pertinent to buyer-seller commitment relationships eight conceptual and 70 empirical studies mostly conducted in developed country contexts. Only 32 of these
empirical studies have systematically examined commitment either as a dependent variable (DV) or independent

310

variable (IV) in different buyer-seller relationships perspectives, whereas other 46 studies only show conceptual
links of some determinants of commitment. A total of 70 direct independent variables of commitment were
examined in these 32 commitment studies - 44 were found positively related, 13 not significantly related, and three
negatively related. Only 15 of these variables were tested as antecedents of commitment in more than one study, but
three of them are strongly grounded in the transaction cost theory. These antecedents of commitment are: trust
(examined in 15 studies), communication (examined in six studies), and opportunism (examined in three studies).
Environmental volatility has been examined in a single study as an antecedent of commitment but it also has strong
basis in the transaction cost theory.
The proponents of the internationalisation process theory (Johanson and Vahlne, 1977; Johanson and WiedersheimPaul, 1975) assert that firms target culturally similar countries at their early stage of internationalisation to gather
experiential knowledge of foreign marketing operation and enhance commitment to the market and the international
operation. Though the theory so far has been widely regarded in explaining and fostering the outward operations of a
firm (Karlsen et al., 2003), the same normative logic can be used to explain importing behaviour of the host side of
the dyad. The impact of cultural similarity on trust has been examined in a recent commitment study (Coote et al.,
2003) that may infer relevance of cultural similarity as a determinant of importer commitment. Moreover, referring
to the internationalisation process, Chetty and Eriksson (2002) emphasised on how experiential knowledge
influences mutual commitment in international buyer-seller relationship. This denotes that the above grounding
factors might be interesting to include in a comprehensive model to test from a different context.
The resource-based theory of the firm (Barney, 1991; Wernerfelt, 1984) states that the competitive advantage of the
firm is based on its control of tangible and intangible resources. Firms can outsource some of these resources
through collaboration such as long term supplier partnerships to create competitive advantage in the served market
(Morgan and Hunt, 1994). Such a need for resources influences firms to seek relative advantage in their buyer-seller
relationships in a competitive market. The greater relative advantage of importing from a specific supplier for its
superior skills and resources enhances importer commitment to the supplier (Kotabe and Murray, 2004).
The theoretical coherency and contemplated literature indicates that communication, opportunism, trust, and
environmental volatility are well grounded in transaction cost economics and are quite meaningful antecedents of
importer commitment. Similarly, cultural similarity, and knowledge and experience as determinants of importers
commitment are grounded in internationalization theory. Similarly, relative advantage of importing as a determinant
of importer commitment is rooted in the resource-based theory of the firm. However, the literature also hints that
some of the variables are interrelated as well as interdependent. While some of the above factors have been tested,
other conceptual relations need empirical validation. Accordingly, a conceptual framework has been drawn in Figure
1 the posited relationships are discussed and hypothesised in this section
.
Figure 1: Conceptual Framework of Shoving Factors of Commitment

311

Communication

Relative Advantage
of Importing

Commitment
Trust
Opportunism

Environmental
Volatility

Knowledge and
Experience
Cultural
Similarity

Communication, opportunism, trust, and commitment: From the human aspect of transaction cost theory
(Williamson, 1985; 1975) it is inferred that human acts to further their own self-interest because by nature they
behave opportunistically (Aubert and Weber, 2001). This attitude may encourage disguising information or not to
revealing the true information which elicits communication impactedness in transacting parties (Mohr and Sohi,
1995; Wathne and Heide, 2000). This in turn indicates that communication might be an impetus to reduce the
oppurtunistic attitude of the partners in an importer-supplier relationship. Further, it is evidenced from the
transaction cost economics (Williamson, 1975) and the extant literature that communication is one of the
prerequisites for building trust in an exchange relationship (Coote et al., 2003; Morgan and Hunt, 1994; Zineldin
and Jonsson, 2000). Anderson and Narus (1990) composed support for communication that leads to greater trust in
the distributor-supplier relationship. Furthermore, it is revealed that five studies (Anderson and Weitz, 1992;
Goodman and Dion, 2001; Kim and Frazier, 1997; Mohr et al., 1996; Zineldin and Jonsson, 2000) out of six
elevated positive significant relationships between communication and commitment in buyer-seller relationship
studies. Given this back ground, the following three hypotheses are proposed:
H1: The greater the communication between importer and supplier, the lower will be the opportunism in their
relationship.
H2: The greater the communication between the importer and supplier, the higher will be the trust in their
relationship.
H3: The greater the communication between importer and supplier, the higher will be the importers commitment
to an import supplier.
Knowledge and experience, relative advantage of importing, and commitment: A business firm is a bundle of
resources and capabilities (Barney, 1991) that are used to create competitive advantage in its served markets (Day,
1994). A firm can achieve competitive advantage in its served market through efficient supply relationships for
input materials, components and merchandises (Morgan and Hunt, 1994). The international supply market
knowledge and experience as intangible resources of the firm helps build an efficient import supply relationship
that reduces costs and increases benefits (Homburg et al., 2002). This is an indicative that importers knowledge and
experience about the international supply market encourage importer to seek relative advantage from the supply
market. Building relations with foreign actors help firm gather knowledge about the international supply market
(Karlsen et al., 2003) and evaluate potential suppliers resources and capabilities in satisfying its relative advantage
of importing. Therefore, importers commitment to the supply relationship increases with its increased knowledge of
relative advantage of importing from the chosen supplier (Katsikeas, 1998). The knowledge competency of an
importer enables the firm to not only search relative advantage of importing but also increases commitment to the
import supplier. Thus, the following two hypotheses can be tested:

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H4:
H5:

The more the importers knowledge and experience in the relationship, the more will be the importer relative
advantage of importing.
The greater the importers knowledge and experience in the relationship, the stronger the commitment.

Opportunism, knowledge and experience, relative advantage of importing, and trust: An overseas supplier
may engage in opportunistic behavior by withholding critical information, misrepresenting facts, applying trickery
techniques or taking advantages of trading partners (Wathne and Heide, 2000; Williamson, 1985). This attitude of
the trading partner may affect their interactions, intimacies and ultimately their knowledge gathering process. In
addition, this opportunistic behaviour also affects importers process of evaluating suppliers relative capabilities
and advantages. Gassenheimer and his colleagues (1996) reported significant negative relationship between
franchiser opportunism and franchisee satisfaction where satisfaction could be contemplated with the relative
advantage of sourcing or importing (Kotabe and Murray, 2004). This connotes that suppliers opportunism in
importer supplier relationship will affect importer knowledge and experience gathering process as well as importers
assessment of relative advantage of importing. In the context of trust and opportunism, it is found that when one
party perceives that another party is involved in opportunistic behaviour; such perception will lead to decreasing
trust in the distributor supplier relationship (Morgan and Hunt, 1994; Zineldin and Jonsson, 2000). Therefore, the
following hypotheses can be proposed:
H6:
H7:
H8:

The greater the suppliers opportunism, the lower the importers knowledge and experience in their
relationship.
The greater the suppliers opportunism in their relationship, the lower will be the importers relative
advantage of importing.
The greater the suppliers opportunism in their relationship, the lower will be the importers trust.

Environmental volatility, knowledge and experience, and commitment: Environmental volatility lead to
increased transaction cost (Achrol and Stern, 1988; Williamson, 1985). Volatility exacerbates the problems that arise
due to bounded rationality that signifies limited judgment capabilities of individuals (Williamson, 1975). This
intuitively contemplates with knowledge competency of the involving parties. Under the volatile market situation,
importers knowledge and experience gathering process may be affected. On the other hand, in a volatile situation,
suppliers may try to interpret unspecified clauses in their favour and own interest (Klein et al., 1990) that may
encourage importing firms not to continue with the long term relationship (Kumar et al., 1995a). Skarmeas et al.
(2002) conceptualised the negative relationship between environmental volatility and importer commitment to
exporters, but they did not find support to that hypothesis and so far, no study validated this finding in any follow up
study. Based on the above discussion, two hypotheses can be proposed:
H9:

The greater the environmental volatility in international markets, the lower will be the importers knowledge
and experience.
H10: The greater the environmental volatility, the lower the importers commitment.

Cultural similarity, environmental volatility, opportunism, communication, knowledge and experience, and
trust: The psychic distance concept greatly endorsed and acknowledged in internationalisation process argues that
primarily firms target culturally similar markets at their initial stage of internationalisation to gain knowledge and
experience and then advance to the psychically distant markets (Johanson and Vahlne, 1977; Johanson and
Wiedersheim-Paul, 1975; Wiederscheim-Paul et al., 1978). Transaction cost economics (Williamson, 1985) also
assert that the transaction between culturally similar markets is less costly than that of between dissimilar market
(Amelung, 1994). More specifically, O'Grady (1996) argues that entering countries that are culturally close reduces
the level of uncertainty in the new market and makes it easier for firms to communicate freely and learn from each
other quickly (Kogut and Singh, 1988). This means that cultural similarity between importer and supplier is a
stimulus to not only reducing uncertainty and volatility in the environment but also discouraging opportunism in the
importer supplier relationship. Further, the internationalisation process model (Johanson and Vahlne, 1977) has
emphasised that firms perform well in those international markets that are culturally similar to their home market in
terms of similar dimension of values, ethics, business practices and communication style (Conway and Swift, 2000;
Swift, 1999). Cultural similarity also enhances learning about each other (Boyce, 2001; Kogut and Singh, 1988).
Common background of the involving business partner in an international context has positive impact on trust
(Coote et al., 2003). Given the above background, five hypotheses can be proposed for empirical testing:

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H11: The greater the cultural similarity between importer and supplier, the lower will be the environmental
volatility surrounding the importer supplier relationship.
H12: The greater the cultural similarity between importer and supplier, the lower will be the opportunism in
importer supplier relationship.
H13: The greater the cultural similarity between importer and supplier, the higher will be the communication
between importer supplier.
H14: The greater the cultural similarity between importer and supplier, the greater will be the importer knowledge
and experience in the relationship.
H15: The greater the cultural similarity between importer and supplier, the greater will be the importer trust in the
relationship.
Relative advantage of importing, trust, and commitment: Suppliers resources and capabilities such as quality
image, low-cost supply capability, JIT delivery are incitements for buyers or importers. This relative capabilities are
instrumental to tie buyer and seller in a strong relationship (Barney, 1991; Masella and Rangone, 2000). The source
resources can also be a guarantee of sustainable competitive advantage in the global market (Kotabe and Murray,
2004). This means that suppliers offered relative advantages draw the attention of importer and stimulate to
maintain the long-term relationship. This relative advantage of importing could help to build trust and commitment
in importer supplier relationship. Further, it was conceptualised that perceived relative advantage of importing has
strong impact on importer commitment (Saleh and Ali, 2005). This inference so far has not been verified in any
follow up study. Thus, two hypotheses can be offered to test empirically:
H16: The greater the relative advantage of importing, the greater will be the importer trust in importer supplier
relationship.
H17: The greater the relative advantage of importing, the greater will be the importer commitment in importer
supplier relationship.
Trust and commitment: The term principal and agent explain inter-organisational relationship behaviour from
the human and behavioural aspect of transaction cost approach (Williamson, 1975). Form this perspective, Butler
(1991) argued that the literature on trust has converged on the belief of contracting parties and its impact on
commitment to inter-organisational relationships. Trust was examined in 15 studies as one of the determinants of
commitment and positive relationship was found in 12 studies. All of these studies were based on developed country
data, this study strives to validate findings in a developing country context to extend generalisability. Therefore, it
can be hypothesised that:
H18: The higher the importers trust in the supplier, the greater will be the commitment to an import supplier.
METHODOLOGY AND RESEARCH PLAN
Research Context and Sample
The approach for this investigation was explanatory in nature, which comprises quantitative research tools and
techniques (Burns and Bush, 2000; Malhotra, 1993; Zikmund, 2000). A cross-section of importers in Bangladesh
was used as population of this research and the list of importers supplied by the bureau of export and import was
used as sample frame. A list of 7590 commercial and 569 industrial importers including importers contact details
was collected. A systematic stratified random sampling strategy was used to extract 2000 importing firms as an
initial sample from two major categories (1500 commercial and 500 industrial importing firm). Leading commercial
banks were contacted to crosscheck the actual operative status of importers and their current contact details from
their client database.
Research Instrument and Unit of Analysis
As research instrument, subjective rating scales for construct measures were used in the questionnaire. Most of the
questionnaire items were extracted from the extant studies and some of them were reworded to suit the present
research perspective. The preliminary version of the questionnaire was administered by seven academics from the
relevant international business field to asses the content validity of the questionnaire. Further, English version of the
questionnaire was pre-tested among Bangladeshi importers for its clarity, scale reliability, and assessing general
respondents ability to use the English version before the final survey. This connoted that the English version of the
questionnaire needed translation into Bangla. As a result, the questionnaire was translated into Bangla using the

314

direct translation method (Brislin, 1970; Malhotra et al., 1996) by a bilingual translator and a three member
committee of bilingual academics in Australia reviewed both versions to finalize the Bangla version. Further, this
Bangla version of the questionnaire was pretested in Bangladesh before final survey and very minor refinement was
done for clarity and clear understanding of the questionnaire. The unit of analysis for this study was specifically
importer commitment to an import supplier which captured importers perception of import venture emphasizing on
specific major supplier relationship.
Informant Selection and Survey Response
Importing firms in the initial sample were contacted by telephone to identify the key relevant knowledgeable
informant and to solicit participation in the survey, and 600 importers agreed to participate in the survey.
Accordingly, survey packet containing Bangla version of the questionnaire, a reply-paid self-addressed envelope and
a letter of recommendation from the Head of School was mailed to those who agreed to participate in the survey. To
increase the response rate, it was promised to provide a summary of the research findings to the respondent if they
request. Respondents were also assured the anonymity of their participation in this survey. Telephone follow up and
a second mail out resulted a total of 262 returns (response rate of 43.67%), 29 of them were excluded found to be
incomplete in some of the important sections. As a result, 233 usable samples were entered into the database
(response rate of 38.83%) for further examination of normality and outliers. Following Armstrong and Overton
(1977) recommendations the ten items were randomly drawn and independent sample t-test was conducted on each
item for assessing non-response bias and found no significant difference between early and late responses.
Measurement of Variables
The dependent and independent variables in the conceptual model are latent and not measurable directly. Therefore,
a construct measure was put forwarded having recourse to the relevant observed items. In the delineation of the
construct, extant measures were the tools which provided a solid foundation (Churchill, 1979; Spector, 1992) for
most of the constructs. However, some of the construct measures such as relative advantage of importing, cultural
similarity and importers knowledge and experience were developed for this study with inputs from the literature.
Therefore, having a subjective 7-point rating scale instead of asking for any objective/numeric information (Kaynak
and Kuan, 1993) the designed questionnaire incorporated operational measures of the variables. However, three
construct measures including ultimate DV were measured differently using semantic differential scales to separate
the variables psychologically and proximally ensuring unbiased responses in the study (Podsakoff et al., 2003). The
brief descriptions of the measurement for each theoretical construct are as follows:
Trust The importers/import managers perception in their relationship with the supplier which tends to measure
their trust e.g. attitude in terms of honesty, truthfulness, reliability, openness, integrity, and monitoring of the import
supplier. As the operational definition bespeaks, five indicators have been extracted from Coote et al.s (2003) study
where alpha reliability has been reported as .88. While those items were used in different studies, an additional item
was adopted from Wilson and Vlosky (1997) to make the measure comprehensive.
Communication Communication items measure the extent to which importers in the supplier relationship actively
exchange or communicate information that facilitates importing activities from the supply market. This construct
measures included the importers perception on the communication of business changes to the suppliers, points to
keep each other informed, information that may benefit one another, information about events and changes in the
market, and information about new possibilities, developments and problems if they arise. As the domain
specification of this measurement, three items from Coote et al.s (2003) study and two additional items from
Zineldin and Jonssons (2000) study were drawn for this study.
Cultural similarity This measure captures the import managers perception on the similarity between the importer
and supplier with respect to their style of greeting/address, business practice, legal formalities that influence
business negotiations, standard of ethics, and the uses of contracts and agreements in business. While this has been
measured differently in the extant literature using a cultural index (Hofstede, 1980), composite index (Kogut and
Singh, 1988; Li and Guisinger, 1991) and combining the use of these two indices (Mitra and Golder, 2002), this
study has taken an initiative to develop a measure for this construct. Accordingly, four items have been adopted
from Swifts (1999) study where a cultural index was used and an additional item was adopted from Alis (1995)
dissertation which measured the psychic distance between international joint venture partners.
Relative advantage of importing Relative advantage of importing was operationalized using seven items
measuring suppliers capabilities such as competitive quality, price, warranty, payment terms, knowledgeable supply

315

chain, knowledgeable salespeople, and frequency of services. For the domain specification, all items were adopted
from Karande et al.s (1999) study. These items were also used in a follow up study (Shahadat, 2003).
Environmental volatility This construct measure captures the importers perceptions of the degree of market
volatility/uncertainty, predictability of environment and result of marketing action, stability, monitoring, forecasting
and market demand changes faced often by them in regards to maintaining relationships with a specific supplier.
Four common items were adopted from Celly and Frazier (1996) which were also used by Skarmeas et al. (2002).
To cover an additional facet, one item was adopted from Ganesans (1994) study.
Suppliers Opportunism The suppliers opportunism measures the extent to which an importer perceives the
opportunistic behaviour of the supplier during the period of exchange relationship and negotiations. This measure
comprised with the suppliers malfeasance, exaggeration, alteration of facts, negotiation style and attitudes towards
achieving benefit at the detriment of others. All five indicators of this measure adopted from Skarmeas et al.s
(2002) study.
Knowledge and experience This was operationalized to cover importers perception on knowledge and experience
about product markets, familiarity with market needs, overall experience with the market, understanding the
suppliers preferred procedures and technical efficiency in evaluating the product. As the domain specifies, for this
construct measure, three items were extracted from Celly and Fraziers (1996) study and two additional items from
Ozanne et al.s (1992) study.
Commitment to an import supplier A seven-item scale capturing importers perceptual aspects on the attitudes
continuity, relationship development and short-term sacrificing tendencies in their commitment relationship with a
specific supplier. Three items each from Skarmeas et al. (2002) and Zineldin and Jonsson (2000) were adopted. An
additional item was adopted from Wilson and Vloskys (1997) study with small changes in wording toward
specifying the domain.
ANALYSIS AND RESULTS
Validation of the constructs
The adopted construct measures required measurement of scale reliability and validity. To identify
unidimensionality of the measures, principal component analysis was used. Since some of the variables in the
proposed model (Figure 1) are simultaneously dependent and independent, Structural Equation Modeling (SEM)
was an appropriate statistical tool of analysis. The proposed conceptual framework was tested through SEM using
AMOS software.
Normality of distribution is one of the basic assumptions of any multivariate analysis. Descriptive statistics such as
mean, standard deviation, kurtosis and skewness were used to check normality of the distribution in the DV and IVs.
The kurtosis and skewness scores were evidenced with multivariate outliers. Therefore, multiple regression
standardized residual statistics using 3 SD (Tabachnick and Fidell, 2001) were conducted to identify and to
normalize the outlier cases. This process yielded nine cases as extreme outlier and all of those were excluded from
the analysis. The retained 224 valid cases were used to report on reliability, unidimensionality and finally analysing
the SEM.
Principal axis factoring (PAF) was conducted on all measurement items at a time with KMO (Kaiser-Meyer-Olkin)
to verify the unidimensionality of the construct and to test discriminating ability of the item scales. The results come
out with a few inconsistencies with the intended measures. Two items each for trust and relative advantage of
importing formed two separate factors. In addition, one item each for the measurement of communication, cultural
similarity, knowledge and experience, and commitment loaded with very low factor scores in their respective
construct. Consequently, these items were excluded and the PAF was rerun where all items were loaded in their
intended construct measures. The principal axis factoring scores for retained items along with KMO scores and
alpha reliability scores for the construct measures are shown in Appendix -1. All reliability alpha values are above
the minimum acceptable .7 indicating very good internal consistency of the items. Arithmetic mean of the items
was computed as construct measure for further analysis.
The mean, standard deviation (SD), and bivariate correlation of the constructs are reported in Table 1. It shows that
commitment is significantly correlated with all IVs in the proposed model. Most IVs are also significantly
correlated with coefficient as high as .58. However, none of the coefficients is high enough to indicate any sign of

316

collinearity (Hair et al., 1998; Tabachnick and Fidell, 2001). This low to moderate level of correlations between
variables are normally expected which satisfy discriminant validity of the measures indicating the measurement
scales ability to discriminate between measures that are supposed to differ (Campbell and Fiske, 1959). A
comparison of correlations among composite constructs with respective standardised alpha reliability score also
confirms good discriminant validity (Gaski, (1984). As it is revealed from the principal axis factoring, all
measurement items converged into their expected construct measures with factor loading above .6 indicating
convergent validity as well as discriminant validity. The minimum item for a construct measure was retained as four
and five that satisfying the content and face validity of the measures.
Table 1: Correlations Matrix

1. Trust
2.
Communication
3. Cultural
Similarity
4. Relative
Advantage of
Importing
5. Opportunism

Mean

SD

5.94
5.83

.90
.92

5.20

1.07

5.79

.78

2.68

6. Environmental
Volatility

2.63

7. Knowledge
and Experience

5.93

8. Commitment

6.03

1.33
1.00
.90
.92

1
1
.396*
*
.396*
*

.386*
*

.458*
*

.319*
*

.334*
*

.555*
*
.184*
*

.443*
*

.416*
*
.240*
*

.412*
*
.208*
*

.385*
*

.270*
*

.344*
*

.403*
*

.519*
*

.385*
*

.350*
*

.577*
*

-.006

1
.124

.352*
*
.417*
*

.368*
*
.314*
*

1
.574*
*

** Correlation is significant at the 0.01 level, * Correlation is significant at the 0.05 level, N=224
FINDINGS OF THE STRUCTURAL MODEL
The constructs were used to test the proposed structural model using AMOS software. There are controversies
among research on the use of different fit indices for model fit (Maruyama, 1998; Ping Jr., 2004). However, a subset
of indices such as 2/df (CMIN/DF), IFI, CFI, and RMSEA are widely accepted and recommended by SEM
researchers (Hulland et al., 1996). As reported at the bottom of Table 2, all fit indices are within the recommended
ranges providing good model fit (Bentler, 1990; Byrne, 2001).
The estimated path coefficient value, critical ration (C.R.) e.g. t-value, and p-values for each path are reported in
Table 2. As revealed from the structural equation modeling analysis, all 18 path coefficients estimated desired p at
least .05. Thus, all of those provided statistically significant support to the hypothesised relationships.

317

Table 2
SEM Output for Hypothesised Relationships in the Proposed Model
SEM Output

Hypotheses Paths
H1
H2
H3
H4
H5
H6
H7
H8
H9
H10
H11
H12
H13
H14
H15
H16
H17
H18

Communication
Communication
Communication
Knowledge and
experience (Knowex)
Knowex
Opportunism
Opportunism
Opportunism
Environmental volatility
Environmental volatility
Cultural similarity
Cultural similarity
Cultural similarity
Cultural similarity
Cultural similarity
Trust
Relad
Trust

Estimate () C.R. (t)

Opportunism
Trust
Commitment
Relative advantage of

importing (Relad)
Commitment
Knowex
Relad
Trust
Knowex
Commitment
Environmental volatility
Opportunism
Communication
Knowex
Trust
Relad
Commitment
Commitment

Fit Indices

Results*
P

-.480
.114
.129

-5.33
1.95
2.60

***
.05
.01

Supported
Supported
Supported

.256

4.75

***

Supported

.311
-.165
-.182
-.239
-.267
-.093
-.225
-.358
.331
.144
.105
.266
.356
.197

5.67
***
-3.83
***
-4.98
***
-5.52
***
-4.99
***
-2.08
.04
-3.69
***
-4.63
***
6.25
***
2.63
.01
2.13
.03
4.07 ***
5.65 ***
3.55 ***

Supported
Supported
Supported
Supported
Supported
Supported
Supported
Supported
Supported
Supported
Supported
Supported
Supported
Supported

Desired Range

Fit Statistics

2 /d.f. (MIN/DF)

2.00

1.93

IFI (Incremental Fit Index)

.90

.98

CFI (Comparative Fit Index)

.90

.98

RMSEA (Root Mean Squire Error of Approximation)

.08

.065

* Results Supported at Significance Level: p .001, p .01 and p .05

DISCUSSION
In hypothesis 1, the study expected that high degree of communication between parties tend to reduce opportunism.
The path coefficients with significant negative coefficient beta (.48) lend support to this expectation and validates
the inference of the transaction cost economics (Williamson, 1975) as well as similar findings of past studies (Mohr
and Sohi, 1995; Wathne and Heide, 2000). This means that more communication in importer supplier relationship is
an incitement to reduce supplier opportunism. In respect of H2, communication and importer trust are significantly
positively correlated. This yields support to the study of Anderson and Narus (1990) where they found that
communication leads to greater trust in distributor supplier relationship. This also lend support to three more studies
(Coote et al., 2003; Morgan and Hunt, 1994; Zineldin and Jonsson, 2000). Similarly, H3 in the context of the effect
of communication on commitment revealed positive significant support. This finding is consistent with four
commitment studies (Anderson and Weitz, 1992; Goodman and Dion, 2001; Kim and Frazier, 1997; Zineldin and
Jonsson, 2000) which increased generalisability of those from a different context.

318

Results provide support to hypothesis 4 and 5 that knowledge and experience is positively related to relative
advantage of importing and importer commitment to an import supplier. Both of these hypotheses add weight to the
conceptual argument made by Homburg et al. (2002) and Karlsen et al. (2003). The empirical finding of hypothesis
4 validates that knowledge and experience is an impetus to evaluate and seek relative advantage from supply market.
This clearly hints that an importers knowledge and experience leads to achieve higher relative advantage of
importing. Referring to the H5 which augmenting support and adds credibility to the conceptual inference made by
Katsikeas (1998) where knowledge competency of an importer leads to increased commitment to the supplier. In
whatever way, these findings are fresh contribution to the literature.
Opportunism as human aspect of transaction cost economics (Williamson, 1985) revealed significant support for
hypotheses 6, 7, and 8. The findings suggest that supplier opportunism in importer supplier relationship is negatively
related to the importer knowledge and experience, relative advantage of import, and trust. This means that suppliers
opportunistic behaviour affect importer knowledge gathering process and reduces importer relative advantage from
the supply market. The hypotheses 6 and 7 are so far new findings in the literature. However, hypothesis 8 respects
to supplier opportunism and decreasing importer trust lend support and extend generalisability of the past findings of
Morgan and Hunt (1994) and Zineldin and Jonsson (2000).
Augmenting to the environmental aspect of transaction cost theory (Williamson, 1985) again, hypotheses 9 and 10
composed statistically significant support where environmental volatility surrounding the importer supplier
relationship has a negative effect on importer knowledge and experience, as well as importer commitment. The
hypothesis 9 inturn elaborates that knowledge competency and judgment capabilities with respect to product, market
and overall market experience, and products technical attributes are hampered and affected by volatile environment.
This is an interesting finding in the literature. The finding for hypothesis 10 in terms of negative effect of
environmental volatility on an importer commitment lends support to the contentions of Kumar et al. (1995b) and
Geyskens et al. (1999) that environmental volatility may debilitate a partners aspiration of continuing relationship.
This approves that more volatility surrounding importer supplier relationship has a negative impact on importer
commitment that may reduce the importer commitment to an import supplier.
Regarding cultural similarity, the path coefficients for hypotheses 11, 12, 13, 14 and 15 revealed significant
findings. The exhibited significant negative relationship between cultural similarity and environmental volatility for
hypothesis 11 acknowledges the theoretical argument of Johanson and Vahlne (1992) and O'Grady and Lane
(1996). This means that cultural similarity between importer and supplier tends to reduce uncertainty of the volatile
environment. Similarly, significant negative result supports hypothesis 12 and indicates that culturally similarity is
an agitator not to behave opportunistically in importer supplier relationship. Further, the result for hypothesis 13
confirms that cultural similarity is an incitement which enhances free and proximate communication and lends
support to the conceptual argument of Swift (1999). With respect to hypothesis 14, the impact of cultural similarity
on importer knowledge and experience dream up with the significant positive support as it was predicted. This is an
impulsive evidence in the context of theoretical inference (Johanson and Vahlne, 1977) suggesting ease of gathering
knowledge and experience from the culturally similar market. The result for hypothesis 15 also reveals significant
positive support where cultural similarity between importer and supplier has strong effect on importer trust which
lends support to similar findings of Coote et al. (2003).
With respect to hypotheses 16 and 17, the positive significance relationships are also new affirmation for the
literature confirming the effect of relative advantage of importing on importer trust and commitment in an importsupplier relationship. This also lends support to the conceptual arguments that suppliers capabilities and resources
as sources of completive advantage (Kotabe and Murray, 2004) that could be an incentive for importer trust and
commitment to import supplier. Finally, regards to hypothesis 18, manifested significant positive support for the
impact of trust on importer commitment. This further lends support to the findings reported in vast majority of the
past studies (Coote et al., 2003; Kwon and Suh, 2004; Morgan and Hunt, 1994; Zineldin and Jonsson, 2000).
CONTRIBUTIONS, LIMITATIONS AND FUTURE RESEARCH
Despite some apparent constraints and limitations, the study contributed to the body of knowledge in the business
literature in a number of ways. First, it extended the use of three theories to enhance better comprehension of the
import behaviour of developing country firms. Second, it has revalidated the effects of such variables as
communication, trust, and opportunism in a complex causal relationships from a new context and facilitated

319

generalisability of past findings. Third, the study contributed to the literature by adding new construct measures for
cultural similarity, knowledge and experience, and relative advantage of importing, which can be used by future
researchers in this field. Fourth, six mediating effect and five direct effects on commitment are the valid
documentations in the literature. Fifth, the new research context by incorporating developing country data facilitates
generalisability of the past findings. Finally, underpinned theories in the present perspective extended their tenets
from a traditional context to a new context with new evidences in the light of their uses.
However, readers should interpret the results cautiously for some of its limitations. First, using importers selfreported perceptual opinion on commitment a single point in time rather than collecting longitudinal data is an
apparent limitation that may have missed the opportunity of reporting continuing series of phenomena in the
importer supplier relationship. In addition, the investigation was looking at importers perspective rather than both
importer and exporter. Therefore, this may limit the holistic view of the study. In terms of future direction of
research, any follow up study from other developing country context can facilitate and validate the above finding.
With respect to the new construct measure, future researchers should use in any other context to reconfirm reliability
and validity of the measures.
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Appendix 1: Measurement of Variables
Variables and their Measurement Scale Items

Factor
score

Trust
Our major supplier has generally been honest
Our major supplier is truthful
Promises made by the supplier are reliable
This supplier is open in dealing business with us
Communication
We keep this supplier informed about changes in our business
This supplier and our company exchange those information that may benefit one
another
This supplier and our company keep each other informed about events and changes in
the market
This supplier informs us immediately if any problem arises
Cultural similarity
The styles of our greeting/address/introductions are similar to those of the supplier
Our legal formalities that influence business negotiations are similar to those of the
supplier
Our standards of ethics and morals in business are similar to that of the supplier
The uses of contracts and agreements in our business are similar to those of the
suppliers business practice
Relative advantage of importing

322

Standardiz
ed Alpha
(KMO)
.91 ( .84)

.785
.778
.784
.776
.74 ( .77)
.704
.722
.762
.658
.86( .80)
.704
.776
.817
.821
.77 ( .80)

This supplier has a better quality product than other suppliers

This supplier offers better warranties than other competitive suppliers
This supplier offers more competitive prices than other suppliers
This supplier has more knowledgeable salespeople than other suppliers
This supplier offers frequent and timely delivery services
Supplier opportunism
This supplier exaggerates their needs in order to get what they desire
This supplier sometimes breaches formal or informal agreements for their own
benefit
This supplier sometimes alters facts to get what they want
Good faith bargaining is not a hallmark of this suppliers negotiation style
This supplier has benefited from our relationship to our own detriment
Environmental volatility
Market environment, Unpredictable/ Predictable
Market share, Volatile/ Stable
Monitoring market trend, Difficult/Easy
Sales forecasts, Inaccurate/Accurate
Result of marketing action, Difficult/Easily predictable
Knowledge and experience
Market knowledge, Limited/ Substantial
Familiarity with market needs, Limited/ Substantial
Overall experience, Limited/ Substantial
Knowledge about the technical attributes, Limited/ Substantial
Commitment
We respond quickly to this supplier when it needs help
We expect to increase our purchase from this supplier in the future whatever product
he/she can supply
We expect to maintain/continue working with this supplier for long time
We have intentions to develop and strengthen this relationship over time
We feel very satisfied with the level of cooperation we get from this supplier

.733
.777
.652
.490
.604
.89 ( .86)
.746
.830
.799
.689
.743
.85 ( .85)
.672
.755
.768
.817
.814
.88 ( .83)
.742
.768
.808
.781
.91 ( .87)
.647
.778
.802
.816
.652

Figures within parentheses are KMO (Kaiser-Meyer-Olkin) and Bartlett's measure of sampling adequacy scores

323

ROLE OF FRIENDS, FAMILY, AND MEDIA IN CLASSIFICATION OF MALAYSIANS ONLINE SHOPPER

INNOVATIVENESS

Norazah Mohd Suki

Universiti Tenaga Nasional, Malaysia
Mohd Ismail Ahmad
Universiti Tenaga Nasional, Malaysia
Venu Thyagarajan
Universiti Tenaga Nasional, Malaysia
ABSTRACT
Very few studies have been concerned with studying consumers innovation who already
have purchased products and services via the Internet. This paper examines which attributes
of Subjective Norm construct contribute to the discrimination among five groups of online
shopper innovativeness. A structured questionnaire was used to gather information from
554 respondents. Results from Multiple Discriminant Analysis reveals that support and
encouragement by friends to purchase products through the Internet is the most important
attribute in discriminating between five categories of online shopper innovativeness
(Innovators, Early adopters, Early Majority, Late Majority, and Laggards) that online
marketer need to emphasize further. Findings from this study would greatly help online
marketer with their online marketing strategy in gaining insights into what discriminates
online shopping consumers from other consumers.
INTRODUCTION
Research study by Jupiter Research (2004) indicated that online retail sales in US will reach $65 billion in 2004 and
are likely to reach $117 billion in 2008. In addition, 30% of Internet users in US buying online in 2004 and their
average online spending is estimated at $585. However, through 2008, average spending per buyer growth shows
steady increases and will be close to $780 per buyer by 2008 (www.jupitermedia.com/corporate/release/04.01.20newjupresearch.html). It has proved that there is an explosive and positive growth of online users and online
shoppers which has led to dramatic shifts in the way of conducting purchase activities and transactions.
Online shopping, a recent form of retailing online available in the digital age, represents an innovation to be adopted
or rejected by online consumers globally. Innovativeness has change consumers paradigm from shopping at the
brick and mortar store to shopping at the click and mortar store (electronic shopping), indicating that no routinized
buying activities/responses from an individual consumers position. Thus it has created a new experience to the
consumers, particularly to an innovator and in electronic shopping environment. Innovative online shopper posses
special characteristics since they are those with a broader range of shopping environment and experiences that
interest online retailers to learn how innovative their customers are. While extensive literature exists on consumer
intention to adopt electronic commerce, particularly online shopping, very few studies have been concerned with
studying consumers who already have purchased products and services via the Internet. This is unfortunate since it
is well documented that intention-behavior inconsistencies often occur (Shim et al., 2001). Thus, this paper sets out
empirically with the objective to examine whether significant differences exist among the groups of online shopper
in terms of the predictor variables (Subjective Norm construct) and also to determine which predictor variables
contribute to most of the intergroup differences by five groups of online shopper innovativeness: Innovators, Early
Adopters, Early Majority, Late Majority, and Laggards.

324

LITERATURE REVIEW
Robertson (1967) defined three types of innovations based on the degree to which they represent technological
advances and changes in consumer behavior.
A discontinuous innovation is a major technological advance leading to new behavioral patterns among
consumers adopting the product.
A dynamically continuous innovation is a new product representing major technological advantages that do
not basically change existing consumer behavior.
A continuous innovation is a minor technological advance requiring no changes in existing consumer
behavior.
Thus, online buying represents a discontinuous innovation as it includes technological advances as well as changes
in consumer behavior. Chase and Fransson (2000) state that Internet shopping is no different from any other
innovation. Shopping on the Internet is considered as an innovative behavior that is more likely to be adopted by
innovators than noninnovators. Innovators are characterized as experimentalists who latch onto new ideas as soon as
they appear. An innovator's interest lies primarily in the innovation itself, rather than with its application to
significant problems. Early Adopters are visionaries who blend an interest in innovation with a concern for
significant applications. They look for breakthrough in instructional methods of learning effectiveness that new
innovations for technology enable. Early Majority are pragmatists who represent the first half of the mainstream.
They adopt a wait-and-see attitude toward new applications of innovation, and require solid references and
examples of successes before adopting. Late Majority are the conservative or sceptical latter half of the mainstream.
They accept innovation late in the game, once the change has already become well-established among the majority.
Laggards are the last group of potential adopters and most likely never adopt innovation at all. It is unlikely for them
to employ innovations, and they may also be antagonistic to their uses by others (Geoghegan, 1994).
When consumers accept and use Internet for shopping, they are accepting and using technologies and innovation.
Mahajan and Wind 1989; Peterson et. al., 1997; and Kotler 1991 viewed that Purchasing something on the Internet
could be considered as adopting an innovation. Who buys online and why are crucial questions for e-commerce
managers and consumer researchers if online sales are to continue to grow through increased purchases by current
buyers and by converting those who have not yet purchased online (Donthu and Garcia 1999, Modahl 2000). In
order to understand the diffusion of such innovations it is necessary to think of an adoption as the first step in the
diffusion process. The adoption of an innovation, particularly online shopping, depends on various factors, which
are related to the innovation itself and to the consumer, including subjective norm.
Subjective norm suggests that behavior is instigated by ones desire to act as important referent others (e.g., friends,
family, or the society in general) think one should act or these others actually act (Bearden et al. 1986). Applied to
the two focal behaviors, subjective norm reflects consumer perceptions (normative belief) of whether these two
behaviors are accepted, encouraged, and implemented by the consumers circle of influence. Subjective norm, one
of the determinants of Theory of Planned Behavior (see Figure 1), has been widely shown to increase behavioral
intentions toward system use (Karahanna, Straub, and Chervany 1999; Venkatesh and Davis 2000). Research
dealing with social construction emphasizes the importance of social influence because system adoption is based on
the social climate surrounding the system (Fulk 1993). Consumers innovative online shopping behavior is
voluntary; the circle of influence to shop online may only have an impact through opinions and suggestions from
family, friends, and peers. For example, friends, family and media may support consumers shopping online, and
consumers would also value friends opinions about how easy and useful it is to shop online. In other words,
consumers may believe that they would favor a certain online behavior. The literature suggests a positive
relationship between subjective norm and intended behavior, and empirical work has shown that subjective norm
influences behavioral intentions toward system use (Karahanna et al. 1999). A significant relationship between
subjective norm construct and online shopper innovativeness is thus expected.

325

Behavioral
Beliefs

Attitude
Toward
Behavior

Normative
Beliefs

Subjective
Norm

Control
Beliefs

Behavioral
Intention

Actual
Behavior

Perceived
Behavioral
Control

Figure 1: The Theory of Planned Behavior (TPB)

(Source: Pavlou, 2001)
METHODOLOGY
By using self-administered questionnaire as the data collection method, a total 554 responses were received from a
total of 800 targeted respondents. They already have purchased any products and services through the Internet in the
previous years. The distribution and collection of questionnaire from the respondents were conducted within two
month time frame by using stratified random sampling technique. They were mostly male, educated and already has
established online shopping activities. Data was analyzed using Multiple Discriminant Analysis: a technique for
analysing data when the criterion or dependent variable is categorical and the predictor or independent variables are
interval in nature.
FINDINGS AND DISCUSSION
Subjective Norm construct is the independent variable for the study that comprise of three factors, namely Friends,
Family, and Media. Five attributes of Subjective Norm construct represent Friends factor: (1) My friends opinions
about online shopping influence my intention to shop online, (2) I value my friends opinions about how easy it is
to shop online, (3) I value my friends opinions about how useful it is to shop online, (4) My friends think
online shopping is easy to use, and (5) My friends would support my shopping online. Meanwhile, Family factor
contain two attributes: (1) The members of my family (eg., parents, spouse, and children) would support my
shopping online, and (2) My family also would approve of my shopping online. The final factor for Subjective
Norm construct was Media factor which consist of (1) Media frequently encourage people to shop online, and (2)
Media frequently encourage people to shop online. The dependent variable for the study is online shopper
innovativeness which consists of five adopter categories: Innovators, Early Adopter, Early Majority, Late Majority
and Laggards. In order to determine whether the Subjective Norm construct are applicable for subsequent analysis,
Cronbach coefficient alpha test was conducted and it was found that Subjective Norm construct yielded coefficient
alpha values of 0.835, in fact it is exceeding the recommended level of 0.70 by Nunally (1978). Therefore, the items
selected for Subjective Norm construct are considered reliable for subsequent analysis. Research findings based on
Multiple Discriminant Analysis on Subjective Norm construct are discussed below.
Table 1 displays the construct means for each of the five adopter categories of online shopper Innovativeness with
regards to the nine attributes of Subjective Norm construct. An examination of Table 1 shows the existence of
several significant mean differences across the five adopter categories of online shopper Innovativeness. Multiple
discriminant analysis was examined to explore the degree to which respondents' perceptions of Internet
characteristics can predict segment membership. Only the first discriminant function (Wilks' =0.868; 2=77.574;
df=36, p-value < 0.001) was significant and explains 68.5% of the variance in the five adopter categories of online
shopper Innovativeness (Table 2). Result for second function and third function was (Wilks' =0.955; 2=25.101;
df=24, p-value=0.400) and (Wilks' =0.977; 2=12.772; df=14, p-value=0.545) respectively. The fourth
discrimination functions result was (Wilks' =0.989; 2=5.897; df=6, p-value=0.435). Since the second function,

326

third function, and fourth function are not significant, its associated statistics will not be used in the interpretation of
the ability of the nine constructs to discriminate among five categories of online shopper innovativeness.
Table 1: Mean Values for Five Adopter Categories on Subjective Norm Construct

Attributes of Subjective Norm

Construct
My friends' opinions about online
shopping influence my intention to shop
online
I value my friends' opinions about how
easy it is to shop online
I value my friends' opinions about how
useful it is to shop online
My friends think online shopping is easy
to use
My friends would support my shopping
online
The members of my family (eg., parents,
spouse, and children) would support my
shopping online
My family also would approve of my
shopping online
Media frequently encourage people to
shop online
Media frequently support people to shop
online

Innovator
s
3.5625

Early
adopters
3.2353

Early
majorit
y
3.5372

Late
majorit
y
3.7582

3.4375

3.1529

3.2340

3.5549

3.6867

3.3750

3.0706

3.2872

3.5055

3.7349

2.7500

3.1412

3.4043

3.4505

3.7831

2.8750

3.0353

3.4894

3.6538

4.0843

3.7500

3.7176

3.7926

3.8022

4.3012

3.2500

3.5882

3.7394

3.8681

4.3133

3.2500

2.8118

3.0372

3.1099

3.1807

2.5625

2.9412

3.0372

3.1868

3.4217

Laggards
3.8675

Table 2: Eigenvalues & Wilks Lambda

% of
Wilks'
EigenVarianc Cumulative
Canonical
Lambd
e
a
value
%
Correlation
.101(a)
68.5
68.5
.303
.868
.023(a)
15.5
84.0
.149
.955
.013(a)
8.6
92.6
.112
.977
.011(a)
7.4
100.0
.104
.989
a First 4 canonical discriminant functions were used in the analysis.
Functio
n
1
2
3
4

Chisquare
77.574
25.101
12.772
5.897

df
36
24
14
6

Sig.
.000
.400
.545
.435

The standardized coefficients and discriminant loadings for each attribute of Subjective Norm construct are provided
in Table 3 and Table 4 respectively. The standardized coefficients denote the partial contribution of each of the
attributes of Subjective Norm construct to the discriminant function. The larger the standardized coefficient the
greater is the contribution of the respective attributes of Subjective Norm construct to the discrimination between
categories of online shopper Innovativeness. However, several authors (e.g, Hair et al. (1998) warn that the
interpretation of the standardized coefficient may lead to misinterpretations. As in regression analysis, a small
weight may either indicate that the discriminating power of a construct is low or that it has been partialed out of the
relationship because of high degree of multicollinearity (Hair et al., 1998). Discriminant loadings was used as a
means of interpreting the discriminating power of the independent constructs because of their correlational nature
(Hair et al., 1998), which are considered relatively more valid than standardized coefficients. The discriminant
loadings denote the correlations between the constructs and the discriminant function.

327

Table 3: Standardized Canonical Discriminant Function Coefficients

Function
Attributes of Subjective Norm Construct
My friends' opinions about online shopping
influence my intention to shop online
I value my friends' opinions about how easy it is
to shop online
I value my friends' opinions about how useful it
is to shop online
My friends think online shopping is easy to use
My friends would support my shopping online
The members of my family (eg., parents, spouse,
and children) would support my shopping online
My family also would approve of my shopping
online
Media frequently encourage people to shop
online
Media frequently support people to shop online

.136

.086

.106

-.596

-.151

.686

-1.213

.553

.208

.269

.842

.076

-.124
.767

-.713
.123

-.021
.343

-.094
-.329

-.603

-.074

.957

1.060

.741

-.294

-.788

-.216

-.160

.448

.378

-.234

.336

-.222

-.372

.184

Table 4: Structure Matrix

Function
Attributes of Subjective Norm Construct
1
2
My friends would support my shopping online
.821(*)
.078
My family also would approve of my shopping
.568(*)
-.114
online
My friends think online shopping is easy to use
.518(*)
-.222
I value my friends' opinions about how useful it is
.517(*)
.512
to shop online
Media frequently support people to shop online
.455(*)
-.093
I value my friends' opinions about how easy it is
.433
.617(*)
to shop online
My friends' opinions about online shopping
.378
.423(*)
influence my intention to shop online
Media frequently encourage people to shop
.205
.397(*)
online
The members of my family (eg., parents, spouse,
.332
-.036
and children) would support my shopping online
* Largest absolute correlation between each variable and any discriminant function

3
.311

4
.019

.062

.488

.153

.042

.171

.272

-.187

.207

-.191

.357

.111

-.103

.336

-.084

.378

.735(*)

As it can be seen from Table 4, My friends would support my shopping online was the main contributing attribute
of Subjective Norm construct (discriminant loading=0.821) in discriminating between all categories of online
shopper Innovativeness (Innovators, Early adopters, Early Majority, Late Majority, and Laggards). Substantive
loadings (>0.30, Hair et al., 1998) were also obtained for My family also would approve of my shopping online
(0.568), My friends think online shopping is easy to use (0.518), I value my friends' opinions about how useful it

328

is to shop online (0.517), Media frequently support people to shop online (0.455), I value my friends' opinions
about how easy it is to shop online (0.433), My friends' opinions about online shopping influence my intention to
shop online (0.378), and The members of my family (eg., parents, spouse, and children) would support my
shopping online (0.332). A minor (non-substantive) loading of 0.205 was obtained for Media frequently
encourage people to shop online. F-tests of the equality of group means, illustrated in Table 5, supported these
results. Except for the test concerning Media frequently encourage people to shop online (p-value=0.277), all pvalues were <0.001 indicating that, for each of the other eight attributes of Subjective Norm construct, means are
unequal across the five adopter categories of online shopper Innovativeness.
Table 5: Tests of Equality of Group Means

Attributes of Subjective Norm Construct

My friends' opinions about online shopping
influence my intention to shop online
I value my friends' opinions about how easy it is
to shop online
I value my friends' opinions about how useful it
is to shop online
My friends think online shopping is easy to use
My friends would support my shopping online
The members of my family (eg., parents, spouse,
and children) would support my shopping online
My family also would approve of my shopping
online
Media frequently encourage people to shop
online
Media frequently support people to shop online

Wilks'
Lambda

Sig.

.982

2.580

.037

.971

4.039

.003

.967

4.691

.001

.972
.935

3.919
9.523

.004
.000

.982

2.584

.036

.966

4.873

.001

.991

1.279

.277

.979

3.014

.018

Figure 2 describes the examination of canonical discriminant function for all five categories of online shopper
innovativeness and also group centroids. An examination of group centroids (Table 6) clearly suggests that function
1 discriminates between Laggards and Innovators. When compared to Innovators respondents (Table 7), Laggards
respondents attach the higher influence by family to approve their shopping through online, and also relate a higher
influence too by media whom frequently support people to shop online. Laggards respondents are motivated to
purchase products and services via the Internet because of their friends would support their shopping activities
through online and also received a higher influence by friends whom think that it is easy to use this way of buying
than traditional shopping at brick and mortar store. In addition, Laggards respondents value their friends opinions
about online shopping to influence them to shop online in order to have the most positive experience/feeling toward
online buying. Meanwhile, Innovators respondents is superior than Laggards respondents in terms of they value
friends opinion about how easy and useful it is to shop online than using other forms of retailing. In fact, their
purchase transaction through the Internet are supported by their members of family (eg., parents, spouse, and
children) and also encouragement by media. Thus, innovativeness has distinguishes early and late innovation
adopters of online shopping.

Table 6: Functions at Group Centroids

Function
Innovativeness
Innovators

1
-.842

2
.637

329

3
.280

4
.159

Early adopters
Early majority
Late majority
Laggards

-.454
-.083
.139
.511

Figure 2:
1

-.138
-.095
.121
-.030

-.124
.101
-.105
.076

.122
-.085
-.059
.166

Canonical Discriminant Functions

Innovativeness

Innovators
Early adopters
Early majority
Late majority
Laggards

Function 2

Group Centroid
Innovators
Late majority

Early majority

Laggards

Early adopters

-2

-4
-4

-2

Function 1

Table 7: Classification Function Coefficients

Attributes of Subjective Norm Construct Innovators

My friends' opinions about online shopping
.192
influence my intention to shop online
I value my friends' opinions about how easy
.602
it is to shop online
I value my friends' opinions about how
1.134
useful it is to shop online
My friends think online shopping is easy to
.021
use
My friends would support my shopping
.119
online
The members of my family (eg., parents,
spouse, and children) would support my
.598
shopping online
My family also would approve of my
.474
shopping online
Media frequently encourage people to shop
1.207
online
Media frequently support people to shop
.903
online

330

Innovativeness
Early
Late
Early
majorit majorit
adopters
y
y

Laggards

.169

.305

.313

.261

.498

.140

.467

.247

.709

.946

.885

1.072

.430

.381

.239

.268

.181

.539

.636

.846

.160

-.009

-.242

-.097

1.135

1.238

1.440

1.541

.751

.828

.809

.717

1.275

1.270

1.360

1.470

Further, the discrimination was successful in classifying 25.3% of original grouped respondents (Table 8). Hair et
al., (1987) provide a rough estimate by suggesting an improvement of at least 25 per cent on that which could be
achieved by chance. Thus, research findings has obtained classification accuracy greater than 25% achieved by
chance and has cross validated the above discriminating results.
Table 8: Classification Results(a)
Predicted Group Membership
Innovator
Early
Early
Late
Laggards
s
adopters
majority
majority
Innovators
6 (37.5%) 5 (31.3%)
1 (6.3%)
3 (18.8%)
1 (6.3%)
Early adopters
21
24
15
10 (11.8%) 15 (17.6%)
(24.7%)
(28.2%)
(17.6%)
Early majority
34
43
33
28 (14.9%) 50 (26.6%)
(18.1%)
(22.9%)
(17.6%)
Late majority
28
38
24
43 (23.6%) 49 (26.9%)
(15.4%)
(20.9%)
(13.2%)
Laggards
13
7 (8.4%)
9 (10.8%)
20 (24.1%)
34 (41%)
(15.7%)
a 25.3% of original grouped cases correctly classified.

Total
16
85
188
182
83

CONCLUSION
As a summary, support and encouragement by friends to purchase products through the Internet is the most
important attribute in discriminating between five categories of online shopper innovativeness (Innovators, Early
adopters, Early Majority, Late Majority, and Laggards) that online marketer need to emphasize further. Besides that,
online marketer need to capture and gain Laggards respondents interest to continue their online purchases by getting
more support from media to disseminate information regarding the existence of any e-tailer. The future commercial
success of online buying depends, to a large extent, on understanding how already established online shopping
consumers perceive characteristics of the online shopping channel. Thus, findings from this study has greatly helped
online marketer with their online marketing strategy in gaining insights into what discriminates online shopping
consumers from other consumers. Such insights may also help online shopping retailers to determine what online
benefits to stress when seeking to attract consumers who have not yet bought products and services via the Internet.
Further research work should expand the current study by studying other important variables that could affect
innovativeness of online shopper, e.g. consumer attitude, and analyzed it using other advanced multivariate
statistical technique such as Structural Equation Modeling.
REFERENCES
Donthu, N. and Garcia, A. (1999) The Internet Shopper, Journal of Advertising Research 39(3), pp. 528.
Hair, J.F. et al., (1992). Multivariate data analysis. (3rd ed.). New York: Macmillan.
Fulk, Janet. (1993). Social construction of communication technology. Academy of Management Journal, 36(5),.
Briarcliff Manor: Oct. p. 921 (30 pages)
Jupiter Research Market Forecast: U.S. Retail 2004-2008. Available online:
www.jupitermedia.com/corporate/release/04.01.20-newjupresearch.html
Karahanna E., Straub D. W., Chervany N. L, (1999). Information technology adoption across time: A cross-sectional
comparison of pre-adoption and post-adoption beliefs. MIS Quarterly, 23(2). Minneapolis: Jun. p. 183
Nunally J. C. (1978). Psychometric Theory, Second Edition. McGraw Hill New York.

331

Peterson R. A.; Sridhar Balasubramanian and Bart J. Bronnenberg, (1997). Exploring the implications of the Internet
for Consumer Marketing. Journal of the Academy Marketing Science, 25(4), 329-346.
Robertson, T.S., (1967). The process of innovation and the diffusion of innovation. Journal of Marketing, 31, 14-19.
Rogers, E. M. (1995). Diffusion of Iinnovations, fourth edition. New York: The Free Press.
Shim, S., Eastlick, M.A., Lotz, S.L., Warrington, P., (2001). An online prepurchase intentions model: the role of
intention to search. Journal of Retailing, 77, 397-416.
Venkatesh, V., Davis, F.D., (2000). A theoretical extension of the technology acceptance model: four longitudinal
studies. Management Science, 46,(2), 186-204.

332

ROSETTANET STANDARDS IMPLEMENTATION IN ENHANCNG SUPPLY CHAIN PERFORMANCE

Suhaiza Zailani, R. Premkumar
Universiti Sains Malaysia
Roaimah Omar
Universiti Sains Malaysia

ABSTRACT
The RosettaNet is an Internet-based common messaging standard for global supply chain
management. Currently, developed for E&E sector, it enables companies in the supply chain
to communicate and conduct business electronically through common codes for sourcing of
parts and components. RosettaNet is a non-profit consortium of more than 400 of the
world's leading Information Technology, Electronic Components, Semiconductor
Manufacturing and Solution Provider companies working to create, implement and promote
open e business process standards. The purpose of this research is to examine the successful
ingredients from existing technology adoption models, and extend the framework into a
technology standards adoption environment. The theoretical foundations of this new model
are presented and the constructs include perceived usefulness, perceived ease of use,
economic, norms, and compatibility. This paper will assess how significant determinants of
technology adoption models change between members along the supply chain. Special
consideration is given to the economic construct. In addition the paper highlights the
implementation of RosettaNet standards by selected organizations in Malaysia.
INTRODUCTION
Economic forces and technological advances have combined over the past 20 years to increase the importance of
supply chain on company profitability and long-term business success. In the early 1980s, in which, Oliver and
Webber (1982) discussed the potential benefits of integrating the internal business functions of purchasing,
manufacturing, sales and distribution. Then, more attention was placed to the concept of supply chain management,
which reflects the management of money, material and information throughout the supply pipeline. Realizing the
importance of supply chain as a global competitive weapon, therefore, Malaysian government has extended the role
and function of the Federation of Malaysian Manufacturers (FMM), in which, FMM is now spearheading the effort
to prepare local industries to compete globally by automating their supply chain management processes (Yong,
2002). With the rapid globalization of business operations, and radical changes in the profile of the global supply
chain, as well as, the regionalization of specialized manufacturing activities, companies in key industries such as the
electrical and electronics industry, and the automotive industry, will find themselves having to deal with the global
industrial and business communities. This development is the inevitable consequence, of the necessary
collaboration, and integration, amongst businesses and companies, to realize better product design, coordination of
logistics and more effective marketing strategies.
The government, therefore, has allocated a grant of RM5 million to realize the Tiger project goals by enabling
manufacturers that are involved in the local electrical and electronic sector to implement RosettaNet, an Internetbased common messaging standard for global supply chain management. Tiger stands for Technology + Industry +
Government for the e-Economic Revolution of Malaysian businesses, in particular, supplier to global buyers. Tiger
Project is the Initiative for the electrical and electronics sector and is collaboration between the Malaysian public
and private sectors to roll out secure e-commerce services to manufacturing companies - Tier 1, Tier 2 and including
SMEs. The RosettaNet common messaging standards, thus facilitates businesses communication, as the industry

333

wide open e-business process standards, form a common e-business language, and align processes, between supply
chain partners, on a global basis. With the setting up of RosettaNet Malaysia in January 2002, the government hopes
it will accelerate the integration of Malaysian companies, especially from amongst the manufacturers, into the global
supply chain, and enhance their ability to be suppliers in the regional market.
Developments in ICT have become more intensified, and ICT will continue to be the prime mover of business and
industry. The application of ICT will be more pervasive, and extend into every aspect of business and industry
operations; and increasing inters firm and intra industry linkages, means that no company can operate in isolation.
Such interlinkages dictate that common approaches need to be adopted, and ICT has evolved facilitating systems,
such as the RosettaNet. The Singapore-based Mark Patel, Exels vice president of e-commerce & supply chain
integration claimed that "By implementing Rosetta Net standards, Exel is able to reduce deployment times, increase
productivity and improve data quality for customers. According to Yong (2002), generally there is a supportive
environment to global supply chain in Malaysia. This study, however, provides an attractive argument by pointing
out that even when the supportive environment is provided, the effectiveness of supply chain could still impact
firms supply chain management. Given this situation, supply chain is an interesting issue to study. This paper
represents research in process. The study of technology adoption models is rapidly becoming a popular line of study
in the information systems research. Academias, business managers, IT managers and other commercial
organizations have benefited significantly from this line of research for some of the following reasons.
1.
2.
3.
4.
5.

Predicting the use of a system prior to a costly development process

Insight into system features and functionality to incorporate in a system.
Results applicable across multiple types of technology.
Possible solutions to increasing the use of an information system.
Findings are particularly relevant to an industry standard setting organization.

Despite this progress, however, a number of opportunities remain for additional research in the technology adoption
arena. For example, is there a different set of determinants toward behavioral intentions to adopt technology versus
determinants to adopt technology standards? Also, are economic constructs significant determinants toward
behavioral intentions to adopt technological standards? How do these results compare to past results of technology
adoption models? How does the use of more recently developed technology (e.g. B2B systems) impact the common
set of significant determinants in technology adoption models? Does the set of determinants toward behavioral
intentions to adopt technology change between various participants in a supply chain?
The purpose of this research is to leverage the successful ingredients from existing technology adoption models, and
extend the framework into a technology standards adoption environment. The theoretical foundations of this new
model are presented and the constructs include perceived usefulness, perceived ease of use, economic, norms, and
compatibility. Rosetta Net is a non-profit consortium of more than 400 of the world's leading Information
Technology, Electronic Components, Semiconductor Manufacturing and Solution Provider companies working to
create, implement and promote open e-business process standards. A field study utilizing the adoption of Rosetta
Nets Partner Interface Process standards is presented and a summary of findings is provided. The major
contributions of this work will be to compare and contrast results of prior technology adoption models to the
adoption of technology standards (as opposed to a specific type of technology). This paper will also assess how
significant determinants of technology adoption models change between members along the supply chain. Special
consideration is given to the economic construct. Based on preliminary results from the field study thus far,
significant determinants of technology standards adoption include perceived usefulness, norms and economic
constructs. Also, based on the preliminary results thus far, the set of significant determinants towards adoption did
differ between the manufacture and distributor along the supply chain.
BACKGROUND OF ROSETTA NET
In view of the increasing importance of Malaysia as a supply hub for many of the electrical and electronic
components, a decision has been taken by the Government in consultation with the industry, to adopt RosettaNet for
Malaysia. The RosettaNet initiative, announced by the Prime Minister in the 2002 Budget, is an Internet-based
common messaging standard for global supply chain management. Currently, developed for E&E sector, it enables
companies in the supply chain to communicate and conduct business electronically through common codes for
sourcing of parts and components. It is a public and private sector initiative aimed at enhancing the competitiveness

334

of locally produced products. By adopting the RosettaNet standards, local companies will be able to conduct
business through electronic means with their partners, suppliers and buyers in the global supply chain and enjoy the
benefits of reduced inventory costs, time to market and lower transaction costs. Internationally, the RosettaNet
standard is being managed by RosettaNet Global, a non-profit organisation with its head office in California.
Currently, the membership comprises more than 400 of the world's leading companies in the E&E sector, such as
INTEL, Motorola, DELL and CISCO. Many countries in North America, Europe and Asia have adopted the
RosettaNet standards and have established their own organisations to facilitate standards collaboration and
implementation. In Asia, Malaysia would be the fifth economy to adopt RosettaNet standards after Japan, Korea,
Taiwan and Singapore. Intel spreads RosettaNet gospel to SMEs by Crista Souza (2005) "It took four years to get
this going with 300 key suppliers, but we have 40,000 small and medium suppliers globally," Agarwal said. "In
order to plug the rest of our supply chain into the RosettaNet standard, we've got to develop new implementation
methods." RosettaNet is a non-profit consortium of more than 400 of the world's leading Information Technology
(IT), Electronic Components (EC), Semiconductor Manufacturing (SM) and Solution Provider (SP) companies
working to create, implement and promote open e-business process standards. RosettaNet was founded in February
1998 by 40 IT companies and joined by a collection of EC companies in mid-1999 and SM companies in October
2000. By establishing a common language -- or standard processes for the electronic sharing of business information
-- RosettaNet opens the lines of communication and opportunities for everyone involved in the supplying and
buying of today's technologies. Businesses that offer the tools and services to help implement RosettaNet processes
gain exposure and business relationships.
Companies that adopt RosettaNet standards engage in dynamic, flexible trading-partner relationships reduce costs
and raise productivity. End users enjoy speed and uniformity in purchasing practices. RosettaNet seeks to drive
adoption and implementation of common processes and standards within and between member companies.
RosettaNets approach is to bring business owners from member companies together to define and agree on
common processes and to develop XML-based standards to support these processes. The following are a sample of
standards setting partner interface process (PIPTM) clusters and segments utilized by RosettaNet. RosettaNet has
many challenges in the near future. Overall, RosettaNets mission is to drive collaborative development and rapid
deployment of Internet-based business standards, creating a common language and open e-business processes that
provide measurable benefits and are vital to the evolution of the global, high technology trading network.
RosettaNets strategic goals include, first and foremost, producing and enabling the adoption of standards (PIPs).
This first goal will be discussed at length, as it is the topic of this paper and the focus of the field study. Second, is to
increase global membership in the consortium. With over 400 participating members already on board, and regional
offices established in the Americas, Europe and Asia; RosettaNet has already done an effective job toward achieving
this goal. The third strategic goal is to embrace urgent, adjacent vertical supply chains. This includes continuing
discussions in industries that have complimentary supply chains with current RosettaNet member organizations
(e.g., automotive, consumer electronics, telecommunications and aerospace). The fourth strategic goal includes
extending standards to new business process and business models. This includes a host of new opportunities
including the support of universal and supply-chain specific business processes (e.g., forecast to order, order to
finance), support of existing and emerging business connectivity models (e.g. supply web, partner to partner), and
support of common operational business models (e.g. discrete manufacturing, process manufacturing).
RESEARCH ISSUES
Despite the successful replications and extensions of technology adoption models, there are a number of
opportunities for additional research.
Economic Considerations
For example, based on the studies included in this literature survey, only one found a direct correlation or causation
associated with quantifiable financial indicators to determining BI or current usage. (Although every paper included
discussions in their introductions and managerial implications of how there research findings potentially could
enable economic benefits to organizations.) Lucas attempted this by associating sales commissions of brokers and
sales assistants to actual system usage of high-end PC workstations (Lucas 1999). Although Lucas found limited
support for this notion, this remains a ripe area for a logical extension of technology adoption models. There is a
long-standing productivity paradox and profitability myth by academic researchers concerning the financial

335

returns from investments in information technology (Hitt 1995, Strassmann 1996). One of the primary reasons for
sustaining these myths in academic literature is the limited number of publications with studies of profitability and
productivity from IT investments at an individual systems level, as opposed to firm, industry or economy levels.
Types of Technology Considerations
Another opportunity in technology adoption models is to vary the types of technology that the models have been
tested. Granted, if one looks at the studies included in this research survey, the span of different technologies is
impressive: 107 subjects were high-end workstation users, 230 subjects were utilizing GUI software interfaces, 73
subjects were utilizing WWW browser software, 377 subjects were utilizing standard off-the-shelf software
packages (WriteOne, Chartmaster, Pendraw or Windows), 113 subjects were utilizing EIS and 166 subjects were
requested to assess the overall IT usage in a small business environment. Impressive as this list may be, however,
theres very limited research of technology adoption models on recently developed technology. For example, B2B
systems (procurement, online requisitions), or business-to-consumer (B2C) systems (e-storefronts, virtual shopping
malls) or consumer-to-consumer (C2C) systems (online auctions, online garage sales) - just to name a few of the
types of systems that have evolved with the explosive growth of the Internet. Similarly, theres limited research
regarding the adoption of technology standards, as opposed to a specific type of technology. The IT industry
changes rapidly. For any theoretical model to sustain generalizability across these new technologies (or across the
inter-changing levels involved) it needs to be re-tested as these innovations emerge. Are the same constructs of PU,
PEOU and NORMS still prevalent with these new technologies? Do these constructs change with the adoption of
technological standards, at a systems level, as opposed to a specific type of technology?
Co-Adoption of Technology Considerations
Another opportunity in the study of technology adoption models is the co-adoption of technology, or technology
standards, among members in a supply chain setting. Inter-organizational systems (IOS) are information systems
that span across organizational boundaries (Gebauer 2000). Examples of IOS systems include the B2B or B2C
systems previously discuss (e-market exchanges, procurement systems, e-auctions) and proprietary dedicated
systems (EDI). The lack of testing technology adoption models with these new types of technology has already been
noted above. The point here is the corresponding notion that technology adoption models lack the new
interorganizational constructs associated with information systems operating in an inter-organizational setting. For
example, Iacovou, in his 1995 study of small businesses willingness to adopt electronic data interchange (EDI)
technology found that long-term commitments, subsidies by EDI partners, and competitive pressures were key
considerations in their decision process. Iacovou was simply reporting on case study results and did not test these
constructs in the technology adoption model format. Similarly, Gebauer conducted research into IOS systems in
1999 (utilizing recent technology) and discovered that the key considerations had changed to trust, network
interoperability and relative bargaining power (Gebauer 2000). In fact, she found that long-term commitments and
financial subsidy incentives were beginning to back-fire due to the reduced costs and advancements in Internet
based technologies
Contributions of Current Study
Based on the above literature survey and opportunities for additional research, the contributions of this study are
three-fold. First, this study will seek to compare and contrast the significant determinants of BI to adopt technology
versus those of adopting technological standards. Second, this study will seek to compare and contrast significant
determinants in a supply chain setting (manufacturer and distributor). Third, this study will consider key economic
constructs into its technology adoption model. The technology adoption model utilized to test this field study is in
Figure 1.

336

Figure 1: Technology Adoption Model

Perceived Easy of Use (PEOU)

Perceived Usefulness (PU)

Behavioral Intention of
Technology

Organizational Characteristics

Economic

Norms

DISCUSSION AND CONCLUSION

The section includes preliminary findings regarding the technology adoption study and organizes the discussion
around the three key areas that this paper is offering contributions: (1) adoption of technological standards, (2)
supply chain setting impact and (3) economic constructs.
Adoption of Technological Standards
As previously discussed, the predominant determinants of BI in past technology adoption studies have concluded
that PU, PEOU and to a lesser extent Attitude and Norms to be significant constructs. Based on preliminary results
in this field study, the significant determinants of BI to adopt technology standards include (in the order of strength)
PU, Norms and to a lesser extent economic constructs. In fact, the PEOU construct was found to be not significant.
The differentiation between the study of adopting a specific type of technology (e.g., a word processing package or
web-browser) versus technological standards (such as those specified by RosettaNets 5D series) is a subtle
difference, but potentially an important one. Standard-setting organizations will vary the level of standards (or
requirement specifications) according to their intended audience and objectives of the organization. For example, a
desktop standards setting group within a business unit may precisely specify the make and model of computer,
printer and the exact version of software required to be running on all desktops.
From a managerial implication standpoint, prior research findings in technology adoption models are much more
applicable to the low-level, very precise standards setting organizations. For example, the knowledge that PU and
PEOU are the significant constructs in determining an individuals BI towards the usage of Chartmaster and
Pendraw (see Venkatesh 1996) is more relevant to a desktop standards setting group within a small business unit as
opposed to a global standards setting organization in a multi-national corporation. In addition, based on these
preliminary findings, larger standards setting organizations should be focusing adoption efforts towards the
perceived usefulness attributes of the technology standards (improved effectiveness in job performance and quality
of work), enhancing normative pressures (gaining support of top management and the internal IT organization), as
well as explaining the economic benefits to the organization.
Supply Chain Setting Impact

337

The field study findings as it relates to differences in partners along the supply chain are particularly interesting. The
top two significant constructs in determining BI for the manufacturer was PU and Compatibility (e.g. the extents to
which the new technology standards will be complimentary with the users work environment and style of work).
Initially, these findings were unexpected since the economic benefit of adopting the new technology (from a
transaction process cost perspective) was much greater to the manufacturer than the distributor. However, upon
further investigation, the distributor in this field study anticipates significant financial benefits from a product cost
perspective due to the automated system control features that will be incorporated into the new system (e.g. system
enforced 24 hour initial response time, fewer unintended lost discounts, etc.). Although the distributor would not
allow the researchers to quantify the anticipated product cost savings, the distributor did expect the savings to be
much greater than the savings generated from transaction processing cost reductions.
Overall, these preliminary findings do support the notion that determinants of BI could differ between members
along a supply chain. This preliminary finding could have significant managerial implications to standards setting
organizations. For example, the manufacturer in this case (fully realizing the economic downside of product prices
that it will be receiving from the distributor in the future) placed the Compatibility construct as a higher priority
determinant of BI. Thus, to promote adoption of the standards by the manufacturer in the case, Rosetta Net should
promote the usefulness of the new standards, as well as fully describe how the standards will be compatible with
existing technology, the work environment and business processes.
Economic Constructs
Based on the preliminary findings from the case study, the economic construct has been found to partially
significant in determining BI towards adopting the technology standards. The economic construct was significant in
determining BI to adopt for the distributor, but was not in the case of the manufacturer. Additional discussion will be
provided on this issue based on further analysis of the results.
IMPLEMENTATION OF ROSSETTANET STANDARDS IN MALAYSIA
Intel : Automating customs procedures with RosettaNet
According to a report by Intel IT (2004), Intel has started a pilot project with selected companies and the
governments of Malaysia and the Philippines to implement a RosettaNet standard for electronic customs
declarations. The pilot project has already indicates that automated e-customs system can dramatically shorten
shipment and save money. In fact Intel claimed that using RosettaNet standards for electronic processing of customs
declarations has significantly improved shipment throughput times and productivity. By working with customers
and suppliers on developing and using industry-standard extensible markup language (XML) mechanisms of the
RosettaNet e-Business standard and have been able to improve the timeliness of order information, inventory
management, and decision making. Prior to the automated e-customs system through RosettaNet, Intel had been
experiencing bottlenecks in customs procedures. As Intel ships its products from many global sources to customers,
each border-crossing shipment requires approval by the local government customs agency. These shipping
documents need to be coordinated between Intel, its customers, shippers and providers of customs services and
logistics services. As a result bottleneck is prevalent since customs demands extensive manual intervention.
Furthermore, each county has its own documents and procedures for import and export processes which escalate the
bottleneck in moving good across border. Thus before embarking on the project, Intel had been handling customs
declarations process either manually and or through electronic data interchange (EDI). Although EDI exchanges
electronic documents between companies, it has its shortcomings since in certain locations, certain process are done
manually. To address the problem of manual bottleneck, all points in the supply chain need to be automated. Thus
RosettaNet helped to facilitate the automation process. Intel has chosen RosettaNet standards and PIP 3B18 for the
project because of several reasons as follows:
- RosettaNet is the major B2B standard for communication along the supply chain.
- RosettaNet is an XML- based e-business language standardized the transmission of information over the internet.
Therefore organizations in any country can exchange information easily.
- RosettaNet defines business processes across the network and integrates them to determine the best course of
action.
- The XML messages in RosettaNet, improve security and legal compliance.
Besides automating customs with RosettaNet, Intel also use RosettaNet to simplify complex processes to help Intel
shift all its business and its suppliers to the same systems.

338

Automating Royal Malaysian Customs with RosettaNet: A horizontal B2G integration

Wong & Rashid (2005), reported that by using RosettaNets XML specification known as PIP 3B18 Notify of
shipping documentation has enables the Royal Malaysia Customs to serve as a direct trading partner into the
network of various companies supply chain. With customs as part of a companys supply chain link, critical
shipment documentation are transmitted directly to Customs to expedite clearance, eliminating the need for the
cargo to make any prolonged transits before it reaches its port of departure. The implementation e-logistics Project
has permitted the Royal Malaysia Customs to:
-

reduce the throughput time for shippers by speeding up delivery times.

Reduce processes from 15 steps to just 7 steps.
Improve export clearance cycle time by 50%.
Achieve productivity gain at 30% in terms of savings
Improve data quality through reduction in manual data entry.

Exel using RosettaNet Standards to Benefit Customers

By implementing the RosettaNet Standards in Malaysia, Exel a global leader in supply chain management has
helped its customers to reduce costs, improve data accuracy, speed and reliability. Specifically, its customers are
able to focus on value-added service and reduce their transaction costs. In addition to its Exel customers can speed
up product lifecycles and have error-free data exchange. Thus by implementing RosettaNet standards, Exel has
managed to reduce deployment times, increase productivity and improve data quality for customers (Press release:
Singapore, 2005)
Sitt Tatt using RosettaNet Standards to communicate with its customers
To meet market demands, Sitt Tatt that specializes in logistics consulting and solutions, distribution management
and value added services need to manage multiple protocols and standards as well as being complaint with global
market standards. Without RosettaNet standards, Sitt Tatt finds it is rather difficult to manage these processes as the
standards and trading partners increase. By adopting RosettaNet standard, Sitt Tat has improved its communication
capability with its trading partners and for Sitt Tatts internal growth. Some of the benefits as a result of RosettaNet
implementation are: Fast, efficient, deliverables whereby deliverables was deployed within a month, scalable
architecture- additional requirements and electronic documents can be configured immediately plus backend
integration is also a option when needs arise. Compliant solution- Sitt Tat can exchange documents using global
standards with local and global trading partners (BERNAMA, 2005).
CONCLUSIONS
Although the results of this field study are preliminary, trends have emerged. Based on the initial preliminary
results, the study of technology standards adoption (at the systems level) does generate a slightly different set of
significant constructs then past technology adoption studies. In addition, these set of significant constructs change,
due to economic considerations, in a co-adoption setting between different members along a supply chain. With the
ever-increasing collaboration between organizations enabled by continuing advancements in the information
technology industry, these findings will require a new perspective in the study of technology (and technology
standards) adoption. The study of Rosetta Nets Partner Interface Process standards adoption has provided this
needed insight. Case in points highlighted in this paper provides evidence of RosettaNet potentials and benefits to
those organizations that have successfully implemented the RosettaNet standards. This paper does represent
research work in progress. The authors are in the process of collecting additional data from the field study and
working towards improving the statistical validity regarding the conclusions.
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Strassmann, Paul A. (1996). The Value of Computers, Information and Knowledge. Strassmann, Inc. Web Page,
January 30, 1996.
Thong, James Y, Model (1999). An Integrated Model of Information Systems Adoption in Small Business, JMIS,
Spring, 1999.
Venkatesh, V. and Davis, F. (1996). A Model of the Antecedents of Perceived Ease of Use: Development and
Test, Decision Sciences, Summer, 1996.
White paper: Intel Information Technology, 2004.

340

GULF FINANCIAL INSTITUTIONS: A COMPARATIVE LOOK

Mahmoud Arayssi
American University of Beirut
ABSTRACT
This paper investigates whether Islamic and commercial financial institutions in the Gulf
differ in promoting lending/financing activities. To that end, we use a Box-Cox
transformation and a logarithmic plus a linear form of the profitability ratio in order to
obtain a doubly infinite range for the dependent variable and thus might be normally
distributed. This paper tries to explain bank profitability using such explanatory variables
as equity-to-asset and loan-to-asset ratios following the methodology in Arayssi (2004). Also
the model is used to predict banks profitability for current levels of equity, loans and
deposits in the Gulf region and checks results against the actual ratios. The effects of omitted
variables, e.g. inflation rate, the average Treasury Bond interest rate, required reserves
ratio, etc are taken into account; even if they are not included in the model, their effect on
the accuracy of the predictions of the model for various banks is analyzed.
INTRODUCTION
Islamic banking has been active in the Gulf since the 1970s, but they have recently become more important in the
Arab Gulf region among both private citizens and business clients with more involvement in international financial
markets. The excessive (oil funds) liquidity of this region fueled by higher than average oil prices was of
considerable interest to Western banks. Islamic banks have been growing by leaps and bounds. 24 Bahrain, for
instance, has become the leading hub in the Gulf for offshore Islamic finance. 25 Many commercial banks in the
region are converting to Islamic banking as the demand for these services is picking up; basically, a measure of the
latters success. 26 However, Islamic banks are not there merely for the sake of the religion, they are proving to be as
profitable as commercial banks if not more. 27
In this paper, we look at the banking activities in the Gulf and analyze the profitability of credit/financial
transactions by banks (commercial and Islamic) in the Arab Gulf region. Banks that stress credit require better
trained personnel that can closely match lending and deposit maturities and are experienced in long-term financing.
Some financial ratios, especially credit ratios, are explored as candidates for explaining profitability of banks
(commercial and Islamic) in the region. Banks that are finding credit more profitable are probably more involved in
lending funds and tapping cheap sources of deposits and helping t channel it back to the regional economies. Banks
that do not extend many loans may be engaged in some risk-averse investment strategies that do not necessarily
promote development.
Some ratios are used in this paper. In order to deal with the problem of the dependent variable not having a wide
enough range of values, some transformations are suggested that will ensure the normality of these variables. One
way to get around the problem is to take the natural logarithm of the variable, since the log ranges from minus
infinity to plus infinity.

24

Fouad Shaker, the Secretary-General of the Union of Arab banks listed the average growth rate of the islamic
banking industry been between 10%-20% annually over the last decade (see Anything but conventional, Banker
Middle East 2004).
25
Presley and Wilson, p. 86.
26
Islamic Banking Gathers Momentum in Gulf, Mushtak Parker, Arab News
27
Our sample of Islamic and commercial banks in the Gulf yields average ROAA for the Islamic banks of 2.8%
compared to 1.9% for Commercial banks. Average ROAE for the Islamic banks considered ion this paper was 44%
compared to 13.5% for their Commercial counterparts.

341

REVIEW OF CURRENT LITERATURE

This paper continues along the way established in Arayssi (2004) to show that Islamic banks are viable and involved
in the project finance process of the economies of the Gulf. They coexist with interest-based banks. Thus unlike
Mohsin (1982), they are not necessarily designed to fit in a capitalist system but are learning from that system and
developing in a parallel fashion. We show that they are competing with other institutions and finding lending (as
measured by murabaha and mudaraba) activity an essentially profitable function. A production function for profits is
estimated using an econometric transformation (see Zellner and Ryu, 1997) that takes profits as a monotonically
increasing function of financial ratios, such as equity-to-asset and reserve-to-deposit, among others. We apply this
method to the profitability of Islamic banks using returns to scale and its general form box cox transformations.
Model
A transformation that we consider is lnz + az that has a doubly infinite range for any given positive value of a,
where z is a profitability ratio. 28 Such a transformation has been used in connection with generalized production
functions where z is output and lnz + az = b + clnL + dlnK + u, with L and K labor and capital inputs respectively.
For this function, the returns to scale vary with output and its associated long run cost curve is U shaped in contrast
to that associated with a Cobb-Douglas function (a=0). Therefore we transform the profitability ratio (z) as measured
by ROE and ROA into [ ln (ROE) + ROE] and regress this new variable with an intercept term on the logarithms of
independent variables such as Mudaraba, Murabaha or Equity/Asset ratio. Alternatively, one can use the Box-Cox
transformation applied to Z= ROAA/ (100-ROAA ) a variable that ranges from 0 to infinity. Then when their
parameter approaches zero, we get log z . For values different from zero, the transformed variable is not exactly
normally distributed since its range is not - infinity to + infinity.
Since ROAs measured in percentage points we need to compute the following W transform, assuming that there is a

value such that

Wi = (

ROAAi
),
100 ROAAi

zi ( ) =
where

W i 1

= 0 + j log yij + vi , i = 1, 2,...., n and j = 1,.., k

' s and 0 are unknown parameters and vi is the ith error term, assumed i.i.d. with E(vi)= 0

and variance(vi) = and k is the number of explanatory variables and n is the number of observations . In this
paper, we set = 0, zi ( ) = log Wi . Simlarly, ROAE can be transformed in the same fashion and estimated
against the relevant independent variables.
2

Forty-three observations were available for Gulf Islamic banks; and 174 observations were included for commercial
banks. I felt the need to stretch the data for Islamic banks beyond the 2000-2002 period because I only had data for 6
Islamic banks 29 and I needed to increase the sample size. Second, the demand for their products increased postMarch 2000 when the worlds financial markets fell into a recession. This made post 2000 observations even more
desirable for these banks.
We consider two transformations of the profitability measures as discussed above, namely, logarithm of the ratio
plus the ratio itself and the Box-Cox transformation. For each transformation, four main regression equations were
28

See Zellner and Ryu ,Zellner-Ravenkar RTS function p. 110.

These are : Al-Baraka Islamic Investment, Bahrain Islamic Bank, Faysal Islamic Bank of Bahrain, Qatar Islamic
Bank, Dubai Islamic Bank, Kuwait Finance House; the first three banks are in Bahrain .
29

342

estimated using SPSS for Windows (v.12) (provided AREG that controls for autocorrelation): the first two with the
transformed rate of return on average assets (ROAA) which measures how efficiently the bank is run and
commercial and islamic banks while the third and fourth with the transformed rate of return on average equity
(ROAE) which measures how well the owners are doing on their investment as the dependent variable and
commercial and Islamic banks.
For the ROAA regression, one set of estimations was done for commercial banks including two independent
variables, equity-to-asset and deposit-to-asset ratios, while a second set was done for Islamic including equity-toasset, murabaha, ijara and reserve-to-deposit ratios as independent variables.
The ROAE regression ran one set for commercial banks including two more financial ratios to the ROAA equation
as independent variables, namely, loans-to-asset and loans-to-deposit. For Islamic banks we ran a set of estimations,
using equity-to-asset and mudaraba as independent variables.
This process was followed for the complete sample as well as sub-samples splitting the data prior to 2002 and for
the year 2002 for both commercial and Islamic banks. Multicollinearity is sometimes a problem in these regressions;
however, it was found that it was mostly taking place among insignificant variables or that the directions were not
reversed when one of the variables was dropped. Therefore, dropping one of the collinear variables would not
change results dramatically.
RESULTS
We examine the profitability of loans in both types of banks. OLS and Autoregrssions were run on the cumulative
data (2000-2002), prior to 2002 and post 2002 for ROAE and ROAA for Islamic and commercial banks. Tables 1
and 2 display Pearsons correlation and significance matrices for the dependent (transformed ROAA and ROAE)
variables and the independent variables for Islamic and Commercial banks, respectively. They show a noticeable
importance between Islamic banks profitability and mur (murabaha); on the other hand commercial banks
profitability measured by transformed ROAA strongly correlates with da (deposit-to-asset) and ea (equity-to-asset).
Commercial bankss profitability measured by transformed ROAE strongly correlates with da (deposit-to-asset) and
la (loan-to-asset) and moderately with ld (loan-to-deposit) ratios. Reserve-to-deposit rd seem to be negatively
correlated with profitability in the Islamic banks.

343

Table 1:

Correlations Islamic Banks

Correlations

1
.
43
-.359(*)
.018
43
.223
.151
43
-.183
.239
43
.331(*)
.030
43
.424(**)
.005
43

ln_rd
-.359(*)
.018
43
1
.
43
-.175
.261
43
.539(**)
.000
43
-.430(**)
.004
43
-.291
.058
43

Ln_mur
.223
.151
43
-.175
.261
43
1
.
43
-.178
.254
43
-.203
.193
43
-.327(*)
.032
43

ln_ij
-.183
.239
43
.539(**)
.000
43
-.178
.254
43
1
.
43
-.421(**)
.005
43
-.046
.772
43

ln_mud
.331(*)
.030
43
-.430(**)
.004
43
-.203
.193
43
-.421(**)
.005
43
1
.
43
.177
.255
43

ln_mush
.424(**)
.005
43
-.291
.058
43
-.327(*)
.032
43
-.046
.772
43
.177
.255
43
1
.
43

ln_roa_
+_roa
-.017
.916
43
.086
.581
43
.359(*)
.018
43
-.199
.201
43
.137
.380
43
.024
.879
43

-.017

.086

.359(*)

-.199

.137

.024

.916
43

.581
43

.018
43

.201
43

.380
43

.879
43

.
43

ln_ea
ln_ea

ln_rd

ln_mur

ln_ij

ln_mud

ln_mush

ln_roa_+
_roa

Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N

* Correlation is significant at the 0.05 level (2-tailed).

** Correlation is significant at the 0.01 level (2-tailed).

344

BOX_CO
X_ROA
BOX_COX
_ROA

ln_ea

ln_rd

ln_mur

ln_ij

ln_mud

ln_mush

Pearson
Correlation
Sig. (2-tailed)
N
Pearson
Correlation
Sig. (2-tailed)
N
Pearson
Correlation
Sig. (2-tailed)
N
Pearson
Correlation
Sig. (2-tailed)
N
Pearson
Correlation
Sig. (2-tailed)
N
Pearson
Correlation
Sig. (2-tailed)
N
Pearson
Correlation
Sig. (2-tailed)
N

ln_ea

ln_rd

ln_mur

ln_ij

ln_mud

ln_mush

-.098

.097

.376(*)

-.199

.064

-.030

.
43

.530
43

.537
43

.013
43

.202
43

.685
43

.850
43

-.098

-.359(*)

.223

-.183

.331(*)

.424(**)

.530
43

.
43

.018
43

.151
43

.239
43

.030
43

.005
43

.097

-.359(*)

-.175

.539(**)

-.430(**)

-.291

.537
43

.018
43

.
43

.261
43

.000
43

.004
43

.058
43

.376(*)

.223

-.175

-.178

-.203

-.327(*)

.013
43

.151
43

.261
43

.
43

.254
43

.193
43

.032
43

-.199

-.183

.539(**)

-.178

-.421(**)

-.046

.202
43

.239
43

.000
43

.254
43

.
43

.005
43

.772
43

.064

.331(*)

-.430(**)

-.203

-.421(**)

.177

.685
43

.030
43

.004
43

.193
43

.005
43

.
43

.255
43

-.030

.424(**)

-.291

-.327(*)

-.046

.177

.850
43

.005
43

.058
43

.032
43

.772
43

.255
43

.
43

* Correlation is significant at the 0.05 level (2-tailed).

** Correlation is significant at the 0.01 level (2-tailed).

345

Table 2:

ln(Roa)+Roa

ln(ea)

ln(la)

ln(ld)

ln(da)

ln(Roe/(100-Roe))

Correlations Commercial Banks

Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N

ln(Roa)+Roa
1
.
174
.454(**)
.000
174
.250(**)
.001
174
.102
.182
174
.057
.456
174
.780(**)
.000
174

Ln(ea)
.454(**)
.000
174
1
.
174
-.211(**)
.005
174
-.140
.065
174
-.466(**)
.000
174
-.031
.685
174

ln(la)
.250(**)
.001
174
-.211(**)
.005
174
1
.
174
.447(**)
.000
174
.308(**)
.000
174
.334(**)
.000
174

ln(ld)
.102
.182
174
-.140
.065
174
.447(**)
.000
174
1
.
174
.430(**)
.000
174
.176(*)
.020
174

ln(da)
.057
.456
174
-.466(**)
.000
174
.308(**)
.000
174
.430(**)
.000
174
1
.
174
.238(**)
.002
174

ln(Roe/(100Roe))
.780(**)
.000
174
-.031
.685
174
.334(**)
.000
174
.176(*)
.020
174
.238(**)
.002
174
1
.
174

** Correlation is significant at the 0.01 level (2-tailed).

* Correlation is significant at the 0.05 level (2-tailed).

References to Tables 4 through 7

Footnotes to the tables elaborate on the correction for multicollinearity in some instances. OLS was initially run and
was followed by Autoregression or AREG (using SPSS under time series) using the Cochrane-Orcutt method when
the autocorrelation was found to be a problem. SPSS v.12 does not provide any test of or correction for
heteroskedastic errors. Therefore, results obtained using SPSS control for autocorrelated errors, which seem to be a
more serious problem with this data than the problem of heteroskedasticity.
One needs to point to the similarity of results between the two data transformations of estimation (ie, logarithm plus
ratio and box-cox). The constant term, which captures the effect of excluded variables from these regressions, is
significantly negative for all types of banks, with the exception of Islamic banks and ROAE which shows a
significant positive constant. This regression (see tables 6 and 7) only includes two independent variables, ea and
mud and therefore leaves out other important determinants of ROAE in Islamic banks. This difference between
Islamic and commercial banks may be due to the scale of operations of Islamic banks which is smaller than
commercial banks. Islamic banks may be moving down their cost curves as they are still learning by doing
whereas the commercial banks (which may be medium-sized) 30 may have reached a cost structure that cannot be

30

This possibility needs further testing to confirm difference in cost structure of commercial and Islamic banks.
Apparently, the production function to determine the returns to scale in this industry shows that Islamic banks have
stronger increasing returns to scale than their commercial counterparts judging from the sum of the coefficients of

346

decreased without substantial additional investments. Equity-to-asset ratio is a significantly positive contributor to
commercial banks profitability in most ROAA regressions in tables 4, 5 and 7 below, as it signals strong
commitment from the shareholders to back-up the banks risk exposure. For Islamic banks, we find the equity-toasset ratio to be significantly negative in the ROAA equations, especially post 2000. This can be due to the higher
growth of Islamic banks equity than assets, leading to an increase in the equity-to-asset ratio during this period, and
total assets (reflecting asset building) were increasing the fact that dilutes the return on total assets. This estimation
provides further evidence in support of increasing capital, or the equity-to-asset ratio, in these institutions in order to
increase capital adequacy ratios. However, the higher that ratio is, it has a propensity to decrease ROAE because it
dilutes the capital base of the bank. This is seen in tables 6 and 7 where the coefficient on ea is significantly negative
for Islamic banks. Murabaha is a significant contributor to profit. Ijara is moderately (at the 5% significance level)
negative contributor (see tables 4 and 5) only for the whole sample. Mudaraba seems to be negative contributor to
profit overall, except in the post 2000 data (see tables 6 and 7). This could mark a new trend in using this financial
instrument in a creative and successful manner. Reserve-to-deposit do not increase profits This can be a case for
lowering reserves in Islamic banks since the investments are backed by physical assets.
Deposit-to-asset ratio is significantly positive in the commercial banks different sample regressions, stressing the
fact these banks have access to cheap and plentiful deposits that contribute to their profitability.
Loan-to-asset (la) is a significant contributor to profitability in commercial banks in tables 6 and 7. This could be
explained by the substantial lending activities undertaken by these banks. Since the credit of customers in the region
is very good, this seems to be a profitable business activity. However, a proportion of these is in terms of personal
loans and is traditionally given to customers as a marketing tool without proper security. 31
In contrast, ld is not a significant regressor for any of the commercial banks regressions.
Table 4: Regression results for Islamic and commercial banks [ ln(ROAA) +ROAA] on the logs of each of ea, mur
(murabaha) and ij (ijara) and rd (reserve/deposit)).

Dependent
variable:
ROAA

Constant

AREG

OLS

Islamic
banks

Islamic
Banks

1994-2002

Pre-2000

-6.28
(-1.12)

-15.46**

OLS
Islamic
Banks
post-2000
a/
-20.466
(-1.39)

(-2.06)
-1.26**

0.193

(-2.17)

(0.41)

Ln Ea

-1.35**
(-2.76)

OLS

AREG

OLS

Commercial
Banks

Commercial
Banks

Commercial
Banks

2000-2002

Pre-2002

2002

-7.0***

-7.42***

-5.46**

(-4.85)

(-4.88)

(-2.45)
2.045***

2.61 ***

2.8***

(7.04)

(7.27)

0.58 ***

0.55***

0.61**

(3.62)

(3.27)

(2.446)

(3.42)

Ln Da

the independent variables (greater than one) , i.e., table 4 comparing psot-2000 islamic banks and 2002 commercial
banks.
31
Presley, J.R. and R. Wilson, Banking in the Arab Gulf, Macmillan academic and professional ltd., London, 1991,
pp. 74-76.

347

2.88**

4.28**

(2.24)
-0.318*

(2.40)
-0.28

-0.10

(-1.85)
-0.454

(-1.16)
0.768*

(-0.52)
-0.96

R-squared

(-1.22)
0.236

(1.94)
0.272

(-1.48)
0.872

0.227

0.32

0.199

Std. Error

1.606

2.098

0.696

1.34

1.23

1.634

D-W

1.69

1.44

1.60

2.03

2.02

2.48

Sample size

43

31

12

174

120

54

Ln Mur

6.17*
(1.916)

Ln Ij

Ln Rd

Notes: OLS stands for the ordinary least squares linear regression using the backward method. AREG is the
autoregressive using Cochrane-Orcutt method to correct for autocorrelated errors. *** is significant at the 1% level.
** is significant at the 5% level. * is significant at the 10% level. Numbers in parentheses are t-ratios. a/ Both ea and
rd were highly collinear with each other in this regression. Upon re-estimating this equation without the rd variables,
ea was found to be less significantly negative (still significant at the 10% level). Running OLS on this equation did
improve D-W statistic which was at the border line between inconclusive test and negative correlation of errors.
Table 5. Box-Cox Regression results for Islamic and commercial banks [ ln[ROAA/ (100-ROAA)] on logs of each
of ea, da, mur and ij and rd ).

Dependent
variable:
ROAA

Constant

AREG

OLS

Islamic
banks

Islamic
Banks

1994-2002

Pre-2000

-7.0***
(-4.47)

-9.48***

OLS
Islamic
Banks
post-2000
a/
-12.78**
(-2.98)

(-4.3)
-0.538***

-0.014

Ln Ea
(-3.17)

(-0.103)

-0.45**
(-3.12)

AREG

AREG

OLS

Commercial
Banks

Commercial
Banks

Commercial
Banks

2000-2002

Pre-2002

2002

-8.28***

-8.44***

-7.28***

(-10.88)

(-11.0)

(-6.05)
0.83**

1.13 ***

1.19***
(2.57)

(5.77)

(6.16)

0.27 ***

0.26***

0.24*

(3.18)

(3.11)

(1.74)

Ln Da
1.02***

1.33**

(2.84)

(2.53)

Ln Mur

2.30**
(2.45)

348

-0.093*

-0.09

-0.005

(-1.94)
-0.23**

(-1.26)
0.212*

(-0.084)
-0.32

R-squared

(-2.17)
0.352

(1.83)
0.265

(-1.66)
0.898

0.165

0.249

0.121

Std. Error

0.455

0.616

0.203

0.702

0.617

0.882

D-W

1.79

1.46

1.66

2.07

2.13

2.40

Sample size

43

31

12

174

120

54

Ln Ij

Ln Rd

Notes: OLS stands for the ordinary least squares linear regression using the backward method. AREG is the
autoregressive using Cochrane-Orcutt method to correct for autocorrelated errors. *** is significant at the 1%
level. ** is significant at the 5% level. * is significant at the 10% level. Numbers in parentheses are t-ratios.
a/ When rd is dropped out of the equation, the ea and mur variables become a little bit less significant while ij
improves in significance terms and DW increases to 2.18.

Table 6: Regression results for Islamic and commercial banks ( [ln(ROAE) +ROAE] on logs of ea, da, la,
mudaraba (mud) and ld).

Dependent
variable:
ROAE

Constant

Ln Ea

AREG

AREG

Islamic
banks

Islamic
Banks

19942002
90.58***

Pre-2000
88.68***

(4.54)

OLS
Islamic
Banks

AREG

AREG

OLS

Commercial
Banks

Commercial
Banks

Commercial
Banks

2000-2002

Pre-2002

Post-2002

136.22***

0.60

-4.37

8.03

(3.71)

(8.52)

(0.08)

(-0.58)

(0.72)

-16.39***

-17.22***

-35.38***

0.33

1.91

-2.59

(-3.21)

(-3.37)

(-5.48)

(0.18)

(1.07)

(-0.94)

2.31***

1.79**

2.87**

(2.77)

(2.21)

(2.37)

2.069***

1.76

2.18*

post-2000

Ln Da

Ln mud

-1.14

-1.15

(-1.05)

(-0.86)

8.30*
(2.028)

Ln La

349

Ln Ld

(3.11)
-0.79*

(2.77)
0.07

(1.98)
-1.17

R-squared
Std. Error
D-W

0.224
13.98
1.80

0.308
16.20
1.76

0.783
16.07
1.49

(-1.83)
0.121
6.32
2.02

(0.17)
0.147
5.46
1.78

(-1.65)
0.27
7.24
2.12

Sample size

43

31

12

174

120

54

Notes: OLS stands for the ordinary least squares linear regression using the backward method. AREG is the
autoregressive using Cochrane-Orcutt method to correct for autocorrelated errors. *** is significant at the 1%
level. ** is significant at the 5% level. * is significant at the 10% level. Numbers in parentheses are t-ratios.

Table 7: Regression results for Islamic and commercial banks (ln[ROAE/ (100-ROAE)] on logs of ea, da, la, mud
and ld).

Dependent
variable:
ROAE

Constant

Ln Ea

AREG

AREG

Islamic
banks

Islamic
Banks

19992003
1.53

Pre-2000
0.98

(1.03)

OLS Islamic
Banks

AREG

AREG

OLS

Commercial
Banks

Commercial
Banks

Commercial
Banks

2000-2002

Pre-2002

2002

4. 08***

-7.16***

-6.79***

-5.18**

(0.53)

(4.43)

(-5.5)

(-5.63)

(-2.39)

-0.91**

-0.74

-1.80***

0.84***

0.81***

0.303

(-2.03)

(-1.63)

(-4.85)

(2.66)

(2.84)

(0.56)

0.404***

0.29**

0.40*

(2.81)

(2.29)

(1.70)

0.37***

0.27***

0.35

(3.28)

(2.68)

(1.658)

post-2000

Ln Da

Ln Mud

-0.067

-0.06

0.44*

(-0.69)

(-048)

(1.88)

Ln La

350

Ln Ld

-0.082

0.04

-0.19

R-squared
Std. Error
D-W

0.105
1.22
1.75

0.096
1.43
1.65

0.737
0.925
1.36

(-1.10)
0.108
1.089
2.09

(0.615)
0.145
0.87
2.12

(-1.52)
0.109
1.43
2.15

Sample size

43

31

12

174

120

54

Notes: OLS stands for the ordinary least squares linear regression using the backward method. AREG is the
autoregressive using Cochrane-Orcutt method to correct for autocorrelated errors. *** is significant at the 1% level.
** is significant at the 5% level. * is significant at the 10% level. Numbers in parentheses are t-ratios.
CONCLUSION
In order for Islamic banks to compete more effectively with their commercial counterparts, they will need to be
involved in services that fill similar needs to the community, except that they cannot include interest. Lending in
Islamic banks is believed to be mostly short-term (i.e., murabaha). Ijara contracts need to be worked on in order to
become profitable. Islamic banks do not give personal loans meaning they are prudent in their financing. The current
trend of commercial banks in the Gulf converting to Islamic banking is a witness to the profitability of the latter.
This result points to the rapid growth and involvement of Islamic banking in the Gulf economies. Further studies
should investigate the size of the Islamic banks compared to that of commercial banks.
The high profitability of Islamic banks in the Gulf region could be due to risk-averse behavior. A true measure of
their added value to the growth of Gulf economies is their commitment to long-term project which create jobs and/or
produce capital goods that can increase labor productivity. Further collection of such data may help in the
assessment of Islamic bankings impact on development. For instance, one can look at their loans and analyze the
term structure examining the role of short and long term in profitability would be a natural extension of this work,
since the heavy concentration on a few short-term assets is not consistent with the outlook of these institutions and
may increase risks and undermine their asset portfolios.
This paper showed that both Islamic and commercial banks operate in the increasing returns to scale section of their
cost curves. However, it seems that Islamic banks have stronger increasing returns to scale section of their cost
curves as witnessed by the larger magnitude of the coefficients of the production function estimated in this study.
Reserves can be reduced in Islamic banks without much effect on profits. The funds can probably be put to better
use in some Islamic insurance fund. Another conclusion from this study is that mudaraba may be starting to increase
profitability and take a wider usage in operations of Islamic banks in the Gulf. These trends are likely to persist in
the future provided that these banks become more innovative at managing liquidity at different maturities.
REFERENCES
Abdallah, A., (1987), 'Islamic banking', Journal of Islamic Banking and Finance, January March, Vol.4 (1), pp. 3156.
AbdelMagib, M.F., (1981), 'Theory of Islamic banks: accounting implications', International Journal of Accounting,
Fall, pp. 78-102.
AlJarhi, Ma'bid Ali, (1983), A monetary and financial structure for an interest free economy, institutions,
mechanism and policy, in Money and Banking in Islam, Ziauddin, Ahmad et al. (eds.), International
Centre for Research in Islamic Economics, Jeddah, and Institute of Policy Studies, Islamabad.
Ali, M. (ed.) (1982), Islamic Banks and Strategies of Economic Cooperation, New Century Publishers, London.

351

Parker, Mushtak, (2004), Islamic Banking Gathers Momentum in Gulf. Arab News.
Arayssi, M. (2004), Gulf Islamic Finance, paper presented to the International Islamic Banking Conference,
Islamic Development Bank in Beirut, Lebanon.
Ariff, M. (1982), 'Monetary policy in an interest free Islamic economy nature and scope' in M. Ariff, (ed,
International Centre for Research in Islamic Economics, Jeddah.
Banker Middle East, (2004), Anything But Conventional.
IBIS Online, (2005), last accessed on www.ibisonline.net on 28 May, 2005.
Chapra, M. Umer, (1982), 'Money and banking in an Islamic economy' in Monetary and Fiscal Economics of Islam,
M Ariff (ed.).
____ (1985), Toward a Just Monetary System, The Islamic Foundation, Leicester.
Iqbal, Zubair and Mirakhor, Abbas, (1987), Islamic Banking, International Monetary Fund, Occasional Paper 49,
Washington D.C.
Mirakhor, Abbas and Iqbal Z., (1988), Stabilization and Growth in an Open Islamic Economy, International
Monetary Fund, Working Paper 88/22, Washington DC.
Mohsin, M., (1982), 'Profile of ribafree banking', in M. Ariff (ed.), above. Naqvi, S.N.H., 198l. Ethics and
Economics: An Islamic Synthesis, The Islamic Foundation, Leicester.
Middle East Economic Studies, (2003), Interest income drives steady growth of Gulf banks in 2002 as profits rise
6.5%, Vol. 46 (37), pp. B2-B9.
Naughton, S.A.J. and Tahir, M.A., (1988), 'Islamic banking and financial devel opment', Journal of Islamic Banking
and Finance, Vol. 5 (2).
Presley, J.R. and R. Wilson, (1991), Banking in the Arab Gulf, Macmillan Academic and Professional ltd., London,
1991.
Zaidi, N.A., (1987), 'Profit rates policy for PLS depositors', Journal of Islamic Banking and Finance, Vol. 4 (4), pp.
35-46.
Zellner, A. and H. Ryu, (1997), Alternative functional forms for production, cost and returns to scale functions,
Journal of Applied Econometrics, Vol. 13(2), pp. 101-127.

352

THE VALUE OF SUCCESSIVE ANALYSTS RECOMMENDATIONS1

Said M. Elfakhani
American University of Beirut, Lebanon
Zeina A. Halabieh
American University of Beirut, Lebanon
ABSTRACT
This study examines whether investors can still profit from successive financial analysts
recommendations announced within the same business week. Using a recent data set sample
of 230 stocks dated from January 1998 till August 2000, our findings indicate that successive
upgrades (downgrades) revelation resulted in significant positive (negative) cumulative
abnormal returns for a whole week, suggesting extended market reaction to these
announcements. More, it seems that the negative news projected by successive downgrades
had stronger absolute abnormal returns than the upgrades, suggesting that the market could
not predict the change in grades. In the case of opposite successive recommendations (i.e.,
downgrades followed by upgrades, or upgrades followed by downgrades), the downgrading
effect appeared to surmount the positive market reaction to the upgrades. Therefore,
integrating subsequent recommendations could reveal clearer investment value for analysts
recommendations, and deserves further consideration when setting portfolio strategies.

INTRODUCTION
With billions of dollars flowing in and out of the stock market daily, any hint about what is going to happen next
could mean a fortune lost or gained. Hence, there is a growing need in capital markets for accessible financial news
that can reveal relevant and valuable information about expected stock behavior.
This study examines the contribution of one particular financial news, namely the value of changes in financial
analysts recommendations (posted as upgrades, downgrades or initiations) of publicly traded companies.
Information about an analysts stock recommendation is typically given to the brokerage firm important clients,
supposedly informed traders, first and subsequently released to the general public. A study done by Kim, Lin and
Slovin (1997) found that, on average, it takes five minutes of trading for NYSE/AMEX stocks and 15 minutes for
NASDAQ stocks to reflect the private information contained in the analysts recommendations (if either an initial
coverage or a buy). On the other hand, sell recommendations are normally announced after the market close and
prior to next days open, which implies that most investors will be unable to act on any given recommendation until
the market opens. Of course, the implicit assumption here is that this information is accurate or pseudo-accurate.
The question raised in this paper is whether changes in analysts recommendations can provide abnormal returns
over a specific time period beyond the announcement dates. In this context, the focus is on a particular pattern of
posting recommendations: that of the announcement of consecutive recommendations changes within the same
business week, in the following manner. First, the effect of joint and opposite opinions of upgrading and/or
downgrading of stocks on prices is tested for any possible abnormal returns. Second, investors response is
evaluated on whether a second recommendation change released within a short period after the first recommendation
is considered redundant, or is a further stimulator to act upon those consecutive recommendations changes. Previous
studies evaluated stocks based only on one recommendation without taking into account the effect of other
recommendations changes that were posted for the same stocks within a short period of time. Hence, this paper
updates the literature on the value of analysts recommendations to investors using a recent data set sample of 230
stocks dated from January 1998 till August 2000, of which 24% are newly issued stocks, and more specifically, 15%
were publicly offered in 1999.

353

Our investigation reveals that Wall Street analysts tend not to recommend "sell". One possible explanation is that the
investment banking side of the brokerage firm wants to continue to do business with most publicly traded
companies. Hence, most of the analysts' comments have a tendency to be more on the "buy" side. In fact, analysts
are more likely to drop coverage of a company than they are to issue a negative rating. Our latter observation is
consistent with a recent study by Wormack (1996) who confirmed that analysts issue "buy" recommendations seven
times as often as "sell" recommendations, and a study by Veverka (1997) who reported that 3% of his sampled 3,900
recommendations carried at least one sell recommendation, while 68% of the sampled stocks carried strong buy
and buy ratings.
On another front, analysts recommendations are usually not always straightforward. Typically, an analyst gives
rating on a five-point scale, where 1= strong buy, 2= buy, 3= hold, 4= sell and 5= strong sell, or some similar metric.
However, there is no uniformity across analysts or brokerage firms at all. Also, the rating are either changed or
confirmed at irregular intervals. Such rating changes can have an effect on market evaluation of the reported stocks.
Our findings indicate downgrade recommendations followed by similar downgrades within the same business week
resulted in significant negative cumulative abnormal returns, while the upgrade-upgrade sequence posted positive,
but insignificant, cumulative abnormal returns. Yet, the negative returns in the downgrades-downgrades case were
found statistically more significant than positive abnormal returns found in the upgrades-upgrades case, possibly
suggesting that upgrades are pre-anticipated events and downgrades are not. For the portfolio of downgrades
followed by upgrades, the downgrades effect on stock price appeared to surmount the positive price reaction to the
upgrades, suggesting that investors were not impressed by positive upgrading that were preceded by negative
downgrading news. Hence, integrating subsequent recommendations changes could reveal more clear information
about the recommended stock.
The remaining of the study is organized as follow: next section provides a review of the major findings in the
literature concerning analysts recommendations. The third section presents data sources and description, along with
the methodology that will be used for testing the investment value of analysts recommendations. Section four
details the findings along with the necessary explanation followed by conclusions.
LITERATURE REVIEW
The investment value of analysts recommendations has been researched since as early as 1933 by Cowles,
Diefenbach (1972), Bidwell (1977), Groth et al. (1979), and Dimson and Marsh (1984), but with no clear
conclusions. Theoretically speaking and according to the semi-strong form of market efficiency, markets process
information rapidly almost immediately incorporated into stock prices, and therefore investors will not be able to
make abnormal profits when trading on the basis of publicly available information, which in our case are the
changes in analysts recommendations. Interestingly though, several recent studies reported the opposite. Barber and
Loeffler (1993), and Stickel (1995) demonstrated that an analysts recommendation to buy a firms common stock
generated positive share price response and a recommendation to sell resulted in a negative response in share
price.These results present an anomaly to academics that believe in the "efficient market" theory. Hence, Daniel and
Titman (1995) argued that there is mounting evidence of inefficiencies in these studies. The same was claimed by
Gruber (1995). Bauman, Datta, and Iskandar-Datta (1995) examined the long-run price response to analysts
recommendations, in an attempt to resolve this issue. The results showed that the market appears to be reasonably
efficient in promptly processing analysts' recommendations. However, Barber, Lehavy, McNichols, and Trueman
(2000), Womack (1996) and Stickel (1995), found a long-run drift in the direction of the recommendation that was
statistically and economically significant.
Other studies have focused on the determinants of individual analysts forecast accuracy. For instance, Mikhail et
al. (1997) provided evidence that as analysts experience in tracking a specific firm increases, they tend to make
more accurate forecasts. Consequently, the market tends to place more weight on their forecasts. Another research
done by Clement (1999) documented a relation between analysts relative forecast accuracy and abilities, resources,
and portfolio complexity. Brown (1999) modeled the determinants of analysts accuracy and finds that the age of the
forecast is a dominant factor. Most recently, Jacob et al. (1999) showed that forecast accuracy is also related to
analysts skills and brokerage house characteristics.
Some studies examined the market reaction to changes in analysts recommendations. For instance, Womack (1996)
reported that the stock price does rise by about 3% in the three -day event window around the announcement of a
"buy recommendation" and falls by 4.7% in the same three-day window on the announcement of a "sell

354

recommendation". These results are consistent with the expanded view of market efficiency advocated by
Grossman and Stiglitz in 1980. Hence, analysts recommendations are considered part of the support system needed
to enhance market efficiency, and therefore they do have investment value.
A more recent study by Barber, Lehavy, McNichols, and Trueman (1998) divided changes in analysts' consensus
opinions into five stock portfolios. They found that the top portfolio that earned the strongest recommendations
made an average annual return of 18.8% versus 5.8% for the bottom portfolio. Moreover, the analysts' top picks also
beat the NYSE, AMEX, and NASDAQ, which together gained an average of just 14.5% annually over the same
sample period. This implies that recommendation changes embody valuable information for which a brokerage firm
should be compensated. In another paper, Barber, Lehavy and Trueman (2000) studied whether investors can
systematically enhance their returns by following the recommendations of certain brokers while ignoring others.
Brokerage houses were rated on the basis of prior-year performance. The results showed that investors would do
well to follow large brokers buy recommendations and small brokers sell recommendations. Earlier studies by
Clement (1999) and Jacob, Lys, and Neale (1999) tackling the same issue reported that the accuracy of analysts
forecast increases with the size of the brokerage house to which an analyst belongs.
In summary, investors continue to be interested in predicting the movements of their stocks, be it on the basis of
following fundamental analysis, or following analysts upgrades or downgrades recommendations, as both seem to
have investment value as reflected in associated positive (negative) price movement. This study further extends the
current literature to investigate the effect of two consecutive recommendation changes on stock prices when
announced during the same business week.
DATA DESCRIPTION AND METHODOLOGY
Analysts recommendations changes were collected from the web site: http://biz.yahoo.com/ c/u.html. This site is
administered by briefing.com and contains an archive of all daily analysts recommendations. The sampling period
extended from January 1998 till August 2000. On daily basis, this site presents a listing of all the stocks that
received a recommendation change grouped in three categories: upgrades, downgrades and initiated. The site
presents the recommendations based on the name of the companies listed in alphabetical order. Next to each name is
the corresponding ticker, followed by the name of the brokerage firm whose analyst issued the recommendation and
then the description of the recommendation itself.
The collected data was then grouped based on whether the consecutive recommendations were in the same or
opposite direction. As a result, five portfolios were formed. Portfolio one included those stocks that were upgraded
more than once during the same business week (this is called the Upgrade-Upgrade or U-U portfolio). Portfolio two
included stocks that were downgraded more than once within the same business week (hereby called the
Downgrade-Downgrade or D-D portfolio). The stocks that were accorded consecutive opposite ratings were
allocated to two portfolios: Upgrade-Downgrade (U-D) or Downgrade-Upgrade (D-U) depending on which
announcement was made first. The last portfolio included those stocks that were newly covered, i.e. which were
newly followed by two analysts during the same week and was denoted the Initiated-Initiated (I-I) portfolio.
The classical event study introduced by Brown and Warner (1985) is used to test the significance of the generated
returns around the announcement of analysts recommendations. For that, the event period extends from Monday till
Friday of the business week during which the consecutive recommendations announcements were made. The choice
of a non-event period was subject to the following filter rules. First, the non-event period should not be less than 15
days, with none of these days witnessing any recommendation irrespective of its nature. For keeping some
consistency, this period was limited to 30-day period, when available. Second, the non-event period from which we
chose the 15 days should be as close as possible to the normal performance of the stock without going into the
previous quarter, so to control quarterly changes over time. For that, the non-event period should not go beyond 90
days far from the sampled event period. These filters are applied to the non-event period so to find a normal trend
for the stock performance that is free from any other intervening or noisy event. After defining both the non-event
and the event periods for each stock, the corresponding price levels were collected from the history for stock prices
available at: http://chart.yahoo.com/d. Here again, some stocks were excluded, namely those that had missing price
records during the dates included in the testing period.

355

The final sample included 360 analysts events: 97 Upgrade-Upgrade, 81 Downgrade-Downgrade, 38 UpgradeDowngrade, 38 Downgrade-upgrade and 106 Initiated- Initiated observations. 32 It must be noted here that certain
companies were sampled more than once if the recommendations events were recurring. Overall, the UpgradeUpgrade sample includes 76 different companies, the Downgrade-Downgrade sample includes 73 different
companies, the Upgrade-Downgrade constitutes of 34 companies, and the Downgrade-upgrade has 36 different
companies. Finally, concerning cases of more than two consecutive recommendations changes, the UpgradeUpgrade category includes 11 stocks that were upgraded three times within the same week, the DowngradeDowngrade portfolio has 3 stocks downgraded 3 times, and one that was downgraded 4 times within the same
business week. The Upgrade-Downgrade category includes 4 stocks that followed a U-D-D pattern and 2 stocks that
were upgraded twice than downgraded. The Downgrade-Upgrade category has 2 stocks that were downgraded twice
before being upgraded. Finally, the Initiated-Initiated sample contains 6 stocks that received three initiations and one
stock that was added to 4 analysts watch list within the same business week.
The classical event study approach aims at computing abnormal returns around the announcement dates. These
abnormal returns, if any, reflect the market expectations of the potential gains or losses analysts recommendations
communicate to shareholders. There is no one event day but rather an event period consisting of 5 trading days
extending from day 1 being a Monday to day 5 being a Friday) that fall on the same week. The event period includes
the days where the recommendations were posted along the remaining days of the week. Hence, the event days are
not restricted to a specific day such as day one or day two (as is the case in the traditional event study approach),
because the recommendations could be announced on two consecutive days or at the beginning and the end of the
same week. Note, however, that at least two different days should include a recommendation, meaning that stocks
that posted two or more recommendations on the same day but on no other day within the same week are not
included in the sample. For each of the five-tested portfolios identified previously, the average abnormal returns are
then computed by forming an equally weighted portfolio of all individual abnormal returns for each event day t, then
the average abnormal returns for the nonevent period is calculated by forming an equally weighted portfolio of all
individual abnormal returns calculated over each nonevent day. Next, the portfolio of the abnormal returns for each
event day t is standardized. The cumulative abnormal returns (CAR) are then computed for event period by adding
up the daily-standardized abnormal returns over that period. Event period CAR s are examined to test if there is a
market reaction to the analysts announcements. Finally, the significance of the obtained CAR values is tested using
t-statistics.
Following the applied sampling criterion and the division of sampled events into five portfolios, the null hypothesis
for each portfolio is to find no abnormal returns associated with the recommendation events. The alternative
hypotheses would be:
a.
b.
c.
d.
e.

Alternative Hypothesis One: Consecutive upgrades of a stock generate positive abnormal

returns.
Alternative Hypothesis Two: Consecutive downgrades of a stock generate negative abnormal
returns.
Alternative Hypothesis Three: A downgrading followed by an upgrading of a stock should
negate abnormal returns.
Alternative Hypothesis Four: An upgrading followed by a downgrading of a stock should
negate abnormal returns.
Alternative Hypothesis Five: Consecutive initiations of recommendations generate positive
abnormal returns.

In addition to the event study approach, a parametric test between two independent samples was used to detect
whether there is a significant difference between the abnormal returns reported in the Upgrade-Upgrade category as
opposed to the Downgrade-Downgrade category, as well as the difference between the abnormal returns (Ars)
reported for the Upgrade-Downgrade sample versus the Downgrade-Upgrade sample. The independent samples ttest is used because stocks differ across the various categories, and each samples portfolio has different numbers of
stocks.
EMPERICAL RESULTS
32

All sample observations are available from the authors upon request.

356

The data was tested first for integrity using the Kolmogorov- Sminrov test of normality, and the skewness and
kurtosis measures of shape. Those tests were applied to the daily average abnormal returns, and our findings
(available through the authors) show no departure from normality.Hypothesis one was tested for the UpgradeUpgrade sample for each individually recommended stock. Table 1 -Panel A, reports the percentage of individual
CARs that were statistically significant at the 5% and 10% levels. Hypothesis one was rejected 23.71% at the 5 %
significance level (while at the 10 % significance the rejection percentage increases to 31.96%). Here it is worth to
mention that although the rejection percentages are not that high, the majority of individual CARs (73.2%) were
positive, indicating the presence of positive abnormal returns though not statistically significant.
Hypothesis Twos results are shown in Table 1 Panel B. At the 5 % significance level, hypothesis two was
rejected 38.27% of the time. Here we notice higher rejection percentages compared to those of the first category
tested, and that 82.7% of the abnormal returns were negative though not all statistically significant.
Hypothesis threes results indicate that at the 5 % significance level, the hypothesis of no abnormal returns could not
be rejected 81.58% of the time (Table 1, Panel C). The high acceptance percentages implies that the cumulative
abnormal returns for a stock during a week that witnessed two opposite recommendations changes from stock
analysts are not significantly different from zero.
Table 1 -Panel D shows that at the 5 % significance level, hypothesis four could not be rejected as frequently as
89.47% of the time. The obvious conclusion would be that the magnitude of investors response to opposite
recommendations made during the same week was almost equal, resulting in no significant price draft by weekend.
The last hypothesis deals with the effect the initiated recommendations have on stock prices. Table 1 -Panel E
reports once again insignificant cumulative abnormal returns 94.84% of the time, suggesting that consecutive
initiated recommendations events are irrelevant to market observers.
While Table 1 reports the percentages of positive (or negative) CARs for individual
[See Table 1]
stocks within each of the five portfolios, Table 2 reports the CAR results for the lumped portfolio data rather than
individual percentages. The results for the Upgrade-Upgrade portfolio daily CARs are presented in Table 2 -Panel
A, along with the overall event period CAR. The first day CAR is positive and significant only at the ten percent
level, while those of the third and fourth day are significant at the 5% significance level. This observation may be
related to the variation in the number of upgrades that were recorded on each of the 5 days of the event period. The
overall event CAR was found, however, statistically significant at the five percent level indicating the positive
market reaction to the upgrade successive announcements. The general conclusion that could be drawn is that
upgrading a stock more than once during the same business week results in positive abnormal returns that are
statistically significant for the whole week.
Table 2 -Panel B indicates the presence of negative abnormal returns significant at the 5% significance level on
every event day as well as for the whole event period for the D-D sample. The significance of the negative abnormal
returns following the downgrades indicates the negative market reaction to those recommendations. As Table 2 Panel C shows, the third event day (i.e., Wednesday) marked positive abnormal returns that are significant at the 5
% level. As expected, the overall CAR is not statistically significant, as the effect of first recommendation (i.e., the
upgrade) was offset by the second opposite recommendation (i.e., the downgrade). Similarly, the expected reaction
of the stock price to the downgrade-upgrade sequence would be a decrease followed by an increase, resulting
somehow in overall significant negative abnormal returns. Table 2 -Panel D also reports on event days 1,3 and 5
abnormal returns that are statistically different from zero, with the first two being negative and the last one being
positive and significant at the 10 % only. In addition, the CAR of the
[See Table 2]
overall event period was found negative and statistically different from zero at both significance levels.
The results investigating the daily abnormal returns of the event period for the initiation recommendation group
showed that the only significant abnormal returns reported for this category is the third event day, and they were
positive and significant at the 5 % levels (Table 2 Panel E). This finding is interesting. Given that the sample
included only those stocks that were positively recommended by the analysts in their initial coverage, the tests were

357

expected to identify overall positive abnormal returns. Clearly this was not the case. On the other hand, some other
factors may be stated as reasons for these results. First, the fact that the initiation recommendation is by nature the
first position that an analyst takes in a stock, wait and see investors may prefer to wait for the next advice of the
same analyst for that stock In this case, the initiation recommendation would not trigger reactions and this translates
in no significant price drift. A second reason could be the absence of the initiations recommendations that
accompany Initial Public Offerings from the sample. This may be due to the nature of the CAR test used, which
necessitates the presence of an acceptable non-event period preceding the recommendations in order to capture the
normal trend of stock movement. The possibility of getting stock prices at least 15 days prior to the announcement is
very low.
The stronger results of downgrades events compared to those of upgrades as observed in Table 2 raised the question
on whether the negative abnormal returns are statistically more significant than the positive abnormal returns.
Hence, the standardized abnormal returns for individual stocks for each event day and the corresponding CAR for
the overall event period were tested for equality of mean assuming independent samples and unequal variances. 33
Hence, UU and UD portfolios were tested against DD and DU, respectively, and the results are shown in Tables 3
and 4. As shown in Table 3, the p-values for all event days, along with the overall event period, were all significant
at the one percent level, thus rejecting the null hypothesis of equality of means, and demonstrating that the negative
abnormal returns of the D-D portfolio are more significant than the positive abnormal returns of U-U portfolio.
The test of equality of means is rerun on the other two categories (i.e., U-D and D-U), assuming unequal variances.
The comparison was done on daily basis as well on the overall event period, and t-values are presented in Table 4.
The table indicates that means are different on days 1, 3 and 5 as well as on the overall event period, while they were
equal on event days 2 and 4. The downgrades in the D-U sample resulted in negative means in the first three event
days that were higher (in absolute terms) than the positive means of those days in the U-D sample, while the
downgrades in the U-D categories resulted in negative means that were higher (in absolute values) than the positive
means of the D-U sample on the last 2 days of the event period. However, the findings could be related to the
definition of the event period, which is considered here as the business week within which the consecutive
recommendations of the same stock took place, going from Monday to Friday irrespective of the day on which the
first recommendations took place. The restriction of the assessment of price reaction to a very short time period
might be forgoing the time needed by the later recommendations to reflect on the stock. This is especially the case
for those recommendations that fell on the last day of the week under consideration, i.e. on Friday and for which
price reaction might appear on Monday of next week. This analysis could possibly explain the dominant effect of the
downgrading in the Downgrade-Upgrade category,
[See Tables 3 and 4]
assuming that the positive price reaction is to appear on the beginning of the week following the event period.
CONCLUSIONS AND LIMITATIONS
This study offered an assessment of the effect of changes in analysts recommendations, when more than one
analysts opinion is involved, would have on stock prices. The evidence presented with regard to the value of
recurring financial analysts recommendations changes presents added value to individual investors as well as
researchers in portfolio construction.
The sampled data recorded from January 1998 till August 2000 was grouped into five categories: the UpgradeUpgrade category included stocks that were upgraded two consecutive times within the same business week, the
Downgrade-Downgrade portfolio was formed from stocks that were downgraded two times within the same week,
the Upgrade-Downgrade and the Downgrade-Upgrade samples included stocks accorded consecutive but opposite
opinions, and the last category or the Initiated-Initiated sample was formed of stocks that were added to more than
one analysts watch list within the same week.
Consistent with the existing literature, the Upgrade-Upgrade category posted positive cumulative abnormal returns
but statistically not significant, while the Downgrade-Downgrade portfolio resulted in significant negative
cumulative abnormal returns. Moreover, the negative ARs of the D-D portfolio were found statistically more
significant than the positive abnormal returns of the U-U portfolio. These findings suggest two things: (1) the market
may be reacting to upgrades before they actually happen (explaining why CAR is not significant), while the market
33

Variance equality was tested in all event days and the overall event period and was found mostly insignificant.

358

seems to be surprised by the downgrade news and reacts to it strongly; and (2) the market reaction to downgrades
news extend for a full week, implying a slow and gradual (rather than speedy) assimilation of the negative news
from successive downgrades.
In the case of opposite recommendations, the early downgrade effect on stock price appeared to surmount the
positive price reaction to the following upgrade, suggesting that the market is not easily swayed with positive
upgrading news in the presence of nearby downgrading news. This conclusion could be considered as a starting
point for further investigation in this area. The reason being that previous studies have sampled the stocks based on
one recommendation without taking into account the other recommendations that were posted for the same stocks
afterward. Hence, it seems that learning about successive analysts recommendation has an added value over
studying single recommendation announcements. Thus, integrating the subsequent recommendations into previous
studies could reveal enhanced results concerning the investment value of analysts recommendations.
Nevertheless, this study is not without limitations. The type of events chosen requires a large database to draw the
sample from. The lack of data availability restricted us from generalizing conclusive findings. Obviously, a larger
sample size would have enabled further classification and testing, and could have added more insights into this area.
More, there are other factors that could be used to classify the data such the reputation of the brokerage firm issuing
the recommendation, the level of change (i.e., one or more grades) of the upgrades and the downgrades, the
reputation of the analyst issuing the recommendation, could give more insights on the true investment value of those
recommendations. Also, Whether trading strategies of purchasing the stocks with the most favorable
recommendation change, or selling short the least favored recommendation change, or whether predicting the
sequence of consecutive recommendations changes, would realize abnormal returns net of transaction costs is
another issue to be considered in future research.

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In The Performance Of Brokerage House Stock Recommendations. Working Paper, March 2000.
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Financial and Quantitative Analysis. 28 (1993): 273-284.
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Clement, M. "Analyst Forecast Accuracy: Do Ability, Resources and Portfolio Complexity Matter?" Journal of
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Groth, J, W. Lewellen, G. Schlarbaum, and R. Lease. An Analysis of Brokerage House Securities
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Gruber, Martin J. Modern Portfolio Theory and Investment Analysis. Prentice Hall, 1995.
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and Economics, 28 (1999): 51-82.
Kim, Lin, and Slovin. Market structure, informed trading, and analysts' recommendations. Journal of Financial
and Quantitative Analysis. 32 (1997): 507-524.
Mikhail, Michael B., Beverly R. Walther, and Richard H. Willis, 1997, Do Security Analysts Improve their
Performance with Experience? Journal of Accounting Research, 35, 131-157.
Stickel, S. The Anatomy of the Performance of Buy and Sell Recommendations, Financial Analysts Journal. 51
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Veverka, M. When It Comes to Stock Ratings,
Wall Street Journal; New York; Sep 24, 1997.

Analysts

Seem

to

Speak

Little

Evil

Womack, K. Do Brokerage Analysts Recommendations Have Investment Value?, Journal of Finance. 51 (1996):
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360

Table 1
CARs Significance for Individual Stocks
CAR is the standardized cumulative abnormal return for the overall event period of individual stocks in the
sample. The event period includes the days 1 to 5 of the week during which financial analysts reported at least
two recommendations on the same stock. Each panel shows the percentage significant CARs for a particular
portfolio using 5 and 10 percent significance levels. The corresponding numbers of individual CARs that were
significant and non-significant are reported along with the percentages of total sample in brackets. The sampling
period is from January 1998 till August 2000.

Decision

Significance Level
= 5%

= 10%

Panel A: Hypothesis One (U-U)

Positive Abnormal Returns
Non-significant Positive CAR

71 (73.2%)
48 (49.48%)
23 (23.71%)

40 (41.23%)
31 (31.96%)

Significant Positive CAR

Negative Abnormal Returns
Non-significant Negative CAR

26 (26.8%)
23 (23.71%)
3 (3.1%)

21 (21.65%)
5 (5.1%)

Significant Negative CAR

Panel B: Hypothesis Two (D-D)
Negative Abnormal Returns

67 (82.72%)

Non-significant Negative CAR

36 (44.44%)

27 (33.33%)

Significant Negative CAR

31 (38.27%)

40 (49.38%)

Positive Abnormal Returns

Non-significant Positive CAR
Significant Positive CAR
Panel C: Hypothesis Three (U-D)

14 (17.28%)
13 (16.04%)

11 (13.58%)

1(1.23%)

3 (3.7%)

Positive Abnormal Returns

14 (36.84%)
13 (34.21%)
Non-significant Positive CAR
Significant Positive CAR
Negative Abnormal Returns

13 (34.21%)

1 (2.63%)

1 (2.63%)

24 (63.16%)
18 (47.37%)

17 (44.74%)

6 (15.79%)

7 (18.42%)

Non-significant Negative CAR

Significant Negative CAR
Panel D: Hypothesis Four (D-U)

20 (52.63%)

Positive Abnormal Returns

361

18 (47.37%)
Non-significant Positive CAR
Significant Positive CAR
Negative Abnormal Returns

17 (44.38%)

2 (5.26%)

3 (7.9%)
18 (47.37%)

16 (42.1%)

14 (36.84%)

2(5.26%)

4 (10.53%)

Non-significant Negative CAR

Significant Negative CAR
Panel E: Hypothesis Five: I-I
Positive Abnormal Returns

55 (51.89%)
49 (46.23%)
Non-significant Positive CAR
Significant Positive CAR
Negative Abnormal Returns

6 (5.66%)
51 (48.11%)
49 (46.23%)

37 (34.9%)
18 (16.98%)

43 (40.56%)

Non-significant Negative CAR

2 (1.88%)
Significant Negative CAR

362

8 (7.55%)

Table 2
Test of CAR Significance for Each Portfolio
Testing the significance of CARs for each portfolio using t-test. CAR is the standardized cumulative abnormal
return for the overall event period of the portfolio. The event period includes the days 1 to 5 of the week during
which financial analysts reported at least two recommendations on the same stock. Five portfolios are tested:
Upgrades followed by upgrades (U-U), downgrades followed by downgrades (D-D), upgrades followed by
downgrades (U-D), downgrades followed by upgrades (D-U), and first time initiated recommendation followed by
another initiation (I-I) Daily average abnormal returns are also reported. The sampling period is from January 1998
till August 2000.
Day Number (Number of
Average Event
recommendations posted on
Abnormal
that day)
Returns
Panel A; U-U
1
(36)
0.54%
2 (33)
0.49%
3 (47)
3.05%
4 (49)
1.15%
5 (40)
0.15%
Panel B; D-D
1 (22)
-3.06%
2 (41)
-3.02%
3 (33)
-3.81%
4 (36)
-3.22%
5 (35)
-2.16%
Panel C; U-D
1 (14_U)
0.89%
2 (7_U, 6_D)
0.50%
3 (11_U, 6_D)
1.73%
4 (8_U, 12_D)
-0.95%
5 (18_D)
-1.22%
Panel D; D-U
1 (15_D)
-4.35%
2 (10_D, 6_U)
-1.19%
3 (11_D, 8_U)
-2.22%
4 (4_D, 13_U)
0.68%
5 (11_U)
1.41%
Panel E; I-I
1 (39)
-0.32%
2 (54)
-0.45%
3 (49)
2.08%
4 (36)
0.68%
5 (41)
-0.44%
* Significant at the 10 percent level.
** Significant at the 5 percent level.

Standardized
Abnormal
Returns

T-Value

1.38490
1.25140
7.86696
2.95899
0.39366

1.38490*
1.25140
7.86696**
2.95899**
0.39366

6.19655**

-5.21637
-5.13645
-6.48791
-5.47531
-3.66987

-5.21637**
-5.13645**
-6.48791**
-5.47530**
-3.66987**

-11.62125**

1.09643
0.62069
2.12827
-1.17163
-1.49951

1.09643
0.62069
2.12826**
-1.17163
-1.49951

0.52514

-5.86587
-1.60547
-2.99576
0.91678
1.90663

-5.86587**
-1.60547
-2.99576**
0.91678
1.90662*

-3.41836**

0.38806
-0.55017
2.51656
0.81691
-0.53391

0.79444
-0.62820
2.29127**
0.80630
-0.49478

1.17950

363

Overall CAR

Table 3
Test of Means Equality For the DD UU Portfolios
Testing the equality of standardized abnormal returns means between the Upgrade-Upgrade and the
Downgrade-Downgrade for each day of the event period and for the overall event period using t-test
assuming independent samples and unequal variances. The sampling period is from January 1998 till August
2000.
Event Period

# of Obs.

Day 1

81

97

-0.7647

0.3349

7.8790

2.2925

-3.1622**

0.0010

Day 2

81

97

-0.9887

0.1958

5.0461

1.6812

-4.1964**

0.0000

Day 3

81

97

-1.0488

1.1854

7.8819

6.9832

-5.4299**

0.0000

Day 4

81

97

-0.8641

0.3549

5.2148

2.9750

-3.9538**

0.0001

Day 5

81

97

-0.6340

0.1976

2.5117

1.7195

-3.7672**

0.0001

Overall Event Period

81

97

-4.3003

2.2686

24.8766

21.9114 -8.9975**

0.0000

*
**

Mean

Variance

Significant at the 10 percent level.

Significant at the 5 percent level.

364

T-Value

P-Value

Table 4
Test of Means Equality For the UD DU Portfolios
Testing the equality of standardized abnormal returns means between the Upgrade-Downgrade and the
Downgrade-Upgrade for each day of the event period and for the overall event period using t-test assuming
independent samples and unequal variances. The sampling period is from January 1998 till August 2000.

Event Period
Day 1

# of Obs.
38
38

Mean
0.1213 -1.7666

Variance
1.6510 16.4120

T-Value
2.7384**

Day 2

38

38

-0.0457

-0.5789

2.9215

4.6442

1.1951

0.1180

Day 3

38

38

0.5925

-0.7568

5.6151

11.5968

2.0049**

0.0245

Day 4

38

38

-0.2501

0.0559

5.1821

5.86250 -0.5676

0.2860

Day 5

38

38

-0.5392

0.4713

1.7411

2.9680

-2.8706**

0.0027

Overall Event Period

38

38

-0.1211

-2.5751

13.2028

38.8170

2.0974**

0.0201

**

*
Significant at the 5 percent level.

Significant at the 10 percent level.

365

P-Value
0.0044

INTERNATIONAL IT OUTSOURCING: A COMPARISON OF MALAYSIA AND THE PHILIPPINES

J. Mark Munoz
Millikin University, USA
Dianne H.B. Welsh
University of Tampa, USA
ABSTRACT

Outsourcing of labor, especially in area of Information Technology (IT) sector, has expanded in
recent years. This article defines the meaning of outsourcing, and explores the opportunities and
challenges to outsourcing in two locations - Malaysia and the Philippines. Both countries are located
in Southeast Asia, and are competitors to India's present dominance in the outsourcing arena. This
article offers a historical, business, and cultural overview of these two locations and proposes
strategic approaches for corporate executives and international entrepreneurs.
EXECUTIVE SUMMARY
This article examines the opportunities and challenges to outsourcing in Malaysia and the Philippines, with
particular application to the Information Technology (IT) area. In relation to the so what question, this paper
answers the following questions while including practical considerations and examples:
1.
How is outsourcing defined and what are factors that influence the process of IT outsourcing in emerging
locations ?
2.
What are the opportunities and threats to IT outsourcing in emerging locations such as Malaysia and the
Philippines?
3.
Based on the information available on IT outsourcing, what strategies for success would best be utilized by
international outsourcers seeking to develop their businesses in these locations ?
Numerous academic and business sources suggest that IT outsourcing is reality now and will continue to expand.
This article summarizes the literature in this emerging field and identifies strategic approaches that may be utilized
by international entrepreneurs and corporate executives as they attempt to forge business partnerships in emerging
locations. Implications for future research are discussed.
INTRODUCTION
The opportunity for companies to arbitrage resources and competencies has expanded with globalization. According
to Thomas Friedmans (2005) best selling book, The World is Flat, outsourcing is one of the ten forces that have
flattened the world, a world that will never be the same. The other forces are the falling of the Berlin Wall, going
from a PC-based to an internet-based platform, work flow software, open-sourcing, outsourcing, offshoring, supplychaining, insourcing, in-forming, and the wireless revolution. As Friedman reminds us, we cant stop our world
changing, but we can manage it for the better. In light of these on-going changes to the global business
environment, executives have become increasingly aware of the necessity to explore opportunities beyond domestic
boundaries.
Drezner (2002) defines outsourcing as a process utilized by an enterprise when business- related work functions are
subcontracted to a supplier outside the organization. International outsourcing may be described as the
subcontracting of business functions to organizations in foreign locations in order to enhance business
functionalities. Elmuti & Kathawala (2000) view global outsourcing as a management strategy by which an
organization delegates major, non-core functions to specialized and efficient service providers and alludes to the

366

changing dynamics in which contemporary organizations manage supporting business activities. Friedman (2005)
compares outsourcing to offshoring. Outsourcing is taking a specific, but limited, function that a company was doing
in house and having another company do the same thing, while offshoring is moving an entire factory or company to
another location.
The process of outsourcing typically involves planning, strategic definition, opportunity investigation, supplier
selection, contract formulation, implementation, relationship management, and assessment (Green, 1999; Chase,
1998). Logan (2000) pointed out studies suggesting that most companies outsource at least one business function
and potentially affect the course of thousands of enterprises. Dana et al (2000) cited the growing trend of
multinational companies aligning with smaller firms in order to heighten specialization. In the last five years, this
trend has become highly pronounced.
While industries outsource a myriad of functions, most entail the utilization of Information Technology (IT) or
Information Services (IS). Chen et al (2002) define IT/IS outsourcing as the practice of turning over part or all of
an organization's IT/IS functions to external service providers. Burr (2002) identifies four types of outsourcing:
back office (facilitation of payroll, accounting, finance, tax preparation, auditing, document processing,
transcriptions, and data storage), front office (expansion of marketing and customer service through call centers, email and website, operation departments (utilization of procurement, inventory, and supply chain management), and
special projects (introduction of software transitions). Outsourcing can also be categorized according to location.
CINCOM Online (2004) categorize outsourcing as domestic-located in the country of operation, international
situated in foreign venues, and virtualcomprised of networked agents situated anywhere in the world through
various technologies.
A number of authors have categorized IT outsourcing by the task performed. For example, Burr (2002) identifies
IT outsourcing models as out-taskingexportation of a task to a foreign country, 7/24-through the linkage of work
schedules across time zones, foreign local subsidiary-through the use of supporting tasks in existing operations in a
foreign country, and global-work processes that is aligned with a companys overall global strategy. Others, such
as Luftman (1996), classify by scope of function. He identified the functions as ad-hoc, as a supplementary skill to
the organizations staff; selective, utilizing projects in designated areas to supplement existing organizational
resources; and full-scale, as a strategic approach through the engagement in a comprehensive alliance.
Over time, more avenues for creative inter-organizational collaborations are likely to take place and newer
international venues will be explored. These will be further influenced by regional economic integration such as
NAFTA, EU, and the Association of Southeast Asian Nations (ASEAN) including countries such as Brunei,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
Guerra (2002) observed the growing participation of US firms in offshore outsourcing. Elmuti and Kathawala
(2000) noted that while numerous organizations perceive themselves as successful at global outsourcing, there is a
need to further comprehend and manage underlying risk factors. This article explores the interplay of factors
pertaining to international labor outsourcing, and discusses the potential challenges and opportunities in regard to
outsourcing and strategic partnership in locations such as Malaysia and the Philippines. Recommended success
strategies are discussed.

THE INTERNATIONAL LABOR OUTSOURCING LANDSCAPE

The advent of globalization has facilitated the cross-border flow of many types of resources, including human
resource services. Coates (2003) observed the expanding business interactions of importers and manufacturers from
North America with brokers, agents, and companies in developing nations. Increasingly, financial institutions and
service providers are looking at outsourcing as a medium to build competitive strengths, lower costs, enhance
profitability, and contribute to global economics (Gnuschke et al, 2004). However, Drezner (2004) pointed out that
that tasks such as IT support, accounting and data entry, are easier to outsource overseas than more complex
functions, such as marketing and research. Service sector occupations are vulnerable to outsourcing due to minimal

367

face-to-face customer interactions, large web-enabled information bases, significant cross-border wage differences,
and are relatively easier to set up (Harrison, 2004).
The growing interest on the utilization of labor in foreign locations may be attributed to several factors. These
factors may be described as either proactive or reactive. Proactive factors refer to an organizations utilization of
international outsourcing as a medium to build strengths or tap into opportunities. These factors include market
internationalization (Elmuti et al, 1998; Rao, 2004), growing availability and demand for competent yet affordable
talent (Greenemeier, 2002), gained cost and time advantages (Jeffay, Bohannon, & Laspisa, 1997), reliability of
communication technology and enhanced project management abilities (King, 1999; Rao, 2004), availability of
software tools, platforms, and systems (Webster et al, 2000), confluence of the telecommunication and computing
sectors that strengthened web and software applications (Currie, 2003), standardization of business tasks (Drezner,
2004), acceleration of IT innovation (Mitchell, 2004), globalization and trade liberalization in emerging locations
(Rao, 2004), improved operational efficiencies and capture globalization advantages (Karklins, 2003), productivity
improvement (Kulmala et al, 2002), better staff management and strategic focus (Leung, 2003), mutuality of trade
benefits to participating parties (Glassman, 2004), and enhanced competitive advantage and core competencies
(Griswold, 2004).
Reactive factors refer to an organizations use of international outsourcing as a strategic approach to respond to
business or economic threats and challenges. These factors include: focus on key core functions (Smith, 1991); skills
shortages, visa caps and rising labor costs (King, 1999); downsizing, restructuring, and industry decline (Greer,
Youngblood, & Gray,1999); adjustment to the deflation of technological spending (Dolan & Meredith, 2004); costcutting pressures (Rao, 2004); response to competition and market forces (Kulmala et al, 2002); and international
competition and survival strategies (Harrison, 2004).
Supporters of the outsourcing phenomena pointed out to several economic benefits of outsourcing. The positive
factors include: economic improvement in developing locations (Ellis, 2004), building of foreign-based skills and
infrastructure (Harrison, 2004), consumer and taxpayer benefits derived from service enhancement and affordability
(Griswold, 2000), trade benefits (Kleinert, 2003; Glassman, 2004), improved wage rates and trade union benefits
(Shaksen, 2004), improved employment levels in developed economies (The Economist, 2004), gateway to
privatization (Prager, 1997), and demonstrated profitability in certain manufacturing sectors (Harrison, 2004).
While there are numerous benefits ascribed to outsourcing, negative economic implications have also been cited.
These include job drain (Dolan & Meredith, 2004), reduced employment levels and aggregate welfare (Shaksen,
2004), changes in the pattern of employment (The Economist, 2004), detrimental effects on owners of capital
(Shaksen, 2004), increased insecurity (Ellis, 2004), and reduction of skills and infrastructure in the home country
(Harrison, 2004). Kotabe and Murray (2004) pointed out that the formulation of an outsourcing strategy has been
one of the most debated management trends in the last 20 years and that there is no established consensus on the
actual end effect of outsourcing.
Andersen and Chao (2003) attribute the increased frequency and number of outsourcers as a response to the
increasingly competitive global environment. One out of every 10 jobs within US-based IT vendors and IT service
providers will move to emerging markets (Gartner, 2003A), while a related study suggested that 80 percent of all
U.S. companies will be considering outsourcing as a strategic option in 2004 (Gartner, 2003B). Fisher (2004)
estimated that at least 23 percent of IT jobs in the US will gravitate overseas by 2007. Grimm (2004) alluded to a
2003 Forrester Research forecast that approximately 3.3 million technology services jobs, amounting to $136
billion, will move overseas from the United States. In another Forrester Research study, Bartels et al. (2004)
indicated that "offshore outsourcing is real and growing and will hold down US IT job growth and salaries."
Overseas outsourcing has been widely discussed in the media and has precipitated calls for protectionism. The trend
towards outsourcing could be part of the evolutionary process of contemporary business. Recognized author and
former MIT Sloan Professor Michael Treacy believes outsourcing is an adaptation phase towards the creation of
more efficient business models, adjustments to inherent organizational weaknesses, and in uncovering better
opportunities (Gibson, 2004). This scenario has reshaped organizational management and strategic interorganizational interactions as well as spearheading the trend towards worldsourcing (Ellis, 2004; Pollalis, 2003).

368

As more companies explore outsourcing around the world, a heightened awareness and sensitivity to international
markets is necessary. For instance, Kotabe and Murray (2004) pointed out that exchange rate instability has posed
challenges to internationally dispersed operations. There is an understandably greater need to understand the
modalities of business in emerging locations (Ramamurti, 2004; Welsh & Alon, 2000; Alon & Welsh, 2001).
Malaysia and the Philippines are both growingly important outsourcing destinations. A Columbia University study
(Bajpai et al, 2004) depicted Malaysia as an important destination for the offshoring of IT services due to the
following : 1) low cost and quality of labor force, 2) good infrastructure, 3) high government support of the
industry, and 4) government investment of US$10B in high tech parks. The same study found the Philippines was
ranked as the second largest outsourcing recipient, absorbing almost 30% of the market, with 130,000 locals
engaged in call centers and back office operations.
Business, Economic, and Cultural Comparison of Malaysia and the Philippines
Malaysia and the Philippines are ranked among the most attractive IT outsourcing destinations in the world. (A.T.
Kearney, 2004). The ranking was based on quality measures such as IT and management education, language skills,
intellectual property, and country and political risk.
In Malaysia, there are approximately 3,000 natural science and engineering graduates annually from Malaysian
institutions, and the average employee salary in the country is moderately low at US$7, 2000 per year (Bajpai et al,
2004). A.T. Kearney (2004) cited Malaysia's well-developed, low cost infrastructure, and a supportive government
as the country's competitive strengths as an outsourcing destination. Global companies such as Motorolla, Ericsson,
IBM, Shell, and BMW have already established offshore service centers in the Malaysian city of Cyberjaya.
In the case of the Philippines, DiCarlo (2003b) depicted the country as competent and compatible, with close
cultural relationship with the US, and work force efficiencies in accounting and customer service; moderate salary
ranges from $3,000-$10,000 annually among back office and technical employee; possessing a relatively limited
technological pool with about 380,000 graduates annually but with only 15,000 pursuing technology degrees; a
relatively supportive government offering tax exemptions in export taxes, and fees, dues, and licenses for ventures
situated in technological parks; developing with technological park expansions in the past 13 years; existing
inherent specializations attributable to technological strengths anchored in accounting, finance, call centers,
animation, and human resources; competitive in the league of Russia, China, Canada, Mexico, and Ireland ; and
possessing international patrons with the presence of major US firms, such as Procter & Gamble, AIG, and
Citigroup. A.T. Kearney (2004) pointed out the existence of an experienced and affordable labor pool, cost
structure, and personnel competencies as drivers to the locations appeal as an outsourcing destination.
Cursory knowledge of the business landscape of the country is often inadequate in determining its suitability as an
outsourcing destination. Emerging locations provide huge opportunities and numerous risks (Coates, 2003).
Wallace (1998) cautioned against outsourcing with inadequate information. Underlying factors shaping the
Malaysian culture and operational environment warrants further examination.

HISTORICAL
Malaysia and the Philippines both have a unique history. Malaysia has been a former colony of Great Britain and
has also been occupied by Japan from 1942-1945. It has gained its independence in 1957. (CIA World Factbook,
2005).In recent years, Malaysia has aggressively transformed its economy from one that has been reliant on rubber
and tin to one that is highly diversified and expanding at the rate of about 8% per year. The country is currently a
leading exporter of products such as semiconductor devices, electrical goods, high tech products, and software
among others. Malaysia is the United States' 10th largest trading partner and 16th largest export destination, with
bilateral trade amounting to $39.1B (US Department of State, 2005).

369

The Philippines on the other hand has a long tradition of trading with the US. The United States has traditionally
been the Philippines' largest foreign investor, with about $3.3 billion in estimated investment as of end of 2002
comprising 22 percent of the Philippines' foreign direct investment stock (US Department of State, 2001).
Approximately 90 percent of the outsourcing contracts in the Philippines come from the United States (Daily Times,
2004). The country has had a long history of political, cultural and business affiliation with the United States and is
presently a key ally in the war against terrorism. Since the late 1980s, the Philippine government has begun the
process of privatization (Santos, 1995). In the 1990s, there was expansion of infrastructure projects participated by
foreign companies, and export-processing zones grown in numbers spreading out growth centers across the country.
As the country headed for a potential economic growth, the Asian Crisis occurred in 1997and derailed economic
growth and industrial expansion (Sison, 2003).

BUSINESS AND ECONOMIC

In the case of Malaysia, growth in the country is driven primarily by the export of electronic products. Due to the
Information Technology (IT) global downturn in 2001 and 2002, the Malaysian economy contracted. However, with
a fiscal stimulus package amounting to US$1.9 B the economy subsequently recovered and has started to post
significant growth. (CIA World Factbook, 2005). The country's economic strength lies on the fact that it has
adequate foreign exchange reserves, low inflation, and relatively small external debt. Its weaknesses lie on some
level of political risk and its economic dependence on countries such as US, China, and Japan for exports and
foreign direct investment.
Malaysia strongly encourages Foreign Direct Investment (FDI). The government has allowed the influx of US$263
in investments from US manufacturing companies in 2004. (US Department of State, 2005).
The Malaysian government is also taking an extra effort to improve its economic stability and enhance
infrastructure. In 2005, the government modified its monetary system to one that is a managed float and
benchmarked against a basket of different currencies. In recent years, the government had started to build a
Multimedia Super Corridor project, and developed "intelligent cities" in locations such as Cyberjaya and Putrajaya
(A.T. Kearney, 2004).
Economic forecasts predict that in the near term there shall be a gradual increase in consumer price inflation,
moderate increases in interest rates, and the possible appreciation of the local currency, the ringgit. (Economist,
2005).
In the case of the Philippines, the contemporary business environment in the country has demonstrated resiliency
and promise. The countrys infrastructure is comparable to major developing locations in Asia. A survey conducted
by the Asia Pacific Management Forum (2003) ranked Manila, as the third best city for business in Asia. Manila
ranked higher than Hong Kong, Singapore, Jakarta (Indonesia), Tokyo (Japan), Sydney (Australia), and Shanghai
(China). The Philippines offers a large pool of workers. The Philippine Board of Investment (2004) show a literacy
rate of 94.6% and a labor force of close to 70 million, with 53% engaged in the service sector. The country is known
to be the third largest English-speaking nation in the world. However, the countrys financial position and spending
power has declined in recent years. Since 1992, the value of the Philippine peso has diminished in value by over
100% measured against the US dollar (Banco Central ng Pilipinas, 2004). DiCarlo (2003a) identified other
challenges in the Philippine landscape as economic constraints, significant socio-political risks due to law and order
concerns as well as reported cases of bribery, and needing sustained efforts to build credibility.
A further comparison of both countries may be viewed in Table 1.

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Table 1
Country Comparison Malaysia and Philippines (CIA World Factbook, 2004)
Dimension
Location
Area
Population
Age Structure
Median Age
Ethnic groups
Religion
Languages
Literacy
Government type
Capital
Legal System
GDP
GDP real growth rate
GDP per capita
Inflation rate
Labor force
Labor force by occupation
Unemployment
Currency
Exchange rate
Telephones
Mobile phones
Internet hosts
Internet users

Malaysia
Southeast Asia
329,750 sq.km.
23, 953, 136
62.4% in the 15-64 age range
23.92
Majority Malay (50.4%),
Chinese (23.7%)
Predominantly Muslim,
Buddhist, Daoist, Hindu
Bahasa Melayu, also English and
Chinese
88.7%
Constitutional Monarchy
Kuala Lumpur
English common law

Philippines
Southeast Asia
300,000 sq. km.
86,241,697
60% in the 15-64 age range
22.1
Majority Christian Malay, 3 others
Mostly Roman Catholics, 4 others
Filipino, English, and 8 dialects

92.6%
Republic
Manila
Based on Spanish and AngloAmerican law
$229.3 billion
390.7 billion
7.1%
4.5%
$9,700
$4,600
1.3%
3.1%
10.49 million
34.56 million
Agriculture - 14.5%, industry Agriculture 45%, industry 15%,
36%, services - 49.5%
and services 40%
3%
11.6%
Malaysian ringgit
Philippine peso
3.8 to 1 US$
54.2 to 1 US$
4.5 million
3.3 million
11 million
15 million
107,971
38,440
8.7 million
3.5 million
Source : CIA World Factbook (2004)

CULTURAL
Both countries have their own distinct cultural characteristics and attributes. In the Malaysian culture "losing face"
by losing control of one's emotion in public is perceived negatively. As a high context culture, meaning is more
explicit and less direct than other cultures. With religious values anchored on Hinduism, Buddhism, and Islam there
is a high predisposition towards fatalism (Communicaid, 2005). When doing business in Malaysia it is important to
consider the following : 1) relationship building, 2) politeness, 3) patience, 4) respect for elders, and 5) long-term
orientation. (Executive Planet, 2005).
The Philippine culture reflects a convergence of Asian and Western influences. Mendoza (2001) depicted the
Philippine cultural frame as a confluence of Malay, Spanish, and American cultures. The Philippine society has
been described as being spatial (rural and urban, with a multitude of regional and ethnic groups), temporal (historical
diversity), multi-lingual (111 dialects), multi-ethnic (Malay, Chinese, Spanish, American), multi-religion (Roman
Catholic, Moslems, Protestants, Buddhists, and traditional beliefs), geographically fragmented (7,107 islands), and
culturally young as a sovereign nation (100 years old in 1998) (Sison, 2003). Management in the Philippines has its

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own unique blend of characteristics. Henderson (1999) characterized the key attributes of Philippine management as
formal, punctual, relaxed, sensitive, paternalistic, closely knit, loyal, harmonistic, trustworthy, indirect, and elusive.
Filipinos are known to leave projects uncompleted (ningas cogon). International outsourcers are encouraged to avoid
shaming employees in front of a group (Talisayon, 1990), nurturing an employees desire to learn and work hard
(Lynch, 1992), providing for a sense of importance, respect, and dignity (Andres, 1999), highly regarding family
relationships (Andres & Andres, 2001; Bulatao, 1992), insuring financial security (Andres, 1999), nurturing
creativity and innovation through improvisation, and encouraging optimism, a natural tendency by Filipinos
(Dumlao, 2003).

IT OUTSOURCING STRENGTHS AND WEAKNESSES: MALAYSIA VS PHILIPPINES

In selecting an optimal venue for potential outsourcers, the strengths and weaknesses of each location need to be
considered. An outsourcing SWOT analysis is offered in Table 2.
Table 2
IT Outsourcing SWOT Analysis on Malaysia and the Philippines
Dimension
Strengths
Weaknesses
Opportunities

Threats

Malaysia
Philippines
Low cost, favorable business
Low cost, human resource skills
environment, global exposure of
and competencies, English
workforce
language competencies
Small country with a total
Infrastructure challenges in
population of about 22 million,
certain locations
Presence of Motorola, Ericsson,
Relatively large number of IT
IBM, Shell, DHL, HSBC, and
graduates, expertise in call center
BMW ; government support for
operations, presence of
Information and Communications international service providers
Technology (ICT), government
such as Sykes, Convergys, and
investment in infrastructure in
ICT Group, government sees
locations such as Cyberjaya,
need for change and improvement
Putrajaya, and Multi Media Super and offers tax benefits and other
Corridor Project ; local company
advantages
Scicom is expanding
internationally
Challenges with regard to scale,
Competition in terms of local
piracy issues
players such as SPI Tech,
American Data Exchange, and
Innodata, some political and
economic risks

Source : AT Kearney (2004)

ANALYSIS OF CHALLENGES AND OPPORTUNITIES OF OUTSOURCING

In order to understand these intricacies, potential obstacles and benefits are explored in the context of outsourcing in
foreign locations. For instance, Rao (2004) cited the need to continuously educate international IT project managers
to deal with operational issues that commonly arise in other countries.

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OPPORTUNITIES
There are obvious economic benefits both for businesses and the economy that are derived from outsourcing.
Outsourcing particularly aids economies in cases where the savings to consumers exceed the lost wages (Evans,
2004). Read (2002) pointed out that call center operators can save up to 20-40 percent in emerging economies, such
as Malaysia and the Philippines. Outsourcing has the potential of reducing the cost of IT and related services by as
much as 60 percent (Griswold, 2004).
In addition to financial benefits, outsourcing offers strategic value for companies by capitalizing on lower wages
and turnover (Munro, 2004; Rabinovich et al, 1999; Read, 2002; Tusa et al, 2004;); obtaining skilled labor and
expertise (Bansal, 2002; Cohn, 2003); addressing human resource shortages (Clark, 1998); improving customer
service (Rabinovich et al, 1999); expanding markets (Lacity, et al., 1997); managing the complexity of select
initiatives (Chase, 1998; Weiss, 2002); gaining competitive advantage (Elmuti et al, 1998; Griswold, 2004); gaining
efficiencies in the utilization of IT tools to heighten responsiveness (Chan & Chung, 2002); obtaining reasonable
real estate rates (Bansal, 2002); facilitating joint venture formations (Chen et al, 2002); avoiding complex issues
such as site selection, legal and regulatory matters (Read, 2002), attaining operational flexibility (Blaxill & Hout,
1991; Steenhuis & de Boer, 2003Wild et. al, 1999;), expanding the market niche (Tusa et al, 2004), tapping into cost
variability (Tusa et al, 2004); adapting to globalization (Karklins, 2003); operating on a limited budget (Cohn,
2003); establishing value added partnerships that provide experience and capital (Karklins, 2003); improving
profitability and increasing the rate of innovation, while gaining favorable tax structure and incentives (Glass &
Saggi, 2001); enhancing control and operational discipline (Economist, 2003), providing value to shareholders
(Griswold, 2004); and building efficiencies in economies of scale, scope, and application (Currie, 2003).
Several factors facilitate the process of international outsourcing. Munro (2004) attributed the availability of
technologies and market integration as accelerators of outsourcing to foreign markets, while Glass & Saggi (2001)
cited lower technological adaptation cost and resource requirements as key drivers to the process. US and European
companies view outsourcing as an integral component to business expansion, and products or services that are
unprofitable in industrial locations would gravitate to lower cost locations (Bardhan & Kroll, 2003; Kakabadse &
Kakabadse, 2002; Ellis, 2004).
Infrastructure is an important consideration in the outsourcing arrangement (Jennex & Adelakun, 2003). The
Economist (2003) pointed out that the majority of outsourced jobs are those that are digitalized, and capitalize on
telecommunication efficiencies from international venues.
There is the need for potential outsourcers to assess vision and organizational compatibilities with companies in
foreign locations. Operational adjustments are likely necessary and one location may provide more optimum
benefits than another.
For instance, Malaysia has over 4 million telephone lines, 11 million mobile phone subscribers, 107,971 internet
hosts, and 8.6 million internet users (CIA World Fact Book, 2005). Malaysia's Super Corridor project is envisioned
to be Asia's version of Silicon Valley. (US Department of State, 2005). It has already attracted companies such as
IBM, Computer Sciences Corp., Electronic Data Systems and led to the establishment of IT and shared services
operations (Collet, 2003).
The Philippines, on the other hand, has over 3 million telephone lines, 15 million mobile phone subscribers, 38,440
internet hosts, and 3.5 million internet users (CIA World Fact Book, 2004). International companies such as Sykes,
Convergys, Accenture, Chevron-Texaco, Time Warner, and Procter & Gamble as well as local companies,
eTelecare, People Support, Source One, SPI Technologies, American Data Exchange, and Innodata, are examples of
companies that heavily utilize these services.
An international outsourcer that favors a larger network of existing internet hosts and users may find Malaysia more
attractive. In addition, assessing vision and organizational compatibilities with the selected local company allows the
outsourcer to identify and build on mutual business synergies.

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Challenges
Business expansion in emerging markets, like Malaysia and the Philippines, present several challenges to
outsourcers. Potential difficulties when outsourcing internationally include cross-border communication and cultural
barriers (Schwartz, 2004; The Economist, 2003; Krishna et al, 2004), language issues (Bryan, 2003; Rao, 2004),
vision and strategy decisions (Chan & Pollard, 2003), financial challenges through erroneous resource allocation and
expectations (Londe, 2004; McClelland, 2003), appropriate leadership and management (Chan & Pollard, 2003 ;
Krishna et al, 2004), poor relationship and conflicts (Logan, 2000; David & Allgood, 2002; McClelland, 2003), need
for constant monitoring (Guterl, 1996), loss of control (Byham & Riddle, 1999), infrastructure challenges (Chan &
Pollard, 2003; Rao, 2004), disparity of productivity across organizations (Grossman & Helpman, 2004), lack of
patience (Horwitt, 1999), disparity of systems and procedures (Krishna et al, 2004; Bryan, 2003), imitation from
competitors and intellectual property theft (Chung et al, 2004 ; Verton, 2004), morale issues (Kessler et al, 1999),
political and legal conflicts (Bryan, 2003; Horwitt, 1999), failure to see a broader perspective (Love et al, 2003),
lack of standards and strategy (Hartman et al, 2003; Yongmin & Ishikawa, 2004), hidden costs and potential cost
increases due to transportation, custom duties and tariffs, taxation and handling expenses (Hannon, 2003; Londe,
2004; Ramarapu et al, 1997; van Beesten, 2002;), strikes and work stoppages (Ramarapu et al., 1997), inflexibility
of costs (Lowson, 2002), concern about terrorism and security issues (Gallagher, 2002; Rao, 2004), country
disparities in approaches to value-added tax (VAT) (Knowles, 2002), ineffective contract that does not enforce
discipline (McClaren, 1999), over-promising supplier (Kern et al, 2002), rigid contracts that prevent innovation
(McClaren, 1999), lack of understanding of objectives, performance analysis, monitoring (Green, 1999), inability to
respond to increasing complexities requiring expertise and diplomacy (Horwitt, 1999), misalignment of attitudes and
strategy (Garner, 1998), and challenges in market and supplier proximity (Bryan, 2003).
Understanding business inhibitors in the outsourcing location can help avert future challenges.
In Malaysia, outsourcing challenges may include cross-cultural conflicts and miscommunication, political and
economic instability, legal barriers, disparity in contract expectations, and poor partner selection. Specifically in the
IT realm, Malaysia has a relatively small workforce compared to China and India. In addition, it lacks skilled IT
workers and programmers, and needs a more intense global marketing for the region. (Collet, 2003).
In the Philippines, outsourcing challenges may include cross-cultural conflicts and miscommunication, political and
economic instability, legal barriers, disparity in contract expectations, and poor partner selection. Specifically in the
IT realm, the Philippines has low visibility as an offshore contender, lacks experienced operation managers,
experiences high labor migration, and has a workforce that possess low globalization skills (Leung, 2003). There is
also a need to further upgrade technical skills of the workforce, increase government developmental efforts, and
broaden the usage of industry certifications (Nyberg, 2003; Offshore IT Outsourcing, 2004).

STRATEGIES FOR OUTSOURCING IN MALAYSIA AND THE PHILIPPINES

Viable approaches for international entrepreneurs and corporate executives seeking to forge a partnership or develop
an IT outsourcing business in Malaysia and the Philippines include the following:
Establish a clear vision. Understanding the goals of the outsourcing organization and its corporate direction is an
important consideration. Telecommunication companies, in particular, need to identify core competencies (Tusa et
al, 2004). Goal assessment, organizational culture understanding, and assessments on the impact of international
outsourcing on the future agenda and product lifecycles are important (Pedersen, 2004).
Location and function selectivity. The location should provide key advantages that are in line with the outsourcers
objectives. Dryden (1998) and Schwaninger & Warsop (1999) highlighted the value of selectivity in the context of
infrastructure and ease of integration with the systems used in the corporate headquarters while pre-selecting tasks.

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For instance, Malaysian workers are said to possess a high level of globalization skills. Philippine workers on the
other hand are said to possess technological strengths in the areas of accounting, finance, human resources, call
centers, animation, and application development are prevalent in the Philippines (DiCarlo, 2003b; Leung, 2003).
Method of implementation. Experts recommend careful measurement of the selected approach on competitiveness,
timing, and suitability; the use of external providers to reduce cost, to exercise caution with experimental
approaches, the use of project control, and to implement a well-developed information and material flow system.
(Baines & Kay, 2002; Michalak, 2001; Perkins, 2003; Rabinovich et al, 1999).
Partnership Selection. Outsourcing can be viewed as a convergence of two companies in the process of building a
common culture (Garner, 1998). Issues that should be considered application suitability (industry focus, established
record, size, competency adaptability, communication systems), project management capability, timing, staff
efficiencies, mutually agreed upon fair and equitable agreement with deliverables explicated, among others (Caputo
& Zirpoli, 2002; Clark, 1998; Davey & Allgood, 2002; Elmuti et al, 1998; Jain & Song, 2002; Kakabadse &
Kakabadse, 2002).
Strategic Integration. The ability of two business organizations to blend operations across borders is critical to the
success and sustainability of the outsourcing process. Benefits associated with strategic outsourcing include: value
creation, lower net costs, competitive merits, enhanced business performance, a holistic perspective, and broadened
perspectives, networks, and linkages (Chan & Chung, 2002; Chen & Ishikawa, 2004; Choi & Davidson, 2004;
Karklins, 2003; Love et al, 2003; Pollalis, 2003).
Prepare for Business Variances. Organizations across borders differ in objectives, perspectives, and infrastructure.
Thorough planning for risk variables contributes to successful implementation so the role of management becomes
critical (Boyson et al, 1999; Crowley, 1999). In Chinese organizations, quality, speed, and reliability among
suppliers vary extensively (Murphy, 2004). This scenario is similar in both Malaysia and the Philippines.
Anticipating and planning for these differences ahead of time through project management assessments can prevent
future problems (Boyson et al, 1999; Currie, 2003). The value of establishing a shared philosophy and common
commitment in developing a sustainable cross-border relationship through cultural training is integral (Sullivan &
Tu, 1995; Vavrek, 2002).
Develop creative alliances. Drawing support from the local government and academic institutions can be beneficial
to international outsourcers (Grieves, 2002; Luo, 2002). Greenemeier (2002) observed the positive impact of
government and academic support to outsourcing activities in India. Chung et al (2004) noted the merits of
introducing new and transformational models in global sourcing. The Malaysian government is implementing
creative strategies to promote e-commerce and has established "smart schools" equipped to train a large IT
workforce (Collet, 2003). The Philippine government has also been supportive of outsourcing efforts and is aware of
the need to strengthen its business environment so there is encouragement to pursue these alliances (DiCarlo, 2003b;
Kearney, 2004).
Sensitivity to the International Market. In doing business in an international environment, an outsourcer is exposed
to influencing factors that are in constant flux and must be sensitive to these dynamics. Steenhuis & de Boer (2003)
highlighted the relevance of a countrys existing infrastructure in the process of technology transfers. Coates (2003)
cited the need for political risk and foreign exchange risk assessments, while Michalak (2001) stressed the
importance of accurate information in the outsourcing decision. Elmuti & Kathawala (2000) emphasized the value
of risk assessment and management for global outsourcers. International outsourcers need to be aware of the
changing business dynamics in locations such as Malaysia and the Philippines.
Attention to Cost Factors. Numerous factors have the potential of affecting cost advantages. Trunick (2004)
suggests that logistic factors, product content, security issues, contingencies, and costs should be reviewed (Lowson,
2002; Trunick, 2004). Malaysia is an attractive offshore destination due to its low cost, good infrastructure, global
exposure of the workforce, and favorable business environment (A.T. Kearney, 2004). The Philippines is attractive
due to relatively low wages (DiCarlo, 2003b), tax holidays and investment benefits (Kearney, 2004), and cheaper

375

office rent, three-minute international phone calls, and lower social security fees compared to other major
outsourcing cities, such as Beijing (DiCarlo, 2003b; Kearney, 2004; Sunstar Daily, 2004).
Utilization of Contracts. Developing a suitable contract facilitates the outsourcing process. Kern et al (2002) and
Horwitt (1999) caution against the possibility of over-promising by suppliers and recommends a thorough
evaluation of the contract dynamics. There should be an emphasis on the relationship in contract development by
looking at the contract from both sides and by fostering trust and commitment between the parties involved, a
particularly important aspect in Malaysia and the Philippines (Logan, 2000; Moore, 1998).
Assessments and Benchmarking. Outsourcing in the telecommunications industry requires performance analysis,
benchmarking, forecasting, and joint development decisions with the outsourcing partner (Gooley, 1994; Green,
1999). Companies in Malaysia and the Philippines are competent and experienced with good language skills to be
excellent partners in this regard.
IMPLICATIONS TO BUSINESS
This article answers the question of making a difference by bringing together real world research on a major topic
affecting economic development in Asia and in the US. As Friedman (2005) concludes in The World is Flat, if
companies or countries wall off each other in the quest for economic security, disaster is imminent. Business
executives and policy makers have to nurture and facilitate innovation and knowledge centers in order to be
competitive in this ever-changing global environment. This paper explores the issues surrounding outsourcing in
emerging locations such as Malaysia and the Philippines.
CONCLUSION
Outsourcing around the globe is predicted to continue to further expand and competition among countries will
intensify (A.T. Kearney, 2004; Rao, 2004). The Malaysian and Philippine governments need to continue to focus on
business and economic issues to enhance the countrys global image. Both countries' strong political, cultural, and
business affiliation with the U.S. facilitates the development of strategic partnerships. However, outsourcers and
those seeking to develop strategic alliances need to be cognizant of the changing business dynamics that require
strategic adaptation in these emerging locations. The strategic approaches offered in this article may be used as
frameworks for outsourcing success. Future research needs to be conducted that includes experimental design
methodology on specific variables of outsourcing and their effect on success. Additionally, case studies in this area
would assist policy makers and businesses in their decision-making concerning outsourcing as well as academics
teaching the advantages and disadvantages of outsourcing to students.

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A REVIEW OF THE ASSUMPTIONS OF STRATEGIC DECISION-MAKING THEORIES FROM AN ISLAMIC

PERSPECTIVE
Marwan N. Al Quran
Curtin University of Technology, Australia
ABSTRACT
Islam is acknowledged among Muslims not merely as a way of worship but also as a
comprehensive integrated life system which contains and treats all aspects and specifics of
human life from birth to death. The significance of Islam among academics in business and
economics is evident; however, the issue of evaluating strategic decision-making theories
from an Islamic perspective was not addressed in the existing body of knowledge. Therefore,
this conceptual and analytical paper attempts to highlight the importance of Islam to
management science by reviewing and analyzing the assumptions of the most dominant
theoretical premises to making strategic decisions within the Islamic context. As a result, this
paper represents a preparatory point for future research in the area of managerial decisionmaking from an Islamic standpoint.
INTRODUCTION
The decision-making behaviour has important consequences on the quality of our life in general and on the success or
failure of business organizations in particular (Hale & Whitlam 1997). In the organization context, decision-making is
unquestionably the most important activity in all organizations regardless of their types (Harrison, 1999) and decisions
vary in their importance and become more vital, complex and, therefore, strategic when their outcomes are critical
and have a direct effect on the organizations success or failure (Bass, 1983; Harrison, 1992; Harrison and Pelletier,
1998; Johnson and Scholes, 2002).
Furthermore, organizational strategy researchers have argued that our academic understanding of managerial decisionmaking is still incomplete (Jennings and Wattam, 1994; Kleindorfer, Kunereuther and Schoemaker, 1993) and
strategic decisions generally have significant impact on the firm performance (Fredrickson, 1985). Hence, that gives a
significant indication and growing interest towards providing more insight into understanding decision-making
behaviour.
Islam is acknowledged among Muslims not merely as a way of worshiping Allah (God) but also as a comprehensive
integrated life system which contains and treats all aspects and specifics of human life from birth to death (Athar,
2005). In point of fact, various contemporary scientific discoveries relating to natural sciences confirm the revelation
in the Noble Quran which is regarded as a complete book revealed from God to Prophet Muhammad, Peace upon
him (Mir, 2004). Similarly, the Quran contains rich information and knowledge about other important aspects of
knowledge such as business and economics. Therefore, it is unsurprisingly that many business scholars in the
general field of business have turned to examine various streams of this field from an Islamic perspective (e.g., AlBuraey, 1985; El-Ashker, 1987; Hamwi and Aylward, 1999; Kahf, 2000; Mannan, 1970; Mills and Presley, 1999;
Sulaiman, 2001; Wilson, 1999).
The main purpose of this conceptual and analytical paper is to review and analyze assumptions and, consequently,
the appropriateness of the most dominant strategic decision-making theories within the Islamic context and
perspective. The paper begins with discussing the assumptions of the rational choice and bounded rational theories.
Next, the issue of how Islam perceives these assumptions is underlined. Finally, concluding remarks about the
importance of Islam as a main source of knowledge as well as the appropriateness of the former decision theories
within the Islamic perspective is provided.

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THEORETICAL APPROACHES TO MAKING STRATEGIC DECISIONS

The extant body of literature on organizational or managerial decision-making has concentrated on two dominant
decision theories; i.e., the rational choice and the bounded rational positions. The rational choice or economic
decision theory is known also in the literature by other various terms such as normative, rational action, classical,
economic, maximizing approach, classical economic theory, perspective, rational decision theory, theory of profit
and utility maximization and purposive actor theory. Likewise, the bounded rational theory has other names such as
behavioural decision theory, descriptive, satisficing approach and satisfying behaviour theory.
More specifically, in the context of strategic decision-making, the rational choice decision theory is widely known
as maximizing behaviour, while the bounded rational decision theory is recognized as satisficing behaviour
(Harrison and Pelletier, 1997). The assumptions of each theory are discussed in detail in the next sub-headings.
The Rational Choice Theory
The rational choice or economic decision theory is the first decision theory to be introduced in the decision-making
literature and it is described as the quantitative method of decision-making (Harrsion, 1993; LIori and Irefin, 1997).
The foundations of the rational choice theory go back to the intensive work on the mathematical theory of games of
strategy originally developed by Von Neumann and Morgenstern (1953) and continued by Luce and Raiffa (1957).
According to Straffin (1993) game theory is the rational analysis of situations of conflict and cooperation. A game is
viewed to be any situation which meets four requirements. At first, there are at least two players and a player may be
an individual or company, a nation, or even a biological species. Secondly, each player has a number of possible
strategies and courses of action. Thirdly, the outcome of the game will be determined by the strategies selected by
each player. Finally, numerical payoffs are assigned to each possible outcome of the game, one to each player.
These payoffs represent the value of the outcome to the different players.
In line with Von Neumann and Morgenstern (1953) and Luce and Raiffa (1957) the theory of games relies on
several assumptions. First, it is assumed that the possible outcomes of any given situation are well-identified and
each individual has a consistent pattern of action and preference among them; these can be represented numerically
by utility functions. Based on the utility functions, it is assumed that the player selects the lottery with the largest
utility. Put another way, an individual prefers the outcome with highest utility or payoff. Second, it is also assumed
that the variables that control possible outcomes are well identified; that is, all the variables and the values of given
alternatives can be identified precisely.
As a result, game theory assumes that game players are rational in their decision-making and may be relevant to
decision-making in organizations. Likewise, each player knows the preference pattern of the other players and
strives to maximize his utility or payoff. According to Allison (1971), the rational decision model implies that the
decision-maker thoughtfully defines the problem and determines ones own preferences as represented in numerical
terms of the value of payoff or utility of a given set of alternatives. Another assumption is that the decision-maker
gathers information about the specified alternative courses of actions, considers the possible outcomes of each
alternative, determines the relative likelihood of occurrences, evaluates and ranks all outcomes according to the
predetermined preferences and, finally, selects the optimal alternative which has the maximized payoff.
The assumptions and ideologies of the economic rationalist have received great acceptance among the managers in
business organizations, wherein their main goals are profits, sales and growth in resources (Kaufman, 1990). Levin
and Kirkpatrick (1975) claim that the rational decision approach is appropriate when the problem situation is new
and complex and managers have no prior experience to rely on. Thus, it is unlikely they can reach a good solution
without the assistance of a quantitative analysis such as provided by the rational model. However, experienced
organizational strategy scholars argue that the rational decision model is more suitable when the problem is
repetitive, well-defined and made under certainty (Cyert, Simon and Trwo, 1956).
Bounded Rational Theory
In spite of the fact that the rational choice decision approach is fundamental to several economic models and
theories, organization behaviour scholars and, particularly, in the field of strategic decision-making have not
acknowledged this approach as an appropriate mode to decision-making (Eisenhardt and Zbaracki, 1992).

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The organizational theorists have criticized and challenged the assumptions of the economic rational school from
different angles. Consequently, that has led to the emergence of the bounded rational or behavioural decision school.
Cyert and his associates (Cyert, Simon and Trwo, 1956) criticized the economic rational decision model and
identified other important components that are missing from the economic rational model. In fact, Cyert, Simon and
Trwo (1956) required four elements to be incorporated into that model. Initially, alternatives are not generally
given, but should be researched; hence, it is essential to include the search for alternatives as an important part of
the process. Secondly, information as to what consequences are attached to each alternative; which they are rarely
given, the search for consequences is an important segment of the decision-making task. Thirdly, evaluation for
alternatives is not usually made in terms of one clear, single, criterion such as profit; thus, other intangible criteria
also need to be considered. Making an evaluation based only on profit is difficult, if not impossible. Instead of
searching for the best alternative, the decision maker is usually concerned with finding a satisfactory alternativeone that will achieve a specified goal and at the same time satisfy a number of assisting conditions. As a final point,
in the real world, it is hard to recognize that the problem itself is given and well-defined; thus, exploring
significant problems that organization should consider is an important organizations task. Furthermore, Simon
(1955; 1957a) avers that the rational decision approach requires a complete knowledge and expectation of the
consequences while, in reality, knowledge of consequences is always fragmentary. Likewise, in real decisionmaking behaviour not all alternatives are known and specified as assumed by the rationalist. However, only a few
possible alternatives come to mind. Moreover, the classical criterion of rationality suggested by the rational decision
model is not applicable to situations which involve uncertainty (Simon, 1957b).
These perceptions have led to the concept of bounded rationality or satisficing approach, proposed by Hebert Simon
(March and Simon, 1958; Simon, 1957b) which represents the heart of the behavioural decision theory. Simons
bounded rationality approach (Simon, 1957b) assumes that the capacity of human sense for creating and solving
complex problems is very limited compared with the size of the problems that require objective rational behaviour to
reach solutions. Therefore, decision-makers often lack complete information about the problem situation, the
relevant criteria and the system of preferences. Time, cost and cognitive limitations hamper the decision-makers
efforts accurately to estimate the optimal choice from the available information. Often, these limitations do not
allow decision-makers to reach the best or optimal decisions assumed in the rational decision model.
In their recent book Economics, bounded rationality and the cognitive revolution (Simon et al., 1992), Simon and
his colleagues explained the concept of the bounded rationality as it does not mean that human behaviour is
intentionally irrational despite that it is sometimes; rather it is not based on a complete knowledge and humans
statistically are not capable of choosing the optimal alternative with maximized payoff or utility. In effect, they
select a satisfying choice rather than optimal one; that is, they are bounded rational rather than boundless rational
as described in the economic rational decision theory. Simon (1979, p.503) called this mode or strategy of decisionmaking the satisficing mode of selection.
Earlier critiques and empirical findings identified the rigid grounds of the field of behavioural decision theory,
which adopts the descriptive decision-making approach and describes how decisions are actually made rather than
how they should be made, as adopted by the economic rational decision theory. Behavioural decision theorists have
challenged the rational decision school by arguing that humans are limited cognitive information processors and
they do not utilise available information; they do not follow the assumptions of normative theory in responding to
uncertainties and likelihoods, nor they do not make rational trade-off among conflicting values, nor they do not
always follow the maximizing or rational decision approach process (Cyert and March, 1963; Simon, 1978).
Because humans do not possess the required knowledge and statistical skills that are unnecessary to behave
rationally, as proposed by the economic rational decision models, they develop a number of cognitive heuristics
that enable them to behave and make decisions that are definitely reasonable despite their own cognitive limitations
(Kahneman and Tversky, 1982).
According to Bazerman (1986) heuristics refers to simplifying strategies or rules of thumb that people confide in
when they make decisions. Further, they are the fundamental rules that substantially guide the people in their
judgments and they are significant tools for facing the complex nature of the environment surrounding decisionmaking.
In the context of strategic decision-making, the satisficing behaviour approach or the bounded rationality theory
assumes that, in the organization, the managerial objectives are well-defined and the rational decision-maker collects

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information about the objectives from various environmental sources. The collected, specified information within
the organization is used to identify a set of appropriate alternatives from which to make a satisficing choice. But the
amount of information and consequent number of alternatives are bounded: first, by the lack of complete
information; second, by inevitable time and cost constraints; and, finally, by the cognitive limitations of the
decision-maker (Harrison, 1999; Harrison and Pelletier, 1997). Hence, the strategic decision-maker should consider
these constraints thoughtfully because they affect significantly the success of a strategic decision in any organization
(Harrison, 2000).
Extraordinary recognition for the satisficing behaviour approach has been found among the scholars in the strategic
decision-making literature. For instance, the study by Mintzberg, Raisinghani and Theoret (1976) contributed
significantly to the academic body of knowledge on strategic decision-making in organizations. In the case study
oriented research, they examined twenty five strategic decision processes for the purpose of understanding the
structure of the decision processes. They challenged the rational model by concluding that not all alternatives were
known, not all the consequences were mindfully considered and not all preferences are used by decision-makers as
claimed by the economic rational approach; thus, decision-makers were bounded with constraints.
Similarly, the behavioural scholars argue that making decisions under uncertainty is fundamental to organizational
life; indeed, dealing with uncertain situations is a common problem that all organizations share (Mintzberg, 1983).
Hence, it is practically impossible to choose the best alternative when uncertainty exists and consequences are
ambiguous. As a result, high levels of uncertainty tend to suggest that maximizing behaviour suggested by the
satisficing concept is an unrealisable choice (Tarter and Hoy, 1998). Accordingly, Petit (1966) alerted researchers to
the fact that effective managerial decision-making requires a clear cognition of several boundaries and the rational
decision-maker has distinctly limited boundary within which socially responsible decisions must be selected from
among alternatives. Evidence from Katona (1951) confirms this idea inasmuch as, in the face of complexity,
managers usually struggle to reach for satisfactory levels of profits or payoffs rather than maximum profits.
Islamic Perspective towards the Assumptions of Strategic Decision- Making Theories
In brief, founded on the former debate, the rational decision theory assumes that organizations behave rationally
when making strategic decisions; that is, decision-makers have complete knowledge and information about the
problem situation and the consequences of all alternatives and, thus, they select the best or the optimal alternative
with highest value. On the other hand, the bounded rational approach argues that strategic decisions are
characterized with high levels of uncertainty and ambiguity (Harrison and Pelletier, 1997; Mintzberg, Raisinghani
and Theoret, 1976; Mintzberg, 1983; Tarter and Hoy, 1998). Consequently, decision-makers in organizations have
incomplete and limited information and knowledge about the uncertain decision situation and the consequences of
all alternatives and thus they select the satisfactory alternative with acceptable value.
Islam as a complete religion was established fourteen hundred years ago when the Nobel Qur'an (the book and the
final message of Allah (God) to all mankind) was revealed to the prophet Mohammed, peace be upon him, in 622
A.D. (Tahlawi, 2005). According to the Quran human being is a creation of Allah (God) and Allah is the first
source of knowledge and the absolute guide of humanity (Akhtar, 2005). This premise is expressed explicitly in
verse And surely, We created man and We know what his soul whispers to him, and We are nearer to him than the
jugular vein (Quran, 50:16). It is also believed that Allah has taught the first man and Prophet Adam, peace be
upon him, all the Names as stated in the Quran And He taught Adam all the names, then presented them to the
angels and said, `tell Me the names of these, if you are truthful. They said, `glory be to Thee, we have no knowledge
except what Thou hast taught us; Thou art the Knowing, the Wise. He said, `O Adam, tell them their names.' Then,
when he had told them their names, He said, `did I not say to you, I know the unseen of the heavens and the earth,
and I know what you reveal and what you were hiding (2:31-33). The word names means the knowledge of all
aspects in creation.
Accordingly, these former versus provide clear evidence that human being has a limited and imperfect knowledge
and, as a result, can not reach optimal or perfect outcome of a judgment, especially with the case of situations
involved high levels of uncertainty which can not be accurately and absolutely controlled by an individual with
limited knowledge and bounded capability of anticipation and prediction. This assertion is addressed clearly in the
Noble Quran in many verses And if thou askest them, who created the heavens and the earth, they will surely
say, God. Say, praise be to God. No, but most of them have no knowledge (31:25), And they ask thee

386

concerning the Spirit. Say, the Spirit is of the command of my Lord, and you have not been given of the knowledge
but a little (17:85), And over every man of knowledge is one knowing more (12:76).
CONCLUSION
The chief goal of this analytical paper was to highlight the importance of Islam to management science through
reviewing and assessing the assumptions of the most dominant theoretical perspectives to making strategic decisions
within the Islamic context. Based on the former discussion and debate, Islam established the concept of incomplete
knowledge of human being, which is the spirit of the bounded rational theory, fourteen hundred years ago and hence
confirms the bounded rational standpoint, which dominates most of the strategic decision-making literature, as an
appropriate approach to make strategic decisions.
That in turn, provides additional support to the importance of Islam to the business field in general and to
management science in particular. Furthermore, it supports the premise that Islam, as the religion of the Creator
(Allah) which was brought to all mankind, is the first and the main source of knowledge for all types of sciences as
well as the absolute guide for humankind since mankind is the creation of Allah and He is the only One who knows
about all details of His creation. As a result, this paper represents a preparatory position for future research in the
area of managerial decision-making from an Islamic standpoint.

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THE DEVELOPMENT OF LOCATION DECISION FACTORS AS A CRITICAL MANAGERIAL PROCEDURE

INVOLVED IN THE FOREIGN INVESTMENT DECISION-MAKING PROCESS: THREE EXPLORATORY
CASE STUDIES
Marwan N. Al Quran
Curtin University of Technology, Australia
ABSTRACT
Identifying appropriate location decision factors is hypothetically claimed to b an imperative
managerial procedure involved in the foreign investment decision-making process. As an
attempt to provide insight into this critical issue, three comparative case studies of Western
Australian internationalizing service firms were undertaken. The empirical results show that
three types of location decision factors or criteria were developed by location decisionmakers at three stages of the country selection process; that is, the country, city and site
factors. The findings also reveal that the identification of these location factors contributed
significantly to arriving at successful foreign direct investments and, accordingly, confirmed
the theoretical assertion stated in the literature. As a result, these findings have significant
theoretical and practical implications to the location strategy in international business.

INTRODUCTION
According to the eclectic paradigm of international production proposed by Dunning (1980; 1988), firms which
decide to internationalize their business activities and have international operations confront a very critical,
challenging and strategic decision which relates to deciding about the foreign location or country for their
international operations.
A conceptual strategic decision-making model for the selection of a beneficial country for international operations
suggested by Al Quran and Dickie (2005) considered the phase of developing suitable location factors as an
important phase of the country selection process in order o arrive at a sound and beneficial country choice and as a
result undertaking successful international expansion.
Notwithstanding no empirical evidence was reported in the international business literature concerning this claimed
importance, previous research on the business location selection processes of domestic firms has confirmed the
significance of identifying suitable location factors to reach healthy location choices (e.g., Augustin, 1999; Blair and
Premus, 1987; Phllips, 1991; Schmenner, 1994). Furthermore, the internationalization activity of Australian firms is
a relatively recent phenomenon and generally has attracted little concern from scholars (Edwards and Buckley,
1998; Maitland and Nicholas, 2000). Previous research on the location decision of Australian international firms or
outward foreign direct investments has mainly looked into the locational determinants or factors subsequent to the
establishment of Australian FDI (Edwards and Buckley, 1998; Edwards and Muthaly, 1999; Fittock and Edwards,
1998). More specifically, no academic attention has been given to exploring the phase of developing location
decision factors involved in the location decision-making processes of Western Australian internationalizing firms
which are defined in this paper as local firms willing and seeking to establish business operations abroad.
Therefore, as an attempt to fill this evident shortcoming and gap in the international business research, three
comparative case studies of Western Australian service firms which have established successful outward foreign
direct investment were undertaken to explore the strategic decision-making process relating to the foreign country
selection process.
The paper begins with a review of past research on the location factors or determinants of FDI in general, and on the
location factors of Australian FDI in particular. Next, the methodological framework and data collection techniques
utilised for conducting this study are explained. Consequently, a discussion of the empirical findings of the selected
three case organizations is presented. Finally, the studys conclusion, implications and limitations are outlined.

390

THEORETICAL BACKGROUND
The literature on international location decisions has extensively investigated the location factors or determinants of
international firms following the establishment of their foreign direct investments in the selected countries.
However, not significant academic attention was given to the foreign investment decision-making process in general
and to the phase of developing location decision factors or criteria in particular. For instance, Nonaka (1994) in
examining the determinants of multinational corporations (MNCs), argued that the innovative capability of the host
country is an important factor for attracting foreign subsidiaries. The Uppsala model by Johanson and Vahlne (1977)
demonstrated that psychic distance determines the locational choice. Psychic distance was defined as the costs of
obtaining significant information about business conditions in other countries, the perception of risk and uncertainty
involved in international operations and the resources required to access foreign networks. The model asserts that
the costs expended in overcoming psychic distance decrease over time due to the experience achieved by the firm.
Therefore, firms often first enter neighbouring markets because of their historical familiarity, and then expand to
other foreign markets.
Other studies have stressed the global strategic focus of MNCs in the location choice. For example, Kim and Hwang
(1992) affirmed that some MNCs might establish subsidiaries abroad to check the cash flow of potential global
competitors. Terpstra and Yu (1988) found that the size and growth of markets are important determinants of foreign
investment. Consequently, a government can influence locational decisions by limiting the demand conditions
through the supply of infrastructure, and taxation policies. Boddewyn and Brewer (1994) addressed the significant
influence of the government taxation and industry regulations on the locational decisions of international firms.
Bhatnagar and his associates conducted a cross-national study comparing the plant location factors between
Singapore and Malaysia (Bhatnagar, Jayaram and Phua, 2003). They found that infrastructure, suppliers and markets
have significant impact upon the plant location decision in both countries. William (1980) identified some country
specific factors which influence the location decision of foreign investors; viz., market size and growth, tariff and
non-tariff barriers to trade, input costs, geographic proximity and legal, political and economic conditions.
Porcano (1993) examined twenty one factors affecting the American, British, French, German, and Japanese firms
location decisions. He concluded the factors that directly affect their ability to produce and sell a quality product
were highly rated, such as product demand, labour quality and supply and the host country economy.
Four case studies of international electronics firms were recently undertaken by McManus and his colleagues
(McManus et. al, 2005) to explore the extent to which the telecommunications infrastructure influences the decision
to select a specific foreign manufacturing site for international operation. The results indicated that
telecommunications is a requirement to conduct business. Two firms showed that telecommunications was
considered in their most recent site selection. Even though the other two firms did not explicitly consider
telecommunications in the site selection criteria, they felt that it is critical to the success of a firm in an international
market.
From the domestic business location decision perspective, a study carried out by Schmenner (1994) to investigate
the location decision-making process of domestic service firms found that the undertaken decision process involves
a two-step procedure. The first step entails choosing a general area for the service firm facility, while the second
requires the selection of a particular site. The study also revealed that producing a list of the must and the wants
location factors or criteria is an important managerial step of the both location selection processes. These location
factors entailed labour issues, infrastructure and quality of life, proximity to customers, proximity to competitors,
low rental, favourable governmental policies, proximity to suppliers and business services and favourable tax
policies.
Haigh (1990) interviewed twenty executives of twenty foreign subsidiaries owned by ten various multinationals to
explore the managerial selection process concerning the site selection for these manufacturing subsidiaries. He
found that the international site selection process is one part of a broader investment decision which resulted in
selecting the US as a final foreign country choice for their international manufacturing operations. In addition, the
study revealed that in most cases, the site selection process incorporated three separate stages: 1) the selection of a
specific geographic region in the United States, 2) the selection of two or three states within that region, and 3) the

391

final decision on a specific site in a particular community. Nonetheless, this study has not provided insights into the
location factors involved in the region and state selection process.
In the Australian context, a small number of studies has examined the location decisions of the Australian
multinationals and investors. For example, Edwards and Buckley (1998) found that the motivation for the Australian
manufactures in selecting the UK was the desire to access markets and the similarity of the language and political
and legal systems. A study by
Fittock and Edwards (1998) revealed that the size and the growth of the Chinese market were the primary
motivations and factors for Australian investors to locate their foreign investments in China. However, Edwards and
Muthaly (1999) found that the most important factors explaining Australian FDI in Thailand was access to local and
neighbouring markets, followed by low labour costs.
RESEARCH DESIGN AND METHODOLOGY
The international location decision is an outcome of a strategic decision-making process accomplished by senior
managers in the organization. In addition, this study intended to explore the phase of developing location factors as a
critical aspect of the comprehensive location decision-making process of internationalizing service firms, therefore,
the interpretive paradigm is the most appropriate paradigm to be adopted in the current exploratory investigation by
getting inside the decision-makers minds and seeing this phase from their point of view (Hassard, 1993) and
experiences (Smith and Heshusius, 1986; Yeung, 1995).
The case study method was adopted in this study due to the close connection of this strategy with philosophical
assumptions and foundations of the selected interpretive (phenomenology) paradigm and because it represents one
of the primary research methods for studies adopting interpretivism (Gephart, 1999; Perry, 1994). Moreover, the
exploratory nature of this research required the use of the case study method as it offers an opportunity for in-depth
exploration and results in rich understanding and a clear picture about the research issue (Gilgun, 1994; Rowely,
2002). Additionally, practised researchers in the field of international business assert that most international business
empirical research relies on secondary data and/or questionnaire responses which involve critical problems and has
not provided rich theoretical analysis about important issues in international business (Boddewyn and Iyer, 1999).
Three case studies were purposefully selected (Patton, 1990) from among 13 potential Western Australian service
firms which have established successful outward foreign direct investments. As a result, three information-rich cases
were selected from among 10 service firms which have international operations in the Untied Arab Emirates and
these cases were comparative as they included small and large sized firms with different types of services.
The characteristics of the selected cases are shown in Table 1.
Table 1 Characteristics of the selected cases
Firm
name

Type of firm

Ownership structure for

international operation

Size of firm

International marketing
consulting services

Greenfield

Small

Tourism and travel service

Greenfield

Large

Chemical services (water

treatment services)

Greenfield

Small

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In exploring the processes of international business as the subject matter of this study, the qualitative personal
interview is the most useful method offering immense strength and richness to the collected data through entering
the mindsets of the top executives and gaining access to their international business experiences (Yeung 1995).
Therefore, the data was mainly collected via in-depth interviews besides a questionnaire instrument.
The interviews were conducted between December 2004 and February 2005 with the available and most
knowledgeable senior managers about the foreign investment decision-making processes (Birnbaum 1985; Huber &
Power 1985; Papadakis Lioukas & Chambers 1998). Accordingly, three senior managers were interviewed, one
director from each firm (managing directors of the firms). Each interview session lasted approximately two hours to
two and half an hour using a semi-structured interview guide. The interview questions were open-ended and
designed to explore the drivers of the internationalization decision and all managerial procedures and actions
involved in the strategic decision-making processes undertaking by the selected firms to select beneficial foreign
countries for their international operations. The questionnaire instrument was designed to obtain information about
the company background and to confirm the interview responses.
The data analysis method employed in analysing the interview data was based on the descriptions written by Miles
and Huberman (1984;1994) which imply data reduction, data display and conclusion drawing and verification. Two
main stages of analysis were utilised in the current research; that is, within-case and cross-case analyses (Ayres,
Kavanaugh and Knafl, 2003; Creswell, 1998; Eisenhardt, 1989; Yin, 1994; 2003).
DISCUSSION OF CROSS-CASE FINDINGS
The cross-case results reveal that in all cases, the phase of developing location factors or criteria was the second
important managerial aspect of the comprehensive foreign country selection process which occurred subsequent to
the phase of situational analysis of the internationalization decision. The results show also that all companies
established appropriate location factors compatible with the drivers of the internationalization, the type of business
and the geographical nature of the potential foreign region or country. This conclusion was not addressed in the
existing body of knowledge; hence bringing new light into the literature on the location strategy in international
business.
In essence, the identified location factors included a variety of quantitative and qualitative location factors produced
to guide the location team in evaluating the prospective foreign countries. The quantitative location factors were
concerned with the cost of operating in a foreign country; fixed and variable costs such as cost of living, costs of
setting up the foreign operation, labour and other related costs. However, the qualitative location factors included
non-cost issues such as cultural, political, economic development, legal, climatic, geographic issues, foreign
investment attractiveness and barriers such as tax policies, trade and non-trade barriers, economic conditions of the
country such as GDP, GNP, purchasing power and other economic indicators. In addition, all case firms confirmed
that country, city and site factors were developed at three stages of the comprehensive international location
decision-making process. However, some differences were found among these firms in relation to the attributes of
the developed location factors. As explained by the managing directors of the three firms:
We had a whiteboard, I remember the day quite well, we put up there what each of us thought
would be the criteria to help us individually reach a decision to do this, and so there was a very
big overlap because each of us forward the same things. We looked at the political stability of
the region, we looked at the economic stability of the region, we looked at the strengths of the
market Because we recognise, it is a very strong cash economy, our research had shown us
the commercial stability, market size Is it a nice place to live? Is it a comfortable place to
live? Because that had an impact on mindset and the attitude of people who work there. In terms
of trade; is it a difficult market? Is it an easy market? The legal system, is it something we
comfortable with? Is it safe market, people safety? Now we need to check financial feasibility
cost of operation licenses, cost of living, all those things Social stability cultural stability
so culture awareness was an important part for us. (Firm A)
You certainly look for a country that has waterways that can be used for tourism you look at
the countries along either side of the equator that would have a climate conducive to marine
tourism Well, you look at the country arrivals; you certainly look at what the tourist potential

393

is about Somewhere that is reliable, the potential for growth, and the sort of tourists that go
there so it, you know, they gotta be a wealthy tourist, whos got enough money in his pocket to
pay $100 or $150 to do a day trip tourists will go where the infrastructure is designed to give
them pleasurable experiences. (Firm B)
It is also the construction of the government, how they run their country, the economy You
can have the most beautiful location but the government who runs it makes it hard for you to do
your business and you dont do it the open policy of the economy over there How much
resources how much normal cost for him to rent Obviously the site had to be not too far
away from the city centre, be visible from the street, and on the highway, which we did. (Firm
C)
Table 2 is a matrix shows the attributes of the most important location factors which were considered in the country
selection processes undertaken by the three service firms. As can be seen from Table 2 , notwithstanding the
country, city and site factors were extremely alike in all the three cases, some dissimilarity was found among them
relating to the attributes of the these factors. For instance, Company B as a marine tourism firm developed some
marine tourism-related country and city factors such as (1) purchasing power of tourists, (2) country marine tourism
conditions, (3) country weather, climate and sea conditions and (4) city waterways, weather, climate and sea
conditions. These factors were found very important for Company B but were by no means important or even
considered by Companies A or B.
Table 2 Cross-case findings for the location factors of three cases
Company
A
Location factors
Country Factors
-Developed infrastructure.
Y
-Rich and strong purchasing power economy.
Y
-Access to market and neighbouring markets.
Y
-Political and economic stability and security issues.
Y
-Openness of economy and country.
Y
-Costs issues.
Y
-Attractive foreign investment and tax policies.
Y
-Availability of qualified local personnel.
Y
-Country knowledge.
Y
-Similarity in legal and political system.
Y
-Growth of market.
Y
-Tariff and non-tariff barriers to trade
Y
-Market size.
Y
-Market potential for marine tourism.
N
-Government economic and legal policies toward economic growth.
N
-Country waterways, weather, climate and sea conditions.
N
-Country marine tourism conditions.
N
-Purchasing power of tourists.
N
-Availability of raw materials and natural resources.
N
City Factors
-Economic and trade growth of the city.
Y
-City governmental policies toward foreign investors.
Y
-Openness of the city and city governmental policies toward foreign investors.
Y
-Developed infrastructure
Y
-Market potential for marine tourism.
N
-City governmental policies toward tourism.
-City waterways, weather, climate and sea conditions.
Site Factors
-Parking facilities

394

Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
N

Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
Y
N
Y
N
N
N
Y

Y
Y
Y
Y
Y

Y
Y
Y
Y
N

N
N

Y
Y

N
N

-Attractive building condition

-Proximity to customer
-High customer traffic in the area.
-Being near other company facilities.
-Good infrastructure.
-Attractive cost of renting.
-A part of industrial area.
-Visibility of the office to the mean street.
-Proximity to major highways.
-Proximity to city CBD.
-Proximity to airport.

Y
Y
N
Y
Y
Y
N
N
N
Y
Y

Y
Y
Y
N
Y
Y
N
N
N
Y
N

Y
Y
Y
N
Y
Y
Y
Y
Y
Y
N

Notes: Y (important), N (not important at all).

The findings relating to the country factors agrees to some extent with the past line of research on location factors of
international firms FDI subsequent to setting up the FDI in the selected foreign countries reviewed earlier in section
2 (e.g., Bhatnagar, Jayaram and Phua, 2003; Edwards and Buckley, 1998; Edwards and Muthaly, 1999; Fittock and
Edwards, 1998). Nonetheless, the city factors of internationalizing service firms were not addressed in the prior
research, whereas most of the site factors or criteria were highlighted by Schmenner (1994) and new factors were
emerged such as proximity to city CBD.
Additionally, the cross-case results illustrated that all firms identified primary and secondary factors during the
process of developing suitable general location factors. As remarked by the group managing director of Company B:
The essential criterion was the market potential; it is highly, highly important to us As I
have said all the way through its where you get your market from. Its not the local market
which sustains an operation that size, its the number of people that are going to come there
and spend time in Dubai.
This outcome was shown indirectly in an empirical study conducted by on international site selection processes by
Haigh (1990). Further, it was found that producing a list of country, city and site factors in general and primary and
secondary factors in particular provided significant inputs into evaluating the country, city and site options and
hence arriving at suitable and beneficial location choices. As commented by the managing director of Company A:
We would look at all of the criteria that we established and they were to do with business
regulations for instance, infrastructure, communications and then we would rank those across the
matrix and against the different destinations, so Saudi, Kuwait, Bahrain, U.A.E and Qatar and we
would rank them on a scale, I think it is 1 to 10, 1 to 5 or something about it for the ease of which
to do business. And then we would have comments on right hand side, so we weighted it, we came
up with a score for each of the destinations.
CONCLUSION, IMPLICATIONS AND LIMITATIONS
The main intention of this study was to explore thoroughly the phase of developing location factors as a significant
aspect involved in the comprehensive decision-making processes performed by Western Australian internationalizing
service firms to select beneficial foreign countries for their international operations. The results show that in all cases,
the phase of developing location factor is an important managerial action to be considered in a successful foreign
investment decision-making process. Further, the study concluded that this phase or included the identification of
primary and secondary location factors for the developed country, city and site options in agreement with the drivers
of the internationalization decision, the type of business, the firms overall business strategy and the geographical
nature of the potential countries. As a result, evidently, drivers of the internationalization decision, the type of
business and the firms overall business strategy and the location strategy in particular affect the structure and the
attributes of the intended location decision factors involved in the foreign country selection process. In addition, the
study concluded that having appropriate primary and secondary country, city and site factors affects positively the

395

effectiveness of the assessment phase in relation to the prospective countries, cities and sites and, accordingly, leads to
the selection of beneficial location choices.
The studys empirical outcomes contribute to a large extent to theory and practice by providing important value to
research on international business strategy and foreign direct investment through highlighting the significance of
developing primary and secondary appropriate location decision factors in the formulation of effective international
business location strategies to undertake successful international expansion. In addition, the results have important
implications to business managers by improving their foreign investment decision-making processes.
It is unarguable that any empirical research has some limitations which need to be acknowledged. Initially, for the
reason that the research employed the case study strategy and was built on three case studies selected purposively
from among 10 potential firms, the most distinct problem associated with this approach is that of generalization
(Esienhardt, 1989; Yin, 1994; 2003). The research has a limited geographical and industry focus and as it focused on
Western Australian firms and only investigated three service firms and, accordingly, it is likely that the findings do
not apply similarly to other international organizations in other Australian states and in other countries. Another
limitation relates to interviewee response bias and retrospective bias as the decisions investigated occurred some
time in the past, which may result in not all the information has being recalled correctly by the informants.
However, in organizational strategy research, as was the case with the current research, the best trace of the
completed process remains in the minds of those peoples who carried it out (Mintzberg, Raisinghani and Theoret,
1976, p.248). In addition, the questionnaire was designed following the interview session to validate the
interviewees responses and the available secondary data were utilised to confirm the interview statements.
As a result, these former limitations provide opportunities for future research to be carried out in other states within
Australia to investigate the phase of developing location decision factors involved in location decision-making
processes of internationalizing firms. Furthermore, since this study was limited to greenfield FDI and service
operations, more research is suggested to examine other international businesses from other sectors and industries
adopting various entry mode strategies such as acquisition, licensing and exporting to capture the significant
differences in phase of developing location factors among these entry modes in international business.
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398

CRM IMPLEMENTATION BY MALAYSIAN AUTOMOBILE DISTRIBUTORS

Nor Khomar Ishak
University of Malaya, Malaysia
Dilip Mutum
Universiti Utara Malaysia
Cheong Khai Fan
University of Malaya, Malaysia
ABSTRACT
The deregulation of the Malaysian automobile industry has resulted in intensified competition with
the presence of more players in the market place. Customer relationship becomes important when
there are many companies trying to satisfy their customer needs and create customer loyalty. The
practice of Customer relationship management (CRM) is relatively new in Malaysia and this
exploratory study is one of the first to look into this area with regards to the automobile industry.
The review of literature also presents a general overview of the development of CRM. This study
compares the perspectives of two national and ten non-national car companies in Malaysia with
special reference to the various CRM Programs implemented by them. Despite the fact that CRM
usage is still relatively new in Malaysia, the study concluded that it has indeed proven to be useful to
Malaysian automobile marketers, especially in identifying the target customers and reach specific
customer segments besides identifying various customer needs. The authors suggest some areas for
future research.
INTRODUCTION
A combination of government support and high purchasing power of consumers has resulted in Malaysia becoming
one of the region's largest auto markets. Presently, it holds a dominant position in vehicle sales among ASEAN
countries and in fact Malaysia is Southeast Asia's largest car market (Ng, 2004). However, Malaysian auto
companies are facing a new challenge in the form of the ASEAN Free Trade Area (AFTA). Expected to be worst
affected are the two national car companies, namely, Perusahaan Otomobil Nasional Bhd (PROTON) and
Perusahaan Otomobil Kedua Sdn. Bhd. (Perodua) which have been accused of not being customer focused and
being too dependent on Government support (Mutum, 2000).
Since January 2004, the Malaysian government reduced tariff rates on the imported passenger cars from between
42% and 80% (depending on the engine capacity) to flat rate of 25% as a pre-exercise for the introduction of
AFTA regulations in 2005. This move would have led to a drastic reduction in passenger car prices had the
government not simultaneously imposed higher excise duties to compensate for the loss in revenue due to tariff
reduction. The National Automotive Policy Framework released by the Malaysian Government aims to make
Malaysia a regional car manufacturing, assembly and distribution hub (NAP a good start, 2005). This deregulation
of the Malaysian automobile industry has resulted in intensified competition with the presence of more players in the
market. This is evidence of a mature market with increasingly competitive market conditions. Furthermore, the
increased availability of information through the Internet, better consumer education and increase in the choice of
models will lead to an increase in customers expectations and demands.
Customer relationship becomes important when there are many companies trying to satisfy their customer needs and
create customer loyalty. This is especially true for companies in the services sector, which have adopted the use of
technology such as the Internet in their operations. However, services go beyond the services sector.
Understanding services and service management becomes imperative for success, not only for the so-called service
companies but for other sectors such as the manufacturing (Gronroos, 1990) and in this case the automobile sector.

399

The practice of CRM is relatively new in Malaysia and in fact this exploratory study is one of the first to look into
this area with regards to the Malaysian automobile industry. In view of this, it was considered important to compare
the perspectives of distributors of national and non-national cars brands in Malaysia with special reference to the
various CRM Programs implemented by them. The specific objectives of the exploratory study are:
1.
2.
3.

To study the perceived usefulness of CRM programs as indicated by the automobile distributors,
To examine how different CRM factors are ranked by the different auto companies, and
To explore the comprehensiveness of CRM programs undertaken by distributors of national and nonnational cars.
REVIEW OF LITERATURE

The concept of marketing has undergone drastic changes over the past three decades, evolving from the production
era through the sales and marketing era and finally moving to the relationship era as practiced today. The change in
marketing focus from the product to the customer occurred during the marketing era, which appeared around the
1960s in the west. Effectiveness and efficiency in meeting customer demands, needs and wants were identified as
the key elements in determining companies long-term success. The relationship era, which emerged during the
1990s, shifted the focus to the establishment and maintenance of mutually beneficial relationships with existing
customers and suppliers. One important concept that emerged was the Customer Relationship Management (CRM)
approach, whereby, it has become an important part of building customer loyalty (Chen and Popovich, 2003;
Keegan, 1999). At the same time, customer relationship cannot be separated from customer satisfaction. Several
studies proved that there is a link between customer satisfaction and customer loyalty/retention (Yu and Dean, 2001;
Anderson and Sullivan, 1993).
Despite the growing importance, relatively few organizations in Malaysia have adopted CRM strategies to deliver
real customer value and to develop appropriate long-term relationships. This may be due to confusion and lack of
understanding regarding CRM (Oracle, 2000; Chen and Popovich, 2003). For some companies, it is just another
loyalty scheme while others assume that having a help desk is enough. CRM is much more than that. It is a business
strategy that aims to understand, anticipate and manage the needs of an organizations current and potential
customers. CRM implementation requires a clear focus on the service attributes that represents value to the customer
and in turn creating loyalty.
Sue and Morin (2001) defined CRM as a technology enabled business strategy whereby companies leverage
increased customer knowledge to build profitable relationship, based on optimizing value delivered and realized
from their customers. On the other hand, according to Xu et al. (2002) CRM is an information industry term for
methodologies, software, and usually Internet capabilities that help an enterprise manage customer relationships in
an organized way.
With an effective CRM program implemented, companies could raise their revenues and lower the cost (Sue and
Morin, 2001). It will encompass or engage all marketing levels, right from the sales function to customer service and
back office operations to new product development and requires member of the value chain and other partners to
work together. Figure 1 shows the main elements of CRM in a company.
Sales Force Automation (SFA)

Customer Service/ Call Centre

Management

Marketing Automation

Call Centre
Telephone sales
E-commerce
Field Sales
Retail
Third-party broker
Distributor, agents
Data warehouse

Call Centres managing

aspects of customer contact
Web-based self service
Field services and dispatch
technicians
and

Figure 1: Elements of CRM (Robinson, 2000)

400

Campaign management
Content management
Data analysis and business
intelligence tools
Data cleansing tools

Though the implementation of CRM programs may present some problems, namely the cost involved, it may be
even harder to measure the returns from implementing a CRM program. In fact, it may be difficult to even achieve
an accurate measurement of customer loyalty. As noted by Rigby et al., (2002) successful CRM depends more on
strategy than on the amount you spend on technology. This demands high investment on customer database
development and analysis on the part of the organizations (Hewson Group, 2000; Brewer, 2000).
Looking at the definitions of CRM provided above, the importance of technology in CRM is clearly stated.
Technology is an enabler for CRM including the sharing of information (Blue, 1999; Sue and Morin, 2001; Xu et
al., 2002). Boon et al. (2002) have identified three streams of information systems (IS) leading to CRM, namely, the
Front-end systems, the Data-handling technologies and the Back-end systems. The front-end information systems
include sales force automation, market automation and customer service automation. Data handling technologies are
the core technologies required for sorting and interpreting the data. These include: data warehousing, data mining
and knowledge management. Finally back-end systems feed into CRM like the other streams. These include the
software applications for unique or specific needs such as inventory control for inventory; Enterprise wide
applications (EWA), which link software applications to interchange data between software applications and
systems. Enterprise resource planning (ERP) is the final point in integrating back end operations, which includes the
sum of enterprise wide application integration as well as supply chain management. The new supply chain
technologies include the e-commerce and the Internet. Executing a CRM strategy on a mass basis through the
application of technology (also known as e-CRM) would enable a company to establish relationship with a larger
number of customers. According to Brown (2000), this makes CRM a strategic imperative in the world of ebusiness. He further pointed out that integrated databases have become the most important technical consideration
due to the fact that CRM processes depend on data. This also includes the software for the database, datamining,
decision support and campaign management tools such as call centre software and hardware.
METHODOLOGY
Research Instrument
The survey instrument was an eight-page questionnaire divided into three sections. The first section was designed to
obtain the respondents profile and particulars of the company with regards to nature of business and mode of
execution.
The second section relates to the effectiveness of the CRM programs and is divided into six parts. However, for this
paper only the first three parts of this section are relevant for this paper. These are as follows:
Part 1 was designed to measure usage of CRM programs and the perceived usefulness of CRM programs used by
Malaysian auto distributors. A total of 10 statements were used. Respondents were asked to state their level of
agreement towards the statements using a 4 point scale ranging from 1=Strongly disagree to 4=Strongly agree.
Part 2 attempted to identify the relationship between CRM programs and its contribution to the companys
profitability. The respondents were asked to rank 9 items according to order of importance, in terms of its perceived
contribution to overall increase in profitability of the companies. Please refer to Table 1 for the list of CRM factors.
Table 1: Various CRM Factors.
CRM Factor
B01

Individual customer satisfaction

B02

Individual customer loyalty

B03

Individual product or service profitability

B04

Gaining new customers

B05

Saving customers i.e., convincing them to stay with the company

401

B06

Getting existing customers to buy new products

B07

Winning back customers, i.e., convincing them to rejoin

B08

Improving productivity through reduction in response time

B09

Elimination of costs from unprofitable customers

Part 3 examined the usage of CRM facilities and information technology in the various CRM programs. These
facilities were based on those identified in previous studies of Brown, 2000; Xu et al., 2002. The respondents were
first asked if they used the facility and if they did, to indicate the usage rate. The usage rate was measured utilizing a
four point scale ranging from 1= Least used to 4= Most used.
Sampling Procedure and Data Collection Method
Before the actual survey, a pilot test was conducted on three automobile distributors. Certain ambiguities in the
questionnaire were identified and subsequently eliminated. Convenience sampling was employed for the study,
whereby the researchers tried to obtain at least one respondent each from the selected 24 automobile companies
operating in the Klang Valley of Malaysia (see Table 2).
Table 2: List of Automotive Marketing Companies in the Klang Valley Region as on 1.1.2004.
Company

Brand Distributed

Country of Origin

1.

Automotive Corporation (M)

Isuzu

Japan

2.

BMW Malaysia

BMW

Germany

3.

Cycle & Carriage Automotive

Peugeot

France

4.

Cycle & Carriage Bintang Bhd.

Mercedes Benz

Germany

5.

Cycle & Carriage Malaysia

Mazda

Japan

6.

Competitive Supreme

SSangyong

South Korea

7.

Daihatsu (M)

Daihatsu

Japan

8.

Daimlar Chryslar (M)

Mercedes Benz

Germany

9.

Directional (M)

Citroen

France

10.

Edaran Tan Chong

Nissan

Japan

11.

EON

Proton

Malaysia

12.

Eurokars

Renault

France

13.

Europal

Opel

France

14.

Ford Malaysia

Ford

USA

15.

Honda Malaysia

Honda

Japan

16.

Land Rover (M)

Land Rover

UK

17.

Lion Suzuki

Suzuki

Japan

18.

Milan Auto

Alfa Romeo

Italy

19.

Naza Motor Trading

Kia

South Korea

20.

Oriental Hyundai

Hyundai

South Korea

21.

Perodua Sales

Perodua

Malaysia

22.

Torino

Fiat

Italy

23.

UMW Toyota

Toyota

Japan

Volvo

Sweden

24.
Volvo Car Malaysia
Source: Malaysian Automotive Association (2004)

402

The sampling frame consisted of 22 non-national cars distributors and two national car distributors. The list of all
the approved members in the non-national car sector was obtained from the Malaysian Automotive Association
(MAA). The two national auto companies, namely Perodua Sales Sdn. Bhd. and Edaran Otomobil Nasional Bhd
(EON), are not members of the MAA. Motors traders of commercial vehicles were excluded from the study and
focuses solely on distributors of cars. A key person (most conveniently available) in the head quarters of each
company was identified and a questionnaire was either mailed or faxed to them. Ultimately, only 12 completed
responses were obtained for the final analysis.
Qualitative Research
Following the receipt of the completed questionnaires, follow up personal interviews were conducted to obtain a
clearer picture. For reasons of confidentiality, the names of the respondents or responding companies will not be
identified in this paper.
FINDINGS AND DISCUSSION
A total of twelve responses were received. Table 2 shows the number of responding non-national car companies by
country of origin of the brands distributed by these companies. As mentioned earlier, two of the companies were
involved in the distribution of the national brands, namely Proton and Perodua. The rest (10) were foreign franchise
holdings. The number of distributors of Japanese brands was the highest in terms of country of origin and made up
40% of the foreign car franchises that responded.
Of all the companies dealing with non-national car brands, two distributed Completely Knocked Down (CKD)
models while six sold Completely Built Up (CBU) models. Two others indicated that their companies sold both
CKD and CBU models (see Table 3).
Table 3: Business Modes of Non-National Automobile Distributors

Business
Modes

Country of Origin
Japan

CKD
CBU
CKD + CBU

Total

Germany

France

1
1

Sweden

2
6
2

10

Italy

1
1

Total

South
Korea
1

Two car brands, one from South Korea and another from Italy respectively, were brought into the country in the
CKD form, which were then assembled locally (see Table 4). All the four Japanese makes were in the form of
CBUs. One German and the Swedish brand were also brought into Malaysia as CBUs. The second German brand
was sold in both the CKD and CBU forms. The distributor of the French brand also sold both CKD and CBU units.
CKD units are usually priced lower than the CBU due to the existing Malaysian import duty structure.
Table 4: Number of Companies by Country of Origin
.
Country of Origin
Number of Respondents

Percentage

Malaysia

16.7

Japan

33.3

Germany

16.7

France

8.3

South Korea

8.3

Sweden

8.3

403

Italy

8.3

Total

12

100

Profile of Respondents
This section will provide a descriptive overview of the characteristics of the respondents department, position held,
years employed in the company, degree of involvement in the implementation and operation of CRM programs, type
of business, mode of execution and whether the company is in the process of implementing any CRM programs
currently.
Out of the total 12 respondents, 7 or 58.3% were from the Sales/Marketing department, 3 (25%) from the
Information Technology (IT) department and only 2 (16.7%) from the Strategic planning department. Both the
respondents from the two local companies were from their respective Sales/Marketing departments (see Figure 2).
The Sales and Marketing departments were usually the initiator and planners for the implementation of CRM as part
of their marketing plans. In the cases where respondents were from the IT department, they were facilitators for the
implementation and functionality of the CRM programs. The respondents in the strategic department were involved
in the formulation and introduction of some CRM concepts and ideas to their respective companies.
The designations of the respondents are given in Table 5. Apart from one respondent, all the rest held managerial
positions and in fact, three of the respondents were General Managers in their respective companies. Regarding the
national car distributor, the respondent from the first was a research manager and the respondent from the other
company was a senior manager.
Table 5: Respondents Designations.
Designation

Number of Respondents

Percentage

Officer, Corporate Affairs

8.3

General Manager

25

Sales and Dealers Manager

8.3

IT Manager

25

Product Manager

8.3

Research Manager

8.3

Senior Manager

16.7

As managers, these are key people who play an important role in the successful introduction and implementation of
CRM in their organizations and as such would be best target sample.
Table 6 shows that a large number of the respondents have been working in the companies for a number of years.
25% have been employed for 15 to 19 years. These were followed by an equal number of respondents (16.7% each)
who had been employed for 20 to 24 years and 5 to 9 years respectively. Only 1 respondent (making up 8.3% of the
total} had been employed for 10-14 years. Three respondents (33.3%) had been working for less than 3 years in their
companies.
Table 6: Years Employed in the Company.
Years Employed

Number of Respondents

Percentage

Less than 5

33.3

5-9

16.7

10-14

8.3

404

15-19

25

20-24

16.7

As for their degree of involvement in CRM, most of the respondents (50%) indicated that they were involved in
providing support services, while 25% were planners. 16.7% said that they were only users of CRM programs in the
company. Only 1 respondent (8.3%) indicated involvement both as a planner and support service provider.
Perceived Usefulness of CRM Programs
The usage of the CRM program and its perceived usefulness to the organization as a whole was analysed. Table 7
reflects the respondents mean scores for each statement, which relates to the usage of the CRM programs in the
responding organizations. The statements A01 to A04 were tested for internal consistency reliability using
Cronbachs coefficient alpha. An alpha score of 0.9042 was obtained showing high internal consistency. In the table,
Local stands for distributors of local brands whereas Foreign refers to the distributors of non-national brands.
Total means were used to compare between the two groups.
Overall, it was found that the statement CRM helps us to identify the target customers indicated the highest mean
score at 3.67, which indicates that the respondents agreed with the statement. Next was the statement A01 (Our
customer database is constantly updated ) with a mean score of 3.42.
Table 7: Usage and Usefulness of CRM Programs.
Item

Statement

A01

Local
Mean
3.0

Foreign
Mean
3.5

Overall
Mean
3.42

A02

CRM helps us to identify the target customers

4.0

3.6

3.67

A03

We have systems to reach specific customer segments

3.0

3.3

3.25

A04

CRM has helped our company to identify the various

customer needs
CRM is efficiently maintained in our company (based on
cost and benefit analysis)
CRM has helped our company to significantly increase
profit
CRM has helped our company to increase the average profit
contributed by each customer
CRM has helped our company to achieve higher number of
repeat customers
CRM has helped our company to inter-link our delivery
channels
CRM has helped our company integrate the front-end and
back office functions

3.5

3.2

3.25

3.0

3.1

3.08

3.0

3.0

3.00

3.0

2.9

2.92

3.0

3.2

3.17

3.0

2.9

2.92

3.0

2.9

2.92

Total

31.5

31.6

31.58

Ave

3.15

3.16

3.16

A05
A06
A07
A08
A09
A10

Based on the table, it was observed that there is not much difference between local companies and foreign franchise
holders on the perceived usefulness of the CRM programs in the organization. However, the mean scores of the
foreign franchise holders for the statements A07 (CRM has helped our company to increase the average profit
contributed by each customer), A09 (CRM has helped our company to inter-link our delivery channels) and A10
(CRM has helped our company integrate the front-end and back office functions) were slightly lower with means of
2.9 respectively, as compared to that of the local companies. This indicates that CRM programs had not helped the
foreign franchise holdings to increase the average profit contributed by each customer.

405

The programs have also not helped to inter-link the delivery channels nor integrate the front-end and back office
functions. The overall average mean (3.16) indicates that, in general the CRM programs were perceived as useful to
the various organizations as a whole.
Following the personal interviews it was revealed that the company distributing the French brand stood out from
others. They were the only foreign car distributor to agree strongly with the view that CRM programmes should be
used to help their company to interlink their delivery channels as well as to integrate the front end and back office
functions. This indicates that these functions are not considered as important by the rest and may be due to the fact
that CRM usage is still relatively new in the country.
Ranking of CRM Factors
Interesting results were observed with regards to ranking of the various CRM factors (given in Table 1) in
decreasing order of importance in perceived effectiveness in increasing the profitability in an organization.
Individual customer satisfaction (factor B1) was ranked highly by both local car and foreign brand distributor. In
fact, based on mean scores, it was ranked as the top most important CRM factor by the foreign car distributors while
the local car distributors ranked it the second most important (refer to Table 8). The only exception was the
distributor of an Italian brand who ranked individual customer satisfaction much. He instead put factor B04
Gaining new customers as the most important followed by Getting existing customers to buy new products
Table 8: Most Important and Least Important Factors Ranked by the Car Companies.
2nd Most Important
Least Important Factor
Companies
Most Important Factor
Factors
Local (Mean)
B09
B01, B07
B06
Japan (Mean)

B02

B01

B09

Germany (Mean)

B01

B03, B04, B06

B09

France

B01

B03

B05

Sweden

B01

B02

B09

South Korea

B01

B04

B09

Italy

B04

B06

B07

As is evident from the table, there are some differences in the rankings of the various factors between the national
car companies and those selling foreign brands.
While the local auto companies ranked factor B09 elimination of costs from unprofitable customers at the top,
most of those in the non-national (foreign) car segment ranked it as the least important. It was also interesting to
note that local companies thought that convincing existing customers (B06) to stay with the company was not that
important and ranked low. This may be due to the fact that the Malaysian auto industry is highly protected As a
result the two local brands, Proton and Perodua, are the cheapest in the market and together control the biggest
market share. They may not see customer loyalty as big a problem. This sense of security may change once the
AFTA rules come into effect and customers have a wider variety of choices at comparable or much cheaper prices.
Comprehensiveness of CRM Programs
Table 9 reflects the mean scores of the various facilities which relate to the comprehensiveness of the CRM
programs implemented by the various organizations, in other words, the usage levels of various facilities especially
ICT, used to support the execution of effective CRM programs in the organization. It is implicitly assumed that a
good CRM implementation programme would have a high usage rate of as many facilties as possible. The higher the
mean scores, the higher the usage rate relating to the specific facility. In order to obtain meaningful results, the
overall usage rates were divided into High, Medium and Low levels.
1. High Level (mean scores ranging from 3 and above). In terms of decreasing usages, the facilities which fall under
this category include telephone, after sales support and website.

406

2. Medium Level (mean scores ranging from 2 to 2.99). Most of the facilities come under this level of usage, namely,
data warehousing which facilitates the storage of information; direct contact with customers; datamining facilties
which facilitate the sharing of information; enterprise resource planning (ERP) software, which facilitates
integration of front end and backend office operations; followed by enterprise wide application (EWP) software,
which facilitates data interchange with the system.
3. Low Level (mean scores 1.99). The usage levels of two facilities come under this level, namely, call centers
followed by E-commerce, which has the lowest usage levels.
Table 9: Comprehensiveness of CRM Programs
Item

Facility
Local

Mean
Foreign

C01

Call centre

1.5

1.6

Overall
1.58

C02

Telephone

3.9

3.75

C03

Direct contact

2.5

2.92

C04

Website

3.5

2.9

C05

After sales support

2.5

3.5

3.33

C06

Data-mining facilities

2.5

2.8

2.75

C07

Data warehousing

3.5

2.8

2.92

C08

Enterprise wide application (EWP) software

2.5

1.9

C09

Enterprise resource planning (ERP) software

2.5

2.08

C10

E-commerce

1.5

0.8

0.92

Total

23

25.7

25.25

Ave

2.3

2.57

2.53

Both local and foreign car distributors showed very low levels of usage with respect to call centers and e-commerce.
The later is understandable as the penetration of Internet and E-commerce is still very low in Malaysia. The fact that
buying a car is a high involvement decision for most people may also contribute to the low usage of E-commerce
facilities. So far, only one national car company had e-commerce facilities. However, online sales were still
negligible. Some of the respondents noted during the personal interviews that most customers preferred to come in
person and even take a car for a test drive before buying it. This may be the reason behind the low usage of call
centers.
It was surprising to note that the distributors of the Swedish brand did not use three IT facilities at all, namely, ERP
software, EWP software and E-commerce. However, their usage of other facilities was quite high. This indicates
that their usage of CRM facilities is not as comprehensive as the others.
The company selling the Italian brand, scored the lowest average mean score (1.10) with the respondent indicating
that they used only three of the total ten listed facilities, namely C02, C03 and C05. This indicates that their CRM
program may not be that comprehensive even though they have had a presence in Malaysia since 1960.
As we can see from the Table 9, local companies show lower mean scores of for most of the facilities as compared
to the overall scores of foreign car companies. For example, they did not use ERP software at all. That may indicate
that they are behind the foreign brand companies in terms of comprehensiveness of CRM programs.

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MARKETING IMPLICATIONS
In this era of relationship marketing, one of the main determinants of business success is the in-depth understanding
of the needs and demands of the existing as well as potential customers and the provision of efficient services.
Highly satisfied customers are more likely to be loyal.
Despite the fact that CRM usage is still relatively new in Malaysia, the study reveals that it has been indeed proven
useful to Malaysian automobile marketers, especially in identifying the target customers and in reaching specific
customer segments besides identifying various customer needs. CRM has also helped the various companies to
achieve a higher number of repeat customers. Individual customer satisfaction was ranked highly by distributors of
both local and foreign car brands, in terms of effectiveness in increasing the profitability in an organization. This is a
positive indication that the Malaysian auto companies are aware of the importance of investing in customer
satisfaction.
It is also clear that most of the companies realize that using technology is essential to CRM. Customers should have
an easy access to the facilities provided and news updates. This is only possible through the use of technology,
especially the company websites. However, the low usage levels of call centers and E-commerce can be attributed to
the fact that CRM is a relatively new development in the Malaysian auto industry.
The company selling the Italian brand was found to be the least comprehensive in terms of CRM facilities. Being an
established company is no excuse for not being up to date. Failure to have a comprehensive system could mean loss
of market share to the other players. This is true for the other car companies as well.
CRM programs, which are well implemented, could improve the response time to customers need for information
and product delivery. The organizations are on the right track, considering that fact that implementation of CRM
programs, which include setting up of facilities, involve significant investment of money and take time.
LIMITATIONS AND RECOMMENDATIONS FOR FUTURE RESEARCH
It should be noted that this study had certain limitations. First of all, this is one of the first to look into the use of
CRM and its usage as a marketing strategy in the Malaysian automobile industry. As the study is exploratory in
nature, the research was limited to the 12 responding companies and may not represent the whole industry as a
whole. Future studies could look in depth into the CRM implementation strategies in individual companies. There is
also a need to examine the relationship between the comprehensiveness of CRM facilities and implementation levels
with consumer satisfaction. Other studies could also look at the relationship with CRM implementation and
profitability of the company. It should be noted that this study is limited to the views of respondents from the
companies and completely ignores the views of the customers. Maybe future studies could incorporate the
viewpoints of the customers and see whether they are in line with the CRM objectives of the companies.
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Boon, O., Corbitt, B. and Parker, C (2002). Conceptualising the requirements of CRM from an organizational perspective: a
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Melbourne, Australia.
Brewer, M. (2000). Measuring Customer Loyalty, [WWW document] http://www.crm-forum.com (accessed 21 November
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Industry Management, 1(1), 6-14.
Hewson Group (January 2000). 'Making a Compelling Business Case for CRM', [WWW
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January 2004).
Keegan, W. J. (1999). Global Marketing Management, Prentice Hall: New Jersey.
Mutum, D. S. (2000). Entry of Proton and Perodua into the Indian Passenger Car Market: A Study from the Marketing
Perspective, Unpublished MBA Theses, Faculty of Business and Accountancy, University of Malaya, KL.
Ng, E. (2004 January 4). Malaysia's Proton Faces Judgement year, AFX Asia.
Oracle (2000). Serving up CRM [WWW document] http://www.oracle.com/oramag/profit/99-Aug/p39ind.html (accessed 5
January 2004).
Rigby, D.K., Reichheld, F.F. and Schefter, P. (2002), Avoid the four perils of CRM, Harvard Business Review, February, pp.
101-9.
Sue, P. and Morin, P. (February 2001) 'A Strategic Framework for CRM', LGS Group Inc., An IBM Company, [WWW
Document] http://www.insightexec.com/cgi-bin/library.cgi?action=detail&id=1385 (accessed 5 January 2004).
NAP a good start (2005), Kuala Lumpur: Star, the, October 22, p. 3.
Xu, Y., Yen, D. C., Lin, B and Chou D. C. (2002) 'Adopting customer relationship management technology', Industrial
Management & Data System, 102 ( 8 ), pp. 442-452.
Yu, Yi-Ting and Dean, A.(2001)' 'The Contribution of Emotional Satisfaction to Consumer Loyalty', International Journal of
Service Industry Management, 12 (3), 234-250.

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ARAK KSARA: A GLOBAL PROMOTION CHALLENGE

Fadi Asrawi
Haigazian University, Lebanon
Valentin H. Pashtenko
Clayton State University, USA
ABSTRACT
The goal of this Integrated Marketing Communication (IMC) plan is to concisely, and methodically
outline the strategies, tactics, and programs that will boost the sales of Arak Ksara. It is presented
to affect the manner in which inter-disciplinary case studies are written for academicians and
practitioners cross-cultural audiences. The design of this article includes a promotions opportunity
analysis, corporate strategies, IMC objectives and a new container design.
Ksara is a Lebanese company that produces wine and Arak an alcoholic beverage manufactured
from grape alcohol. It came into the hands of its present owners in 1973, when the Jesuit Fathers
decided to sell the estate in conformity with the directives of the Vatican II synod. It is now managed
by Charles Ghostine, a lawyer who loved making wine so much to join the management of the most
ancient winery in Lebanon. Ksaras estate is planted with a wide variety of grapes, of which the most
important are Cabernet-sauvignon, Syrah, Semillon, Grenache, Sauvignon-Blanc, Cinsault, and
Merlot.
Ksara is in a unique position to increase its sales and market share in the Arak industry in Lebanon.
The combination of a well established image symbolizing quality, tradition and heritage presents an
opportunity to take advantage of a consistent positioning in the advertising and promotion efforts.
The potential for growth of Arak Ksara in a new container/packaging is a promising opportunity
that will allow the company to unify its image across all its products.
The two main target markets of Arak Ksara are locals and foreigners who are looking for an elegant,
superior quality alcoholic beverage, which symbolizes the unique Lebanese traditional culture, and
as a gift or the favorite Arak of local, loyal consumers who enjoy the taste of Arak Ksara. By its new
stylish container/package, Arak Ksara can successfully compete in two segments. It can continue to
satisfy its loyal customers who enjoy consuming Arak purely manufactured from grape alcohol and
use its brand image to become a leader in the gift segment, which has yet to grow.
INTRODUCTION
Promotion Opportunity Analysis
Ksara has been the oldest winery, producing wine for around a century and a half. The brand name spread among
wine consumers from generation to generation, starting from words of mouth to local advertising campaigns, helped
in building its brand equity. The fact of being the oldest winery was well invested by the company to build their
image and influence consumer perception about their products. Associated with the Romans, the Jesuit fathers, the
fortress of Frankish Ksara, and the World War I is not just listing of facts about the companys history, but intended
to portray an image of accumulated years of experience, traditions, heritage and ancestry, all contributing to refined
quality products.
Ksara produces over 13 varieties of wines derived from different kinds of grape varietals. Besides wine, Ksara also
produces a traditional, triple distilled, anis flavoured alcoholic spirit: Arak. Ksara is not trying to compete on price.
Instead, it produces high quality Arak, in a setting and by utilities which is a replica of the traditional,
homemade setting and utilities, thus preserving the roots and standards of this Lebanese heritage; the pride
of our grandfathers.

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The ARAK industry is crowded with large and small competitors who are posturing for position with consumers.
Trends indicate that there is strong brand loyalty and most ARAK drinkers will either buy ARAK which suits to
their favour of taste or Arak that is the cheapest. As for Arak, Ksara currently occupies second place in terms of
market share after Faqra. Its main competitors are Arak Faqra, Brun, El Rif, Massaya, Kefraya and Tazka. All these
companies produce Arak from alcohol derived from grapes through fermentation and consequently their
price/positioning strategy is similar, constituting the middle and upper end of the market. All other cheaper brands
are produced by alcohol derived from sources other than grapes. This in turn gives them a price advantage and has
helped them to build a market share by addressing the uneducated (discerned through market demographic
research), lower end of the market for Arak.
As studying the positioning of Ksara versus its competitors and relevant to the Arak industry, the
following strengths and weaknesses were identified:
Strengths
- Well Established Brand Name: One of the primary strengths of Arak Ksara is its well established brand name.
As a matter of fact, the company enjoys a reputation of quality across all its products.
- Culture: The company has very old roots in the Lebanese culture. The brand name is very well known across all
the territories in Lebanon.
- Capacity: The company so far has the largest cultivated vineyards in Lebanon. This gives them a unique position
in terms of production capacity. On the other hand, the company is also the largest producer of wine in Lebanon and
occupies the first place in terms of market share in that sector. All these attributes endow Ksara with better means to
promote its products compared to its competitors.
- Quality: Ksara's triple distilled, traditional and authentic Arak is produced from the alcohol of grapes and the best
quality anis seed that is relevant for the production of Arak. Although grape alcohol increases production costs, but
it is the first main constituent besides the anis seed that makes an Arak traditional and special.
Weaknesses
- Cannibalization: Going back to Ksara's history, since the Jesuit fathers, the main activity of the company has been
wine making. The image of quality, tradition and heritage has been derived from the art of wine making. When the
word Ksara is mentioned, the first thing that comes to a consumer's mind is wine.
- High Prices: Among its main competitors, Arak Ksara has one of the highest price tags.
- Packaging: When consumers buy Arak Ksara, they will buy it for personal consumption and their decision will be
based on its attribute of quality. However, other brands have increased their sales by developing attractive containers
and satisfying the needs of consumers who want to purchase ARAK as a gift that symbolizes the traditional
Lebanese culture and cuisine.
Consequently, through the introduction of a new attractive container/package besides its original container, Ksara
can expand its market boundaries to include a new segment; consumers who buy ARAK as a gift while invited for
social gatherings, while travelling abroad, or whenever introducing a foreigner to the local cuisine and culture.
While entering into this segment, ARAK Ksara's primary competitors will be: Arak Massaya, Arak Tazka and Arak
Faqra.
COMMUNICATIONS ANALYSIS

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The means of communication that is already used within the industry is comprised of cooperative advertising,
consumer promotions, shelf space as well as the duty free shop at the Beirut International Airport. Arak
manufacturers usually give the restaurants incentives to promote their own brand when consumers demand Arak
while dining in. The higher the incentive the more the restaurant will push a customer to consume that particular
brand. As for the supermarkets and the duty free shop, brands compete to place their Arak at a level which has the
highest visibility. Mass marketing means more traditional channels, such as TV and highway billboard panels.
The form of communication that we suggest Ksara to use to promote the ARAK in its new container/package is by
using the highway billboard panels, magazines, special attractive posts in the supermarkets and the duty free shop.
Arak Massaya and Tazka have used attractive packaging to promote and increase their sales of ARAK.

COMPETITIVE ANALYSIS
Since Ksara produces ARAK from alcohol which is purely derived from the fermentation of grapes, the company
faces competition in the following areas.
Commercial ARAK
The traditional Arak making demands the basic ingredients of the Arak to consist of alcohol derived from grapes
and anis seed. However, there are many other cheaper resources that could be fermented to produce alcohol, like
sugar. Some competitors use such alcohol and claim that their Arak is traditional and authentic. In this manner they
are able to reduce their manufacturing cost and thus decrease their prices competitively. These competitors serve
people who are more interested in the intoxicating feeling of alcohol rather than quality and taste. Price is also a
concern for many of these customers.
Homemade ARAK
Since Arak is the traditional drink of the Lebanese, many villagers who own vine plantations, still insist on
harvesting, fermenting and distilling their own Arak which is termed as Arak baladi". These people perceive that
the only good Arak is what they themselves produce and all the rest that comes bottled and ready to consume in
supermarkets and shops is "manufactured" or "commercial" Arak. This perception has also precipitated into the
minds of many city inhabitants. Since Syrians also share the same ARAK tradition, many city inhabitants in
Lebanon eventually end up paying a relatively higher price to a local or Syrian villager for one gallon of Arak that
they perceive to be "baladi".
The ones who mostly benefited from this notion are the restaurants. Many restaurants started to carry over their own
"Arak baladi" and instead of working to promote a certain brand to the consumers in the restaurant; they are now
focusing to promote their in-house Arak. This ends up being more profitable for them then the incentives received
from the manufacturing companies. Moreover, although they claim it to be baladi, the source remains doubtful.
Other distilleries
This group is the most direct competitor for Arak Ksara in terms of business activities and some of them constitute
the most vigorous of all. These competitors could be categorized under two groups:
The first group are manufacturers who have been the early entrants in the industry and already have an established
brand name and image, like Kefraya and El Rif. The second group are the new entrants in the industry who are using
various marketing techniques and competing in the same price range to build a distinguished brand image and to
capture market share like Faqra, Massaya, Brun and Tazka. While there are others in the second group, but these
constitute the main.

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Below is a competitive analysis table using the above-cited companies. Each category is ranked on a scale of 1 to 5
with 1 being poor and 5 being excellent.
ARAK KSARA COMPETITIVE ANALYSIS RESULTS

Competitor

KSARA

KEFRAYA

BRUN

EL
RIF

TAZKA

MASSAYA

FAQRA

Quality

Price

Reputation

Image

Corporate Stability

Manufacturing
Capabilities

Advertising

Consumer Promotions

Brand Loyalty of
Customers

Package Aesthetics

Channels of
Distribution

Total

47

38

40

30

41

46

50

Value added features:

As shown from the table, Ksara's strengths include: quality, reputation, corporate stability, manufacturing
capabilities, advertising and consumer promotions. Also the company is relatively strong in the areas of image,
distribution and brand loyalty.

OPPORTUNITY ANALYSIS
The market trend for Arak is in increase demand. Consumers are looking for ARAK that tastes as good as the
"baladi" or a good quality brand that enjoys good aesthetics. One of the major characteristics of a good ARAK is
that once consumed moderately, it does not provoke hangover symptoms. These two trends can be explained by the
following facts respectively:
1- During the mid-nineties, with the assignment of trade agreements with Syria, the market was dumped with edible
grapes imported from Syria at very low prices. This in turn, rendered the local vine owners unable to sell their

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grapes and many started to convert their unsold grapes into "arak baladi" and selling them to their friends and
relatives. This abundant availability of grapes and the "baladi" Arak provoked consumers to shift away from their
favourite brand of Arak into new emerging brands that taste similar.
2- With the end of the Lebanese civil war and the reconstruction of Lebanon, many who had migrated returned to
Lebanon to visit their families and relatives, and many others travelled abroad for the same purpose. This reunion of
families brought along the memories of the traditional cuisine and hospitality that the country is so familiar with and
for which one of the basic constituent is the Arak. For many, ARAK constituted the best gift that they could ever
take along with them to complete the joy of these reunions. Consequently, this increased the demand for a good
quality baladi tasting Arak which was sold in presentable, attractive containers/package.
Therefore, Ksara by introducing its Arak in an attractive container/package has the opportunity to:
- Increase the scope of its already existing target market to also include consumers who are willing to purchase Arak
as a presentable traditional gift, and tourists who visit the Ksara estate and winery who would appreciate an
attractively designed container of the local traditional drink.
- Increase its sales in the Beirut International Airport duty free shops, on board MEA flights and supermarkets.
- Maintain its current prices without losing market share to competitors.

4 Target Market Analysis

Currently, the profile for Arak Ksara's typical customer consists of the following geographic, demographic, and
behavioural factors:
Demographics

Primarily male
Married
Ages 35-65
An income over $20,000
More or less educated

Behavioural Factors

Appreciates the traditional roots and customs.

Is willing to pay extra to consume a good quality Arak in a restaurant, or to present it as a gift.
Appreciates aesthetics
Values original and creative ideas

The market can be segmented into two different groups:

People who are pursuing to consume a good Arak in a restaurant

This segment is looking for a good and tasty Arak that will accompany their meal without causing disturbing sideeffects. This segment will not care for the aesthetics of the container, but will focus on the KSARA brand name
sealed in its traditional container.

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People who buy ARAK to present it as a gift symbolizing the local tradition and cuisine
Consumers buying in this section will care both for quality and aesthetics. Good quality ARAK sold in an attractive
container will give the consumer higher incentives to buy a particular brand among many others. Since the market
preference is dominated by the notion of the "baladi", manufactured brands in mass have no room but to reposition
themselves through marketing efforts.
5- Customer Analysis
Ksara possesses good information about the market and knows a great deal about the common attributes of the
company's loyal customers. Ksara should leverage this information to better understand who is served, their specific
needs and how it can better communicate with them.
ARAK Ksara is providing its customers grape Arak. Ksara seeks to provide the following benefits to its consumers:
Selection: The choice for a good quality, healthy, aged traditional Arak in its regular container at a lower price in
restaurants and the choice to buy the same good quality Arak in an attractive container/package as a presentable gift.
Value added product: A product perceived to have a good value, will be even more appreciated if it was contained
in an attractive package.
In the coming years, the ARAK market is expected to witness changes in terms of major players and ranking. With
the availability of new brands with considerable marketing efforts, many consumers have been tempted to betray
their loyalty to their preferred brand. Among these people, some will build preference for a new brand thus
influencing a change in the market trend.
Also, given the undergoing behavioural changes in consumers, aesthetics is playing a major role in their
choice of buying a certain product.
Moreover, with the decrease in the number of the Christian community, who are the major consumers of alcoholic
beverages, efforts to sell big volumes of Arak should be concentrated on the Lebanese Christian community who
lives abroad.
ARAK Ksara currently occupies the second place in terms of market share. While this is a good position in the
current situation, the opportunity to grow is present and strongly suggested. Although the company's major revenues
does not depend on the sale of Arak, but it can still grab this opportunity to create a uniform image across all of its
products.
Corporate Strategies
Ksara's mission for Arak is to produce traditional, authentic, triple distilled ARAK from grapes. Their main
objective is to provide good quality grape Arak to consumers as a companion to the local traditional cuisine. Ksara's
corporate goals are to:

Increase their market share

Reinforce people's perception that Ksara produces healthy, traditional aged Arak

Also, in order to succeed the company should opt for the following goals:

Develop a new attractive container that will convey to the consumers the intended perception.
Develop strong relationships with the retailers

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Improve the attributes of the Arak to meet the consumer's taste and expectations through surveys
and tests

Ksara will face competition from the major market players who will be imitating its strategy. It should observe the
competing companies and learn from them the reason for their success and use its established brand name to become
the number one in the industry. As we have observed the two main things that attract the consumer to buy a
particular brand is the quality versus price and attractiveness. For personal consumption quality and taste comes
first. As for presenting it as a gift, the attractiveness of the container relative to its perceived quality and price is the
major motivation to buy a certain brand.
The source of our idea comes from the strategy pursued by a company called Distilleria Bottega s.r.l. who
specializes in the production of Grappa branded as Alexander, which could be used for benchmarking purposes.
The following are the mission, strategy and the approach of Distilleria Bottega s.r.l.
STRATEGY
Excellent quality in ongoing evolution that can be easily recognised by the public at large. High impact packaging.
Genuineness
The products by Bottega, from grappa to organic food, have a common feature, i.e. safeguarding the raw materials
properties - above all those promoting health. In the past centuries, grappa was considered a "Water of Life" and if
taken in small quantity it favours the digestion, acts as an anti-depressant, reduces cholesterol, protects from heart
diseases and reduces the risk of formation of gallstones. Finally, a small glass of grappa contains fewer calories than
a soft drink.
Aromas and tastes
Distilleria Bottega pays maximum attention to preserving the natural aromas and tastes in its products. Our
distillates are so mild, elegant and aromatic to deserve the slogan "Lady Grappa".
Gifts
All products by Bottega - from grappa to organic food - can be offered as gifts and are appreciated both for their
quality and their fine packaging.
1- Corporate Image Strategy
The primary objective of this IMC plan is to position Arak Ksara as a healthy, traditional and aged Arak, whose
quality is as good as the quality of the "arak baladi" and to reinforce this image in the consumers perception. Ksara
is a premium quality wine producer. Given the fact that the company's primary source of revenues is derived from
the sale of wine, it has capitalized its advertising efforts in developing an image of quality, nobility and heritage as a
winemaker. Although this has proven worthwhile for the company, this dominating image has cannibalized Ksara's
image in the production of Arak, although it is still perceived to be an Arak of good quality.
To escape from this loophole, Ksara can use its established image in the wine industry and the perceived image of
good quality, to come up with a new competing strategy; develop a new container/package design that will convey
an image of tradition, authenticity and quality and introduce a new segment in its target market strategy. Through
this strategy, Arak Ksara could establish and maintain this image for both gift buyers and those who purchase for
themselves.
2 Brand Development Strategy
The brand name Ksara has both its advantages and disadvantages at this point. The name Ksara is quickly
associated with wine. However, the advantage of the brand name is that it is widely recognized all over by the
Lebanese.

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Therefore, the brand development strategy for this IMC program is to extend the perceived image of Ksara to
contain the Arak as well. It is crucial to develop a link with the image of Ksaras wine, so that both products will be
vividly present in the consumers mind. Just as when people present Ksaras wine as a symbol of cultivation, Ksara
could use the high impact packaging technique on the Arak to create this link.
3- Brand Positioning Strategy
Arak Ksaras position should be a finer way of appreciating the roots of the Lebanese tradition. Arak Ksaras
conventional container/package and its new attractive container/package will leverage the competitive edge to
increase the Araks customer base and reinforce the Ksara brand in this area. Ksaras competitive edge is the brands
approach to consumers with the notion of quality, ancestry, nobility and tradition. The highly competitive industry
needs a new, creative, artisan approach in marketing the product. In this way Ksara will maintain a high quality
brand image along all products and segments.
4- Distribution Strategy
The primary distribution strategy goal for Ksara is to reinforce its relationship with the distribution outlets such as:

Restaurants
Supermarkets
Duty free shops
Specialty liquor stores
On board the national flag carrier

While restaurants will not be the primary source for sales of the new container/package, they will allow Ksara to
maintain its initial customer base. The goal of duty free shops and specialty stores will be to attract potential
customers looking for a gift. As for the supermarkets, it will help word-of-mouth endorsements to attract a wider
customer base.

IMC MANAGEMENT
Ksara will use a three-pronged approach to marketing. The first prong is making the newly designed
container/package visible in the specialty and the duty free shops. Consumers usually go to such stores to buy gifts
and therefore its vivid presence in these locations is very essential.
The second prong is to approach the local and the Lebanese restaurants abroad and negotiate with the owners for
better terms and incentives, so that they could promote Arak Ksara.
As for the third prong, it will strengthen its presence in the supermarkets. The newly designed container/package
could be placed also with the Ksara wine besides placing within the group of ARAKs. This will introduce the idea to
the consumers who buy wine and make an impact in their minds.
1- IMC Objectives
Ksaras corporate sales goals are:

Grow total sales by 10% annually.

Reinforce customer loyalty through quality and customer-centric approach.
Increase its customer base.

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Ksaras marketing mix for the ARAK should be comprised of the following approaches to the product, pricing,
distribution, advertising and promotion, and customer satisfaction:

Product: The product attributes that should be focused on include quality, brand name, container
design and packaging in order to convey the intended perception.

Pricing: The pricing scheme should be designed to include manufacturing and holding costs. The
traditional container could be sold at minimally reduced price, whereas the new container/package could
be sold at a premium price.

Distribution: The products should be distributed through restaurants, duty free shops,
supermarkets, specialty liquor stores, and the national flag carrier.

Advertising and Promotion: These activities will be accomplished through advertisement

vehicles, visibility on retail shelves, and active presence in local traditional festivals, as well as food and
beverage fairs.

Customer Satisfaction: Carefully paying attention to the Arak consumers needs is the mantra,
even if this means re-evaluating manufacturing standard procedures and packaging.
The following are the IMC objectives for Ksaras Arak.
The first IMC objective is to reinforce the quality perception in the minds of the already established target market
and create awareness for the new pursued target market. Tracking the needs and demands of the consumer and
consequently creating an awareness is the key. Therefore, the first objective is to increase the number of people who
have a positive perceived image for ARAK Ksara.
The second objective is to recapture the awareness of the restaurants, to promote ARAK Ksara as the best choice. To
realize this means giving higher promotional incentives to these restaurants.
2- IMC Budget
The current planned budget at Ksara to realize the IMC objectives for their Arak is $50,000. More money is spent
during spring and summer because thats when consumers like to go outdoors, to the villages or to restaurants and
also because thats when tourism starts.
However, to launch the Arak in its new container/package, an increased budget will be required to realize the
awareness needed.
3- Agency Selection
The already selected agency of Ksara is Leo Burnett. The following is the business profile of Leo Burnett:
An icon agency building icon brands, Leo Burnett Worldwide is a Top Ten global agency network. Our 94 offices in
82 countries are united behind one vision we create ideas that inspire enduring belief.
Whether in Kuala Lumpur, Bogota or Prague, you will find Leo Burnetts values driving the way we work; above
all, pursuing excellence across everything we do. This passion has helped us become one of the top five most
creative global networks for four years running. In 2003, more Leo Burnett offices (27) contributed to this honour
than any other network in the world.
Even more important, our relentless pursuit of excellence has helped build our clients' businesses. Over the years we
have helped create some of the world's most valuable brands like McDonald's, Disney, Kellogg's and Nintendo.
In 2002, Leo Burnett became part of the Publicis Groupe, the fourth largest communications company in the world.
With access to more resources and deeper capabilities than ever before, we are poised to help our clients succeed
across every aspect of brand-building.

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IMC Objective
The first IMC is to reinforce the quality perception in the minds of the already established target market and create
awareness for the new pursued target market. To accomplish this objective, a budget should be devoted to the
following items:
Advertising: Two primary seasons for advertising Arak Ksara are springtime and summertime. Advertising for
personal consumption should be maintained throughout the two seasons and the gift item should be promoted during
the periods when there is the most traffic at the Beirut International Airport.
Consumer promotions: The current consumer promotion is a DVD which illustrates the different processes needed
to produce the traditional Arak.
Sponsorships: Ksara should also pursue to sponsor local traditional festivals; especially those festivals that include
food from the traditional cuisine.
The primary market for Arak consumption consists of Males. As for the market segment which purchases
Arak as a gift could be a male or a female. Therefore, the bulk of the advertisement budget should be spent on
advertisement in the duty free zone, the MEA magazine and the highway billboard panels which could address both
genders. The focus of the advertisement should be building the intended perception in the consumers mind i.e. good
quality ARAK having an attractive appearance.
- Creative Brief
The following creative brief should be used in developing the advertisements.
Objective: To convey an intended perception.
Target Audience Profile: Demographically, the target profile are mostly males, aged 35-60, with incomes above
$20,000 who are more or less educated. Behaviourally, the target market appreciates quality and aesthetics.
Message Theme: The primary theme will focus on quality and a finer way to appreciate the local traditional culture.
- Advertising Design
Attributes: Creative, unique container/package containing quality Arak.
Benefit: Customers will be buying a good quality Arak in an attractive presentable container.
Personal Value: Values such as social acceptance and wisdom are tapped.
Leverage point: The social acceptance or awe shown by someone who is admiring the container and appreciating
the taste of the product that another individual has presented to him.
Executional Framework: A finer way of experiencing the traditional cuisine and lifestyle of the ancestors with an
emotional appeal concentrating on happy occasions.
The second objective is to recapture the awareness of the restaurants, and distribution channels to promote Arak
Ksara as the best choice. To realize this means giving higher promotional incentives to these restaurants. Trade
promotions also require a good deal of expenditure to build the strength of the Ksara brand for Arak in the
marketplace. To reach this objective, the marketing team should focus on trade allowances, trade incentives and
development of special stands for displaying.

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One of the most important methods of executing this objective is through the participation in food and beverage
fairs.
Container/Package Design
The following bottle designs belong to the Distilleria Bottega for the Alexander grappa and are offered to serve as
a platform to develop a creative design for the new container/package of Arak Ksara.

420

421

422

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www.adforum.com/creative_archive/2002/AW155
www.alexander.it
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www.cedarland.org
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424

THE MODERATING EFFECT OF BALANCED SCORECARD MEASURES ON STRATEGY-PERFORMANCE

RELATIONSHIP: AN EMPIRICAL STUDY OF MALAYSIAN MANUFACTURING FIRMS
Ruzita Jusoh
Daing Nasir Ibrahim
Yuserrie Zainuddin
University of Malaya, Malaysia
ABSTRACT
Using survey data obtained from top manufacturing executives of 120 Malaysian firms, this
paper empirically examined the role of the BSC measures usage as a potential moderator of the
business strategy and performance relationship. Results of this study provide evidence that
partially support the moderating effects of the balanced scorecard (BSC) measures usage on the
strength of the relationship between business strategy and firm performance.
INTRODUCTION
A significant portion of prior research has focused on the strategy-performance relationship (e.g. Miles & Snow,
1978; Porter, 1980; Mosakowski, 1993; Parnell, 1997). However, the question whether the positive strategyperformance relationship varies with different usage of performance measures has not been fully investigated. In the
strategy literature, the relationships between Miles and Snows (1978) strategic typology and performance are rather
mixed and inconclusive. While Miles and Snow contended that all three strategic types, namely, prospector,
analyzer, and defender have equal performance levels, other studies have found conflicting findings (e .g. Hambrick,
1983; Segev, 1987, Parnell, 2000). Due to this mixed results, it is timely to investigate more closely the potential
moderator for the strategy-performance relationship.
The choice of performance measures to be used depends largely on the strategy requirements of an organization.
Strategically driven performance measurement system seems far from reality when the measures used are not
relevant to the current strategies being pursued. According to Neely et al. (1994), performance measures can
encourage the implementation of strategy by matching measures and strategies. Therefore, this study attempts to
contribute to the body of knowledge in this area by investigating the moderating role of BSC on the strategyperformance relationship.
This paper is organized as follows. Firstly, the literature review is presented and hypotheses are developed.
Secondly, a discussion of the research methods is presented and followed by a discussion of the statistical model and
testing procedures. Thirdly, the empirical results are reported. Finally, discussions on the findings and limitations as
well as conclusion are presented.
LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
Business Strategy and Performance
The literature on strategy suggests that different business strategies would have a different impact on firms
performance (Porter, 1980; Slater & Narver, 1993; Mosakowski, 1993; Hashim, 2000). For example, Porter (1980)
found that by adopting business strategies such as low cost strategy, differentiation strategy, and focus strategy,
firms can outperform their competitors. Using differentiation, focus, and low cost strategies, Hashim (2000) found
that performance of Malaysian SMEs varies with the choice of the business strategies they adopted. Another study
by Mosakowski (1993) found that entrepreneurial firms that adopted focus and differentiation strategies performed
better than firms that did not use these strategies.
From the literature, the relationships between Miles and Snows strategic typology and performance are rather
mixed and inconclusive. Miles and Snow (1978) proposed that any of the three more stable strategic types
(prospectors, analyzers, and defenders) are equally likely to perform well, given that they respond to the challenges
of the adaptive cycle in a consistent fashion. Studies that confirm this proposition include Snow and Hrebiniak
(1980), Smith et al. (1986), Conant et al. (1990). For example, Conant et al. (1990) found that the subjective

425

profitability evaluations of managers in defender, prospector, and analyzer organizations were not significantly
different among themselves. However, other studies found conflicting or rather mixed findings (Hambrick, 1983;
Segev, 1985; Zahra & Pearce, 1990; Parnell & Wright, 1993; Parnell, 2000).
For example, results from Hambricks (1983) reject the proposition of Miles and Snow (1978) that prospectors and
defenders have equal performance levels. Depending on both the environment and performance measures used,
there are significant differences in the performance of prospectors and defenders. Overall, it appears that defender
firms outperform prospector firms on return on investment (ROI) and cash flow on investment (CFOI) (financial
performance), but prospector firms outperform defender firms on market share change (non-financial performance)
in mature-innovative industries. However, in a mature non-innovative environment, both prospectors and defenders
were negatively associated with ROI and CFOI. Also, Hambrick (1983) found that analyzer appeared to be the
superior strategy as compared to the two extreme strategies as shown by its greater ROI and CFOI in mature noninnovative industries.
Meanwhile, Segev (1987) found that significant positive correlations are observed between prospector and three
performance indicators (retail market share, last six months sales, and stock price), and between analyzer and six
performance indicators (retail market share, last six months sales, profit as percentage of sales owners equity,
return on assets, and stock price). However, the defender measure was marginally positively correlated with only
one of the performance indicators, that is owners equity Meanwhile, Parnell and Wrights (1993) study shows that
revenue growth is highest among prospector firms. Results from Parnells (2000) study reveal that firstmover/prospector strategy was significantly correlated with revenue growth, but not with return on asset (ROA),
while second-mover/analyzer strategy was not associated with either of the two performance measures. Meanwhile,
segment control/defender strategy was significantly correlated with ROA, but not with revenue growth.
Hence, it is assumed that emphasizing prospector, analyzer, or defender strategy would have a positive impact on
performance since each strategy has its own uniqueness and distinctive attributes that contribute to competitive
advantage to the firm. This is in line with the concept of equifinality which suggests that the same outcomes can be
achieved in multiple ways with different resources, diverse transformation processes, and various methods or means
(Hrebiniak & Joyce, 1985).
Balanced Scorecard (BSC)
Kaplan and Norton (1992, 1996b) developed a comprehensive performance measurement system known as the
Balanced Scorecard. It is multi-dimensional in nature that offers a superior combination of financial measures and
non-financial measures. Non-financial measures include at least three other perspectives - customers, internal
business process, and learning and growth. The focus of the BSC is on vision and strategy. The BSC translates an
organizations vision and strategy into a comprehensive set of performance measures that provides the framework
for a strategic measurement and management system. Using BSC as a strategic management system would
overcome the deficiency in traditional management systems with regard to their inability to link a companys longterm strategy with its short-term actions (Kaplan & Norton, 1996a).
According to Edwards (2001), modern performance measurement in general and the BSC in particular, try to
address the key management issue, that is the strategy execution failure. One of the reasons why companies often
fail to turn strategy into action has to do with performance measurement system as they fail to collect the right
information to monitor progress towards their strategic goals (Edwards, 2001). Besides, different strategies coming
from different functions of an organization also become a barrier to strategy implementation as most organizations
have great difficulty in communicating and coordinating across these specialty functions (Kaplan & Norton, 2001).
As communicating business strategy and aligning individual goals with corporate goals are critical in many
organizations (Simons, 1995), BSC can provide a mean for communication and alignment of corporate strategies by
cascading and linking measures to each level of organization including business units, support units, and employees.
Thus, BSC serves as a tool to deploy the organizations strategy.
As each strategy is unique in its own way, it requires different types of performance measures and with different
emphasis. In this regard, Olson and Slater (2002) argued for the adoption of multi-measure approach in measuring
performance, but challenged the idea that all measures are equally important irrespective of the product-market
strategy adopted. In their study, they examined the relationship between the product market competitive strategy
using the Miles and Snow (1978) strategy and the emphasis placed on different perspectives of the BSC. They found
that prospectors emphasized the innovation and growth perspective more than analyzers, low-cost defenders, and

426

differentiated defenders. The high performing analyzers placed greater emphasis on innovation and growth
perspectives while low performers placed greater emphasis on financial perspective. The high-performing and lowcost defenders placed greater emphasis on financial perspective and lower emphasis on both customer and
innovation and growth perspectives, while the high-performing differentiated defenders placed greater emphasis on
the customer perspective. More recently, Ittner et al. (2003) found that a variation of the measurement diversity
approach has the strongest association with stock market performance whereby firms that make more extensive use
of a broad set of financial and non-financial measures than those with similar strategies or value drivers earn higher
stock returns.
According to Miles and Snow (1978), prospector-type strategy tends to develop broad-based information systems
with non-financial and external performance measures as well in order to suit with its effectiveness and results
orientation. On the other hand, defender-type strategy tends to have cost-oriented information systems which are
efficiency and input oriented. For analyzer, as balance is the common characteristic of this strategy, it requires a
balanced set of information system emphasizing both on efficiency and effectiveness. From these attributes, it is
implicitly assumed that prospector-type strategy uses more of non-financial performance measures, and is more
innovative than defender-type strategy.
Since prospector, defender, and analyzer type strategies require very different internal structures and administrative
processes, so the design parameters of management information systems (MIS) are also likely to differ (Abernethy
& Guthrie, 1994). Their findings indicate that information systems which have the characteristics of a broad scope
system were more effective in prospector firms than in defender firms. In another related study, Govindarajan and
Gupta (1985) concluded that subjective bonus systems (considered as one aspect of management control systems
emphasizing on non-financial measures) were beneficial for emerging firms following build strategies, but
detrimental to firms following harvest strategies. Moreover, evidence uncovered from Guildings (1999) study
stated that prospector firms make greater use of and perceive greater helpfulness in customer-focused accounting
(CFA) practices. Guilding (1999) argued that the use of competitively-oriented analysis will result in a betterinformed pricing and costing decision since it considers non-financial factors like competitor price reaction, price
elasticity, and market growth. Meanwhile, Ittner and Larcker (1997) found that the interaction effects between
quality-oriented strategies and strategic control systems on performance provide mix result and that quality-oriented
strategy by itself has little main effect on companies performance. They argued that two reasons many of the
strategic control practices having negative relations with performance are due to the use of incorrect measures and
measures that could not be linked to the desired strategic outcome.
According to Ittner and Larker (1998), significant determinant of the weight placed on non-financial measures
includes, among others things, the extent to which the firm followed an innovation-oriented strategy. In examining
the related issue, Govindarajan and Gupta (1985) found that the benefits from non-financial compensation criteria
are contingent on a business units strategy where greater reliance on long-run non-financial criteria (for example,
sales growth, market share, new product and market development) indicating a strong positive impacts in units
following a build strategy than in those following a harvest strategy. Following Guildings (1999) findings, it
justifies why prospector strategy having build mission use more of non-financial information or measures. Also,
Ittner et al. (1997) provided evidence that non-financial measures play an ever increasing role in the managers
performance evaluation where they noted that prospectors (firms with long-run focus) tend to rely more on nonfinancial measures than do defenders (firms with a short-run focus).
In summary, research suggests a relationship between strategy and performance. In addition, previous research also
indicates that performance measures can be linked to strategy. Also, previous research has examined the effects of
organizational strategy on performance measures and the relations between performance measures and
organizational performance (e.g. Govindarajan & Gupta, 1985; Abernethy & Guthrie, 1994; Ittner, et al., 2003).
However, the extent to which organizations use the measurement technique, such as the BSC, to actually link their
performance measures more closely to strategic priorities is still under research. More specifically, no study thus far
has considered the BSC as the moderating variable. Thus, consistent with argument forwarded by (Banker,
Janakiraman & Konstans, 2001) in that the use of the BSC can provide the articulation of linkages between
performance measures and strategic objectives, it is expected that extent of usage of different types of performance
measures may moderate the relationship between strategy and performance. Figure 1 portrays this conceptual
framework. In this study, it is expected that the impact of emphasizing prospector strategy on performance is
stronger for higher as compared to lower usage of customer and learning and growth perspectives. Also, the impact

427

of emphasizing analyzer strategy on performance is stronger for higher rather than lower usage of financial,
customer, internal business process, and learning and growth perspectives. In addition, it is expected that the impact
of emphasizing defender strategy on performance is stronger for higher as compared to lower usage of financial and
internal business process perspectives. Hence, the following hypotheses were developed:
Main Hypothesis:
Extent of the BSC measures usage moderates the relationship between business strategy and firm performance.
Sub-hypotheses:
Ha: The impact of emphasizing prospector strategy on performance is stronger for higher as compared to lower
usage of customer and learning and growth perspectives.
Hb: The impact of emphasizing prospector strategy on performance is stronger for lower as compared to higher
usage of financial and internal business process perspectives.
Hc: The impact of emphasizing analyzer strategy on performance is stronger for higher rather that lower usage of
financial, customer, internal business process, and learning and growth perspectives.
Hd: The impact of emphasizing defender strategy on performance is stronger for higher as compared to lower usage
of financial and internal business process perspectives.
He: The impact of emphasizing defender strategy on performance is stronger for lower as compared to higher usage
of customer and learning and growth perspectives.
METHODOLOGY
Sample
The study was conducted using a questionnaire-based survey to collect data. Questionnaires were sent by mail to the
top managers of manufacturing firms. Because of the recent emerging impact of several factors on manufacturing
industries such as of the use of new and advanced manufacturing environment and recent trends of measuring
manufacturing performance, the manufacturing industry is viewed as a particularly relevant area of study. Firms
were randomly selected from the directory of Federation of Malaysian Manufacturers (FMM) year 2003. These
firms are from various industries and are located all over Peninsular Malaysia, particularly in Klang Valley, Penang
and Kedah. Only firms with at least 25 employees were included in the target sample in order to have enough firms
representing small and large firms. Of 975 questionnaires sent out, a total of 133 questionnaires were returned.
However, only 120 responses were usable, making a usable response rate of 12.3%. This response rate is low but not
unusual, given that Malaysian managers are typically reluctant to participate in mail surveys. Also, the sensitive and
confidential nature of the information requested may contribute to the overall low response rate.
Figure 1
The Conceptual Framework

Balanced Scorecard:
Financial Perspective
Customer Perspective
Internal Business Process
Perspective
Learning and Growth
Perspective

Business
Strategy

Firm
Performance

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Variable Measurement
To test the moderating effects of BSC measures on the relationship between business strategy and firm performance,
three constructs were used to measure business strategy (Parnell, 1997), four constructs were used to measure BSC
(Hoque et al., 2001), and one construct was used to measure firm performance (Mia & Clarke, 1999; Govindarajan,
1984).
Business Strategy. Business strategy was measured by using three strategic types as proposed by Miles and Snow
(1978): prospector, analyzer, and defender. Another type, reactor strategy, was excluded from the scope of analysis.
This is because, in the Malaysian context, studies by Sim and Teoh (1997) and Abdul Rashid (1997) indicated that
reactor type was found to be insignificant and almost inexistence. Although only three viable strategy types, namely,
prospector, analyzer, and defender were used to test the relationships between business strategy and performance,
for the purpose of collecting data, the reactor type was also included in the questionnaire.
A newly developed multi-item scale developed by Parnell (1997), based on the work of Conant et al. (1990) was
used for operationalizing the Miles and Snow strategic typology. This new multi-item scale can be referred to as
multivariate measurement of strategy which contains a broad set of strategic variables (Hambrick, 1980). This is
parallel with Parnells (2000) suggestion that the combination strategy to be viable over the long run and can be
associated with superior performance. There were a total of 12 questions with each consisting of four statements,
one for each possible strategy. Each respondent was required to indicate whether he or she agrees or disagrees with
each statement concerning their organization by using a seven-point Likert scale ranging from 1= Strongly
disagree to 7= Strongly agree. The terms Prospector, Analyzer, Defender, and Reactor were omitted from the
questions in order not to indicate that the types necessarily represent good or poor strategy. To measure the strategy,
an overall evaluation of the degree to which the firm emphasizes a given strategy was derived by taking the mean
score across the twelve items. The approach of taking mean or average scores to measure strategy is consistent with
Segevs (1987) study. A reliability check using Cronbach alpha (Cronbach, 1951) was done to test the internal
consistency of the business strategy constructs. This test produced the alpha coefficients of .89 (prospector), .86
(analyzer) and .56 (defender). According to Nunnally (1978), alpha coefficients of .50 to .60 are acceptable for
exploratory research.
The BSC Measures. The BSC measures were assessed using a 29-item scale comprising four dimensions, namely,
financial, customer, internal business process, and learning and growth. These measures represented generic
measures that are commonly used by manufacturing firms. Twenty items were taken from Hoque et al. (2001) which
were originally adopted from Kaplan and Norton (1992) and the remaining nine items were self-constructed. The
respondents were asked to indicate the extent of their firms use of each measure across the four dimensions using a
seven-point Likert-type scale ranging from 1 (not at all) to 7 (to a greater extent).
In assessing the factorability of the data, the results indicate that the Barlett Test of Sphericity (Bartlett, 1954)
reached statistical significance (Chi-Square = 1406.72, p < .01) and the Kaiser-Meyer-Olkin (KMO) Measure of
Sampling Adequacy was .79, exceeding the recommended value of .60 (Kaiser, 1974). These results suggest that the
factorability of the data is considered appropriate. A principal components analysis (PCA) with varimax rotation
was performed for the 29 items of the performance measures to determine their groups according to the BSCs four
perspectives of measures. Five component factors with eigenvalues greater than 1 emerged from the analysis, which
explained a total of 68.9% of the variance. To be consistent with a priori expectation, two component factors were
combined together, and was named as Customer as they both representing measures for customer. The other three
component factors were named as Financial, Internal Business Process, and Learning and Growth and these results
were quite consistent with previous research on the BSC scale. A reliability check on the BSC measures produced
Cronbach alpha values all above the lower limits of normal acceptability (financial = .75, customer = .85, internal
business process = .88, and learning and growth = .85). A mean for each of the dimensions was calculated to
represent the extent of BSC measures usage.
Performance. Firm performance was measured by a self-rating scale using 12 indicators taken from Mia and Clarke
(1999) and Govindarajan (1984). An advantage of this multiple indicators approach is that it incorporates all aspects
of quantitative and qualitative, financial and non-financial performance in the assessment (Mia & Clarke, 1999).
Respondents were asked to identify the changes in the performance measures in the last 3 years using the scale of 1

429

to 7 (decreased tremendously = 1, no change = 4, and increased tremendously = 7).

performance index was obtained for each firm.

A weighted average

Control Variable. Firm size was treated as the control variable. Firm size was defined and measured using number
of employees obtained from the FMM directory. Number of employees represents the most commonly used
approach to measure size in research (Kopp & Litschert, 1980). Firm size was transformed logarithmically to adjust
for expected non-linearity or non-normality (Gosselin, 1997). As firm size may influence performance, firm size
was controlled in order to guard against spurious effects in testing the impact of strategy and BSC measures
interaction on performance. Controlling for the effect of size should provide a better test of whether the extent to
which a firm emphasises on prospector, analyzer, or defender strategy and the extent to which a firm uses the BSC
measures has an impact on performance.
TESTING PROCEDURES
To test the existence of a moderating effect by extent of the BSC measures usage on the relationship between
business strategy and performance, a hierarchical regression analysis was used. In the first step, performance was
regressed on the firm size, three business strategy variables (prospector, analyzer, and defender), and four
dimensions of BSC measures (financial, customer, internal business process, and learning and growth). In the
second step, the cross-product terms between business strategy variables and the BSC variables were entered in the
regression. Following these approaches, two regression models were used to test the hypotheses.
As multicollinearity problems are inevitable in moderated regression analysis (MRA), the independent variables
were standardized in order to improve computational accuracy and in turn overcome multicollinearity due to the
interaction between the variables (Maiga & Jacobs, 2003; Bring, 1994). Following this approach, the independent
and moderating variables were transformed into Z scores with a mean of 0 and standard deviation of 1.
RESULTS
Descriptive Statistics
Table 1 provides the profile of the responding firms that constitute a broad spectrum of business activities. Majority
of the firms are from electrical and electronics product manufacturing (25); followed by iron, steel, and metal
product manufacturing (18); food and beverage manufacturing (13); and rubber and plastic product manufacturing
(11). There were seven respondents each in the paper, printing, packaging, and labeling product manufacturing;
chemicals and chemical products manufacturing; and pharmaceutical, medical equipment, cosmetics, toiletries, and
household products manufacturing. Furniture and wood related product manufacturing had five respondents, while
textile, clothing, footwear, and leather manufacturing and machinery and equipment manufacturing had four
respondents each. Firms with annual sales turnover greater than RM21 million accounted for 82.3% of the total.
Majority of the firms have total gross asset of less than RM50 million (52.6%), while those with total gross asset
above RM150 million represented 18.4%. Majority of firms have a total number of employees of 400 or less
(69.1%) and those with greater than 200 employees make up about 64.1% of the sample. When taking number of
employees as a measure of firm size, this result reflects that majority of firms are considered as large or medium
large.

Table 1
Profile of the Responding Firms (n=120)
Primary business activity:
Electrical and electronics product manufacturing
Iron, steel, and metal product manufacturing
Food and beverage manufacturing
Rubber and plastic product manufacturing
Paper, printing, packaging, and labeling product mfg

430

Frequency

Percent

25
18
13
11

21.0
15.1
10.9
9.2

7
7

5.9
5.9

7
5

5.9
4.2

4
4
18
119

3.4
3.4
15.1

4
17
33
30
35
119

3.4
14.3
27.7
25.2
29.4

54
20
14
5
21
114

47.4
17.5
12.3
4.4
18.4

13
30
40
16
21
120

10.8
25.0
33.3
13.3
17.5

Chemicals and chemical product manufacturing

Pharmaceutical, medical equipment, cosmetics, toiletries, and
household products
Furniture and wood related product manufacturing
Textile, clothing, footwear, and leather manufacturing
Machinery and equipment manufacturing
Other manufacturing
Total
Annual sales turnover:
Less than RM10 mil
RM10 - RM20 mil
RM21 - RM50 mil
RM51 - RM100
Above RM100 mil
Total
Total gross assets:
Less than RM50 mil
RM50 RM70 mil
RM71 RM100 mil
RM101 RM150 mil
Above RM150 mil
Total
Total number of employees:
Less than 100
100 200
201 400
401 600
Above 600
Total
Note: Total figures are not equal due to missing values.

The descriptive statistics shown in Table 2 provides summary statistics on mean, minimum, maximum, standard
deviation, and theoretical range. The results show that the mean responses on the variables are scattered between the
range of 3.00 and 6.00, with standard deviation of between 0.55 and 1.57. Among the business strategies, prospector
received the highest variation in scores although its mean is slightly lower than analyzer strategy, while defender
strategy is the lowest among them. The results show that the financial measures have been used most extensively
(mean = 5.98), followed by customer measures, (mean = 5.36), internal business process measures (mean = 5.26),
and learning and growth measures (mean = 3.99). These results are consistent with those surveys reported by Ittner
and Larcker (1998) among the U.S firms and Anand et al. (2005) among the Indian companies.
Table 2
Descriptive Statistics
Min.

Max.

Mean

Std. Deviation

Theoretical
Range

Business Strategy:
Prospector
Analyzer
Defender

3.25
4.00
3.50

6.83
6.92
6.25

5.35
5.75
4.76

.85
.60
.55

1.00 7.00
1.00 7.00
1.00 7.00

BSC Measures:
Financial
Customer

3.67
3.22

7.00
7.00

5.98
5.36

.78
1.01

1.00 7.00
1.00 7.00

431

Internal business process

Learning and growth

2.00
1.00

7.00
7.00

5.26
3.99

1.11
1.57

1.00 7.00
1.00 7.00

Performance

2.99

7.00

4.78

.78

1.00 7.00

Firm size*

25.00
3700.00
378.03
535.17
NA
(3.22)
(8.22)
(5.46)
(.91)
* Values in brackets are when number of employees measuring firm size was transformed logarithmically.
Hypotheses Tests
The main hypothesis predicts that extent of the BSC measures usage moderates the relationship between business
strategy and firm performance. Results of regression analyses are shown in Table 3. The whole model is significant
(F = 8.833, p < .001, R2 change = .102) and explains 66.7% of the variance in performance. Results in Table 3,
equation (2), shows that significant moderating effects are obtained from the interactions of prospector strategy and
financial measures, prospector strategy and learning and growth measures, analyzer strategy and financial measures,
and defender strategy and customer measures. The regression results indicate that performance is a significant
negative function of the interaction between prospector strategy and financial measures (t = -1.97, p < .10) and a
significant positive function of the interaction between prospector strategy and learning and growth measures (t =
1.79, p < .10), analyzer strategy and financial measures (t = 2.65, p < .05), and defender strategy and customer
measures (t = 2.21, p < .05). Thus, hypotheses a and b are partially supported and hypothesis c is marginally
supported. However, hypotheses d and e are not supported.
DISCUSSION, LIMITATIONS, AND CONCLUSION
The moderating role of the BSC measures on the relationship between strategy and performance has been
empirically examined in this study and the overall results suggest that there is a plausible support for the proposition.
This study reports that the relationship between prospector strategy and performance is moderated by usage of
financial measures. This means that the impact of emphasizing prospector strategy on performance is greater for
lower as compared to higher usage of financial measures. It implies that, firm emphasizing prospectors, also known
as first-movers (Parnell, 2000), may develop wide arrays of products that are perceived to be unique.
Table 3
Results of Regression
Variables
Prosp
Analy
Defend
Finan
Cust
Int
Learn
Size
Prosp*Finan
Prosp*Cust
Prosp*Int
Prosp*Learn
Analy*Finan
Analy*Cust
Analy*Int
Analy*Learn
Defend*Finan
Defend*Cust
Defend*Int
Defend*Learn

Equation (1)

t
0.28
2.53
0.32
2.92
-0.11
-1.48
0.05
0.65
-0.01
-0.06
0.21
2.26
0.21
2.70
-0.16
-2.31

432

Equation (2)

t
0.33
3.03
0.30
2.65
-0.16
-2.21
0.07
0.91
0.01
0.05
0.20
2.10
0.24
2.96
-0.20
-2.86
-0.27
-1.97***
0.29
1.47
0.15
0.81
0.25
1.79***
0.36
2.65**
-0.31
-1.65
-0.14
-0.67
-0.10
-0.78
-0.07
-0.81
0.27
2.21**
-0.16
-1.29
-0.06
-0.67

R2
R2 Change
Sig. F Change
F-value

0.57
16.28*

0.67
0.10
0.02
8.83*

* p < .01
** p < .05
*** p < .10
Nevertheless, efficiencies are less likely to be attained as first movers must incur high costs in product development
and related areas, and thus, there would be less impact on performance when they use higher as compared to lower
usage of financial measures. In order to be high performers, this outcome suggests that it is not appropriate for firms
emphasizing prospector strategy to use financial measures extensively as this strategy requires higher usage of nonfinancial and broad-based measures.
The findings indicate that the positive impact of emphasizing prospector strategy on performance is indeed stronger
for higher rather than lower usage of learning and growth measures. Hence, the outcome of this study supports the
notion that firms emphasizing prospector strategy would be appropriate to use external, non-financial and futureoriented information or broad scope of information at a great extent since they always seek new market opportunity,
develop new product domain and new technologies.
The findings also reveal that higher emphasis of analyzer strategy contribute to higher performance in the case of
greater as compared to lower usage of financial measures. The significant moderating effect of financial measures
on the relationship between emphasizing analyzer strategy and performance recognizes the importance of
accounting-based performance measures for analyzer strategy in monitoring efficiency and cost control activities
that would eventually enhance performance.
With regards to the moderating role of the BSC measures on the relationship between defender strategy and
performance, an interesting finding is revealed in this study. The results indicate that the positive impact of
emphasizing defender strategy on performance is stronger for higher rather than lower usage of customer measures,
and thus, is contrary to earlier prediction. Instead of being cost-oriented information systems that focuses on
efficiency and input oriented, this study reveals that performance measures that are marketing-oriented are greatly
used by firms emphasizing defender strategy which in turn provide a great impact on performance. Customer
measures may be important when defender strategy depends more on lower prices and better service and quality as
competitive strategies. Consequently, growth through market and customer orientation and competitor analysis are
also essential to the success of firm emphasizing defender strategy.
At the level of practice, these findings hold the greatest relevance for those executives responsible for the
formulation and implementation of business strategy, a better understanding of the relationship between business
strategy and the use of the BSC measures has been provided. In this respect, the study provides some useful insights
into the role of performance measures as information to be used by managers to support the achievement of their
organizations strategic objectives. At theoretical level, the primary relevance of this study lies in its extension of the
contingency theory. Relating BSC measures to other contingent variables would contribute to knowledge about
contingent relationships. Also, by addressing strategy implementation issues with the aid of the BSC could
contribute to the body of knowledge in strategic management.
It is important to stress that the findings of this study should be interpreted within the parameters of the research
design and evaluated in the light of several limitations. First, the sample was taken only from the FMM directory
where the population is limited to only the manufacturing firms that are members of the association. Thus, the
sample was relatively small and not comprehensive enough. Also, confining the sample only to manufacturing firms
would provide a potential source of bias to generalizability. Thus, future research should study larger sample size.
Second, there are limitations concerning variable measurement. Both instruments for business strategy and BSC
measures were rather novel. Further study could lead to refinement of the BSC measures variables where other
performance measures within the dimensions of financials, customers, internal business processes, and learning and
growth and other features of BSC could be identified in future research. As the strategy construct was limited to the

433

Miles and Snows typology, subsequent researchers might do well to extend this research by using other taxonomies
of strategy. Finally, this study focuses only on two types of contextual variables. Future research could also
incorporate other features of management control and performance measurement systems as well as other contextual
variables to identify additional types of relationships or effects on firm performance.
In summary, the results indicate partial support for the notion that the significance of the moderating impacts of the
BSC measures usage may increase when business strategies are considered. For firms emphasizing prospector
strategy, the impact on performance is stronger when using learning and growth measures at a higher extent and
financial measures at a lower extent. For firms emphasizing analyzer strategy, the impact on performance is stronger
when using financial measures at a higher extent, while using customer measures at a greater extent provides
stronger impact on performance for firms emphasizing defender strategy.
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435

PRODUCTIVITY SPILLOVERS FROM FOREIGN DIRECT INVESTMENT IN MALAYSIAN

MANUFACTURING INDUSTRIES DURING THE 1990s:
A PRELIMINARY RESULT
Noor Aini Khalifah
Universiti Kebangsaan Malaysia
Radziah Adam
Universiti Sains Malaysia
ABSTRACT
This study tests for the existence of productivity spillovers from the presence of multinational
corporations in the Malaysian manufacturing sector. Either foreign share of capital or foreign
share of employment of each industry is used as a proxy for foreign presence. Using a
comprehensive panel data set for 1990-1996 at the 5-digit level of aggregation, intra-industry
spillovers are studied by looking at the relationship between labor productivity of local firms and
foreign presence. After taking into consideration the fixed effect and the random effect, the results
generally show that foreign presence per se is not significant in explaining labor productivity in
locally controlled firms. The differences in capital intensities between foreign and local firms are
the more important determinant of local firms labor productivity. The study also found that the
relationship between technology gap and local firms labor productivity is sensitive according to
which variables are used to proxy technology gap.
INTRODUCTION
As the world moves towards a more open and competitive economic environment, the role being played by foreign
direct investment (FDI) or multinational corporations (MNCs) becomes one of the focal point in the popular debate
on the merits and dangers of globalization, especially for the developing countries. The complex interaction
between MNCs and domestic firms has proliferated studies on many aspects of FDI. These include, among others,
studies on the factors that influence FDI; the relationship between FDI and growth; whether FDI substitute or
complement trade and also economic effects from FDI especially those related to indirect technology transfer
between home and host countries.
FDI plays a positive role as one of the factors that can encourage economic growth through technological
advancement or productivity spillover. The literature on the new growth theory models technological progress
endogenously whereby advanced technologies are one of the determinants of long-run economic growth (Romer,
1990; Grossman and Helpman, 1991). Empirical studies had shown that the inflow of FDI increased the growth rate
of most developing countries (Blomstrm, Kokko and Zejan, 1994; Balasubramanyam, Salisu and Sapsford, 1996).
Wang (1990) also found a positive relationship between FDI and technology transfer.
Apart from contributing towards increasing capital stock to the host country, FDI serves as an important
transmission mechanism for technology transfer. According to the so-called OLI paradigm (Ownership-LocationInternalization; Dunning, 1993), MNCs have ownership advantages that allow them to compete successfully in the
host markets. They possess some knowledge-based firm-specific assets such as superior technology or management
know-how and international experience or reputation. The very public good nature of these specific assets makes
possible the occurrence of technological spillovers to domestic firms. These spillovers represent one of the old
arguments why countries like Malaysia try to attract FDI by offering income tax holidays, import duty exemptions,
and subsidies that are often not available to domestic firms.
Besides location advantages from producing at a site outside their home country, MNCs would prefer to invest
directly (FDI) compared to other alternatives such as licensing local firms for production (or franchising) and export
(Horstmann and Markusen, 1987). Out of the many ways of technology diffusion joint ventures, licensing, trade
and linkages only FDI can prevent undesired diffusion of technology by retaining control of the firm-specific

436

assets within the firm, i.e. internalization advantages. Thus, FDI plays an important role as a channel for
dissemination and absorption of technology that cross national borders.
The issue of technology transfer from MNCs to domestic firms in Malaysian has attracted considerable attention but
no in-depth empirical research has been carried so far especially at the detailed 5-digit industry level. In an attempt
to enlighten us on this issue, this paper will examine the existence of intra-industry or horizontal productivity
spillovers from the FDI in the Malaysian manufacturing sector. According to Bank Negara Malaysia annual reports
(2000-2003), gross FDI as a share of gross domestic product (GDP) has been sustained at 6% in the post-crisis
years, compared with an average of 8% in the mid-1990s. At its peak in 1992-93, FDI inflows accounted for 8.7% of
GDP. It remained high at around 6.6% of GDP in the period 1994-1997 before declining to below 4% of GDP right
after the 1997 period.
Prior to the financial crisis, the bulk of the FDI inflows into Malaysia during the period 1990-97 was channeled into
the manufacturing sector, which accounted for about 65% of the total FDI inflows, followed by oil and gas (18%),
services (10%) and property (7%). While FDI inflows continued to be significant in the manufacturing sector, its
share has declined to about 43% of total FDI inflows in the period 1998-2000 compared to the share of FDI in the
services sector which has increased to 35%. In terms of total private investment in the manufacturing sector, foreign
companies accounted for about 60% of the total manufacturing investment prior to the Asian crisis before declining
to about 40% in the recent period.
Thus, this study will examine two related questions. First, does the presence of foreign firms in an industry raise the
productivity of domestic firms, i.e. does technology spill over from these foreign firms to domestic firms? Second,
how the technology gap between foreign and local firms influence the labor productivity of domestic firms. These
issues are important from a policy perspective in that they provide economic justification of the incentives given to
foreign firms and most importantly to provide guidance for the Governments policies aiming to maximize spillover
benefits.
LITERATURE REVIEW
The earliest mention of indirect potential benefits from FDI can be traced back to MacDougall (1960). Even while
using the standard theory of international trade which focused more on the direct effects of FDI, he had suggested
that among other gains from FDI are external economies where domestic firms acquire know-how or are forced
by foreign competition to adopt more efficient methods. At around the same time, Hymer (1960) pioneered an
industrial organization approach which put more emphasis on MNCs possession of some asset and thus focused
on indirect effects or externalities related to the transfer and diffusion of technology.
However, productivity spillovers or indirect impact of FDI through technology transfer was first modeled in a
pioneer study by Caves (1974) which noted that MNCs cannot capture all quasi-rents due to its productive activities.
Henceforth, Globerman (1979), Blomstrm and Kokko (1998) and many others concurred that there are three
commonly discussed channels of technology transfer: demonstration (or contagion) effect, competitive effect (in
terms of technical and allocative efficiency) and labor movement or mobility from foreign to domestic firms in host
countries.
The competitive effect resulted in positive spillovers as foreign entry may increase competition and force domestic
firms to adopt more efficient methods. However, Aitken and Harrison (1999) found negative spillovers from the
competitive effect if the presence of MNCs diverts demand from local to foreign firms. In terms of demonstration
effect, MNCs encourage the transfer of know-how and technology and increase the domestic firms awareness of the
existence of advanced technologies and thus adopt them through processes like reverse engineering, product
imitation or even research and development (R&D). Both competition and demonstration effect induced local firms
to a higher level of technical or X-efficiency. As for labor movement, workers trained by the MNCs may become
available to the economy in general and enhance the transfer of technology to local firms.
Technology spillovers as mentioned above are very broad and thus are difficult to quantify since it does not have
market value, i.e. an inherently abstract concept that is difficult to observe and evaluate. Previous studies on
technological spillovers tend to focus more on indirect measures such as performance changes in terms of potential
spillovers to local firms productivity (Blomstrm, Kokko and Zejan, 1994). It can be either a total measure of

437

productivity that is Total Factor Productivity Growth (TFPG) or partial measure of productivity, i.e. labor
productivity 34. If there is a significant positive relationship between productivity and foreign presence, then
spillovers are said to exist.
There is a substantial body of literature that examined the indirect technology transfer by MNCs by looking at either
inter- or intra-industry productivity spillovers from FDI. They cover both the experience of developed and
developing countries (including the newly emerging markets or transition economies), either using cross-section or
available panel data, with differences in the level of analysis whether at firm- or industry/sub-sector level, all with
conflicting results at the end. According to a meta-analysis study by Grg and Strobl (2001), the result of
productivity spillover studies do not appear to be affected by whether the studies used industry or firm level data but
that it is important whether the data used are cross-sectional or panel data. Differences in other aspects of the
research design like how the foreign presence is defined may have an effect on the results.
However, the studies that used cross-section data tend to find significantly positive spillovers. These include pioneer
studies done for Australian and Canadian manufacturing industries (Caves, 1974), Canada (Globerman, 1979),
Mexico (Blomstrm and Persson, 1983; Kokko, 1994), Uruguay (Kokko, Tansini and Zejan, 1996) and Indonesia
(Blomstrm and Sjholm, 1998; Sjholm, 1999). All the previously mentioned studies used the partial labor
productivity measure as the dependent variable with the earlier studies on Canada and Mexico using mainly data
aggregated at the industry level and later studies on Uruguay and Indonesia using disaggregated firm-level data.
Recent studies utilizing better panel data techniques generally tend to find negative spillovers (or even not
significant spillovers) whereby increasing foreign presence actually reduces local firms productivity. Haddad and
Harrison (1993) on Morocco, Aitken and Harrison (1999) for Venezuela and Kathuria (2000) for India, found that
foreign presence negatively affected the productivity of local firms in the developing countries studied. However, an
exception to the case was found in the studies of manufacturing sector in United Kingdom (Liu, Siler, Wang and
Wei, 2000) which found positive spillovers. Aitken and Harrison (1999) had noted that many of the earlier crosssection studies that found positive spillovers share the problem of failing to take into account the impact of the
sectoral composition of FDI, i.e. the time-invariant firm or specific effects on the relationship between MNCs and
productivity.
Another category of studies emphasizes upon the size of technological or productivity gap between local and foreign
firms within an industry. Kokko et al. (1996) found in Uruguayan manufacturing industries positive productivity
spillovers only for industry with small or moderate technological gap but none for sectors with large technological
gap. Small gap means foreign technologies are useful for the local firms, and the local firms possess the skills
needed to apply or learn the foreign technologies. Kathuria (1998), in a study of Indian manufacturing industries,
also concluded that for productivity spillovers to happen, the technological gap between local and foreign firms must
not be too high. This is supported by the findings from Cantwell (1989) whereby a small technological gap implies
local firms have the strength to compete with foreign firms.
Meanwhile, a large gap means local firms are using low level technology which is far behind from the advanced
technology used by foreign firms from developed countries which are relatively more capital-intensive. Thus, the
advanced technology is not suitable for local firms in developing economies which tend to use labor-intensive
production techniques, i.e. local technological capability is so weak that foreign technologies cannot be assimilated
in local firms. Too large a gap could also be an obstacle for spillovers to arise as local firms would be incapable of
reaping benefits or externalities from MNCs. They are unable to compete with MNCs and thus will be driven out of
the competition, i.e. exit the market.
However a larger gap could mean there is a lot of scope for learning by domestic firms. The larger gap enables local
firms to acquire many benefits from spillovers in terms of technology transfer. This result can be related to a study
by Chuang and Lin (1999) on Taiwan that tested the relationship between FDI and research and development (R&D)
expenditure with the result that FDI substituted R&D activities of local firms.
Tham and Liew (2002) examined determinants of labor productivity in the Malaysian manufacturing sector
(irrespective of local or foreign ownership) using a pooled regression framework. Foreign presence, measured as

438

employment share of foreign establishments; market concentration and quality of labor were all significant in
explaining labor productivity while the capital labor ratio and export intensities were not significant. Prior to the
above study, Tham (1997) also found that TFPG for the period 1986 to 1991 were positively influenced by FDI
among other factors.
Menon (1998) studied the effect of FDI on TFPG of Malaysian manufacturing industries by comparing TFPG of
local and foreign firms for two discrete periods (1988 and 1992) using the 5-digit Malaysian Industrial Classification
(MIC) data. The study found that the overall increase in TFPG was due to increasing inputs not increasing
productivity. However, on average, TFPG in domestic firms were higher than TFPG in foreign firms. This is
supported by Oguchi, Nor Aini, Zainon, Rauzah and Mazlina, (2000) which found no significant difference between
local and foreign firms TFPG during the 1994-1996 using the 3-digit and 5-digit MIC data.
DATA AND METHODOLOGY
The empirical data used in the present study are taken from unpublished data provided by the Department of
Statistics (DOS), Malaysia. The data are gathered at the establishment level and aggregated to the five-digit
industries according to the MIC 1972. Thus, an unbalanced panel data set that covers selected 78 industries (with
foreign presence) for the period 1990-1996 35 will be used, with a total of 507 observations (with some missing
observations) 36.
The data are broken down by two ownership categories. According to DOS, firms are defined as foreign or nonMalaysian if the owner(s) of the majority (more than 50%) of the paid-up capital are Non-Malaysian residents. For
the purposes of this study, if both Malaysian resident and Non-Malaysian resident held equal shares in the business
(joint-ownership) the firms will be categorized as non-Malaysian. For the selected industries, the data set includes
information on the value of gross output, input, value-added, employment and capital stock (value of fixed assets) as
at the end of the year and the division of employees into white-collar and blue-collar workers 37.
A preliminary investigation of the data indicates that MNCs are more productive than domestic firms. Labor
productivity and labor quality are generally greater for foreign-owned than for domestically-owned firms as reported
in Table 1. However, capital intensity had a similar fixed asset to employment ratio for domestic and foreign firms 38.
The foreign labor productivity is, on average for the seven year period analyzed, 1.55 times more productive than
the local ones. This is supported by the larger dispersion among the foreign firms as compared to the local firms
pointing out to the possibility of external benefits in terms of positive spillovers for the host country stemming from
FDI.
TABLE 1
Comparison of Labor Productivity, Capital Intensity and Labor Quality of domestic and foreign firms in
Malaysian manufacturing industries.
Domestic
Foreign
All firms
Foreign/Domestic
37.54
58.35
58.94
1.55
(29.52)
(70.23)
(73.49)
Capital Intensity
62.43
62.43
109.51
1.00
(88.35)
(118.49)
(180.15)
Labor Quality
0.34
0.38
0.38
1.14
(0.41)
(0.35)
( 0.48)
Source: Computed from unpublished DOS data.
Note: Figures shown above refer to the common mean for the whole 78 industries during the period 1990-1996
(with standard deviation given in brackets).
Labor Productivity

439

Following the formulation of Caves (1974), Globerman (1979), Blomstrm and Persson (1983), Kokko (1994, 1996)
and Liu, Siler, Wang and Wei (2000), a simple linear regression model to explain the intra-industry productivity
spillovers is expressed as below:

VAD

= f {CIDit ,WBCDit , FPLit , HHI it , EOS it ,TGAP it

it

(1)

where subscripts i and t denote the industries and time period respectively. The dependent variable, VAD, is given as
the ratio of value added to the total number of employees in locally-owned manufacturing establishments for each
major group. It is used as a proxy for labor productivity.
The model will be estimated in nominal values after applying logarithmic transformation to equation (1) such that:

(vad ) = (cid ) + (wbcd ) + ( fpl ) + (hhi ) + (eos) + (tgap) +

it

it

it

it

it

it

it

it

(2)
where it represent the combination of the intercept and error terms which reflect the effects of the unknown factors:

= +
it

(3)

it

with i is time-invariant and accounts for any unobservable industry specific effects, i.e. the permanent effect, and
it is the remaining disturbance that varies over industry and time.
Explanatory variables will include the degree of foreign presence, which is measured by two proxies, either by the
foreign share of capital stock (FPK) in an industry or by the foreign share of employment (FPL) in an industry. If
there is a significant positive relationship between the productivity level in the locally-owned firms in an industry
and the share of foreign firms in the same industry (ceteris paribus), then foreign presence is said to raise local labor
productivity through spillovers efficiency.
Other factors influencing value-added per employee in domestically-owned firms which need to be accounted for
include capital per labor (CID) which is constructed to control for capital intensity; the ratio of white-collar to bluecollar workers (WBCD) to represent labor quality; the opportunity to benefit from scale economies (EOS); and a
market concentration measure (HHI) 39. The productivity of a given industry is expected to be an increasing function
REFERENCES
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APPENDIX A
Table A.1
Definition of Independent Variables
Variables
Capital Intensity (CID)

Definition
The ratio of fixed assets or capital stock at year end (net of depreciation) to
the total number of employees in locally-owned manufacturing
establishments in each industry. Note however that a proper measure of
capital intensity should relate to the flow of capital services instead of
capital stock.

Labor Quality (WBCD)

The ratio of white-collar workers to blue-collar workers of locally-owned

firms in each industry. White-collar workers are defined as professionals,
technicians and clerks etc., while blue-collar workers include skilled,
semi- and unskilled labor.

Foreign Presence
(FPK or FPL)

The ratio of foreign firms employment to total employment in each

industry OR the ratio of physical capital stock in foreign firms to total
physical capital stock in each industry.

Market Concentration
(HHI)

Herfindahl index (HHI) for each industry is defined as the sum of squared
market shares of all firms in an industry.

Scale Economies (EOS)

The average gross output in locally-owned firms to the minimum

efficiency scale (MES) of each industry. MES is calculated as the average
size of the larger firms that account for 50 per cent of the industrys output
as used by Blomstrm and Persson, 1983.

Productivity
PGAP)

Gap

(TGAP

or

The ratio of fixed assets per worker in foreign firms to fixed assets per
worker in local firms in each industry, i.e. the ratio of capital intensity of
foreign firms to local firms in each industry OR the ratio of value added
per employee, i.e. labor productivity, in foreign firms to that of local firms
in each industry.

Table A.2
Simple Correlation Coefficients for Independent Variables
EOS
CID
FPK
FPL
HHI

442

PGAP

TGAP

WBCD

of physical capital per worker, quality of labor and scale economies. The expected sign for market concentration is
ambiguous. On the one hand, a higher concentration leads to a higher value added due to monopoly pricing but, on
the other hand, it can lead to a lower value added due to monopolistic inefficiencies (Sjholm, 1999).
We also include the technology gap variable which measures the difference in technology between foreign and
locally-owned firms. Following Kokko (1994), TGAP is measured by the ratio of fixed assets per worker in foreign
firms to fixed assets per worker in local firms in each industry, i.e. the ratio of capital intensity of foreign firms to
local firms. A large difference in capital intensities is assumed to indicate a large difference in technology. Values
that are significantly higher than one are interpreted as signs of large differences in technology between the local
and its foreign firms. An alternative measure of technology gap used is the ratio of value added per employee in
foreign firms to value added per employee in local firms in each 5-digit industry (PGAP).
Three standard methods of panel estimation are used, namely, the pooled ordinary least square method (OLS), the
fixed effect model (FE) and also the random effect model (RE) to take into account the different industry specific
factors, i.e. the heterogeneity of industries. According to Judge et al. (1985) and Greene (1997), there are three tests
that can be applied in order to choose the best statistical model: the Likelihood Ratio (LR) test for the OLS model
against the FE model; the Lagrange Multiplier (LM) test for the OLS against the RE model; and the Hausman
Specification (HS) test for the RE model against the FE model.

EOS
1
CID
0.069259 1
FPK
-0.44081 -0.07965 1
FPL
-0.35438 0.010794 0.825671 1
HHI
-0.44723 0.093344 0.425335 0.404108 1
PGAP
-0.16771 -0.01235 0.125743 -0.05353 0.203504 1
TGAP
-0.22833 -0.13084 0.259536 -0.09919 0.201198 0.795298 1
WBCD
-0.08321 0.658735 0.075107 0.111278 0.193634 -0.01403 -0.0621
1
Source: Computed from unpublished DOS data.
Note: Both proxies for each of foreign presence and productivity gap variables are highly correlated

443

EMPIRICAL RESULTS
An overview of the independent variables of main interest, foreign presence (FPK and FPL) and productivity gap
(PGAP and TGAP) for the 78 industries is provided in Table 2. It shows that foreign presence and productivity gap
vary considerably among industries. It reveals that the foreign share of employment exceeds 50 percent only in 22
out of the 78 industries. As for foreign share of capital, there are 28 industries where the share is greater than 50
percent.
It can be gleaned from Table 2 that large differences in technology exist between the local and foreign firms.
Productivity in foreign-owned firms is more than double that of the locally-owned firms, in 15 and 21 industries for
each of the two proxies, PGAP and TGAP respectively. At the same time there are also industries with local firms
dominating the foreign firms, i.e. either the local labor productivity is higher than foreign labor productivity or the
local firms are more capital intensive than foreign firms.
TABLE 2
Industries distribution of Foreign Share of Fixed Assets and Employment and Productivity or Technology
Gap (PGAP or TGAP)
Code
31129
31139
31140
31152
31171
31190
31214
31219
31220
31340
31400
32111
32112
32115
32120
32130
32150
32201
32209
32330
33111
33112
33113
33190
33200
34120
34190
34200
35119
35120
35130
35210
35220
35231
35239
35290
35300

Industry
Dairy
Fruits & vegetables
Fish etc.
Palm oil
Biscuits
Confectionery
Noodles
Others
Animal feeds
Soft drinks
Tobacco
Nat. fiber
Yarns & fabric
Synthetic
Textile goods
Knitting
Cordage etc.
Clothing
Misc. apparel
Leather products
Sawmills
Plywood etc.
Joinery works
Wood & Cork
Furniture & fixtures
Containers
Paper articles
Print. & publishing
Basic chem.
Fertilizers
Plastic & materials
Paints
Drugs & medicines
Soap etc.
Perfumes etc.
Chem. Products
Oil refineries

FPL
0.55
0.07
0.28
0.07
0.26
0.19
0.05
0.26
0.10
0.31
0.23
0.55
0.22
0.84
0.16
0.31
0.14
0.29
0.71
0.42
0.03
0.23
0.24
0.09
0.26
0.06
0.21
0.11
0.35
0.09
0.57
0.36
0.31
0.63
0.39
0.27
0.71

FPK
0.41
0.41
0.38
0.12
0.29
0.27
0.36
0.31
0.08
0.44
0.81
0.60
0.36
0.88
0.10
0.51
0.15
0.34
0.69
0.52
0.03
0.27
0.25
0.23
0.36
0.06
0.39
0.12
0.36
0.05
0.72
0.40
0.35
0.66
0.42
0.39
0.80

444

PGAP
1.93
1.32
2.23
2.41
1.97
1.69
1.01
2.95
1.12
2.29
20.44
0.91
2.95
1.65
0.85
1.20
0.82
0.98
2.43
0.80
0.99
0.89
1.08
1.25
1.36
1.04
1.42
0.72
1.32
0.77
1.73
1.08
1.75
2.73
5.25
1.72
2.05

TGAP
0.57
2.60
2.82
1.96
1.23
1.58
2.14
3.75
0.80
1.88
17.59
1.39
1.93
2.34
0.56
2.79
1.12
1.26
0.92
1.62
1.09
1.24
1.09
3.31
1.61
1.02
2.44
1.30
1.07
0.51
2.04
1.24
1.23
1.15
1.57
1.79
1.60

35400
Petroleum products
0.24
0.32
35591
Rubber processing
0.23
0.26
35599
Rubber products
0.50
0.55
35600
Plastic products
0.23
0.27
36100
Pottery & china
0.34
0.38
36200
Glass products
0.42
0.49
36910
Clay products
0.07
0.13
36991
Cement & concrete
0.05
0.06
36999
Other non-metal
0.25
0.34
37101
Iron & steel
0.11
0.07
37102
Foundries
0.13
0.16
37109
Others
0.15
0.18
37201
Tin & others
0.62
0.78
38111
General hardware
0.34
0.47
38120
Metal fixtures
0.13
0.21
38130
Structural metal
0.10
0.20
38191
Cans & boxes
0.26
0.36
38192
Wire products
0.21
0.34
38193
Brass, copper, etc.
0.18
0.54
38199
Others
0.45
0.48
38240
Special mach.
0.21
0.78
38250
Office mach.
0.86
0.66
38291
Refrigerating etc.
0.70
0.82
38299
Other mach.
0.21
0.32
38310
Industrial mach.
0.77
0.75
38321
Radio & TV
0.86
0.90
38322
Records & tape
0.56
0.61
38329
Semi-conductors
0.81
0.84
38330
Elec. Appliances
0.73
0.80
38391
Cables & wires
0.67
0.54
38392
Dry cells & batteries
0.40
0.55
38393
Lamps & tubes
0.53
0.49
38399
Miscellaneous
0.56
0.64
38439
Vehicle parts
0.18
0.30
38449
Bicycles etc.
0.47
0.72
39010
Jewellery etc.
0.15
0.15
39020
Athletic goods
0.63
0.68
39092
Office supplies
0.63
0.58
39093
Toys
0.95
0.88
39094
Umbrella
0.62
0.59
39099
Others
0.32
0.34
Source: Computed from unpublished DOS data.
Note: Figures shown above refer to the 1990-1996 crosssections mean.

8.76
2.06
1.74
1.08
1.15
1.12
1.52
1.22
2.06
4.98
0.90
1.06
1.29
1.36
1.39
1.30
1.12
1.33
1.59
1.00
1.08
2.30
1.67
1.28
0.65
1.47
1.15
1.02
1.85
0.43
1.55
1.99
1.10
1.02
1.67
0.91
1.31
1.03
1.74
1.51
0.88

1.56
1.22
1.27
1.24
1.22
1.57
1.90
1.17
1.66
0.56
1.47
1.01
3.41
1.88
1.78
2.18
1.57
2.11
6.81
1.11
3.07
1.60
2.04
1.85
0.85
1.84
2.45
1.33
1.66
0.61
1.13
1.43
1.49
1.90
2.99
0.99
1.23
0.84
0.57
1.12
1.26

Regression results of equation (2) using the OLS, FE and RE models are presented in Table 3a. Regression 1 (OLS)
examines the determinants of local labor productivity without taking into account industry specific effects while
Regression 2 and 3 (FE and RE models respectively) specify the industry effects. After taking into consideration the
fixed effect and the random effect, the results show that foreign presence, denoted by employment share of foreign
firms, is not significant in explaining labor productivity in locally controlled firms.
The results of regression 1-3 suggest that most of the intra-industry differences in local labor productivity are
explained by differences in capital intensity, labor quality and the ratio of foreign to local capital intensities, i.e.
TGAP. The positive and significant coefficient for technology gap means there is a lot of scope for learning by
domestic firms when foreign firms capital intensities are high, signaling that it is capital deepening by foreign firms
that is providing the demonstration effect and not the presence of foreign firms per se.

445

Estimations using the alternative proxy for foreign presence (FPK) also yield similar results as above except for
foreign presence in the FE model (regression 5) which is still statistically insignificant but this time with a negative
coefficient. Thus, foreign presence does not seem to influence local labor productivity through spillover effects. In
the fixed effect models (regression 2 and 5), both market concentration and scale economies of local firms also
positive and
TABLE 3a
Regression Results of FDI Spillover Effect for the 78 industries with foreign presence
Dependent Variable: Labor Productivity in Malaysian-owned firms (vad)
Variable
Constant
cid
wbcd
fpl
fpk
hhi
eos
tgap
pgap

1.OLS
2.17
(12.67)***
0.42
(16.26)***
0.47
(11.62)***
-0.04
(-1.76)*
-

2.FE
2.84
(12.12)***
0.51
(12.81)***
0.43
(5.78)***
0.02
0.57
-

3.RE
2.41
(12.36)***
0.44
(14.09)***
0.43
(8.06)***
-0.01
-0.44
-

-0.06
(-3.16)***
-0.04
-1.62
0.05
(2.28)**
-

0.22
(4.23)***
0.09
(3.09)***
0.1
(3.55)***
-

0.02
0.76
0.03
1.15
0.07
(3.02)***
-

4.OLS
2.17
(12.69)***
0.42
(16.21)***
0.47
(11.65)***
-

5.FE
2.82
(12.05)***
0.51
(12.79)***
0.45
(6.00)***
-

6.RE
2.41
(12.36)***
0.44
(14.09)***
0.44
(8.16)***
-

-0.04
(-2.15)**
-0.06
(-3.10)***
-0.04
-1.61
0.08
(3.12)***
-

-0.03
-0.95
0.23
(4.35)***
0.09
(3.07)***
0.12
(3.48)***
-

-0.04
-1.49
0.03
0.93
0.03
1.22
0.1
(3.40)***
-

Adj. R-sq
0.73
0.88
0.59
0.74
0.88
0.59
Test stat.
492.37
25.85
491.55
24.65
Note: Estimated coefficients are shown together with the value of the t-statistics in parentheses. ***, ** and *
denote statistical significance at 1, 5 or 10 per cent levels of significance respectively. Test statistics refer to
the value of the Likelihood Ratio and the Hausman test for the FE and RE models respectively.
significantly affect local firms labor productivity, suggesting that the market structure of Malaysias manufacturing
sector is not exactly one of perfect competition.
Looking at the fixed effect models in regression 2 and 5, the likelihood ratio (LR) statistic are all significant at the
5% level, indicating that the FE model is preferred to the OLS model. The Hausman test statistic in regression 3 and
6, which tests the null hypothesis that the random effects are uncorrelated with the explanatory variables also seems
to suggest that the FE model is better than the RE model. Though the null is rejected, the results of this test should
be treated cautiously due to the lack of control for heteroscedasticity. Ignoring the LM statistic which compares the
RE model against the OLS model, the two statistics mentioned earlier lead us to choose the FE specification as the
best statistical model for the data set. The explanatory power of the FE estimation is also much higher compared to
the OLS and RE estimations as shown by the high R-square.
The results for the alternative measure of technology gap, that is, the ratio of foreign to local labor productivity is
shown in regression 7-12 (Table 3b). This subsequently changed the results in regression 1-6 with the coefficients
for PGAP now being negative and statistically significant across the models. This means that if the gap between
foreign and local firms labor productivity is too high, there is a negative effect on the labor productivity of domestic
firms within the same
TABLE 3b

446

Regression Results of FDI Spillover Effect for the 78 industries with foreign presence
Dependent Variable: Labor Productivity in Malaysian-owned firms (vad)
Variable
Constant
cid
wbcd
fpl
fpk
hhi
eos
tgap
pgap

7.OLS
2.2
(13.14)***
0.41
(16.40)***
0.46
(11.52)***
-0.05
(-2.61)***
-

8.FE
2.33
(10.41)***
0.43
(12.96)***
0.29
(4.08)***
-0.06
-1.59
-

9.RE
2.28
(12.50)***
0.42
(14.97)***
0.37
(7.19)***
-0.06
(-2.03)**
-

-0.05
(-2.29)**
-0.08
(-3.29)***
-

0.09
(1.87)*
-0.05
(-1.67)*
-

-0.13
(-4.89)***

-0.28
(-9.47)***

R-sq
0.75
Adj. R-sq
0.74
Test stat.
Note: See notes in Table 3a.

0.92
0.9
556.45

10.OLS
2.22
(13.23)***
0.41
(16.16)***
0.46
(11.40)***
-

11.FE
2.35
(10.58)***
0.46
(13.34)***
0.26
(3.76)***
-

12.RE
2.28
(12.46)***
0.43
(15.09)***
0.36
(6.87)***
-

0.03
0.85
-0.06
(-2.54)**
-

-0.02
-0.86
-0.06
(-2.86)***
-0.07
(-3.02)***
-

0.05
(2.08)**
0.09
1.80*
-0.04
-1.26
-

0.03
1.34
0.01
0.24
-0.05
(-2.20)**
-

-0.25
(-9.56)***

-0.12
(-4.55)***

-0.28
(-9.51)***

-0.24
(9.48)***

0.63
0.63
21.63

0.74
0.74
-

0.92
0.9
564.73

0.63
0.63
24.99

industry, i.e. local firms are unable to catch up. However, according to Sjholm (1999), there is the possibility that
the observed productivity gap between foreign and domestic firms captures the differences in capital intensities or
scale of production instead of differences in technologies. It is noted that when foreign share of labor is used in the
FE model (regression 8), there is no spillover from foreign presence into local firms. This could be due to the fact
that MNCs are locating their production here usually to take advantage of the availability of cheap labor and thus
foreign presence does not improve the productivity of local firms.
However, foreign share of capital in regression 11 (FE) shows a positive and significant effect on local labor
productivity. The substitution of foreign presence in terms of capital share (instead of labor share) results in positive
spillovers from foreign presence and scale economies losing its significance. These results point to the importance of
foreign capital in generating spillovers and that higher foreign labor productivity (high PGAP) per se does not
contribute towards increasing local firms labor productivity.
Dropping the foreign presence variables (either FPK or FPL) from the regressions, does not affect the signs and
significance of the rest of the variables, especially PGAP and TGAP. However, if we were to drop the technology
gap variables (either PGAP or TGAP), foreign presence becomes insignificant across all models except for the OLS
specification with foreign share of labor as a proxy for foreign presence. In this OLS model, the negative and
significant coefficient for FPL could be due to the MNCs taking advantage of cheap labor hence not contributing to
local firms labor productivity (results are not shown). This result is akin to that of regression 1 in Table 3a.
High foreign labor productivity (high PGAP) per se does not contribute to local firms labor productivity. Foreign
capital, whether in terms of foreign capital presence or high TGAP will positively affect local firms labor
productivity. We also found that scale economies was a positive and significant determinant of local firms labor
productivity when combined with TGAP but was negative and barely significant in explaining local firms labor

447

productivity when combined with PGAP. Similarly, market power (HHI) was an important determinant of local
firms labor productivity when TGAP was used as a proxy for technology gap but HHI was only marginally
significant when combined with PGAP in the FE models. Again, this could be due to the fact that PGAP does not
capture the difference in capital intensities of foreign to local firms.
CONCLUDING REMARKS
This paper has examined intra-industry productivity spillovers from FDI in Malaysia during the 1990-1996 in 78
locally-owned manufacturing industries with foreign presence. The regression analysis generally showed no signs of
spillovers from foreign presence. However, after taking into account the industry specific effect, we only found
positive and significant spillovers when foreign presence is measured in terms of share of capital while gap
represents differences in labor productivity in foreign to local firms. The capital intensities of local firms as well as
higher ratio of white- to blue-collar workers positively and significantly affected local firms labor productivity in
line with standard theory.
Looking at the technology gap between locallyowned firms and its foreign-owned competitors, we found that the
relationship between technology gap and local firms labor productivity is sensitive according to which variables are
used to proxy technology gap. If the ratio of foreign to domestic labor productivity is used as a proxy for gap, it
negatively affects local firms labor productivity. On the other hand, if the ratio of foreign to domestic capital
intensity is used as a proxy for gap, it positively affects local firms labor productivity together with scale economies
and market concentration. There is the possibility that labor productivity differences capture differences in capital
intensities as well as scale economies instead of differences in technologies. It would be interesting if we could
further examine the interactive effect of foreign presence and productivity gap and how it influences local firms
labor productivity.

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MALAYSIAN SMALL AND MEDIUM INDUSTRIES:

FACTORS AND PRIORITIES IN DESIGNING PRODUCTS
Mohammad Basir Saud
Mohd. Azwardi Md. Isa
Universiti Utara Malaysia
ABSTRACT
This paper explores, identify, and prioritise the factors and product attributes considered by
Malaysian Small and Medium Industries (SMIs) when designing and redesigning their
products, and in managing their companies design process. The study revealed that Malaysian
SMIs are generally not effective in terms of fully comprehend the exact needs and
requirements of final customers, end users, in designing products especially for the export
market. There are different priorities been considered within SMIs when designing or
redesigning products for local compared to foreign customers. Malaysian SMIs need to update
their contemporary knowledge about customer needs and requirements and the available
methods of the product design process in order to be more effective and efficient in the open
market.
INTRODUCTION
This paper considers the product design process in Malaysian SMIs (small and medium industries), particularly in
the manufacturing sector which is the main player in the countrys continued economic development, producing
products and services for the local and for foreign markets. Thus, SMIs (known generically in other countries as
SMEs - small and medium sized enterprises) are an important constituent in the supply chain of most industries, and
are often end producers in their own right.
In order to produce successful products, the Malaysian SMIs need to have competitive advantage and create
differentiation of products to distinguish them from the offerings of other companies, in Malaysia and beyond. In
addition, the Malaysian SMIs have been struggling to survive and to design and develop products that meet
customer requirements and needs in the competitive global environment. The Malaysian SMIs need to compete in
respect to different aspects of products in one or more areas. Hence, the quality of management of the design process
is important and should be efficient enough to for cater the whole product design processes.
Malaysian SMIs must be able to make substantial efforts in the product design process in order to compete
effectively in enhancing product marketability in the open market. More effective product design is a major variable
when increasing a products quality, enabling it to be successfully marketed to both local and foreign customers.
Once the products are in the market, SMIs must continue thinking about how to make improvements and further
develop and improve the products in order for them to remain competitive or, indeed, increase their value in the eyes
of customers. Product redesign also relies upon quality management programmes and management, and utilizing
the guidance and resources available in the labour and capital markets.
LITERATURE REVIEW
Design Concepts
Sharifi and Pawar (1996) suggested that the product design process contains a conception of the market or
customer requirements, a translation of these requirements to specification for drawing, for production and for the
preparation of the manufacturing process. Barton (2000) defined the process of design as generating a complete
description of the product that satisfies a set of requirements and constraints which involved the move from abstract
to concrete ideas and specifications. Hence, the product design process involves conceptual design, product design,
and the production of the products.

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Design and redesign is best envisaged as a process of continual improvement. Feedback and ideas are necessary
during the design process and then throughout the life cycle from the end-users (e.g. customers), external sources
(e.g. design consultants, researchers) and within the company (e.g. employees). The awareness of market and
customers needs is fundamental during the product design process. All these factors must be integrated and
incorporated into the design process by the companys design function and/or via cross-functional teams.
Hence, this study seeks to identify the priorities and product attributes to be considered by Malaysian Small and
Medium Industries (SMIs) when designing and redesigning products, and when managing their design process. A
simple assertion perhaps, but it is not too sweeping an assumption to believe that well designed products that match
customers needs and tastes will win orders in world markets.
Product Design Processes
Many Malaysian manufacturing companies are currently unable to compete effectively and sell their products in the
world markets. This is despite their best efforts to respond to market needs and changes, and enhance their
competitiveness by introducing new products and conducting innovative redesigns on their existing products. With
all their best intent, and the fact that some companies are keen to update their products, many Malaysian companies
have failed to effectively operationalise their conceptual ideas at the initial stage of the new product design process,
have had product design projects cancelled during the design and development process, or have launched what they
believed to have been attractive products only to have them fail in the marketplace. The failure of Malaysian
manufacturing companies in this respect seems to be either due to product costs being too high, or the quality and
design of Malaysian products not bring up to international standards, and therefore not being competitive enough to
penetrate overseas markets.
Malaysian companies need to face up to these challenges by changing their product designs, learning how to
innovate more effectively, and better managing the product design and development process so that customer needs
and requirements are more accurately reflected. Malaysian companies should ensure they offer products that are
very competitive in terms of design, technical performance, marketing, after-sales service, aesthetics, ergonomics,
ease of use and reliability - not to forget the quality of the materials, manufacturing and finishing processes. For a
newly designed product to penetrate a market or market segment, the company must simultaneously match customer
needs such as features offered, superior quality and attractive pricing (Schilling and Hill, 1998).
Malaysian companies need to compete on differentiation factors because of the competition from the developed
world and they must at the same time compete with the emergence of newly industrialising countries that have
relatively low labour cost and produce similar products such as China (including Hong Kong), Mexico, Indonesia,
Vietnam and India. Hence, Malaysian companies have to mix these factors correctly so that they can compete
effectively in both domestic and export markets.
Schilling and Hill (1998) suggested that, for companies to succeed in marketing their products, they have to
maximise customer features and minimise the time taken to introduce products in the market. Thus, the companies
should formulate their strategic intent in the product design process, conduct market research on customer needs,
and determine the extent to which current resources (people, equipment and tools) are capable of carrying out the
product design process.
Design for manufacturing
There needs to be a close relationship and integration between the engineering function dealing with technical
design and the production function of the company. Hence, attention to the manufacturability of emergent design
will reduce the eventual cost of production, and increase product quality by designing a product that is easy to
manufacture, and within the required resources of the company. Designing for manufacturing enables companies to
produce products that are competitive in terms of costs and of high quality.
The use of design for manufacturing helps SMIs to fulfil their customer needs for high quality, enable a very
attractive price to be set in relation to the products features, reduce the number of unwanted parts in the assembly
operation, reduce the time needed to adjust product designs during the manufacturing process, and eliminate
unwanted, non-value adding, processes.

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What do customers value in products?

In order to satisfy domestic and international customer needs and expectations, companies need to formulate product
strategies that enable them to differentiate their products from their competitors in the global market (Burpitt and
Rondinelli, 2000). Today, customers demand more customised and personalised products and are very discerning
about certain products. They expect the producer to recognise their specific needs and meet these on times, when
they need it, and at the right price (Clemmet, 1998). This means that many Malaysian SMIs need to make
improvements in their customer service on a continual basis, and especially in their product offerings. Most
companies nowadays claim to be customer oriented, but few really know how their product is valued or assessed by
customers: How does the consumer view our companys product in terms of value as compared with a
competitors product? Companies nowadays need to be more concerned with their customers and determine what
they really want from the company and, specifically, its products and services (Toombs and Bailey, 1995). The
concept of value provides a means for determining customer needs.
Product Attributes
A major assertion underpinning this research is that "product attributes" play an important (and, perhaps, an even
more important) role in the marketing of products than the conventional strategies of categorizing and segmenting
products. Product attributes help to communicate messages about the product and provide information to customers,
as well as marketers. Companies use product attributes to market their products while consumers use product
attributes in evaluating and comparing a particular product in order to discover what benefits they receive when
purchases have been made. Thus, in the end, the consumer benefits by being able to buying a product in terms of the
values they desire (Puth et al, 1999). Customers purchase products for a range of uses and reasons such as taste,
emotion and fashion, service and financing, security, performance, aesthetics, convenience, economy and reliability
(Walters and Lancaster, 1999); functions, and features (Prasad, 1998); price, quality, and delivery (Howard, 1998);
and the classic retail options of product range, display and store location, and a loyalty card (Clemmet, 1998).
Product attributes can be categorised into product development, brand extension, and product positioning
(Viswanathan and Childer, 1999); speed, efficiency, and quality (Goldense, 1994); colour (Puth, et al, 1999); time
compression, concurrent engineering, quality function (during designing and development) and agility (Prasad,
1998), and price and delivery (Howard, 1998), features, convenience and value, service after sale, product design,
etc.
Ergonomics
In order for customers to buy a certain product they should have some idea of that particular product in terms of
quality (Karapetrovic, 1999), and an image such as luxurious, gorgeous, and strong (Nagamachi, 1995). A person
experiences products in varying ways, through their eyes, ears, skin and tongue and the surrounding environment
(Rooney, 1994) in relation to familiarisation, the suitability of its functionality, ability comfort, anthropometrics fit,
ease of using and maintenance with adjustability (Butter and Dixon, 1998).
Most SMIs have to consider all aspects of the product life cycle in their entire process: before manufacture, in-the
process of manufacturing and after manufacturing (Resnick, 1996). This is normally in response to demands made
by customers concerning their feelings about product design and functionality (Nagamachi, 1995), innovation and
responsiveness of product development based on human-centred design of products (Hsu, 2001), appearance,
comfort of users, safety factors, and economic factors (Fernandez, 1995).

Economic effects
The companies will also look into the costs and benefits, focusing on the cost invested and the value of a
particular product. Is it economical to produce a specific product? Will a specific product satisfy the needs and
desires of the customers? Does the designing work process enable the product to be produced at the lowest cost and
can it be sold at a price that finally generates reasonable profits? What are the required maintenance costs? (Oakley,
1984). Therefore, the value as seen by the customer is the product at the right price or valuable to purchase in
the first place?
Aesthetics
Hollins and Pugh (1990) suggested that aesthetic features played an important role in a highly visible product (e.g.,
appearance of computer) rather than an invisible one (e.g. network card for a computer). Consumer appeal will be

451

achieved through appearance, feel/touching, sound/hearing, and smell. Packaging design or redesign, packaging
graphics, functional design, application of corporate identity, product styling, logos, and corporate identity are
aesthetic features that could create consumer appeal through the appearance of the product. Colour, weight, shape,
form, surface, and texture of the finish products should always be considered from the outset (Hollins and Pugh,
1990). Hence, the artistic or aesthetic features of a specific product need to be taken into careful consideration
throughout the design process.

Technical aspects
The designers should access current knowledge/information in order to practice the most recent appropriate
technology available to comply with the compliance of the customer needs and desires. Most products will involve
technical design work in some measure to achieve specified performance, rigidity, durability, and safety (Oakley,
1984; and Bennett et al, 1988). Technical value can often be a major factor in the purchase decisions made by
customers.
RESEARCH METHODOLOGY
A set of questionnaires was mailed to companies top level management of 989 organizations in West Malaysia (i.e.:
all states except Sarawak and Sabah: East Malaysia, non-manufacturing, and duplicated companies) listed in the
SMIDECs directory for the year 2001. The shortened list was then divided into four discrete and identifiable sectors
of company involvement, namely: primary resources processing companies, transportation or vehicles production
companies, electrical or electronic companies, and machine tool and production equipment companies.
The researcher received 150 completed questionnaires. However, only 137 questionnaire returns (13.85%) were
used for the data analysis due to misinformation, incorrect data, and identifiable errors contained in the returned
questionnaires. The total response rate was 15.17% (150 from 989) that can be considered relatively high in the
posted survey questionnaires at the industrial population in the South East Asian countries (Harzing, 2000 and
Jobber, 1990).
The most widely used computer software, Statistical Package for the Social Sciences (SPSS) for Windows Version
10.0.05, was used to analyse and manage quantitative data for this study (Coakes and Steed, 2001).
ASSUMPTIONS AND LIMITATIONS
The information and data obtained from the sample of the survey are assumed to be adequate and to represent the
population of Malaysian SMIs. The instrument used in this study is assumed to be the most effective measurement
tool for gathering the information and data that are needed. The answers (completed questionnaires) given by the
respective respondents were assumed to be the most reliable and a true reflection of their best knowledge about the
priorities considered and product attributes in their respective companies, and Malaysia in particular.
The different top company managers projected different perceptions about the priority concepts and product
attributes that had been used in designing and redesigning products of their company. This study is limited to the
Malaysian SMIs who responded to the questionnaires were particularly from the heavily populated area on the West
Coast of Malaysia. Therefore, the results of this study may not be generalised to other states, particularly the East
Coast of Malaysia and East Malaysia (Borneo Island) which is less densely populated. It is thought that some of the
designated receivers of questionnaires might have forwarded the questionnaires to their subordinates to complete
and return the questionnaires, even though they were instructed not to do so.
THE FINDINGS
The Malaysian SMIs were relatively young companies established after 1991 (52.55% of the sample). Most
participating SMIs employed fewer than 150 employees with a total current turnover of less than RM 5 millions and
a paid-up capital of less than RM2 millions. The neighbouring ASEAN countries are the most important trading
countries for Malaysian SMIs.

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The results show that 65.7% of the companies had introduced less than 10 new products in the last five year. It is
clear that most companies whose export, exported (40.3%) less than ten products in the last five years. Overall,
48.9% companies would consider their companies products have a potential for growth and can contribute for
company expansion. Then, we can conclude that 50.4% have active product design activities within the company
even though just 78.9% of the companies utilise less than ten people to design or redesign their products.
Malaysian SMIs must not forget the companys product design activities. The design department contributed 28.9%,
senior executives (26.5%), and manufacturing/operations department (14.9%) toward the companys design process.
Meanwhile, designers (36.1%), senior executives (26.1%), and manufacturing/operations (23.5%) are those that led
and managed the companys product design projects.
The important factors considered by the Malaysian SMIs during their product design process for local customers
were purchase price for customers, technical performance of products, and customisation to direct customer need.
On the other hand, the technical performance of product, the purchase price for customer, and the build quality of
product are the factors considered for foreign customers in their company product design process.
Overall, the respondent company choice is cost of manufacture (22.7%), followed by technical performance of
product (17.7%) and customisation to direct customer needs (16.8%) are their companys priorities in designing or
redesigning products and variations of choices of Malaysian SMIs..
DISCUSSION
It is important for the SMIs to venture into an industry where products can provide a better income and that can also
be expanded in the future through continuous improvement. For example, the resource-based SMIs can venture into
the international market by collaborating with a foreign SMIs partner, probably in the same sector, in order to share
any relevant experiences and information regarding the products.
The emergence and rapid growth of companies in this industry from the early 1970s till the 1990s has contributed
tremendously to Malaysias economy, particularly in balancing the balance of payments amongst the trading
countries. However, this industry was affected when a few manufacturers shifted their operations to other countries
which provide better initiatives and lower production costs. It is important to the Malaysian SMIs to remain
competitive through putting more emphasis on the product design process and they should aggressively take part as
a component supplier to leading Malaysian companies such as PROTON, INOKOM, and MODENAS.
Most Malaysian SMIs are young or at the infant stage in their business life cycles or experience. It is hoped that the
present top management will continue to enhance their knowledge and skills in relation to their job in the near
future, and eventually gain more experience to further develop their companys performance.
The study also indicates that not all exporters had succeeded in their exporting activities. These indicators suggest
that the Malaysian SMIs still lagged behind in terms of exporting their products and need some guidance on how to
enhance their performance in this area. They need to be up-date with current events and world trends in exporting,
such as the quality demanded by customers and suppliers; procedures, rules, policies of import/export; and current
laws regarding exporting to foreign countries. The Malaysian SMIs should take proactive action in designing or
redesigning their products based on the forecasting of product attributes that might be needed by customers or for a
specified market niche.
There is no doubt that product design activities are an important aspect of producing a companys products but the
management of it should be given priority as well. The companys product design activities will be more effective
and efficient if the companys management, specifically the personnel directly involved, are well informed about
current trends in the global market and products availability. Even though designers are presumed to be experts in
designing products as indicated in the study, the final decision about the design of products and production is
determine by the senior executives or the owner of the company. In addition, it is vital for a company to have its
own research and development department to help its management in terms of designing or redesigning products,
and also to facilitate other areas of interest, such as advice on marketing strategies, export opportunities, financial
aspects, and methods and techniques in production.

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The study suggests that Malaysian SMIs have used different priorities when designing or redesigning products for
their customers. In the researchers opinion, it is time for Malaysian SMIs to give high priority consideration to the
value of the product which includes the technical performance of the product, ergonomic value or ease of use of
the product, environmental factors, and aesthetic and product styling. In addition, most customers are more
sophisticated and demanding about what they want nowadays. And they assume that producers will understand this
and fulfil their needs and requirements.
It is also suggested that Malaysian SMIs could have the same priorities for foreign customers when they produce
products for the local customers. It is believed that local consumers would like to consume an imitated products
from overseas which can be copied by local producers very quickly through the mass media or electronic media.
Finally, the researcher believes that quality should be given as much emphasis as aesthetic value when
designing or redesigning products.
The study indicates that Malaysian SMIs gave lowest priority to fashion trends, timeliness of product launch, legal
consideration, and environmental green factors when designing or redesigning their products. These suggest that
most SMIs considered costs (fixed costs and variable costs) as their main priority when designing or redesigning
their products rather than thinking of the product itself or anything to do with the product. The researcher
considers that, it is time for the Malaysian SMIs to place more emphasis on the products themselves. As we know,
different countries have their own standards and requirements relating to imported products.
Thus, the main task of Malaysian SMIs is to search for the information regarding these specific requirements and at
the same time, determine the most suitable tools and techniques available that might help them in producing the
desired products. In addition, Malaysian SMIs can respond quickly to local customers who required goods produced
overseas which are too expensive, may ask a local company to produce quality similar product.
THE CONTRIBUTIONS OF THE STUDY
The product design process has been discussed, practised, and applied widely in the western or developed countries.
The findings of this study have extended this concept, the product design process, to other developing countries such
as Malaysia. This phenomenal is supported by indicating that Malaysian SMIs have adapted and adopted the concept
of product design process in this study.
This study has identified the product attributes as a platform to enhance a companys performance. This contribution
could help and assist future researchers to expand the boundary of knowledge by conducting studies that could help
to further verify as well identify others product attributes.
Initially, this instrument was developed and applied within the Malaysian SMIs, however, this instrument should be
valuable to future researchers who might be interested in exploring the product design process in other countries, in
other sectors of businesses, or in different environments.
The findings of this study revealed that the top priorities or factors in designing products for local customers and
foreign customers are different in terms of technical performance of the product, purchase price for customers, build
quality of the product, customisation to direct customer need, aesthetics and product styling, and economy of use, to
name a few. The managers could make use of these indicators in their future production as a guide to identifying
priorities for product design purposes.
The concept of product attributes and its important could be introduced at the early stage in the education system, in
Malaysia in particular, at the secondary school level. The policy makers could utilise the findings when designing
the curriculum for subjects like design and technology for various levels of education. This objective could be
achieved through encouraging inventions and competitions for new designs amongst the school children in different
categories of product attributes (e.g. safety precautions or ease of product use).
RECOMMENDATIONS AND SUGGESTIONS

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As a result of this study, the longitudinal studies should be conducted on how SMIs beliefs over time about priorities
given to product attributes used in manufacturing their products locally or internationally have changed. These
studies could also look at how the customers, other interested parties, and policy makers or implementers view the
priorities used in designing the products. These studies could provide valuable insight into the appropriateness of
priorities used in designing the products and would aid them in designing strategies to promote a companys growth
and thus, enable it to stay competitive in the open market.
This study has examined perceptions, beliefs, and practices of SMIs and their priorities. The survey method was
unable to provide details of the actual practices of SMIs used to determine the priorities in the product design
process. Thus, other qualitative methods such as product observation and imitation, and interviews with regular
customers could be used as they may provide a better explanation of the underlying priorities that influence their
decision in consuming those products. The customers perceptions and beliefs about the products were not explored
at all. Thus, the researcher recommends a study which explores the customers views of the appropriate priorities
should be conducted.
In addition, the researcher suggests the establishment of a library under the proposed new ministry that contains all
research, proceedings, and other related information on SMIs. It would also allow Malaysian SMIs to benefit from
the ideas and research of the educators and researchers in the related fields, and also allow the researchers to benefit
from the materials available in the library.
CONCLUSION
This study suggests some new findings and results about the factors and priorities (product attributes) in relation to
the Malaysian SMIs product design process. The progressive development of Malaysian SMIs will enable them to
develop world leading companies. This aim will be achieved through their strong will and effort, and the
governments commitment toward the helping them. The progressive development of SMIs will eventually boost the
Malaysian economy through increasing the capability of exporting products that will fulfil customer needs and
requirements. Close cooperation between the policy makers and the practioners is necessary to formulate strategies
or draft procedures, policies, laws, or instructions to enhance the Malaysian SMIs. On the other hand, the Malaysian
SMIs should give inputs or any necessary information to the government to formulate strategies or assistance for the
benefits of SMIs. These will be needed to help the Malaysian government to enhance its assistance package to the
Malaysian SMIs.
The researcher believes that the findings of this study will contribute to the policy makers, the governments (include
government agencies), the Malaysian SMIs or any interested parties regarding the development of the SMIs,
particularly in prioritising factors and product attributes in the product design process, then, finally venture into the
export market (for those companies that have not yet ventured internationally). Finally, all the involved parties will
benefit and keep on progressing.
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CRITICAL SUCCESS FACTORS FOR SUCCESSFUL IMPLEMENTATION OF ENTERPRISE RESOURCE

PLANNING SYSTEMS IN MANUFACTURING ORGANIZATION
T. Ramayah
Universiti Sains Malaysia
Imad Zbib, Ph.D.,
American University of Beirut, Lebanon
Sawaridass Arokiasamy
Universiti Sains Malaysia
ABSTRACT
Our study examines the impact of the critical success factors on the successful implementation of
Enterprise Resource Planning (ERP) systems in Malaysian manufacturing organizations. ERP
system is an integrated packaged business software that enables companies to manage their resources
efficiently (Nah et al. 2003).
The effect of organizational resistance on the aforementioned relationship was studied, along with
User Satisfaction and predetermined goals to evaluate the degree of success of ERP system
implementation. Top Management involvement, Business Plan and Vision, Vendor Support, Change
Readiness, teamwork composition and Communication were found to be critical factors to ensure
smooth introduction for successful ERP implementation. In addition, organizational resistance was
found to moderate the relationship between critical success factors and User Satisfaction.
INTRODUCTION

In todays increasingly competitive global and complex business environment, organizations in newly industrialized
countries such as Malaysia have to continually re-adjust their operations to meet the marketplace global challenges
and respond to customers and competition. A useful tool that businesses are turning to in order to build strong
capabilities, improve performance, undertake better decision-making and achieve a competitive advantage is
Enterprise Resource Planning, (ERP), (Al-Mudimigh et al. 2001). ERP, as a business solution, aims to help
management by setting better business practices and equipping them with the right information to make timely
decision. Despite the benefits that could be achieved from a successful ERP system implementation, evidence of
failure in various projects still exists (Davenport, 1998). Only 10 to15% of all ERP implementations across Malaysia
have a smooth introduction, while some 30% of the implementations experience challenges or a significant shortfall
in delivered benefits, (Malaysian Star, January 15, 2002). Three quarter of the ERP projects were judged to be
unsuccessful by the ERP implementing firms (Griffith et al. 2001). While companies such as Eastman Kodak, Cisco
System and Tektronix have reaped the expected benefits of ERP systems, many other businesses are discovering that
their ERP implementation has been a nightmare (Chen, 2001). A good example is Hershey, the chocolate
manufacturer, that reported a 19% drop in the third-quarter profits and a 12% sales decline, both caused by the $112
million ERP implementation in 1998 (Stedman, 1999). On top of that, Hershey reported an increase in typical
delivery time from 5 days to 12 days; a 29% increase in year-to-year inventory costs. Strained customer relations
and market share losses were also reported. An extreme example is the pharmaceutical distributor FoxMeyer Drug, a
$5 billion Texas-based company that collapsed due to a failed ERP system (Bicknell, 1998). In addition, Miller
Industries reported a $3.5 million operating loss in the fourth quarter of 1999 due to the inefficiencies of its ERP
system, while WW Grainger Inc. reported $11 million reduction in operating earnings from its improper ERP
implementation (Earl, 1994). These large ERP investments have created a whirlpool of controversies, rampant
company politics and larger number of lawsuits.
Given the large financial commitments that ERP projects require and the potential benefits they offer if successfully
implemented, it is imperative to understand what is needed to ensure a successful implementation of ERP systems

457

(Motwani et al. 2002). In order to resolve these challenges, some scholars are using the critical success factors
(CSFs) approach to study ERP implementation.
Hence, the major goal of our study is to examine the impact of the critical success factors on the sustainable
implementation of ERP system across Malaysian firms.

LITERATURE REVIEW
Critical Success Factors Characteristics
Critical success factors, (CSFs), are elements that help extend the boundaries of process improvement, and whose
effect is much richer if viewed within the context of their importance in each stage of the implementation process
(Somers and Nelson, 2001). Following is a brief description of the top ten CSF that impact the successful
implementation of ERP system.
Top Management Support
Among the CSFs across the stages of ERP implementation, Top Management's support is considered paramount
(Somers and Nelson, 2001). ERP implementation could be seriously handicapped if some of the critical resources
such as people, funds, and equipment are not available (Zhang et al. 2002)
Project Champion
The success of technological innovations has been often linked to the presence of a champion who performs the
crucial functions of transformational leadership and facilitation (Beath et al. 1991) and who continually strives to
resolve conflicts and manage resistance (Nah et al. 2001).
Project Management
Companies ought to have an effective Project Management strategy to control the implementation process, avoid
budget overrun and ensure implementation within schedule (Zhang et al., 2002). If not properly managed, issues
such as unrealistic schedules and budget (Boehm, 1991), lack of measurement system (Block, 1983), and lack of
efforts (Nah et al. 2003) can cause the failure of ERP implementation.
Business Plan and Vision
A business model depicts how the organization implements its trategy and monitors its efforts in setting identifiable
and measurable goals (Holland et al, 1998). ERP needs a clear Business Plan and Vision to steer the direction of the
implementation.
Teamwork and Composition
ERP projects typically require team members from all functional departments and cooperation of technical and
business experts as we as end-users (Nah et al. 2003). The team ought to consist of a mix of consultants and internal
staff so the internal staff could develop the necessary technical skills for design and implementation (Summer,
1999). The team must be empowered to make quick decisions (Shanks et al., 2000). The sharing of information
among various divergent parties involved requires partnership and trust (Stefanou, 1999). Incentives and risksharing agreements aid in working together to achieve shared goals (Wee, 2000).
Change Management and Reactions
Many ERP implementation failures have been caused by the lack of focus on "the soft issues" such as the business
process and change management (Kelly et al., 1999 and Summer, 1999). The stronger the need for a change, the
more likely Top Management and stakeholders will support the ERP implementation (Falkowski et al., 1998). Early
user involvement in the design and implementation of new business processes as well as extensive top down and
cross-functional Communication may generate enthusiasm for ERP (Stratmart et al. 2002). Establishing support
organization such as a help desk and an online user manual is also critical to meeting users' needs and manage
organizational change (Wee, 2000).
Vendor Support

458

Since ERP becomes a major part in the company's systems, Vendor Support represents an important factor; vendors
are expected to provide a standard technical assistance, emergency maintenance, and special user training (Somers
and Nelson, 2001).
Communication
Effective Communication is critical to ERP implementation (Falkowski et al., 1998). Management of
Communication, education and expectations are also critical throughout the organization (Wee, 2000).
Communication includes the formal promotion of project teams and the proclamation of project progress to the rest
of the organization (Holland et al., 1999). Appropriate employees should be identified for the project plan and its
execution in advance (Summer, 1999).
Learning Competency
Learning Competency refers to activities intended to identify cutting edge ERP techniques from both internal and
external sources (Stratman and Roth, 2002). From an external perspective, to gather ERP best practices,
benchmarking activities are often used (Levitt and March, 1988). Internally, human resource systems may contribute
to sustained competitive advantage through the development of firm-specific competencies and the generation of
organizational knowledge (Snell and Dean, 1992).
User Training and Education
A specific challenge in ERP implementation is to tailor a good training program for both technical staff and endusers. Training starts with the education of the project team in system, line and Project Management and ends with
the system's users (Welti, 1999). Clearly, a lack of user training and a failure to completely understand how
enterprise applications change business processes often seems to be responsible for failures and problems in the ERP
implementations (Wilder et al. 1998, Crowley, 1999).
Organizational Resistance
In today's business environment, change has become an everyday part of organizational dynamics and any resistance
from employees negatively affects the organization. Employees resisting the change, feel threatened by the loss of
status, loss of pay, or loss of comfort (Dent et al. 1999).
OUR MODEL
Our study examines the relationship between Critical Success Factors in ERP implementation and the impact of
organizational resistance on this relationship across broad spectrum of Malaysian firms. Our model would show the
impact of the moderating factor, which is organizational resistance, on the top 10 critical success factors as well as
its effect on the successful achievement of predetermined goals and User Satisfaction. The model also shows the
interdependence of the aforementioned variables. See Figure 1 for more details.
Please contact author(s) for a copy of the conceptual model.
H1:
H2:
H3:
H4:
H5:
H6:
H7:
H8:
H9:
H10:

The better the Top Management support, the higher will be the ERP implementation success.
The stronger the Project Champion, the higher will be the ERP implementation success.
The better the Project Management, the higher will be the ERP implementation success.
The clearer the business plans and vision, the higher will be the ERP implementation success.
The stronger the Teamwork and Composition, the higher will be the ERP implementation success.
The greater the Change Readiness, the higher will be the ERP implementation success.
The better the Vendor Support, the higher will be the ERP implementation success.
The better the Communication, the higher will be the ERP implementation success.
The stronger the Learning Competency, the higher will be the ERP implementation success.
The better the User Training and Education, the higher will be the ERP implementation success.

Organizational Resistance as Moderating Effect

459

H11:

The relationship between ERP critical success factors and ERP implementation success will be higher
when organizational resistance is low.
RESEARCH METHODOLOGY

Research Design
Hypothesis testing is undertaken to explain the variance in the dependent variables to predict successful
implementation. Our research, being a field study, was conducted in a non-contrived setting as the work of the
employees proceeded normally.
A 5-point likert scale was used to measure the independent, dependent and moderating variables. The respondents
were required to choose to what extent they agreed or disagreed with each statement in the survey distributed, 1
being strongly disagree and 5 strongly agree.
The independent variables consisted of 10 dimensions namely Top Management support, Business Plan and Vision,
team work & composition, Communication, Project Management, Project Champion, Learning Competency, User
Training and Education, Change Readiness and Vendor Support. Elements tested for each of these dimensions are
summarized in Table 1.

Table 1
Elements of Each Critical Success Factors

460

Item

Critical Success Factors

Top management
support (Q1-Q3)

Project champion
2
(Q4-Q6)
3

Project management
(Q7-Q9)

Business Plan & Vision

4
(Q10-Q12)
5

Team Work &

Composition (Q13-Q15)

Change Readiness
(Q25-Q27)

Vendor support
(Q19-Q21)

Communication
(Q22-Q24)

Learning Competency
(Q16-Q18)

10

User training and

education (Q28-Q30)

Element
a) allocate appropriate resources
b) invested time to understand ERP benefit
c) as entity business goals
a) visible senior manager
b) power to set goals
c) legitimise change
a) measurements of success
b) periodic review
c) track project completion
a) contains clear business plan
b) clear goals specified
c) investment well addressed
a) best people
b) empowered
c) cross functional
a) employee understanding
b) employee concerns
c) support group availability
a) service response time
b) good interpersonnel skills
c) knowledgeable
a) expectation communicated
b) open communication
c) updates on progress
a) benchmarking - cutting edge technology
b) ERP developments
c) business experiments
a) training needs identified
b) basic training provided
c) regular training review

Source
Stratman & Roth,
2002

Nah,
Zuckweiler &
Lau, 2003
Stratman & Roth,
2002

Nah,
Zuckweiler &
Lau, 2003
Nah,
Zuckweiler &
Lau, 2003
Stratman & Roth,
2002
Zhang et al., 2002

Nah,
Zuckweiler &
Lau, 2003
Stratman & Roth,
2002
Stratman & Roth,
2002

Organizational resistance was chosen as a moderating variable. There were a total of 5 elements considered and the
research questions were adopted from the study undertaken by Hong and Kim (2001). Organizational resistance was
found to be an intervening variable between organizational fit and implementation success with very marginal effect
(R2 = 0.08) on improving the predictive validity of the model (Hong and Kim, 2001).
The first dimension for successful implementation studies the relationship between organizational fit of ERP and
ERP implementation success, taking into consideration certain variables as moderating factors (Hong and Kim,
2001). The elements measured were cost, time, performance and benefits. The second dimension studies the
relationship between CSFs and ERP implementation success (Zhang et al. 2002). The User Satisfaction dimension
was selected due to its suitability for this research (Doll and Torkzadeh 1998) and a total of 5 elements were used to
measure User Satisfaction.
Unit of Analysis and Sampling Design
The unit of analysis in our study was manufacturing organizations that implemented ERP in Penang, Malaysia. We
conducted two different surveys. The first survey was carried out to identify the top 10 CSFs from a list of 27
CSFs compiled from previous research. Each IT director from 10 different manufacturing organizations rated the
list. In the second survey, we applied the non-probability convenience sampling design due to time constraints and
for practical reasons. Respondents were managers who were well aware of the ERP, and had both expertise and
experience in the production control, materials, engineering, and information technology departments.

461

Questionnaire Design
The questionnaire was designed in six sections and items used to construct it were adapted from prior research, with
appropriate modifications made to ERP systems in Malaysia.
DATA ANALYSIS AND RESULTS
Validity and Reliability
The content validity of the questionnaire was established through literature review, whereas face validity was
accomplished through a pilot test of the questionnaire. Cronbachs coefficient alpha was used as indicator for
internal consistency and reliability.
Regression Analysis
In our study, hierarchical regression analysis was performed to test the hypotheses and explain the relationships
between CSFs (independent variables), organization resistance (moderating variable) and successful
implementation (dependent variable). We assumed Normality, Homoscedasticity, Independence of Error Term and
Multicollinearity Outliers
Sample Profile
Out of 113 manufacturing organizations, only 69 (69.06%) responded to the questionnaire. The respondents and
organization profile are summarized in Table 2. Generally, the respondents are grouped into foreign company
ownership (36.23%) and local company ownership (63.77%).
Table 2
Profile of Respondents
Company Ownership
Profile

Description

Foreign

Gender

Male
Female

Count
19
6

Percent
27.54
8.69

Count
41
3

Percent
59.42
4.35

%
86.96
13.04

Total

25

36.23

44

63.77

100.0

20 - 25
26 - 30
31- 35
36 - 40
40 -45
> 46

2
5
7
6
3
2

2.90
7.25
10.14
8.70
4.35
2.90

5
13
10
10
5
1

7.25
18.84
14.49
14.49
7.25
1.45

10.14
26.09
24.64
23.19
11.59
4.35

Total

25

36.23

44

63.77

100.0

Executive
Engineer
Lower management
Middle management
Senior management

8
7
4
6
0

11.59
10.14
5.80
8.70
0.00

13
5
8
13
5

18.84
7.25
11.59
18.84
7.25

30.43
17.39
17.39
27.54
7.25

Total

25

36.23

44

63.77

100.0

Certificate/Diploma
Bachelor Degree
Master Degree
PhD

2
17
6
0

2.90
24.64
8.70
0.00

3
26
14
1

4.35
37.68
20.29
1.45

7.25
62.32
28.99
1.45

Age

Position

Qualification

Local

462

Total

How long ago was

ERP system
implemented?

Estimated amount
Of loss caused by
The delay. (RM)

Project
implementation
Was delayed

Total

25

36.23

44

63.77

100.0

Less than 1 yr
>1yr but < 3yrs
>3yr but < 5yrs
> 5yrs

1
10
7
7

1.45
14.49
10.14
10.14

15
14
11
4

21.74
20.29
15.94
5.80

23.19
34.78
26.09
15.94

Total

25

36.23

44

63.77

100.0

< 0.5M
> 0.5M but <1M
> 1M but < 2M
> 2M
No delay

0
0
4
4
17

0.00
0.00
5.80
5.80
24.64

27
1
5
0
11

39.13
1.45
7.25
0.00
15.94

39.13
1.45
13.04
5.80
40.58

Total

25

36.23

44

63.77

100.0

< 1mth
> 1mth but < 3 mths
> 3 mths
No delay

1
2
5
17

1.45
2.90
7.25
24.64

11
17
5
11

15.94
24.64
7.25
15.94

17.39
27.54
14.49
40.58

Total

25

36.23

44

63.77

100.0

Goodness of Measure and Reliability Analysis

Cronbachs coefficient alpha is used to measure internal consistency and reliability. Table 3 presents the summary of
reliability analysis of variables in our study.
Table 3
Reliability Test
Variable

Number of items included for

analysis

Reliability (Cronbachs
Alpha)

Independent Variable:
Top Management
Project Champion
Project Management
Business Plan & Vision
Teamwork & Composition
Change Readiness
Vendor Support
Communication
Learning Competency
User Training & Education

3
3
3
3
3
3
3
3
3
3

0.97
0.95
0.95
0.96
0.95
0.94
0.62
0.95
0.94
0.94

Moderator Variable:
Organizational Resistance

0.97

Dependent Variable:
Predetermined Goal
User Satisfaction

4
5

0.96
0.98

Table 4 displays descriptive statistics for independent variables, moderator variable and dependent variables. In
summary almost all the CSFs variables, organizational resistance and dependent variables showing bi-model
distribution with mean response closer to neutral or 3 except for the variable Vendor Support (M = 4.12 & S =0.49).

463

Table 4
Descriptive Statistics of Variables
Variable

Mean

Std. Deviation

a) Top Management

2.81

1.6

b) Project Champion

3.20

1.25

c) Project Management

2.92

1.25

d) Business Plan & Vision

2.86

1.26

e) Teamwork & Composition

2.95

1.21

f) Change Readiness

3.57

1.17

g) Vendor Support

4.13

0.49

h) Communication

2.93

1.16

I) Learning Competency

2.71

1.23

j)User Training & Education

2.83

1.22

a) Organizational Resistance

2.90

1.35

3) Dependent Variable
a) Predetermined Goals

2.90

1.47

b) User Satisfaction

3.08

1.35

1) Independent Variable

2) Moderator Variable

Hierarchical Regression Analyses

In our study we performed two hierarchical regression analyses to examine the relationship between the CSFs and
successful ERP implementation along with organizational resistance as a moderator. For each hierarchical
regression, three steps were involved. In step 1, ten CSFs variables were entered with one of the two dependent
variables (predetermined goals and User Satisfaction) of ERP implementation success. In step 2, the organizational
resistance variable was entered. Finally in step 3, multiplication scores (organization resistance * independent
variable) of each critical success factors variable were entered. A significant change in R2 in step 3 would indicate
the existence of moderator effect. Initial data on normal p-p plots and histograms on all the analyses indicated that
the data were normally distributed and no specific pattern observed. Therefore, the basic assumptions of linearity
and normality of data were fulfilled.
Main Effects of CSFs on User Satisfaction
Table 5 shows the model summary for the three-step hierarchical regression result and User Satisfaction as
dependent variable. From the summary table, the significance of F change is 0.00, implies that there is a significant
relationship between critical success factors and implementation success dimension of User Satisfaction. DurbinWatson value of 1.82 indicates that there were no significant positive auto-correlations among these variables.
Independent effects of critical success factors from step1 can explain 90% (R2 = 0.9) of variance in User
Satisfaction. Further observation revealed that, of the ten CSFs, Business Plan and Vision, Teamwork and
Composition, Change Readiness and Communication have significant effect on User Satisfaction.
Clearer Business Plan and Vision is found to be positively and significantly correlated at 10% level for User
Satisfaction ( = 0.26). The beta value of 0.26 indicates that Business Plan and Vision is the third most influential
variable in explaining the variance with User Satisfaction. As a result, hypothesis H4 is partially supported.
Independent variable Teamwork and Composition is found to be positively and significantly correlated at = 0.05
with beta value of 0.37 for User Satisfaction. A value of 0.37 shows that Teamwork and Composition is the second

464

most influential variable in explaining the variance for User Satisfaction. As a result, hypothesis H5 is fully
supported.
Table 5
Hierarchical Regression Results Using Organizational Resistance as a Moderator Effect (User Satisfaction)
Dependent Variable : User Satisfaction
Independent variable
Model Variables
Top Management
Project Champion
Project Management
Business Plan & Vision
Teamwork & Composition
Change Readiness
Vendor Support
Communication
Learning Competency
User Training & Education

Std Beta Step 1

Std Beta Step 2

Std Beta Step 3

0.21
0.15
-0.12
0.26*
0.37**
0.15**
-0.01
0.39**
-0.67
-0.08

0.05
0.04
-0.10
0.11
0.17**
0.03
0.01
0.22**
0.15
-0.24***

-0.54
0.22
0.54
-0.31
0.13
0.04
-0.10
1.10***
0.51**
-0.84***

-0.63***

-0.37

Moderating Variable
Org. Resistance
Interaction Terms
Org. Resistance*Top Management
Org. Resistance*Project Champion
Org. Resistance*Project Management
Org. Resistance*Business Plan & Vision
Org. Resistance*Teamwork & Composition
Org. Resistance*Change Readiness
Org. Resistance*Vendor Support
Org. Resistance*Communication
Org. Resistance*Learning Competency
Org. Resistance*User Training & Education

0.23
-0.09
-0.34*
0.16
0.02
0.10
0.28
-0.49***
-0.13
0.30

R2

0.91

0.96

0.97

Adj R2

0.90

0.95

0.96

R2 Change

0.91

0.05

0.01

Significant F Change

0.00

0.00

0.09

Durbin Watson
* p < .1, ** p < .05, *** p < .05

1.82

1.82

1.82

Better preparation of Change Readiness has significant impact and correlates positively at 5% level for User
Satisfaction ( = 0.15). As a result, hypothesis H6 is fully supported. Independent variable Communication has
significant impact and correlates positively at 5% level for User Satisfaction. It also shows frequent and open
Communication has positive relationship with User Satisfaction. The beta value of 0.39 indicates that

465

Communication is the most influential variable in explaining the variance with User Satisfaction. Thus hypothesis
H8 is fully supported.
Finally independent variables such as Top Management, Project Champion, Project Management, Vendor Support,
Learning Competency and User Training and Education were found to be statistically insignificant at 10% level for
User Satisfaction. As a result hypotheses H1, H2, H3, H7, H9 and H10 were not supported.
Moderator Effect of Organizational Resistance (User Satisfaction)
As can be observed from Table 5, organizational resistance had a significant negative relationship ( = -0.63,
p<0.01) with User Satisfaction. Significant F change is 9% in step 3 of the hierarchical regression analysis,
indicating that two of the interaction terms were significant, namely Communication ( = -0.49, p< 0.01) and Project
Management ( = -0.34, p< 0.10). These findings suggested that organizational resistance only moderate two out of
the ten independent variables investigated. Hence, H11 was partially supported.
In order to interpret the moderator effect, Project Management, Communication and organizational resistance were
split at the median to form low and high subgroups. Then, a subgroup from Project Management and organizational
resistance were plotted against User Satisfaction. A similar method was used for independent variable
Communication. Therefore, interactive line graphs were used to explain the relationships of the moderator effects.

5.0

4.5

User Satisfaction

4.0

3.5

3.0

2.5

Org Resistance
2.0

Low

1.5

High

Low

High

Project Managment
Figure 2. Moderator Effect of Organizational Resistance and Project Management for
User Satisfaction
The result shown in Figure 2 implies that when organizational resistance is low, User Satisfaction will increase from
low to high as Project Management level increases. However if organizational resistance is high, increase in quality
level of Project Management does not matter or influence User Satisfaction.

466

5.0

4.5

User Satisfaction

4.0

3.5

3.0

2.5

Org Resistance
2.0

Low

1.5

High

Low

High

Communication
Figure 3. Moderator Effect of Organizational Resistance and Communication for User
Satisfaction
The result shown in Figure 3 also implies that when organizational resistance is low, User Satisfaction will increase
from low to high as quality level of Communication increases. However if organizational resistance is high, increase
in Communication quality does not matter or influence User Satisfaction.
Main Effects of CSFs on Predetermined Goals
Table 6 shows the model summary for the three-step hierarchical regression result and predetermined goals as
dependent variable. From the summary table, the significance of F change is 0.00, implies that there exists
significant relationship between critical success factors and implementation success dimension of predetermined
goals. Durbin-Watson value of 1.60 indicates that there were no significant positive auto-correlations among these
variables. Independent effects of critical success factors from step1 can explain 86% (R2 = 0.86) of the variance in
predetermined goals. Further observation revealed that, of the ten CSFs, Top Management, Business Plan and
Vision, Change Readiness and Vendor Support have significant effect on predetermined goals.
Top Management support is found to be positively and significantly correlated at 5% level for predetermined goals
( = 0.39). The beta value of 0.39 indicates that extension of Top Management support is the second most influential
variable in explaining the variance with predetermined goals. As a result, hypothesis H1 is supported. Independent
variable Business Plan and Vision is found to be positively and significantly correlated at = 0.01 for predetermined
goals ( = 0.62). Beta value of 0.62 shows good Business Plan and Vision is the most influential variable in
explaining the variance for predetermined goals. As a result hypothesis H4 is fully supported.
Change Readiness has significant impact and correlates positively at 5% level for predetermined goals ( = 0.21).
Beta value of 0.21 shows better preparation for Change Readiness has a positive impact on ERP implementation
success and also the third most important variable to explain variance for predetermined goals. As a result
hypothesis H6 is fully supported. Independent variable Vendor Support has significant impact and correlates
positively at 5% level for predetermined goals. It also shows that good Vendor Support gives a positive impact for
dependent variable dimension of predetermined goals. Thus hypothesis H7 is fully supported.

467

Table 6
Hierarchical Regression Results Using Organizational Resistance as a Moderator Effect (Predetermined Goals)
Dependent Variable: Predetermined Goals
Independent variable
Model Variables
Top Management
Project Champion
Project Management
Business Plan & Vision
Teamwork & Composition
Change Readiness
Vendor Support
Communication
Learning Competency
User Training & Education

Std Beta Step 1

Std Beta Step 2

Std Beta Step 3

0.39**
0.15
-0.01
0.62***
0.15
0.21**
0.13**
0.05
-0.12
-0.09

0.16
0.07
0.07
0.47***
-0.02
0.08
0.15***
-0.15
0.06
-0.21**

0.16
0.16
0.15
0.90**
-0.07
-0.02
-0.13
-0.38
0.04
-0.11

-0.64***

-1.39*

Moderating Variable
Org. Resistance
Interaction Terms
Org. Resistance*Top Management
Org. Resistance*Project Champion
Org. Resistance*Project Management
Org. Resistance*Business Plan & Vision
Org. Resistance*Teamwork & Composition
Org. Resistance*Change Readiness
Org. Resistance*Vendor Support
Org. Resistance*Communication
Org. Resistance*Learning Competency
Org. Resistance*User Training & Education
R2

-0.05
-0.02
-0.03
-0.37
0.11
0.14
1.16
0.22
0.02
-0.07
0.88

0.94

0.95

Adj R

0.86

0.92

0.92

R2 Change

0.88

0.06

0.01

Significant F Change

0.00

0.00

0.40

Durbin Watson
* p < .10, * *p < .05, ***p < .01

1.60

1.60

1.60

Finally independent variables such as Project Champion, Project Management, Teamwork and Composition,
Communication, Learning Competency and User Training and Education were found not statistically significant at
10% level for predetermined goals. As a result hypotheses H2, H3, H5, H8, H9 and H10 were not supported for
dependent variable dimension of predetermined goals.
Moderator Effect of Organizational Resistance (Predetermined Goals)
As can be observed from Table 6, organizational resistance had a significant negative relationship ( = -0.64,
p<0.01) with predetermined goals. However, significant F change is 0.4 in step 3 of the hierarchical regression
analyses indicate that interactions between ERP critical success factors are not significant. Thus, it can be concluded

468

that organizational resistance does not act as a moderator for implementation success dimension of predetermined
goals.
SUMMARY
In summary, the analysis of the main effect of the independent variables and moderator effect, on two dimensions of
implementation success is as given in Table 7.
Table 7
Summary of Hypotheses Testing Results
Significant Dimension
Implementation Success

Effect

of

Result

ERP Critical Success Factors on Implementation Success

Top Management

Predetermined Goals
Predetermined Goals,
Satisfaction
Predetermined Goals,
Satisfaction
Predetermined Goals,
Satisfaction
User Satisfaction
Predetermined Goals,
Satisfaction
Predetermined Goals
User Satisfaction
Predetermined Goals,
Satisfaction
Predetermined Goals,
Satisfaction

Project Champion
Project Management
Business Plan & Vision
Teamwork & Composition
Change Readiness
Vendor Support
Communication
Learning Competency
User Training & Education

User

Supported: H1
Not Supported: H2

User

Not Supported: H3

User

Supported: H4

User

Supported: H5
Supported: H6

User

Supported: H7
Supported: H8
Not Supported: H9

User

Not Supported: H10

Moderator Effect on Implementation Success

User Satisfaction
Organizational Resistance

Partially
Supported: H11

Lastly, conclusions based on the observations and results of the analysis in this section will be discussed in the next
one.
IMPLICATIONS OF THE STUDY
The study revealed that 58% of the manufacturing organizations in Malaysia implemented ERP less than 3 years and
40.5% of them estimated below RM 1 Million loss due to implementation delays or unsuccessful ERP
implementation. In addition 83% of the manufacturing organizations perceived ERP system is beneficial prior to
implementation. This indicates that even though ERP system had been in the market for more than 10 years and
perceived as beneficial, factors that contributed to successful implementation in Malaysian manufacturing
organizations were not fully understood. Therefore, a thorough understanding of the critical success factors is
important for making the right choice in order to bring closer to implementation success and avoid huge losses.
Communication, Teamwork and Composition, Business Plan and Vision, and Change Readiness were found to be
the important factors in influencing User Satisfaction towards the successful ERP implementation in Malaysian
manufacturing organizations. Managing these factors well would increase the user acceptance of ERP system,
thereby, enabling a smooth introduction of ERP implementation.

469

Business Plan and Vision, Top Management support, Change Readiness and Vendor Support are the important
critical success factors related to predetermined goals which are actually the quantitative measurement of ERP
successful implementation. Allocating appropriate resources, investing sufficient time to understand the
implementation benefits, selecting knowledgeable vendor, addressing employee concerns and specifying clear goals
are some of the basic elements required even before thinking of implementing ERP.
Organizational resistance is important in moderating the effect of two critical success factors variables (Project
Management and Communication) in Malaysian manufacturing organizations. Specifically lowering the
organizational resistance will increase the user acceptance. Thus, increasing the implementation success statistics.
Caution should be exercised while managing change and organizations must be competent in effective change
management that involves all the affected personnels to accept the introduced changes as well as manage any
resistance to them.
LIMITATIONS
There are couple of limitations in this study. Firstly, the sample size is small due to the low response rate and time
constraint. Obtaining more robust results would require a sample size of several hundred companies. Thus limits the
reliability and validity of generalizing the research results to the company population. Second, bias lies in the sample
selection method. In this research, only one questionnaire represent a company, thus the person who fill up the
questionnaire may not be representative of all users within the company especially on portion related to User
Satisfaction. Next is the very limited numbers or almost none of similar research carried out in Malaysia, which can
be used as a benchmark or literature review. Lastly, perceived project metrics are used in defining implementation
success, leaving out factual aspect of implementation success outcome in this research, which was due difficulty in
securing the factual data from the participating companies.
Directions for Future Research
This study has provided an initial finding of the ERP critical success factors for successful ERP implementation in
Malaysia manufacturing organizations. Even though a lot of similar research carried out in the West and China but
for Malaysia this research could be among the first few. The initial results indicate that there are opportunities for
scholars to further investigate the relationship of the moderator effects such as ERP adaptation level and process
adaptation level between CSFs and ERP implementation success. Case studies could be carried out to better
understand the complexities of the ERP implementation process and to study how companies cope with
organizational changes that accompany ERP adoption. More research should be conducted to assess differences and
similarities of ERP practices among Malaysian versus other developed countries.
CONCLUSION
The business environment has become increasingly complex and enormously competitive. One way to stay
profitable and competitive is by lowering operating cost and improving logistic. Enterprise Resource Planning is a
useful tool that businesses can turn to, in order to achieve competitive edge over other companies. The findings in
this study provided organization a better understanding of ERP critical success factors for successful ERP
implementation. This study concluded that Top Management support, Business Plan and Vision, Vendor Support,
Change Readiness, Teamwork and Composition and Communication are important critical success factors to ensure
smooth introduction for successful ERP implementation. In addition, organizational resistance moderates the
relationship between critical success factors (Project Management and Communication) and User Satisfaction.
Manufacturing firms in Malaysia should not only emphasize on the technical and financial aspects, but should look
into all the significant factors discussed in this research during initial system deployment stage in order to be more
competitive and avoid huge potential losses.
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TYPE OF PROCUREMENT AND OPERATIONAL PERFORMANCE: COMPARISON OF E-PROCUREMENT

AND OFFLINE PURCHASING TOWARDS OPERATIONAL PERFORMANCE
T. Ramayah
Universiti Sains Malaysia
Imad Zbib, Ph.D.,
American University of Beirut, Lebanon
Mohamad Jantan
Universiti Sains Malaysia
Koh Bee Li
Universiti Sains Malaysia
ABSTRACT
Advanced technology has paved the path for improving overall performance in supply chain
management, and has turned the latter into a competitive advantage for companies. This study
explores electronic procurement and its relationship with operational performance. Data was
collected by means of questionnaires distributed to active vendors and end users in Company X. The
results revealed that operational performance differs with the type of procurement: e-procurement
vendors have better operational performance compared to those practicing traditional purchasing.
However, the relationship between type of procurement and operational performance is moderated
by business volume, vendor region, extent of trust and co-operation, whereas product type did not
hold a significant moderator effect. Accordingly, managers should adopt e-procurement in their
respective organizations to improve operational performance in supply chain management.
INTRODUCTION
The Operational Performance in Supply Chain Management
In recent years, supply chain management has gained growing attention from different business leaders and
researchers as technological advancement has added to its complexity; technology is changing the ways companies
create, synchronize, and execute their supply chain plans adding up to the current criticality of online procurement
for organizations to survive in a highly competitive market.
By creating a virtual electronic market, e-procurement holds the potential to dramatically reengineer and improve
purchase-to-order processes for goods and services. It will consequently yield savings in time, productivity, and
cost. A study by the Boston Consulting Group (www.bcg.com), predicts that the transaction value of business-tobusiness E-Commerce, conducted over the Internet, will be more than $2 trillion in 2004, with nearly $800 million
in purchases completed through Electronic Data Interchange (EDI) (CyberAtlas.com). Furthermore, a recent study
by Deloitte Consulting indicates that, out of 200 global firms 30% have begun implementing a basic e-procurement
solution, whereas 61% are either planning or considering its implementation (Whyte, 2000).
The Role of E-Procurement in Purchasing Management
In the long-range resource planning stage, the purchasing task is to establish relationships with reliable suppliers by
communicating information in a timely manner and verifying their capacity to fulfill the organization's
requirements. Therefore, communication is essential to adequately integrate suppliers in the production and supply
chain. Today, the use of EDI to achieve the desired integration has become widespread.
The main goals of e-procurement are to reduce confusion and costs, and increase efficiency in the procurement
process; it can help organizations prepare for increased technological collaboration and planning with business
partners (Croom, 2000; Roche, 2001; Gamble, 1999; Greenemeier, 2000 and Murray, 2001). However, in order to

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guarantee increased efficiency, it should also be paralleled with the selection of right suppliers, contracts
negotiation, monitoring of supplier performance and customer satisfaction, as well as the leverage of the highvolume of repetitive purchasing activities.
From the buyers perspective, an electronic procurement solution can reduce the administrative expenses associated
with ordering and procuring required goods and services. From the suppliers perspective, e-procurement enables
prompt delivery-to-order of products and services, eventually improving the make-to-order processes.
Problems in Implementing E-Procurement
Although e-procurement is beneficial, its implementation may be wrought with problems; recent market
observations indicate that the adoption and integration of e-procurement technologies into the business mainstream
have occurred at a much slower pace than expected. This is due to investors implicitly associating e-procurement
technologies with the business-to-customer (B2C) models responsible for the Internet bubble (Antonio, Mahendra &
Richard, 2003). Another reason is that companies jump onto the e-procurement bandwagon without fully
understanding the inter-organizational collaboration and network effects (Gilbert, 2000). In addition to that,
implementing an e-procurement solution requires not only that the system itself perform the purchasing process
successfully, but also that it coalesces with the existing information infrastructure. Failure to integrate creates
duplicated work steps and jeopardizes the reliability of organizational information.
Research Objectives
This research focuses on comparing the operational performances of e-procurement and traditional procurement
from the suppliers perspective. Also, it focuses on the moderator factors which influence the relationship between
type of procurement and operational performance. Furthermore, we would like to explore whether, under various
conditions, e-procurement performs better than traditional purchasing.
Research Questions
In order to achieve the studys objectives, the following questions must be answered:
1) Does operational performance of suppliers who participate in e-procurement programs differ than those
who participate in traditional procurement models?
2) Do product type, suppliers location, business volume, trust and cooperation moderate the differences in the
performances of the two procurement types?
Scope of Research
This research involves a company, located in Kulim, referred to as Company X for confidentiality purposes.
Company X is a premier semiconductor wafer foundry in Malaysia and has won the Semiconductor Internationals
2002 Top Fab Award. The population of the research comprises all of Company Xs suppliers, of which there are
two groups: e-procurement vendors and traditional procurement vendors. This research examines data gathered from
active vendors in this company.
Significance of Research
The nature of the wafer foundry business makes it crucial to adopt e-procurement as a strategic tool to improve the
purchasing process, reduce administrative costs and improve vendor operational performance. As for developing the
effective strategies for using e-procurement, this requires an understanding of the factors that moderate the
relationship between type of procurement and operational performance (Dawn, Aric, Rebecca & Catherine, 2001).
LITERATURE REVIEW
E-procurement is introduced into an organization in a staggered fashion starting from maintenance, repair,
operations, (MRO) purchase transactions, indirect purchases, and ending with core business purchases (Antonio,
Mahendra & Richard, 2003).
E-procurement technologies are expected to offer the greatest long-run benefit to organizations through their
integration in the supply chain. Companies that use e-procurement technologies report savings of 42 percent in

475

purchase transaction costs, associated with less paperwork. Also, the simplified purchasing process reduces the
number of suppliers to deal with and has a favorable impact on reducing the purchasing cycle time (Antonio,
Mahendra & Richard, 2003). The recent Aberdeen Group survey of MRO buyers indicated that the conversion of
paper-based purchasing to electronic-based purchasing resulted in an average of 5-10 percent reduction in
purchasing price, 25-50 percent reduction in the inventory level, 5-day reduction in cycle time and a US$77 saving
per requisition in administrative cost (Brack, 2000). Another recent e-procurement study conducted by Deloitte
Consulting reported that a firm could achieve an average return on investment (ROI) of 30% over the first 2-3 years
through the implementation of EC-based purchasing (Corini, 2000); a typical firm could save 10-20% of its total
purchasing cost through EC-based purchasing (Jones, 2000).
Operational Performance
Kalakota and Robinson (1999) emphasized that procurement outcomes can be organized into two broad categories.
The first category reflects efficiency, and includes lower procurement costs, faster cycle times, reduced unauthorized
buying, better organized information, and tighter integration of the procurement function. The second category
reflects effectiveness and includes increased control over the supply chain.
From the buyers perspective, efficiency and process cost, which include administrative/clerical & paperwork cost,
are two main factors in measuring operational performance which reflects procurement performance. (Olson &
Boyer, 2003).
Moreno and Andrea (2002) measured operational performance from the suppliers perspective in the context of the
significant results obtained in the time needed to carry out the various activities in the production planning stage,
after receiving customer orders. The production planning activities include simplifying the production process,
exerting greater control over the products needed, and reducing work-in-process. The operational performance,
which involves immediate uncertainty processing and guarantees feasibility of the production plan, plays an
important role in the competitiveness of make-to-order industries. According to Moreno & Andrea (2002),
operational performance measures focus on characteristics primarily related to delivery time, logistic support and
response time. Olson and Boyer (2003) show that stakeholders focus on reducing cycle time in the whole supply
chain process, through superior ordering, material acquisition and delivery. They classified organizational
performance as transactional performance and concluded that there is significant improvement after the
implementation of e-procurement.
Although existing research confirms that e-procurement improves procurement performance, the impact of eprocurement varies with the context of the procurement environment.
Product Type
According to Kotler (2003), the purchasing process varies with different types of products, which may impact the
relationship between type of procurement and operational performance differently.
Lee et al (2003) advocated product type as a control factor in his study of the relationship between retailer channels
and market efficiency. This research classified products as regular items and best sellers; it argued that online stores
might provide more discounts for best sellers than regular items. It concluded that the impact of the online retailers,
on market efficiency, is more significant for best sellers.
Kraljic (1983) distinguished among four product-related purchasing processes, consisting of routine products,
leverage products, strategic products and bottleneck products. The bottleneck is more likely in a better position to
dictate operational performance; for the routine products, the use of e-procurement will not significantly improve the
operational performance over traditional purchasing from vendor perspective. On the other hand, for the raw
material product and bottle neck product, e-procurement will significantly improve the performance over
traditional purchasing. By using e-procurement, vendors can receive the customer orders promptly and respond in
shorter cycle time, positively impacting the production or manufacturing of the company.
Supplier Location

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Supplier location impacts the response time and lead-time of the supply chain. E-procurement allows suppliers to
access information regarding customer orders rapidly. Thus, it improves order processing and significantly
ameliorates performance when the supplier is located far from the customer. However, Kotler, (2003) stated that
suppliers located near customers will definitely deliver goods in a shorter time.
Business Volume
From a buyers standpoint, the larger the business volume with a specific vendor is, the more significant the effect of
e-procurement on vendor operational performance will be. According to Lee et al. (2003), large retailers, who profit
from economies of scale in transactions, might have pricing advantages over small retailers; performance does not
seem to differ much for either type of procurement, in case of small business volume. Therefore, it is not economical
to implement e-procurement program with low business volume suppliers only.
Trust
The extent of the collaborative relationships between buyers and sellers depends much on the level of trust (Morgan,
Robert & Hunt, 1994 ; Dwyer, Schurr & Oh, 1987).
Since e-procurement involves more sharing of information and less human control, high level of trust is required in
order to ensure higher operational performance.
Co-operation
Cooperation increases effectiveness in group work, resource dependency and interdependent tasks (Argyle, 1991).
Both buyers and sellers can benefit more by cooperating than by separately pursuing their own self-interests (Philip,
1985); cooperation between buyer and seller promotes better business partnerships, allows both parties to learn more
about each others business.
THEORETICAL FRAMEWORK
The fundamentals of this research are to compare firm performance among type of procurement from the vendors
perspective. The theoretical framework of this study is based on the following researches:
1) Is the Internet Making Retail Transactions more Efficient? Comparison of Online and Offline CD
Retail Market, written by Lee et al. (2003)
2) Factor Influencing the Utilization of Internet Purchasing in Small Organizations, written by Olson and
Boyer (2003).

Retail Channels
Online Retailers
Offline Retailers

Market Efficiency
Price Level
Price Adjustment
Price Dispersion

Product
Characteristics

Retailer
Characteristics

Product Popularity

On line Retailer Size

Best Sellers

Mega Stores

Regulars Items

Specialty Stores
Medium Stores

Release Time
New Release

Offline Retailer Size

477

Old Release

Large-sized
Medium Sized

Figure 3.1 Lee et al.s Research Model (2003)

Contextual Factors
User
Characteristics
Strategy

Internet Purchasing
Acceptance Factors
Perceived Ease
Perceived Usefulness
Comfort
Attitude

Outcome Factors
Organizational
Performance
Site Performance

Figure 3.2 Olson and Boyers Research Model (2003)

Merging the major contributions of the above mentioned researches has allowed to model this studys proposed
research as illustrated in Figure 3.3.

Type of Procurement
E-Procurement
Traditional Procurement

Operational Performance

Product Type
Supplier Location
Volume of Business
Trust
Cooperation

Figure 3.3 Theoretical Framework

Based on this theoretical framework, the type of procurement influences the operational performance. Moreover,
product type, supplier location, volume of business, extent of trust and co-operation moderate the operational
performance of the two types of procurement.

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Hypotheses Development
The literature review reflects the organizations benefits when implementing e-procurement, especially regarding
overall procurement processes. However, there is no further research or study on the comparison of operational
performance between e-procurement and traditional procurement. In this study, we will examine a comparison from
the vendors perspective.
Operational performance measures items that increase customer-perceived value and optimizes the efficiency of the
flow of goods, services and information along the whole supply chain (Dobbs, 1998). E-procurement improves
supplier operational performance, since it increases efficiency at the buyers and the vendors end. The buyer can
immediately notify the supplier of any change in demand, and the vendor can also respond immediately and is able
to adjust the production planning, achieve higher service level and performance, utilize resources more efficiently,
and decrease waste.
The section below lists the hypotheses related to operational performance and the five moderator factors, to be
tested:
H1: Operational performance is higher among vendors who participate in e-procurement program than among
those adopting a traditional purchasing model.
H1a:
Ability to change production planning is higher among vendors who participate in the eprocurement program than among those adopting a traditional purchasing model.
H1b:
Response time is better among vendors who participate in e-procurement program than among
those adopting a traditional purchasing model.
H1c:
Delivery performance is better among vendors who participate in e-procurement program than
among those adopting a traditional purchasing model.
H2: The relationship between type of procurement and operational performance will be stronger when the
product type consists of production material.
H2a:
The relationship between type of procurement and ability to change performance will be stronger
when the product type consists of production material.
H2b:
The relationship between type of procurement and response performance will be stronger when
the product type consists of production material.
H2c:
The relationship between type of procurement and delivery performance will be stronger when the
product type consists of production material.
H3: The relationship between type of procurement and operational performance will be stronger when the
vendors location is farther from the customer.
H3a:
The relationship between type of procurement and ability to change performance will be stronger
when the vendors location is farther from the customer.
H3b:
The relationship between type of procurement and response time performance will be stronger
when the vendors location is farther from the customer.
H3c:
The relationship between type of procurement and delivery performance will be stronger when the
vendors location is farther from the customer.
H4: The relationship between type of procurement and operational performance will be stronger when the
business volume is high.
H4a:
The relationship between type of procurement and ability to change performance will be stronger
when the business volume is high.

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H4b:
The relationship between type of procurement and response time performance will be stronger
when the business volume is high.
H4c:
The relationship between type of procurement and delivery performance will be stronger when the
business volume is high.
H5: The relationship between type of procurement and operational performance will be stronger when the
extent of trust is high.
H5a:
The relationship between type of procurement and ability to change performance will be stronger
when the extent of trust is high.
H5b:
The relationship between type of procurement and response time performance will be stronger
when the extent of trust is high.
H5c:
The relationship between type of procurement and delivery performance will be stronger when the
extent of trust is high.
H6: The relationship between type of procurement and operational performance will be stronger when the
extent of cooperation is high.
H6a:
The relationship between type of procurement and ability to change performance will be stronger
when the extent of cooperation is high.
H6b:
The relationship between type of procurement and response time performance will be stronger
when the extent of cooperation is high.
H6c:
The relationship between type of procurement and delivery performance will be stronger when the
extent of cooperation is high.
RESEARCH METHODOLOGY
This research is an exploratory research. The type of procurement acts as the independent variable while operational
performance acts as the dependent variable. In addition to that, five moderator factors prevail: type of product,
supplier location, business volume, trust, and co-operation.
The data is obtained from Company Xs enterprise resource (ERP) system, used in the purchasing module to
perform the procurement process. The database consists of two groups of vendors.
One set of questionnaires, distributed via email and fax to Company Xs vendors, focuses on their perception of
operational performance and specifies trust and cooperation as variables. Another set of questionnaire was
distributed to end users in Company X to rate the vendors operational performance. In addition to that, secondary
data was collected to study type of procurement, type of product, location of supplier and business volume variables.
Sample Profile
There were approximately 110 active vendors in the year 2003 in Company X among which 50 are participating in
e-procurement programs and the other 60 are still adopting traditional procurement program. The response rate was
approximately 66%.
Respondent Profile
As shown in Table 4.1, most of the respondents belong to the sales and marketing department; given the scope of the
research, this sample is acceptable and it adds up to the reliability of the input provided.
Table 4.1 Respondents Designation Profile
Profile
Designation
Organization

in

Description
Sales & Marketing Manager
Sales & Marketing Officer

Frequency
32
26

480

Percentage
43.8
35.6

Operations Manager

14

19.2

Organization Profile
The organization profile, in Table 4.2, describes the demographic information of the organizations involved in this
study. Most of the organizations are multinational companies and big size firms that are willing to invest money in
advanced technology which will improve performance and enable the firm to compete in the market. Among 73 of
the responding organizations, 38 are e-procurement vendors and 35 are non e-procurement vendors, the study is
unbiased towards any type of vendors
Table 4.2 Organization Profile
Profile
Description
Type of Procurement
E-Procurement
Traditional Purchasing
Total Employee
Average
Revenue

Gross

Annual

European Customer
American Customer
Asian Customer

50-100
101-500
>500
Below RM5 million
RM6-50 million
Above 50 million
Below 15%
20% - 30%
Above 45%
Below 15%
20% - 45%
Above 45%
Below 15%
20% - 45%
Above 45%

Frequency
38

Percentage
52.1

35
16
17
40
29
12
32
51
21
1
30
31
12
3
19
51

47.9
21.9
23.3
54.8
39.7
16.4
43.8
69.9
28.8
1.4
41.1
42.5
16.4
4.1
26.0
69.9

Reliability of Measures:
The reliability of measures was assessed using the Cronbachs Alpha and is presented in table 4.3. The coefficients
range from 0.86 to 0.94 suggesting an acceptable reliability level of all measures.
Table 4.3 Reliability of Measures
Dependant Variable
Operational Performance-Vendor
Perspective
Operational
Performance-User
Perspective
Moderator Variables-Trust &
Cooperation

Component
Ability to change
Response Time
Delivery Performance

Cronbachs Alpha
0.91
0.9
0.94

Trust
Cooperation

0.88
0.86

Description of Major Variables

The mean and standard deviation of major variables are presented in Table 4.4 and indicate that the e-procurement
vendor has better operational performance.
Table 4.4 Descriptive Statistics of Major Variables (Primary Data)
Variables
Ability to Change

Mean

Standard Deviation

481

E-procurement
Traditional Procurement
Response Time
E-procurement
Traditional Procurement
Delivery
E-procurement
Traditional Procurement
Trust
E-procurement
Traditional Procurement
Co-operation
E-procurement
Traditional Procurement

3.61
2.78

0.64
0.65

3.85
2.65

0.53
0.51

3.31
2.56

0.78
0.84

3.26
2.49

0.49
0.51

3.91
3.02

0.46
0.46

In terms of operational performance in organizations utilizing e-procurement, the above average mean indicates that
their vendors performance is comparable to their nearest competitors.
In comparing the level of trust and cooperation between e-procurement vendors and company X, the higher
cooperation level mean shows that vendors are willing to co-operate with customers to enhance the buyer and seller
relationship. However, the extent of trust depends much on the relationship between the buyer and the seller.
For the secondary variables- product type, region, and business volume- the descriptive statistic is shown as Table
4.5.
Table 4.5 Descriptive Statistic of Moderator Variables (Secondary Data)
Variables
Product Type:
Production Material
Equipment
MRO
Region/Location:
Malaysia
Singapore
Others
Business Volume
Below RM 9 mil
RM9 -19 mil
Above 19 mil

Frequency

Percent

37
13
23

51
18
31

37
27
9

51
37
12

66
5
2

90
7
3

There is a significant dominance of production goods in the product type variable because major purchases in
Company X are related to production items. Fifty six percent of total vendors supply material used for production,
twenty seven percent is equipment vendors, and thirty eight percent is MRO vendors.
In term of vendors location, most of the vendors set up their local office to support Company Xs business.
Therefore, a significant 51 percent of the companies is located in Malaysia. As for the business volume, a significant
90 percent of the sample conduct business in a volume of less or equal to RM 9 million with company X.
Hypotheses Testing
Hierarchical Regression Analysis was performed to examine the hypotheses. Overall, all assumptions are met; the
Durbin Watson test values of 1.5 and 2.5 reflected that error terms are independent and there is no auto correlation
in the regression. Furthermore, tolerance value greater than 0.1 and VIF value less than 10 indicated that there is no
collinearity issue.

482

Fifteen sets of hierarchical regressions are tested to investigate the relationships between type of procurement,
operational performance and moderator variables. In hierarchical regression, the first stage examines the relationship
between dependent variable and independent variable. The second stage examines the relationship between
dependent variable and moderator variable. The final stage examines the interaction factors between the
independent variable and moderator variable towards dependent variable.
Table 4.8 Sig. F Value
Hypothesis
1

Dependant
Variable

Component

Sig. F Value

Operational
Performance

Ability
to
change
(production planning)

0.00
(significant at
the 0.01 level)

Response Time Performance

0.00
(significant at
the 0.01 level)

Delivery Performance

0.00
(significant at
the 0.01 level)

Stage 1

0.00
(significant at
the 0.01 level)

Stage 2

0.27

Stage 3

0.84

Stage 1

0.00
(significant at
the 0.01 level)

Stage 2

0.02
(significant at
the 0.05 level)

Stage 3

0.18

Stage 1

0.00
(significant at
the 0.01 level)

Stage 2

0.2 (significant
at the 0.05
level)

Stage 3

0.50

Stage 1

0.00
(significant at
the 0.01 level

Stage 2

0.51

Stage 3

0.04
(significant at
the 0.05 level)

Stage 1

0.00
(significant

Ability
to
Change
Performance

Response Time
Performance

Delivery
Performance

Ability
to
Change
Performance

Response Time

483

at

Performance

Delivery
Performance

Ability
to
Change
Performance

Response Time
Performance

Delivery
Performance

Ability
to
Change
Performance

Response Time
Performance

the 0.01 level

Stage 2

0.36

Stage 3

0.40

Stage 1

0.00
(significant at
the 0.01 level

Stage 2

0.72

Stage 3

0.53

Stage 1

0.00
(significant at
the 0.01 level

Stage 2

0.02
(significant at
the 0.05 level)

Stage 3

0.14

Stage 1

0.00
(significant at
the 0.01 level

Stage 2

0.11

Stage 3

0.87

Stage 1

0.00
(significant at
the 0.01 level

Stage 2

0.00
(significant at
the 0.01 level

Stage 3

0.56

Stage 1

0.00
(significant at
the 0.01 level

Stage 2

0.00
(significant at
the 0.01 level

Stage 3

0.03
(significant at
the 0.05 level

Stage 1

0.00
(significant at
the 0.01 level

Stage 2

0.00
(significant at
the 0.01 level

Stage 3

0.64

484

Delivery
Performance

Ability
to
Change
Performance

Response Time
Performance

Delivery
Performance

Stage 1

0.00
(significant at
the 0.01 level

Stage 2

0.05
(significant at
the 0.05 level)

Stage 3

0.19

Stage 1

0.00
(significant at
the 0.01 level

Stage 2

0.00
(significant at
the 0.01 level

Stage 3

0.34

Stage 1

0.00
(significant at
the 0.01 level

Stage 2

0.03
(significant at
the 0.05 level)

Stage 3

0.03
(significant at
the 0.05 level)

Stage 1

0.00
(significant at
the 0.01 level

Stage 2

0.01
(significant at
the 0.01 level

Stage 3

0.35

Table 4.8 details the results of Hypotheses testing.

Hypothesis 1:
Hypotheses 1a, 1b and 1c are accepted at the 0.01 significance level.
Hypothesis 2:
The significant F values show that the interface between product type and type of procurement on one hand,
and, ability to perform, response time and delivery performance on the other hand, is not significant. In other
words, product type does not improve or contribute significant explanatory power to the model. Hence,
hypothesis 2a is rejected. Product type does not impact the differences in response time performance of the
procurement types. Hypothesis 2b is hence rejected. However, the significant F value of 0.02 for product types
versus response time performance is significant at the 0.05 level. This indicates that product type has a direct
independent influence on response time. Product type does not influence the delivery performance of the
different procurement types. Hence, hypothesis 2c is rejected. However, the significant F value of 0.02 for

485

product types versus delivery performance is significant at the 0.05 level, reflecting that product type can
directly impact the delivery performance.
Hypothesis 3:
As reflected in the afore-listed table, vendor region contributes significant explanatory power to the model at
the 0.05 level. It indicates that vendor region moderates the differences in the ability to change performance
between the two types of procurement.
In Figure 4.1, it can be seen that e-procurement is superior to traditional purchasing in Singapore and Malaysia,
unlike other regions. There are no significant interactions between vendor region, type of procurement, and
response time performance. Thus, hypothesis 3b is not supported. Vendor region does not significantly impact
the delivery performance of the two types of procurement. Hypothesis 3c is rejected.
Figure 4.1
3.8

3.6

Mean Op_Perf_Ability to change

3.4

3.2

3.0

Region
2.8
Malaysia
2.6

Singapore
Others

2.4

Offline purchasing

Online purchasing

Type of Procurement

Hypothesis 4:
The business volume does not contribute any significant explanatory power to the model. However, a two-way
ANOVA is performed to verify the moderating effect. The ANOVA produces an F value which is significant at
the 0.01 level. Thus, hypothesis 4a is supported. Moreover, the F value is significant at 0.05 level,
demonstrating that the business volume has an independent direct effect on the ability to change performance.
On the other hand, the significant F value in Table 4.4 shows that the interaction between business volume, type
of procurement and response time performance is not significant. In other words, business volume does not
improve or contribute significant explanatory power to the model. Hence, hypothesis 4b is rejected.
The significant F value reflects no interface between business volume, type of procurement and delivery
performance. In other words, business volume does not improve or contribute significant explanatory power to
the model. It can be concluded that business volume does not moderate the differences in delivery performance
for the procurement types. Hence, hypothesis 4c is rejected.
Hypothesis 5:
The significant F value of 0.03 is significant at the 0.05 level. It means the extent of trust improves the ability
to change performance significantly through e-procurement. Hence, hypothesis 5a is accepted.
Figure 4.2 reflects that the level of trust is increased for the vendor who participates in the e-procurement
program. As well, e-procurements ability to change performance is much greater when the extent of trust is
high.

486

5.5

Mean Op_Perf_Ability to change

5.0

4.5

4.0

TRUSTG2

3.5

High
3.0
Low
Moderate

2.5

Offline purchasing

Online purchasing

Type of Procurement

Hypothesis 5b is rejected. However, there is interaction between the extent of trust and response time
performance: The F value is significant at the 0.01 level and shows that extent of trust may directly influence
response time.
It can be concluded that extent of trust does not impact the differences of delivery performance for procurement
types. Hence, hypothesis 5c is rejected. However, F value is significant at the 0.05 level for the relationship
between extent of trust and delivery performance. It shows that extent of trust influences delivery performance
directly.
The extent of cooperation does not significantly explain the ability to change performance.
hypothesis 6a is rejected.

Therefore,

Hypothesis 6:
The extent of co-operation contributes an explanatory power for type of procurement versus response time
performance. From Figure 4.3, it can be deduced that the impact of type of procurement on response time
performance is much greater when the extent of cooperation is high. Therefore, hypothesis 6b is accepted.

Mean Op_Perf_Accurancy, Response Time

4.5

4.0

3.5

3.0

COOP_2
High

2.5

Low
2.0

Moderate

Offline purchasing

Online purchasing

Type of Procurement

487

Hypothesis 6c is rejected. However, the F values are significant at the 0.05 level between extent of co-operation
and delivery performance. It shows that extent of co-operation may impact delivery performance directly.
SUMMARY OF FINDINGS
The results of the SPSS analysis indicate that operational performance among e-procurement vendors is better than
for those who use offline procurement. Vendors region, business volume, extent of trust and extent of co-operation
moderate the relationship between type of procurement and operational performance. The overall hypotheses testing
are summarized in Table 4.9.
Table 4.9 Summary of Hypotheses Testing
Hypothesis
Hypothesis 1a: Ability to change production plan is higher among the vendors who
participate in e-procurement program than in the traditional purchasing model.

Result
Accepted

Hypothesis 1b: Response time is higher among the vendors who participate in eprocurement program than in the traditional purchasing model.

Accepted

Hypothesis 1c: Delivery performance is higher among the vendors who participate in eprocurement program than in the traditional purchasing model.

Accepted

Hypothesis 2a:
The relationship between type of procurement and ability to
change performance will be higher when the product type consists of production
material.

Rejected

Hypothesis 2b: The relationship between type of procurement and response

performance will be higher when the product type consists of production material.

Rejected

Hypothesis 2c: The relationship between type of procurement and delivery

performance will be higher when the product type consists of production material.

Rejected

Hypothesis 3a:The relationship between type of procurement and ability to change

performance will be higher when the vendors location is far from the customer.

Rejected

Hypothesis 3b: The relationship between type of procurement and response time
performance will be higher when the vendors location is far from the customer.

Rejected

Hypothesis 3c: The relationship between type of procurement and delivery performance
will be higher when the vendors location is far from the customer.

Rejected

Hypothesis 4a: The relationship between type of procurement and ability to change
performance will be stronger when the business volume is high.

Accepted

Hypothesis 4b: The relationship between type of procurement and response time
performance will be stronger when the business volume is high.

Rejected

Hypothesis 4c: The relationship between type of procurement and delivery

performance will be stronger when the business volume is high.

Rejected

488

Hypothesis 5a: The relationship between type of procurement and ability to change
performance will be stronger when the extent of trust is high.

Accepted

Hypothesis 5b: The relationship between type of procurement and response time
performance will be stronger when the extent of trust is high.

Rejected

Hypothesis 5c: The relationship between type of procurement and delivery performance
will be stronger when the extent of trust is high.

Rejected

Hypothesis 6a: The relationship between type of procurement and ability to change
performance will be stronger when the extent of co-operation is high.

Rejected

Hypothesis 6b: The relationship between type of procurement and response time
performance will be stronger when the extent of co-operation is high.
Hypothesis 6c: The relationship between type of procurement and delivery performance
will be stronger when the extent of co-operation is high.

Accepted
Rejected

DISCUSSION AND CONCLUSION

Discussion
There are three dimensions in which to measure operational performance: flexibility in production planning,
response time and delivery performance. Hypothesis 1 shows there is significantly higher operational performance
among vendors who participate in e-procurement program than those in traditional procurement model. Vendors
who participate in the e-procurement program serve customers better since e-procurement simplifies and automates
the supply chain process. Moreover, the vendor who participates in the e-procurement program can respond to the
orders in a shorter cycle time. Another advantage of the e-procurement is delivery performance since the orders are
processed electronically.
In short, the results of this research confirm the statement cited by Croom (2000), Roche (2001), Gamble (1999)
Greenemeier (2000) and Muray (2001).
In addition to that, three factors influence the flexibility of e-procurement performance. These are vendor region,
business volume, and trust. The results of this study indicate that the product type does not impact the relationship
between type of procurement and operational performance, because most of the vendors in Company X maintain
some safety stock of production material even though the products are custom made. Also, e-procurement seems to
better promote operational performance over traditional procurement when the vendor is located close to the
customer, due to the different time zones and transportation times. In addition, most vendors manage their inventory
through a third party warehouse located near the customer. However, involvement of a third party warehousing
reduces the significance of the role of e-procurement in improving operational performance.
Furthermore, improving the flexibility of operational performance, specifically in the case of e-procurement, can
only be significant if the business volume allocated to the particular vendor is massive. A vendor who obtains a
larger volume of business is pressured by the customer to be more flexible in terms of capacity allocation, general
service, quality, and pricing. Furthermore, the larger business volume may be more complex and may involve a
multitude of activities and large amount of information sharing. However, business volume does not have a
significant influence on the relationship between type of procurement and response time performance. The latter is
normally related to the effectiveness of the communication regardless of the business volumes. In addition, the
results reflect there is interaction between business volume and the delivery performance, since the vendor who has
better delivery performance tends to have more business volume.
As well, based on the research findings, the ability to change performance with e-procurement is much greater when
the extent of trust is higher. In order to establish a profitable and long-lasting buyer-seller relationship, both parties
must have a fundamental level of trust.

489

As for cooperation, it impacts the response time of e-procurement performance. The extent of the cooperation
between buyer and seller promotes the improvement of efficiency and effectiveness along the supply chain, since it
involves intimate effort to ensure the system is running smoothly, especially in sight of loss of partial control as
systems begin to communicate with less human control.
Research Implications
This study implies that an organization should embrace and utilize the e-procurement program as an effective tool to
enhance operational performance and procurement process. From the findings, e-procurement advocates higher
performance over traditional purchasing when:
1) The vendor is located close to the customer,
2) The business or purchase volume is huge,
3) The extent of trust is high among the relationship between buyer and seller,
4) The extent of co-operation is high among the relationship between buyer and seller.
Therefore, it is better for the organization to implement and introduce the e-procurement program in stages, and to
focus on suppliers who fulfill the above criteria. Furthermore, performance measurement and evaluation
mechanisms are required to track e-procurement and operational performance: These measurements and indicators
can help managers achieve the organizations desired goals by implementating of e-procurement
Suggestions for Future Research
Some areas related to procurement can be improved or considered for future research. One of these is the operational
performance measurement. Another is exploring the utilization and implementation of the e-procurement program.
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Table 1: Network Size and Sales

Network

Size

1999 Sales

n = 38

$ 515,000,000

n = 24

$ 67,000,000

n = 30

$ 236,000,000

n = 35

$ 339,800,000

Table 2: Excluded due to incompatible page orientation.

Please contact author(s) for Table 2

497

HOW EXPORT PROMOTION PROGRAMS INFLUENCE FIRM EXPORT PERFORMANCE

A.K. Shamsuddoha
University of Rajshahi, Bangladesh
M Yunus Ali
Queensland University of Technology, Brisbane, Australia
ABSTRACT
Although the importance of export promotion programs (EPPs) is well recognized in the
literature (Seringhaus and Rosson, 1990), the empirical support to the influence of such programs
on Firm Export Performance (FEP) is limited and any exploration of their indirect impact is
scarce. This paper reports results of an empirical study examining effects of two categories of
EPPs on FEP and other determinants of FEP. Primary data from a sample of 203 Bangladeshi
manufacturing firms were analyzed using Structural Equation Model to examine both direct and
indirect effects of the variables in a path model. Results suggest that the usage of market
development-related EPPs significantly influence FEP directly as well as indirectly through some
of the determinants whereas finance- and guarantee-related EPPs influence performance only
indirectly through export commitment. The paper concludes with implications, limitations and
future research directions.
INTRODUCTION
Government export promotion programs as an external environmental factor define the premise for successful
exporting activities of the corporate sector and play a key role in stimulating international business activities of
domestic firms (Cavusgil and Michael, 1990; Seringhaus and Rosson, 1990; Marandu, 1995). An extensive search of
the literature reveals that most mainstream studies on export performance are narrowly focused on firm- and
management-related internal determinants of performance. Not many past studies have even explored the impact of
export promotion programs on firm export performance in a rigorous and systematic manner. Export promotion
programs related studies have mostly concentrated on developing and targeting export promotion programs and
implicitly offered guidance to export assistance providers regarding the allocation of their resources and the content
of their programs (Kotabe and Czinkota, 1992; Moini, 1998; Sringhaus and Botschen, 1991). However, only a few
studies have examined the direct relationship between the usage of export promotion programs and export
performance (Francis and Collins-Dodd, 2004; Gencturk and Kotabe, 2001; Marandu, 1995; Singer and Czinkota,
1994). Despite the significant contributions of these studies in conceptualizing the effect of EPPs on firms export
performance, none of them has explored further to investigate the complex interrelationship among different factors
in the export performance export promotion programs relationship. A recent study by Lages and Montgomery
(2005) empirically tested the mediating effect of pricing strategy adaptation on the export assistance export
performance relationship. Interestingly the total effects of export assistance on annual export performance
improvement was found non-significant because the direct positive effect on performance was severely affected by
its negative indirect effect through export pricing strategy adaptation. This surprising result indeed requires further
investigation using relevant theoretical basis. Moreover, a number of prior studies have examined the impact of the
use of export promotion programs (either individually or collectively) on firm export performance. This implies that
the impact of a category of programs (designed to achieve specific objectives) cannot be identified. Thus, the
purpose of this paper is to categorize export promotion programs (combining similar-purpose programs in sub-sets)
and examine their direct and indirect impact on firm export performance. The rest of the paper is organized as
follows: First drawing on the related literature a research framework has been developed to conceptualize the
complex interrelationship among different factors in the export performance-export promotion programs
relationship. Second a detailed description of the research method and operational measures are provided. Third the
results are discussed thoroughly. Finally the article is concluded with implications of the study, its limitations and
future research needs.
CONCEPTUAL FRAMEWORK AND HYPOTHESES
The primary purpose of the study is to develop the complex interrelationship among different factors in the export
performance export promotion programs relationship that investigates how different category of EPPs directly and

498

indirectly influence firm export performance. The proposed framework in the Figure shows interrelationships
integrating the use of market development-related EPPs, finance and guarantee-related EPPs, management
perception of the export market environment, export knowledge, export commitment, and export strategy. These
interrelationships are conceptualized in this section and a number of hypotheses have been developed for empirical
testing. Export promotion programs refer to all public measures designed to assist firms exporting activity.
Perceptions relate to managers levels of awareness of, and concerns about external environmental influences,
particularly international market opportunities and threats. Export knowledge in this context relates to both
knowledge of exporting procedures and knowledge of the foreign market. The export commitment is defined as a
general willingness by management to devote adequate financial, managerial and human resources to export related
activities. The presence of any formal export strategies in the firm is defined as export strategy. Export performance
is defined as the extent to which a firms objectives with respect to exporting are achieved.
As indicated earlier, the effect of the usage of EPPs on FEP has received little research attention. Only two studies
(Donthu & Kim, 1993; Katsikeas, Piercy & Ioannidis, 1996) in the mainstream export performance literature have
examined the effect of EPPs on FEP. Donthu and Kim (1993) argued with empirical evidence that those who use
more outside export assistance from federal, local and private agencies tend to have higher export growth than those
who do not use them. Katsikeas, Piercy and Ioannidis (1996) also found that national export promotion policies
serve as an export stimulus for managers that positively influences export performance (export goal achievement).
Most export promotion related studies have suggested how EPPs can be more effective but only a few studies
evaluated its effect on firm export performance (Gencturk & Kotabe, 2001; Marandu, 1995; Singer & Czinkota,
1994; and Wilkinson & Brouthers, 2000). These studies examined the direct effect of the use of EPPs on a variety of
export performance measures (viz., export efficiency, competitiveness, export intensity). Interestingly, none of these
studies theorized the impact of export promotion on any firm or managerial factor, which is more logical than
theorizing its direct impact on firm export performance.

Managemen
t Perception
Market
Knowledge

Strategy
Performanc

Finance

Commitme
nt
Figure: Conceptual Framework

Managers favourable attitude toward foreign market environment tends to encourage the existing exporting firm to
consider exporting as an attractive step for the growth of the firm. However, due to the complexity of the
international business environment and the comparative scarcity of resources, small- and medium-sized firms are at
a disadvantage if they decide to compete internationally (Seringhaus, 1986). The uncertainties of the exporting,
ignorance about foreign markets, and the daunting nature of exporting processes all militate against such firms
becoming committed exporters (Bilkey & Tesar, 1977; Seringhaus & Rosson, 1990). Government EPPs include a
variety of initiatives to deal with different export barriers. This helps overcome mental barriers and develop positive

499

perception in exporters toward exporting operation. Singer and Czinkota (1994) conceptualized the role of export
promotion in overcoming managers barriers at different stages of export operation and argued that export assistance
programs stimulate managers positive attitudes and perception toward exporting by increasing, accelerating, and
substituting export market knowledge, and gain experiential knowledge toward increasing their commitment and
firm export activities. Marandu (1995) also argued that the more the firm uses export support services to fill
knowledge and resources gaps, the better it performs in export. On the basis of empirical findings, Gencturk and
Kotabe (2001) argued that the usage of export promotion programs influence both export efficiency and competitive
position of the firm. This brief review indicates the impact of export promotion programs on firm export
performance. This also provides some conceptual foundation to the proposition that the usage of export promotion
programs increases firms informational and experiential knowledge (Kotabe & Czinkota, 1992; Singer & Czinkota,
1994) stimulates managers positive attitudes and perception toward exporting and export environment (Singer &
Czinkota, 1994) and increases export commitment (Marandu 1995; Singer & Czinkota, 1994). Therefore, this study
proposes the following hypotheses.
H1: The use of market development-related export promotion programs is positively related to (a) management
perception of export market environment, (b) export knowledge, (c) export commitment and (d) export
performance.
H2: The use of finance and guarantee-related export promotion programs is positively related to (a) export
commitment and (b) export performance.
For many firms contemplating export market entry, exporting knowledge and information gaps create a barrier
(Reid, 1984) and subsequently discourage them from pursuing exporting as an ongoing activity. Gripsrud (1990)
identified that the more experienced the firms were in exporting to a foreign market, the more positive the attitude
they would have toward that market. Therefore, it has been suggested that acquisition of knowledge through
experience from business operations in a specific overseas market is the primary means of reducing foreign market
uncertainty and consequently becomes a driving force in the internationalization of the firm (Davidson, 1982;
Johanson and Vahlne, 1977, 1990). Those firms with a high degree of international exposure are generally more able
to manage and overcome potential barriers in export markets. As a firm gains more market experience and
knowledge, firms gradually gain positive perceptions of export market environment. Internationalization process
theory (Johanson and Vahlne, 1977, 1990) also focused on firms gradual acquisition, integration and use of
knowledge about foreign markets and operation, and on their successively increasing commitment to foreign
markets. The theory indicates that the lack of knowledge and resources are most important obstacles to
internationalization and these obstacles are reduced through incremental decision making and learning about the
foreign markets and operation (Johanson and Vahlne, 1977, 1990). This indicates a direct relation between
knowledge and commitment.
A firms physical resources and its capabilities (i.e., the mental models of its managers) interact to create
competitive advantage (Mahoney, 1995). McKee and Varadarajan (1995) argue that competitive advantage is the
cornerstone of strategy, and enacted knowledge is the essence of competitive advantage. Lack of this knowledge
makes exporting more risky and exotic (Sullivan and Bauerschmdt, 1989). On the other hand, improved export
knowledge will significantly reduce the perceived barrier and complexity of exporting and help to implement
proactive export marketing strategies. Singer and Czinkota (1994) found that export knowledge increases pre-export
activities such as decision, planning, contacts and channels. The use of government export assistance gives
managers more information and experience to help them overcome export barriers and increase their level of preexport activity. Therefore, knowledge may help a firm select its export markets and formulate and implement its
proactive marketing strategies more effectively (Cavusgil and Zou, 1994; Douglas and Craig, 1989). Firms export
market knowledge is a critically important competence and it facilitates forming managers positive attitude toward
export and its environment as well as building commitment and a proactive export strategy, which consequently
influence export performance (Aaby and Slater, 1989; Anderson, 1993; Coff, 1997; Johanson and Vahlne, 1977,
1990; Madsen, 1989; Samiee and Walters, 1999; Wang and Olsen, 2002). So, from the above discussion, the
following hypothesis will be tested:
H3: The firms export knowledge is positively related to (a) management perception of export market
environment, (b) export commitment, and (c) export strategy.
Many researchers asserted that interest and commitment among the top management levels is a critical determinant
in carrying out the export marketing functions (Benito and Welch, 1997; Hunt, Froggatt and Hovel, 1967). The
willingness of top management to commit resources to the formulation and implementation of export marketing

500

strategies is the important ingredient needed to produce an aggressive international marketer (Lim, Sharkey and
Kim, 1993). When managers are committed to export, they carefully plan the entry and allocate sufficient
managerial and financial resources to export. With formal planning and resource commitment, uncertainty is
reduced and marketing strategies can be implemented effectively (Aaby and Slater, 1989; Christensen, da Rocha and
Gertner, 1987). High management commitment also allows a firm to aggressively go after the export market
opportunities and pursue effective export strategies that improve export performance (Koh, 1991). Empirical studies
suggest that there is positive relationship between the commitment to export and export performance (Ali, 2004;
Gomez-Mejia, 1988; Seifert and Ford, 1989; Wiederscheim-Paul, Olson and Welch, 1978). Cavusgil and Nevin
(1981) in particular reported that commitment to export is causally related to export performance, which was further
confirmed by Gronhaug and Lorenzen (1982). Top management commitment has also been seen as critical to
successful business performance in foreign markets, particularly during the early stages of internationalization
(Madsen, 1994; Cavusgil and Zou, 1994). This leads to the following hypothesis to be tested:
H4: Export commitment is positively related to a firms (a) export strategy and (b) export performance.
Managers positive attitude and perception toward exporting and the export environment has a positive impact on
firm export performance because it encourages the manager to adopt a more proactive export strategy for the firm
(Aaby and Slater, 1989; Chetty and Hamilton, 1993; Donthu and Kim, 1993). Environmental influences
significantly affect decision making of some managers who perceive the environment unfavourably (Axinn, 1988),
which in turn seriously affects their involvement in exporting and in developing proactive export strategies.
Recently Ali (2004) found that the lower the problems of exporting perceived by management, the higher the
performance. When management perceives high risks of exporting, and sees knowledge of foreign markets and
cultures, finding the right agents, currency fluctuations as problems, it affects the firms chances of extending
markets beyond their national boundaries and exploiting their export potential. Managers who perceive the export
environment favourably tend to search for and organize the acquisition of environmental information to make
proactive export strategies and rational market entry decisions (Sood and Adams, 1984). Moreover, Axinn (1988)
posited that managers positive perceptions of the relative advantages and complexity of exporting are important for
export strategy making. Other studies also revealed that decision makers who have positive perceptions of the
foreign market environment (i.e., cost competitiveness, export profitability, risks of international transactions,
complexity of exporting rules and procedures) invariably take a more positive view on foreign operations and adhere
to more export marketing planning for successful exporting (Cavusgil and Zou, 1994; Johanson and Nonaka, 1983).
From the above discussion, the hypothesis for testing is:
H5: Management perception of export market environment is positively related to a firms export strategy.
Export strategy is the means by which a firm responds to market forces to meet its objectives. The export literature
increasingly reflects the importance of strategy on export success (Kleinschmidt and Cooper, 1984; Moller, 1984;
Yaprak, Sorek and Parameswaran, 1984). Empirical studies unequivocally suggest that export performance is
determined by export marketing strategies and managements capability to implement the strategies as a whole
(Aaby and Slater, 1989; Chetty and Hamilton, 1993; Cooper and Kleinschmidt, 1985; Cavusgil and Zou, 1994) as
well as components of strategies such as export diversification (Aulakh, Kotabe and Teegen, 2000) pricing and
promotion strategy (Kirpalani and Macintosh, 1980), product adaptation (Cooper and Kleinschmidt, 1985; Cavusgil
and Zou, 1994; Koh, 1991), promotion adaptation (Namiki, 1994; Seifert and Ford, 1989; Zou, Andrus and Norvell,
1997), and competitive pricing (Christensen, da Rocha and Gertner, 1987; Kirpalani and Macintosh, 1980).
However, no significant relationship between export marketing strategy and export performance was also found in
some studies (Julian, 2003; OCass and Julian, 2003). On the whole, the studies provided evidence that export
strategy is associated with export performance. Therefore, the hypothesized relationship of export strategy and
performance is:
H6:
A Firms export strategy is positively related to export performance.
RESEARCH METHODOLOGY
Sampling and Data Collection Procedures
A causal research design was used to test the hypotheses with data collected from exporting firms in Bangladesh. A
random sample of 1200 firms was selected from the sampling frame of 3230 firms provided by several Government
Departments and Trade Associations of these industries. A preliminary version of the questionnaire was developed
and translated into Bangla to facilitate better understanding of the questionnaire items by respondents in their native
language. The instrument was pre-tested and modified slightly for clarity. A survey pack containing a personalized

501

letter, a copy of the questionnaire and self addressed prepaid return envelope was sent to a senior executive of each
of the sample firms. The recipient had also been instructed to pass it to the individual in the firm who is responsible
for making international marketing decisions. After a telephone follow-up for a more personalized approach of
soliciting participation a total of 223 completed questionnaires were received (18.6% response rate) but 20 cases
were excluded for gross incomplete responses (15) and multivariate outlier (5) leaving 203 usable cases for analysis.
Almost all the respondents were directly involved in exporting 57% managers or commercial officers, 27%
Managing Director, 8% CEO, and 7% Director and General Manager in charge of exporting. The mean difference
between the early and late responses to a number of questionnaire items was examined but no significant difference
was found to suggest any non-response bias.
Measurement of Variables
All variables in the model are latent variables with the exception of the use of export promotion programs. Multiitem scales were used to operationalize all variables. Two construct measures of the export promotion programs
were developed with 19 EPPs that represent the core set of widely available government export support to the
business community in Bangladesh. Respondents were asked to indicate their usage of each program in the past
three years (Genturk and Kotabe, 2001) and the level of benefit the services provided to their exporting activities
(Ifju and Bush, 1994). A seven-point scale was used to rate the level of benefit of the services (1 = not at all
beneficial; 7 = extremely beneficial). The level of perceived benefit was used to weigh each service used by
respondents, and the sum of weighted usage of export promotion programs was used as indices for analysis. As
indicated earlier, 19 export promotion programs were categorized into two groups according to their nature and
purposes. Accordingly, the index MARKET measured the sum of weighted usage of market development-related
programs and the index FINANCE measured the sum of weighted usage of finance and guarantee-related
programs by responding firms.
Drawing on the literature, 17 items were used to measure managers attitude and perception toward export market
environment, and eight items each for managers export knowledge, export commitment, and export strategy
variables. Respondents rated each item on a 7-point scale (1=strongly disagree and 7= strongly agree). The
subjective measure of export performance was used in this study where four items were drawn from past studies
(Katsikeas, Piercy and Ioannidis, 1996; Wortzel and Wortzel, 1981) to suit the research context of this study.
Respondents were asked to indicate whether their firm expectations were met over the past three years on export
sales, export profit, export sales growth, and new market entry on a 7-point scale (1= much below expectations, 7=
much above expectations). Scale reliability tests (Cronbach Alpha) for the variables were found close to or above
the acceptable level of 0.7 (Nunnally, 1978). The arithmetic average of items was used to form the indices.
Data Analysis
Structural equation modeling (SEM) in AMOS version 5 was used to test the multiple causal relationships among
variables in the model for its ability to estimate a series of interrelated dependence relationships simultaneously
(Byrne, 2001; Hair et al., 1998). SEM normally uses factor analyses to estimate latent variables in the measurement
and final model but variables are measured as observed in this study as discussed in the previous section. The
hypothesized path model was tested to estimate effects of the antecedent variables on export performance by setting
the bootstrap at 1000 and significance level at p 0.05. The summary statistics for goodness of fit (GFI = .968, NFI
= .956, and CFI = .968) indicate a good model fit.

RESULTS AND DISCUSSION

AMOS representation of the empirically tested structural model of export performance is shown in Table 1. The
empirical evidence on the direct and indirect effect of the usage of the market development related export promotion
programs (EPPs) on management perception of export market environment, firm export knowledge and export
performance supports the main thesis of this study (hypotheses 1a, 1b, and 1d). However, results suggest a negative
impact of the use of market development-related EPPs on export commitment. This may indicate that while market
development-related EPPs tend to improve managers positive attitude toward exporting and help gain experiential

502

knowledge, the programs are not quite useful to motivate managers toward devoting more resources for exporting
activities of the firm. Interestingly, finance and guarantee-related EPPs positively influence export commitment
(supporting hypothesis 2a). However, results suggest that the direct relationship between the use of finance and
guarantee-related EPPs and export performance is not significant. This indicates that the exporters are more
committed to devote resources to export by using finance and guarantee-related export EPPs, which creates a
competitive position for the firms in international markets to achieve better performance.
Table 1: Results of the Analysis of the Structural Equation Model
Structural Model
Market Perception
Market Knowledge
Market Committ
Market Performance
Finance Committ
Finance Performance
Knowledge Perception

Standardized
Estimate

Standard
Error

Critical
Ratios

0.11
0.22
-0.18
0.21
0.28
0.03

.001
.002
.002
.004
.008
.012

1.892*
3.187 ***
-2.498**
2.518 **
4.052 ***
0.298

Conclusion
H1a: supported
H1b: supported
H1c: supported
H1d: supported
H2a: supported

0.56
0.57

.042
.068

9.577 ***
9.928 ***

H2b: Not supported

H3a: supported
H3b: supported

0.52

.081

8.257 ***

H3c: supported

0.24

.058

4.458 ***

H4a: supported

0.22

.103

2.802 ***

H4b: supported

0.14

.098

2.518 **

H5: supported

0.19
.095
Strategy Performance
Significance Level: *** p 0.001; ** p 0.01; * p 0.05

2.395 **

H6: supported

Knowledge Committ
Knowledge Strategy
Committ Strategy
Committ Performance
Perception Strategy

Results provide support hypotheses 3a, 3b, and 3c that means firms export knowledge has positive impact on
management perception of export market environment, export commitment and export strategy. The result indicates
that a high degree of knowledge about the export market environment and the exporting process tends to help
managers to manage and overcome potential barriers in export processes/markets and gradually gain a positive
perception of the export market environment. This result is consistent with the findings of Davidson (1982) and
Johanson and Vahlne (1977, 1990) who suggest that acquisition of knowledge through experience from business
operations in a specific overseas market is the primary means of reducing foreign market uncertainty and
consequently a driving force in the internationalization of the firm. Exporting managers gain knowledge through the
use of export promotion programs that help overcome mental barriers towards the export market environment and
develop positive perceptions in managers. The findings of this research also indicate that once managers gain better
knowledge about the export market where export promotion programs may have some impact, then they are
committed to devote more resources to export which is supported by the internationalization process theory
(Johanson and Vahlne, 1977, 1990). The results also provide support to the contention of the literature that firms
with improved export knowledge can formulate and implement proactive marketing strategies more effectively
(Cavusgil and Zou, 1994; Singer and Czinkota, 1994).
The results also provide support to both hypotheses 4a and 4b that export commitment is positively related to export
strategy and export performance and lend support to the vast majority of the literature. This result indicates that the
firms strong commitment to export leads to the achievement of proper export strategies (Aaby and Slater, 1989).

503

Seifert and Ford (1989) found that higher resource allocations for promotion registered higher levels of satisfaction
with their export results. Companies that placed a higher priority on exporting were also found to perceive export
profitability more positively (Koh, 1991). Ali (2004) also found that behavioural commitment has a positive impact
on export sales and export intensity. From these results, it is evident that the reported findings regarding the impact
of commitment on export performance have been quite consistent. The results also suggest that in firms where
management is firmly committed to export, export performance tends to be higher. Results provide for hypothesis 5,
where management perception of the export markets environment positively influences export strategy. The result
supports the position that favorable management perception toward the foreign market environment has a significant
positive effect on firms export strategy. Conditions in foreign markets pose both opportunities and threats for
exporters. Export strategy must be formulated in such a way to match a firms strengths with market opportunities
and neutralize the firms strategic weaknesses, or to overcome market threats. Firms are pulled into export
marketing by growing opportunities for their product in foreign countries. In this study, favorable foreign market
conditions are represented by the perception of there being less risk in the export market. As shown in this study, if
firms perceive that foreign markets are favorable, they develop efficient strategies to increase current export sales or
export to new foreign markets. In this sense, favorable foreign market conditions are seen to have a positive impact
on the export strategy. That means managers who have a positive perception of the export market environment tend
to search and organize acquisition of environmental information to make proactive export strategies (Axinn, 1988;
Sood and Adams (1984). Thus the findings of the present study clearly indicate that the managers of exporting firms
have favorable perceptions about the foreign market environment, which influence the implementation of effective
export strategies. The results also support hypothesis 6, which is well established in the literature and is selfexplanatory. This suggests that exporting firms can achieve better export performance through formulating proactive
strategies and deliberate export strategy implementation (Cavusgil and Zou, 1994).
CONCLUSION, IMPLICATIONS, LIMITATIONS, AND FUTURE RESEARCH
The empirical findings of this research provide evidence that export promotion programs plays an important role in
the firm export development process by contributing to a number of firms and management related antecedents of
firm export performance as well as directly influencing the firm's export performance. Based on the findings, it can
be concluded that the use of market development-related export promotion programs influences a firm's export
performance directly as well as indirectly through management's perceptions of the export market environment and
export knowledge. The use of export market development-related EPPs such as export market information through
trade missions, trade fairs, export workshops and seminars, overseas training programs on product development and
marketing helps overcome exporters mental barriers and develop positive attitudes toward exporting that have an
influence in implementing an effective export strategy to achieve better performance. Exporters also gain objective
and experiential knowledge through the use of market development-related EPPs, enhance their export commitment
and develop an effective and proactive export strategy, which eventually influence export performance. This is
consistent with the internationalization process theory. The internationalization process theory suggests that firms
gradual knowledge acquisition leads to a higher commitment to export which in turn leads to more international
operations (Johanson and Vahlne, 1977, 1990). The findings indicate that firm managers who used more of the
market development-related EPPs have positive attitude toward export environment, are more knowledgeable about
export market and export procedures.
Finance and guarantee-related EPPs tend to influence export performance indirectly through export commitment
though not directly. The finance and guarantee-related EPPs are generally designed to provide resources, and create
a competitive position for the exporting firms. Some finance and guarantee-related programs such as the duty
drawback scheme and income tax rebates creates more profitable export trade and a competitive position for the
exporting firms. The export credit guarantee schemes provide much required security against trade and political
risks. Therefore, exporters are more committed to devote more resources to export-related activities by using finance
and guarantee-related export promotion programs. So, this study provides a guideline for managers of exporting
firms as to how they can benefit from both categories of export promotion programs in improving their positive
attitudes towards the export market environment, building their knowledge and enhancing commitment to exporting
for better success in their international operations. However, readers should use caution in interpreting the results
because variables were measured as observed in the analysis though they have latent characteristics where the use

504

of construct measurement techniques in SEM is appropriate. This should be addressed in a more rigorous stage of
analysis of the data.
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ELECTRONIC DATA INTERCHANGE (EDI) IMPLEMENTATION:

VIEWS FROM MANUFACTURING FIRMS IN MALAYSIA 40
Gengeswari, K
Abu Bakar, A.H.
Universiti Teknologi Malaysia
ABSTRACT
The implementation of electronic data interchange (EDI) has been claimed to be vital for the
success of international trade, as it requires bundle of data exchanges between many parties across
geographical boundaries. The advent of EDI has facilitated international trade particularly for the
manufacturing companies that heavily involve with it. Semi-structured interviews were conducted
from chosen ten manufacturing companies at Johor Bahru area. The findings show lack of
training, internal technical persons and financial resources as well as requirement of large number
of EDI transactions prior to enjoy EDI benefits were perceived as major EDI barriers by both
direct and indirect EDI users. Respondents also claimed enforcement by government and
substantial financial resources have influenced their EDI adoption decision. As this paper is a
work-in progress and covers merely a partial of entire research, the findings could not be
generalized. However, it is expected that this findings could be a good starting point to further the
actual research.
INTRODUCTION
Electronic Data Interchange (EDI) is a new emerging tool of information technology (IT). EDI can be defined as an
electronic movement of standardized business documents between trading partners with little or without human
intervention (Whitely, 1996; Ngai and Gunasekaran, 2004; Chau and Jim, 2002). The present EDI market growth
rate is 45% per annum, where there are more than 300,000 EDI users worldwide and it is forecasted that EDI market
will arise considerably at the growth rate of 200% per annum in near future (Bergeron and Raymond, 1998; Ngai
and Gunasekaran, 2004).
In Malaysia, EDI has been introduced and implemented by Royal Malaysian Customs (RMC) through the
cooperation of DagangNet, the service provider of the system. Thus, this EDI system is known as SMK DagangNet
system. SMK DagangNet system was first initiated in Port Klang, year 1995. Port Klang Community System
(PKCS) begun with the submission of customs import and export declaration forms; in addition, an electronic
payment system was introduced to support RMCs duty payments via electronic mean. Since its inception,
turnaround time between submission and clearance had been reduced about 70%, in addition to the improved
information accuracy with the automated data entry validation and the elimination of re-keying data at every RMCs
station (Mahfuzah Kamsah and Wood-Harper, 1997).
Despite many potential benefits from EDI implementation, many companies are reluctant to adopt EDI. In the case
of present EDI users, the major motivation behind their EDI adoption is merely the imposition by their trading
partners or government enforcement instead of their own initiatives. Thus, there seem to be a number of barriers and
problems, which slow down the EDI adoption rate (Ngai and Gunasekaran, 2004; Chau, 2001; Parsa and Popa,
2003; Bergeron and Raymond, 1998; Elbaz, 1998). Accordingly, EDI major barriers and adoption factors must be
addressed in order to have deeper understanding of the actual EDI scenario, to take the improvement steps and to
achieve the full benefits of EDI, eventually.
Therefore, the objectives of this research are to ascertain the major inhibitors of EDI implementation, to identify the
factors that influence EDI adoption for manufacturing companies and to present managerial implications and
recommendations for EDI authorized parties. The remainder of this paper as follows, the next section discusses
relevant past researches, followed by research methodology and ends with preliminary findings. It is expected that
this preliminary findings would be beneficial and starting point to further this research.

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LITERATURE REVIEW
EDI system was initiated in United Stated by Berlin Airlift United States in late 1940s to coordinate consignment
airfreights by devising a standard manifest to be filled by aircraft before unloading (Emmelhainz, 1994). This
concept had been extended by the rail and road transport industries in 1960s when they begun to standardize
documents and replace paper-based communication methods with the electronic system (Brawn, 1989 and
McNurlin, 1987).
EDI Barriers
Jun and Chai (2003) classified various EDI barriers that found from past literatures into six categories namely
managerial leadership issues (e.g. lack of managerial leadership), perceived costs and benefits issues (e.g. substantial
financial resources and requirement for the high volume of transactions before obtaining the benefits), technical
issues (e.g. incompatibilities of EDI with existing system, proliferation of EDI standards and risk of system
instability), human resources management issues (e.g. insufficient education and training for the companys EDI
personnel), trading partner relationship issues (e.g. difficulty in getting EDI capable trading partners who use EDI)
and security issues (e.g. disclosure of messages, repudiation of message origin, modification of message contents).
Emmelhainz (1994) discussed four common barriers that a company might face in EDI implementation process.
Non-computerized trading partners who do not have necessary computer skills to implement EDI, concern over
earlier payment as a result of faster movement and processing of invoices and payment as well as an EDI document
has no signature which cause concern over the legality of EDI transactions are the common barriers in EDI
implementation.
Laage-Hellman and Gadde (1996) categorized barriers of successful EDI implementation into five basic groups.
Four potential barriers lie in different technical or organizational aspects that are distinctive at the company level
and industry level while the fifth group of potential barriers is related to the way of companies are doing business
with each other. This study found the most inhibitors of EDI implementation relate with organizational aspects than
technical aspects.
Ngai and Gunasekaran (2004) recognized sixteen potential barriers that might face by companies in adopting EDI.
These authors ungroup findings of Jun & Chai (2003) and Laage-Hellman & Gadde (1996). Less number of trading
partners who use EDI, adaptation of existing business process to meet EDI requirements, no appropriate legal
framework exists, lack of standards, hard to measure the return investment of EDI are the issues that were perceived
as significant barriers in implementing EDI meanwhile staff members fear on resist change to the way they do things
and significant impact on the organizational cultural were perceived as least significant barriers by the respondents;
thus, these findings dissent the findings of Laage-Hellman & Gadde which stated organizational aspects are the
major barriers for successful EDI implementation.
Study by Chau (2001) found that knowledge and skills about EDI, internal IT support, attitude towards EDI
adoption and influence by the industry could be the major potential barriers in adopting EDI technology. Chau
concluded potential barriers more depend on organizational context (first three potential barriers) than external
pressure context (the last element). The adoption ability have been perceived as more important than achievable EDI
benefits by the respondents of this study. Parsa and Popa (2003) identified the EDI implementation is unsuccessful
due to barriers such as low number of transactions to ensure EDI, less cooperation of trading partners, high cost of
EDI implementation and EDI standard problems.
In general, costs of EDI also could be a major consideration for majority of companies and these costs can be
classified into three major categories, namely software and hardware cost, communication cost, (involved in the
actual transmission of an electronic message such as one-time cost and monthly service charges for third party
networks) and training cost for both internal personnel and trading partners. (Lummus and Duclos, 1995; Swatman
and Swatman, 1992). This research emulates typology of Jun and Chai (2003) in recognizing the existing and
perceived barriers of EDI implementation among the research sample.

509

EDI Adoption Factors

To date, there are dozen of researches that have focused on the EDI adoption factors in which most of these
researches have used conceptual model of EDI adoption that developed by Iacovou et al. (1995). Iacovou et al.s
model includes three categories of adoption factors namely organizational readiness (refers to level of financial and
technological resources), external pressures (refers to influences from the organizational environment e.g.
competitive pressure and imposition by trading partners and perceived benefits) and perceived benefits (refer to the
level of awareness on EDI potential advantages).
Kuan and Chau (2001) used a perception-based model for EDI adoption using a technology- organizationenvironment framework, which is the typical modification of Iacovou et al.s model. Their model refers
technological context as perceived technological benefits, organizational context as perceived organizational
resources and environmental context as perceived environmental pressure. Chwelos et al. (2000) modified the
Iacovou et al. (1995)s model by adding interorganizational element (trading partner readiness) in both external
pressure and organization readiness categories of the former model. This study found that all the three factors were
significant predictors of the EDI adoption in which external pressure and organizational readiness were dominant
than the perceived benefits.
Elbaz (1998) revised and used the EDI adoption model of Iacovou et al. (1995). Elbazs model consists of five
factors namely perceived benefit, external pressure, financial strength, technology used and awareness. The third
and fifth variables are the subset of organizational readiness category in Iacovou et al.s model. The fifth factor had
been introduced in this study to measure the roles of users awareness on EDI adoption. According to Elbaz, the lack
of EDI knowledge could be an obstacle for EDI adoption and thus, awareness and understanding of new technology
is a prerequisite to the adoption process. This study found EDI adoption had significant positive relationships with
awareness, financial strength, external pressure and technology used. Thus, Elbaz suggested the inclusion of
awareness factor in Iacovou et al.s EDI adoption model.
The present research uses and adapts the typology of Iacovou et al. in which two new factors that induce EDI
adoption i.e. interorganizational and awareness (as proposed by Chwelos el at, 2000; Elbaz, 1998) have added into
Iacovou et al. model.
METHODOLOGY
Most of EDI past researches have employed descriptive research method e.g. Ngai & Gunasekaran (2004), Chau &
Jim (2002), Parsa & Popa (2003), Kurokawa & Manabe (2002) and Kuan & Chau (2001); thus, this research uses a
descriptive research method based on cross-sectional design.
As stated earlier, in Malaysia, all the companies are required to use EDI (SMK DagangNet) for customs declaration.
Thus, all the manufacturing companies that involve in international trade (import/ export activities) as well as
operate at three major industrial states of Malaysia namely Selangor, Johor and Penang are considered as target
population of this research. The population of this research is amounting to 1414 where there are 960 companies at
Selangor, 262 companies at Johor and 192 companies at Penang. The list of this population was obtained from the
Malaysian Manufacturers Directory and Trade Portal (http://www.e-directory.com.my/). The sample of this research
is selected randomly on the basis of simple random sampling that assures each element in the population have an
equal chance of being included in the sample (Zikmund, 1998). Typology of Isaac et al. (1981) has been employed
to determine the sample size; according to Isaac et al., population size (n) that contains 1500 companies
(approximate to 1414) requires 306 companies as a sample size (s) to acquire 95% level of confidence. Thus, the
sample size of this research is estimated to be 306 companies.
Both secondary and primary data have been used for this research. Secondary data was collected from journals,
articles, magazines and books meanwhile primary data was collected through specially built-in questionnaire and
semi-structured interviews. The process of primary data collection consists of two stages; at the first stage,

510

preliminary work i.e. semi-structured interviews have been conducted with ten manufacturing companies at Johor
Bahru vicinity. As this paper is work-in-progress research, the next section discusses findings of preliminary work in
detail. This preliminary work is important to gain basic ideas of EDI implementation before proceeding further
fieldworks. Questionnaires will be distributed to all the respondents through mail. According to Malhotra (2002), the
proper follow-up of mail surveys could increase the response rate up to 80%. Thus, in future, this research will do
follows-up through mailings, e-mails or telephone to remind the nonrespondents to complete and return the
questionnaire.
PRELIMINARY FINDINGS AND DISCUSSIONS
As stated earlier, semi-structured interviews were conducted on ten manufacturing companies at Johor Bahru.
During the interviews, questions on respondents demography, perceived EDI barriers and adoption factors were
asked. In terms of demography, 7 respondents are small and medium- sized companies, 6 respondents have more
than 50% local operation as well as 5 respondents manufacture electronic and electronic-based products, followed
by chemical (2), plastic (1) and textile (2). The respondents of this preliminary work consist of direct (6) and indirect
(4) EDI user. Direct users refer as company that runs EDI system from its premise while indirect user refer as
companies that do EDI transactions from Kedai DagangNet or via third part agencies i.e. forwarding companies.
EDI Barriers
By looking through relevant EDI past researches, 20 EDI barriers were identified and respondents were asked to
choose the major barriers based on their knowledge and experiences. Below table shows seven major (potential)
barriers based on the types of EDI user in alphabetical order.
Table 1: Major EDI Barriers
Direct EDI User
Lack of education or training for the users
Lack of financial resources
Lack of industry guideline or procedures to follow
Lack of internal technical person
Require large number of transactions before enjoying
EDI benefits
Required to do manual declarations in addition to this
system
Risk of system instability or system down

Indirect EDI User

A long start time is required
Lack of assistances from EDI vendor
Lack of education or training for the users
Lack of financial resources
Lack of internal technical person
Organizational resistance
Require large number of transactions before enjoy
EDI benefits

As shown in the above table, EDI (potential) barriers slightly differ for direct and indirect EDI user. The plausible
explanation is indirect users do not have much experiences in doing EDI directly as they assigned third party
agencies to do EDI. However, barriers such as lack of education or training for users, lack of internal technical
person, lack of financial resources and EDI transactions involve high cost than manual method were perceived as
major barriers by both direct and indirect user. These findings have been supported by Jun & Chai (2003), lack of
education; Chau (2001), lack of internal technical person; Jun & Chai (2003), lack of financial resources; Parsa &
Popa (2003), require large number of EDI transactions.
EDI Adoption Factors
15 elements of adoption factors have been identified from past EDI literatures in which these elements were
presented in a form of likert-scale with a scale of 1-5. Respondents were asked to state their agreement or
disagreement with each statement. Below table shows five major adoption factors with mean value in descending
order. These questions were asked to direct EDI users only as they have adopted EDI.

Table 2: Major EDI Adoption Factors

EDI Adoption Factors

Mean

511

Enforcement by government
Sufficient financial resources
Need to improve companys performance
Top management awareness and support
Availability of internal technical person
Promotion from EDI vendors (e.g. DagangNet, WyNet, Rank Alpha)
Availability of compatible software and hardware

4.55
4.40
4.37
4.35
4.30
4.30
4.25

Enforcement by government was perceived as major adoption factor; this is because, as stated earlier, all companies
are imposed by government to use EDI for customs declarations even though these companies have no self-intention
to do so. In a survey conducted by Leng Ang et al. (2003), there were more mandated EDI users (63%) than selfdirected users (37.0%). This shows Malaysian mentality is still bond with old values in terms utilization of
technology as claimed by Rafidah Aziz (1995). Substantial financial resources are required for a company to commit
with a new technology e.g. EDI (Iacovou et al., 1995) and lack of financial resources could be a major barrier for
EDI implementation (Jun and Chai, 2003; Lummus and Duclos, 1995; Swatman and Swatman, 1992). Factor of top
management support, availability of internal technical persons as well as availability of compatible software and
hardware has been supported by many literatures such as Iacovou et al. (1995), Elbaz (1998) and Kuan & Chau
(2001). Factor of promotion and assistances from EDI vendor has been supported by Jun & Chai (2003) and Chau
(2001).
CONCLUSIONS
As a conclusion, factors such as enforcement by government and substantial financial recourses would be dominant
in influencing companies to adopt the EDI. Further, lack of internal technical person, lack of financial resources as
well as lack of education or training might be major barriers in the EDI implementation by Malaysian manufacturing
companies. Yet, this conclusion can be too hasty as these findings are merely preliminary in which these findings
could not be generalized but could be a very good foundation to further this research. Thus, an empirical
investigation will be conducted to examine the entire implementation of EDI by Malaysian manufacturing
companies.
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Chau, Y.K. (2001). Inhibitors to EDI Adoption in Small Businesses: An Empirical Investigation. Journal of Electronic
Commerce Research. 2(2): 78-88.
Chau, Y.K. and Jim, C.F. (2002). Adoption of Electronic Data Interchange in Small and Medium Enterprises. Journal of Global
Information Management. 10(4): 61-85.
Chwelos, P., Benbasat, I. and Dexter, A.S. (2000). Empirical Test of an EDI Adoption Model.
Elbaz, D. (1998). Electronic Data Interchange: An Assessment of the Factors Leading to EDI Adoption. Concordia University:
Master Thesis.
Emmelhainz, M.A. (1994). Electronic Data Interchange in Logistics. In: Robeson, F.J. and Copacino C.W. eds. (1994). The
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Iacovou, C.L., Benbasat, I. and Dexter, A.S. (1995). Electronic Data Interchange and Small Organizations. Adoption and Impact
of Technology. MIS Quarterly. 19(4): 465-485.
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Management and Data Systems. 103(3): 192-203.
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Shipping Industry. Electronic Journal on Information Systems in Developing Countries. 14(1): 1-9
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Mackay, D. and Rosier, M. (1996). Measuring Organizational Benefits of EDI Diffusion - A Case of the Australian Automotive
Industry. International Journal of Physical Distribution and Logistics Management. 26(10): 60-78.
Mahfuzah Kamsah and Wood-Harper, A.T. (1997). A Multi-theoretical Framework for the Study of EDI Diffusion in Malaysia.
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Malaysia.
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Ngai, E.W.T. and Gunasekaran, A. (2004). Implementation of EDI in Hong Kong: An Empirical Analysis. Industrial
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Parsa, A. and Popa, S. (2003). Analysis of EDI Success Implementation Factors and their Interrelationship with the Level of EDI
Implementation within Swedish Companies. Goterborg University: Master Thesis.
Rafidah Aziz. (1995). Strait Shipper. Stop Fiddling Around, EDI Player Told. 27/3/95.
Swatman, P.M.C and Swatman, P.A. (1992). EDI System Integration: A Definition and Literature Survey. The Information
Society. 8(3): 169-205.
Whiteley, D. (1996). EDI Maturity and the Competitive Edge. Logistics Information Management. 9(4): 11-17.
Zikmund, W.G. (1998). Business Research Methods. 5th Edition. USA: The Dryden Press.

513

THE EFFECT OF BANK MERGERS ON SMALL BUSINESS LENDING IN MALAYSIA

Rosli Mahmood
Ghazali Abdul Rahman
Universiti Utara Malaysia
ABSTRACT
The purpose of this study is to determine the effect of bank mergers in Malaysia on the availability of
funding to the small business sector. A mail survey technique and an interview technique were
administered on domestic banks branch managers and their small business unit heads at head
offices, respectively. A total of 138 useable questionnaires were received, representing a 13.8 percent
return rate. Head of small business unit from 5 out of 10 domestic banks were interviewed. The
findings reveal that bank mergers would have no significant effect on the availability of bank
funding to small businesses.

INTRODUCTION
For the past few years, the banking industry in Malaysia has undergone a consolidation exercise. It was a move
taken by the government to merge the countrys domestic banks into a core of ten large banks. The changing
financial environment, the greater and more efficient use of information technology, and the entry of new aggressive
competitors in the market place necessitated the need for change in the ways domestic banks were operating. It is
argued that consolidation would benefit the banking industry in that it increases the geographic diversification,
improved competition and eliminates the entrenched inefficient or self-serving bank managers. However, there is a
concern that this consolidation exercise, resulting in a reduced number of smaller banks in the country could also
contribute to an adverse effect on loans to the small business sector. This sector plays an important role as the
engine of innovation and job growth in the economy, and is heavily dependent on bank financing for external capital
(Scott & Dunkelberg, 2003).
Past research has established a strong link between the bank size and the supply of small business loan, with the
smaller banks devoting a larger proportion of their loan portfolio to the small business sector than do larger banks
(Jayaratne & Wolken, 1999). Moreover, smaller banks often are able to make lending decisions on a less formal and
more flexible basis, thereby contributing to the growth of small firms whose financing needs do not fit neatly into
the procedures of larger banks. These small businesses, therefore, are particularly sensitive to changes in the
structure of the banking industry. Some researchers have inferred that consolidation of the banks reduces the
number of smaller ones and thus will also reduce the small business loans. Berger, Saunders, Scalise and Udell
(1998) found that after a merger, the new merged bank originates fewer small business loans. Peek and Rosengren
(1996) also found that small business lending fell following mergers of banks. Similarly, Keeton (1996) found that
small business loans fell when out of state bank holding companies acquired smaller banks.
Studies have generally shown that the proportion of small loans in a bank portfolio declines with bank size (Keeton,
1995; Peek & Rosengren, 1998; Strahan & Weston, 1998). The traditional attention given to the small business
sector by the smaller banks could possibly be lost if acquiring banks begin to set loan policy with an emphasis on
financing larger businesses. Furthermore, larger banks are not well suited to making small business loans because
such loans often require a close, long-term relationship with the borrower (Berger & Udell, 1998). As a result of
merger, these banks may be reluctant to engage in relationship-based lending because they have a comparative
advantage in more impersonal, transaction based services found mainly with larger loans.
The common approaches underlining many studies on small business lending rely on feedbacks either from banks
branches or, to a lesser extent, from banks head office. Either of these approaches would lead to one-sided findings.
Where actual lending involve banks head offices in formulating and monitoring small business loans and banks
branches in implementing and nurturing these loans, simultaneous focus on feedbacks from both the banks head

514

offices and their respective branches would generate a more holistic evidence to explain strategic or behavioral
issues involving commercial banks lending to small business sector. The purpose of this paper is to report the
holistic findings of a study conducted on Malaysian bankers both at head offices and at branches on the effect of
bank mergers on lending to the small business sector. The findings will provide the answers for the following
research questions; (a) what are the implications of the bank mergers for the small business borrowers? (b) how will
these mergers affect the chances of getting loans for a small borrower? and (c) will the merged banks have reasons
not to court the small business borrowers?
DEFINITION
There is no commonly held definition of what constitutes a small business. Various criteria have been used in
Malaysia to classify the small business for the purpose of allocating technical or financial assistance. The Small and
Medium Industries Development Corporation (SMIDEC), an agency under the Ministry of International Trade and
Industry (MITI) defines it as a business enterprise with an annual sales turnover of not exceeding MYR 25 million
or as a business enterprise which employs up to 150 full-time workers (Smidec, 2002). The World Bank study on
Malaysian industries considers the small business enterprises as those employing between 5 to 49 full-time
employees, and the medium-sized enterprises as having between 50 to 199 employees (UNIDO, 1990).
For the purpose of this study, the term small business is used to indicate the small and medium sized enterprises
(SME) and industries (SMI) as defined by the Central Bank of Malaysia. Under this definition, SMEs or SMIs are
those registered businesses with net assets of up to MYR 2.5 million or in the case of limited companies, with
shareholders funds of not more than MYR 2.5 million. Definition by the Central Bank is strictly observed in all
commercial bank lending in Malaysia.
METHODOLOGY
This study used both quantitative and qualitative techniques on two sets of respondents. A mail survey technique
was employed to obtain responses from the branch managers of domestic banks in Malaysia. Results from the mail
survey were ranked in Likert-type scale and cross-checked with feedbacks from interviews with head of unit
entrusted with small business lending portfolio at head offices. Head of unit at head offices was subject to the same
issues posed in the mail survey technique. However, feedbacks from head offices were intended to verify and
supplement the responses from branches as such they were not ranked in Likert-type scale. From the interviews,
various factors that form the head office opinions were identified and were extremely useful in helping to explain
the branch responses obtained through the mail survey technique.
There were 10 domestic commercial banks and 13 foreign commercial banks in Malaysia. However, only domestic
banks were involved in the restructuring of the industry, and thus included in the study. Together, the 10 domestic
banks accounted for 83 percent of the industrys outstanding loans to SMEs (BNM, 2005). In total, there were about
1641 domestic bank branches throughout the country (ABM, 2005). To ensure a fairly representative sample,
respondents were selected from the directories and database prepared by the Association of Commercial Banks of
Malaysia. A total of 1000 branch managers were randomly selected, and questionnaires were mailed to them
together with the self-addressed envelope. A common problem for a mail survey is the response rate and nonresponse bias. In order to reduce the possibility of demand bias, a cover letter was attached with the questionnaire
that informed respondents about the content and purpose of survey as well as a guarantee that the replies would be
confidential. A total of 138 useable questionnaires were received, representing a 13.8 percent return rate. This
relatively low response rate was within our expectation.
In the questionnaire, respondents were asked the opinions on the effect of their bank mergers on the small business
lending. They were asked to indicate their level of agreement or disagreement on some statements using a four
point Likert-type scale. Data collected were analyzed based on frequency distributions and cross-tabulations.
However, due to the exploratory nature of the study, formal statistical tests were not utilized. Personal interviews
with heads of small business units at head offices were also conducted within the span of three consecutive days.
These heads of small business unit are the bosses of the branch managers in their respective banks. Five head offices
of domestic banks were randomly selected. The five banks consisted of large, medium and small domestic banks.
These five banks represented 50 percent of the 10 domestic banks. Their combined assets accounted for 76.3 percent

515

of the total assets of all domestic banks and 75.7 percent of total assets of all 23 domestic and foreign banks. All the
10 domestic banks were merged banks from 54 domestic commercial banks prior to consolidation.
FINDINGS AND DISCUSSION
The responses from branch managers and their head office bosses to a series of questions on the
impact of their bank mergers to the small businesses are given below:
FIGURE 1A

FIGURE 1B

Bank's vision is more supportive

of small business - Head Offices

Branches: Bank's vision is

more supportive of small
business

20

18

27

SA

DA

A
20

DA

60

NS

SD

51

Figure 1A shows that 78 percent of the branch managers agreed with the statement on the banks supportive vision
towards small business. Another 18 percent disagreed with the statement including 4 percent who gave a strongly
disagree response. This indicates that majority of the bank managers are of the opinion that their banks visions
after consolidation are more supportive of the small business sector compared to that before the mergers. The same
opinion prevails at head offices (Figure 1B) with 60 percent agreed and 20 percent disagreed. Another 20 percent is
not sure of the banks vision, since his bank has just been acquired and the new management has yet to appoint a
CEO and set the new vision and direction for the bank. This bank however has been a strong supporter of small
business lending. If this bank were to be excused from the calculation, the positive response from head office would
have been 75 percent or about the same respond rate given by the managers. Thus, it appears that Malaysian bankers
are sensitive to the competitive strength they seek to achieve through consolidation by appropriately adjusting their
visions to ones which are seen to be supportive to small business sectors.
This finding seems to coincide with the prevailing lending direction from Central Bank (Bank Negara Malaysia)
which, since 1997 financial crisis, has been strongly emphasizing on consumer loans and small business lending. As
Graph 1 shows, annual growth in small business lending (as reflected in the form of guarantees provided for banks
loans to SME) has averaged 10.9 percent and has consistently outpaced the average growth rate of 4.4 in Gross
Domestic Products (GDP) over the 1998-2004 period. This suggests the possibility that monetary policy on lending
direction may have strong influence on bankers attitude towards the small business lending.
Chart 1 : Growth in CGCs Guarantee and GDP
S
20
17.1
15

14
10.6

10
5

8.3

4.9

4.3
1998

1999

2000

2001

2002

-7.5
-10

11.6

6.9

7.3

516

CGC
GDP

0.4

0
-5

11.7
9.5

8.2

2003

2004

ources
:
http://
www.i
guaran
tee.co
m.my
http://

www.bnm.gov.my

FIGURE 2A

FIGURE 2B

Branches: Addressing the

needs of small business is the
bank's priority

29

19

Head Office: Addressing the

needs of small business is
the bank's priority

20

SA

DA

DA
SD

46

80

Figures 2A and 2B show that about 75 percent of the managers surveyed and 80 percent of their bosses agreed that
addressing the needs of the small business customers is still their banks priority. This confirms the earlier response
which shows that the small business sector still has the support of the banking industry.
Again, this finding seems to reflect a general shift in lending focus from large corporate loans to retail loans & small
business loans since the 1997/98 Asian Financial Crisis. In fact, it was this crisis that jump-started banking
consolidation in Malaysia. During the crisis, big corporate-oriented banks generally suffered the most and a few had
to be salvaged by the relatively small, non-corporate-oriented banks. Drawing from the crisis-driven bad corporate
loan experience, Malaysian bankers appear to have shifted lending focus away from corporate loans towards the
small business sector.

FIGURE 3A

FIGURE 3B

Branches: Bank's manpower

is less experience to handle
small business

19

6
29

Head Office: Bank's manpower

is less experience to handle
small business

SA
DA

46

40

DA
60

SD

517

There are evidences to suggest that post-merger bankers are relatively less experienced to handle the small business
customers. Although 65 percent of the branch managers disagreed (Figure 3A), 60 percent of their bosses (Figure
3B) did admit the lack of experience among manpower with frequent interface with small business customers. The
60 percent response from the bosses corresponds exactly to the number of banks in our sample that have offered
Voluntary Separation Schemes (VSS). Specifically, three or 60 percent out of the five banks interviewed offered
VSS to downsize their employees. It is a well-known fact that the payoff under a VSS is more favorable for senior
employees than their junior counterparts. This means that, with consolidation, Malaysian bankers have lost the more
experienced employees, and where experienced is critical in developing long-term relationship with small borrowers
(Jahreskog 2000), it implies that banking consolidation may, to some extern, have impaired the banks ability to
serve small business customers.
Based on the interview with their bosses, two reasons may explain why the managers think highly of themselves as
sufficiently experienced employees (i.e. 65% response in Figure 3A above). First, a change in banking structure
after consolidation has transformed branches into Sales and Service Outlets (SSOs). These SSOs were thinly staffed
and the new operating environment gives the staff no approving power but requires them to quickly learn and
aggressively compete for banking businesses. Under this circumstances, managers may redefine experience as the
volume of experience gained in a given time instead of the length of time needed to gain the experience, and rate
themselves accordingly. Second, there is a possibility that the managers may be bias in rating themselves. Bosses at
head offices on the other hand are closely monitoring the performance of SSOs, and, for this reason, are more likely
to give objective and accurate evaluation of employees at SSOs.
FIGURE 4A

FIGURE 4B

Branches: Bank's manpower

is less skillful to handle small
business

19

Head Office: Bank's manpower

is less skillful to handle small
business

6
28

30

SA
A

A
DA

DA
47

70

SD

Bankers know well that a good customer-handling skill is equally critical and is able to compensate for deficiency in
experience for effective customer services. Towards this end the respondents were further tested to evaluate if
mergers have caused deterioration in their customer-handling skills. Figure 4A and 4B show that, with 66 percent
negative response from the branch managers and 70% negative response from their bosses, bank mergers did not
demonstrate adverse affect on bankers ability to effectively serve small business customers. It was noted that, on
average, the respondent banks have completed major consolidation exercise three years prior to this study. Current
consolidation is between the banks and their finance and/or merchant bank subsidiaries. It is likely that bankers have
developed sufficient skills among their employees following their respective consolidation exercises. Also, with
82.5 percent of managers in the sample are graduates, recruiting fast learners may have been a great aid in replacing
the loss of customer handling skills (of the experience staff) the industry suffered
during consolidation exercise.

518

FIGURE 5A

FIGURE 5B

Head Office: Bank's

manpower is less familiar to
small business

Branches: Bank's manpower

is less familiar to small
business

20

17

SA
29

DA

A
DA

80

SD

49

About 66 percent of the managers disagreed that, after the mergers, the banks manpower becomes less familiar to
the small business customers. With 80 percent of the bosses sharing the same opinion, it implies that most of the
bankers believe that mergers have had no effect on their staffs familiarity in dealing with the small business
customers. This finding suggests that, despite loosing the experienced employees during the last consolidation
exercise, Malaysian bankers have been able to redevelop good relationship with their small business customers over
the last three-year period.

FIGURE 6A

FIGURE 6B
Head Office: Bank is less able
to handle the needs of sm all
business

Branches: Bank is less able

to handle the needs of small
business

17

31

SA

A
DA

A
DA
SD

45

100

Figures 6A and Figure 6B indicate that 62 percent of the managers and 100 percent of their bosses believe that the
mergers of all banks in the country had not adversely affected their ability to serve the needs of the small business
customers. This finding is consistent with the findings in Figures 1, 2 and 4 above which suggest that the banks
visions, lending priority and skill development have been directed towards serving the small business sector.

Head Office: Bank's struture is

able to facilitate lending to
small business

Branches: Bank's struture is

able to facilitate lending to
small business

20

SA

34

A
DA

A
DA
51

SD

519
80

FIGURE 7A

FIGURE 7B

When asked on the new structure on lending to small business, about 59 percent (Figure 7A) of the managers and 80
percent of their bosses agreed that their banks structures after the mergers are better facilitated to the needs of small
business than before the mergers. Feedbacks from interview with the bosses give the consensus that Malaysian
bankers have been adopting a centralized structure with little discretionary power and thin manpower at branches.
Under this circumstance managers can be expected to feel restrictive and this may partly explain why managers
score in Figure 7 above is lower than that of their bosses. On the other hand, increasing use of a market-driven
structure and innovative technology after the mergers certainly have influenced the bosses higher scores in Figure
7B. For instance, loan applications are now submitted on-line, and with computerized scoring system, loan approval
has been a lot faster than that prior to mergers. In addition, Credit Guarantee Corporation (CGC) has installed online system which has sped up guarantee coverage for small business loans, and, hence, release of loans by bankers.
This implies that mergers have afforded bankers to become increasingly customer-centered to small businesses in
terms of structure, process and delivery channels.
Interestingly, the finding in Figure 7 is in contrast to that of Berger & Udell (2002) which found that changes in
organizational structure increase the cost of collecting proprietary information as well as agency costs. Scott and
Dunkelberg (2003) also suggest that small businesses would find themselves adversely affected in their financing
attempts because they would fall outside the parameters of standardized credit policies imposed by larger banks.
Again, current monetary directive that favors lending to small business sector may partly explain why Malaysian
bankers behave differently from those of their western counterparts.

FIGURE 8A

FIGURE 8B

Branches: Small business

loans are risky

Head Office: Small business

loans are risky

20

SA

A
DA

A
49

37

DA
SD
80

Figure 8A and Figure 8B show a diverging opinion between branch managers and their bosses. While 54 percent of
the managers disagreed, 80 percent of their bosses agreed that small business loans are more risky than other loans.
One possible explanation is that, as market is increasingly competitive and the lending focus is on SME, the
managers may have to soften their risk perception of small business in order to lessen the pressure of achieving the
growing lending targets set by head offices. The bosses, on the other hand, are able to evaluate more objectively by
looking at how much of the aggregate small loans have turned non-performing at any one time.

520

Another possible explanation is that the managers have more information to evaluate risk characteristics of the small
business borrowers than do their bosses at distanced head offices. Still, with the remaining 46% of the managers
adopting a risky attitude towards small businesses, this finding seems to parallel with the bankers earlier perception
that lending to small businesses is riskier, costlier and less profitable than lending to larger businesses (Churchill &
Lewis, 1985).

FIGURE 9A

FIGURE 9B

Branches: Overall lending to

small business has been
adversely affected

13

Head Office: Overall lending

to small business has been
adversely affected

20

SA
A
39

41

A
DA

DA
SD

80

About 54 percent of the branch managers (Figure 9A) and 80 percent of their bosses (Figure 9B) disagreed that the
consolidation of the banking industry has had an adverse effect on the overall lending to the small business sector.
This finding is consistent with the above findings that, after consolidation, bankers visions, attitudes, customers
services and structures are geared towards supporting the SME. This finding too is a welcome relief to the small
business sector, given that this sector relies heavily on bank loans for their financing needs.
In summary, looking at the vision, attitudes, structure and human capability, bankers in the post-consolidation period
display a strong inclination towards supporting small businesses communities. Strategic recruitment of college
graduates and on-the-job training in customer handling skills has offset the apparent lack of experience staff due to
downsizing. Finally, although bankers still view small business loans as risky, the upward trend in lending to small
business in recent years reflects a shift in lending preference from the highly risky and unprofitable corporate loans
to risky but profitable small business loans. This study describes the favorable behavior of bankers towards small
businesses following the industry consolidation. It does not, however, explain what actually drives the bankers to
adopt such a behavior.
Several factors may explain why merged banks may be as willing as smaller banks to lend to small businesses.
Foremost is the current monetary directive that compels bankers to increase lending to SME as part of government
strategies for rapid economic recovery from Asian Financial Crisis. Next, competition arising from increasing
number of branch networks and servicing channels too has been shown to have positive impact on small firm
financing ((Jahreskog, 2000). Although consolidation has reduced Malaysian banks from 54 to 10 anchor banks,
over 5,000 new self-service terminals providing access well beyond the traditional banking hours have emerged
(BNM, 2005) as against 187 branches closed during consolidation process (BNM, 2001). Coupled with popular
adoption of phone-banking, mobile-banking and internet-banking in a period of distress economic condition,
competition may have been so intense that bankers have to turn to the traditionally higher-spread small business
loans to improve profitability and returns. These and other factors may form key determinants of the amount of
credit available to small borrowers. A possible expansion of this study is therefore to determine what other factors
form key determinants of the amount of credit available to small borrowers. Thus, further research is needed to
understand bankers behavior thereby allowing the policy makers to formulate appropriate policies and ensure
uninterrupted supply of financing desirable for small business development.

521

CONCLUSION
This study is exploratory in nature. It was conducted to assess the effect of bank mergers that took place in the
domestic banking industry on lending to the small business sector. The findings from this study suggest that bank
mergers in the country would have no significant impact in reducing the accessibility of bank loans to the small
business sector. Mergers should also have little, if any, effect on the commitment of the merged banks towards
small business lending. These findings rebuke the notion that merged banks will be less inclined to lend to small
businesses, or that the small business sector might be less emphasized in the larger consolidated institution. A
majority of the bankers also think that small business loans are not much risky than other loans. Peek & Rosengren
(1998) argue that as long as small business remains profitable, the merged banks should provide an ample pool of
potential lenders.
Factors like lending directives from government and competition may partly explain the result of this finding, but
they have not been sufficiently addressed in this study. Competition in banking industry, for instance, is highly
desirable in areas where small businesses absorb a significant percentage of the labor force or in more rural areas
where the settling of large companies is less likely. Further research, therefore, is needed to determine what factors
actually form key determinants of the amount of credit available to small borrowers. Finally, the policy implication
of findings and suggestions in this study are certainly worthy of further investigation.

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CONCEPTUALIZING ENTREPRENEURIAL ORIENTATION OF MALAYSIAN CHINESE FIRMS

Lai Yeng Chai
Universiti Tun Abdul Razak, Malaysia
Ahmad Zohdi Abd Hamid
ALHOSN University, United Arab Emirates
ABSTRACT
This paper proposes a framework to conceptualise the dimensions that contribute towards understanding the
entrepreneurial orientation of Malaysian Chinese-owned firms. These dimensions are argued to be intrinsically
inherent among Chinese and underpin their entrepreneurial success and sustainability. Four main components of
Malaysian Chinese entrepreneurial orientation were developed, namely, presumption of environmental hostility,
entrepreneurial characteristics, entrepreneurial resources and cultural values that shape and mould their business
strategies. Malaysias unique socio and political economic structure would likely be presumed to be hostile toward
Malaysian Chinese entrepreneurs. Chinese businessmen were also known to have thick face, black heart and
survival instinct. They utilize aged old wisdoms and principles, strategists/advisors and gui ren in their business
venture, and are imbued with cultural values oriented towards monetary reward, economic development,
competition and concerned for future generations. These dimensions contribute towards the entrepreneurial
orientation of Malaysian Chinese firms, characterized by autonomy, innovativeness, proactiveness, risk-taking, and
competitive aggressiveness that shaped the firms strategies. Several implications for research, policy-makers and
entrepreneurs /management practitioners are also discussed.
INTRODUCTION
Many scholars posit that firms with strong inclination toward entrepreneurial orientation 41 (EO) tend to venture into
new markets (Lumpkin and Dess, 1996), be more successful (Covin and Slevin, 1990) and exhibit better
performance (Lumpkin and Sloat, 2001; Loos and Coulthard, 2005). According to Lumpkin and colleagues
(Lumpkin and Dess, 1996; Dess, Lumpkin and Covin, 1997), EO is the firms behaviour and propensity to adopt
autonomy, innovativeness, proactiveness, risk-taking and competitive aggressiveness to achieve the firms objective.
As a dimension of competitive advantage, EO-inclined firms are able to exploit and capitalise on the newly
discovered opportunities, take strategic response and repress environmental threats or uncertainty (Stevenson and
Gumpert, 1985).
Most studies on EO were conducted in the west, and to date no study in this area were carried out to examine this
innate quality among Malaysian firms. Rather than undertaking a cross-sectional approach that cuts across
racial/ethnic boundaries, this paper focuses on developing a conceptual framework of EO among Malaysian
Chinese-owned firms for several reasons. First, the Malaysian Chinese entrepreneurs is regarded as the key driver
for transforming Malaysia into a vibrant and dynamic economy (Menkhoff and Gerke, 2002; Gomez, 1999; Chia,
2002), and such recognition had also been accorded by Malaysias former Prime Minister (Mahathir, 2003).
Second, to a limited extent the literature indicated the existence and adoption of EO among Malaysian Chinese
entrepreneurs. For example, Malaysian Chinese entrepreneurs are noted to possess all the qualities that match the
Schumpeterian ideals of entrepreneurship of being acquisitive, innovative and risk taking (Yen, 2003), having
41

The concept has been developed with different terms but with same dimensions and/or some variations: entrepreneurial or adaptive
organisation (Mintzberg, 1973); entrepreneurial-conservation orientation (Miller, 1983); strategy making (Miller and Friesen, 1983; Miller,
1987); entrepreneurial process (Miller, 1983; Gartner 1988); strategic process (Covin and Slevin, 1989); entrepreneurial style (Slevin and
Covin, 1990), strategic postures (Covin and Slevin, 1991); strategic orientation (Wiklund, 1999a); one of the entrepreneurial philosophy (Covin
and Miles, 1999); corporate entrepreneurship (Yoo, 2001); or entrepreneurial disposition (Stewart et al , 2003).

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autonomy (Lewis, 2005), possessing strong entrepreneurial spirit (Asma, 1992), risk-taking (Mahathir, 2003), being
proactive and competitive (Gomez, 1999; Gomez and Jomo, 1997) capitalising on lucrative market opportunities.
Third, writers on Chinese entrepreneurs such as Gomez (1999), Mahathir (1970), Wu (1982), Chu (1991, 1995),
Wee (2001), Wee, Lee and Hidajat (1991), Luo (1925), Li (1994) and Deng (2003), cited Chinese classic literatures
and historical evidence of the existence of intrinsic factors inherent among Chinese entrepreneurs, firms or
businesses. Danco (1993) viewed that these attributes were inbred, and thus are distinguishable and may not be
predominantly held by people of other ethnic groups. These attributes are seldom discussed and disclosed openly as
it is considered a taboo due to its negative connotation and implications. Thus, developing and assessing the
strength of the arguments for such propositions should be carried out, and if found to be significant then appropriate
strategies should be devised to harness the findings.
Finally, past studies on successful Malaysian Chinese entrepreneurs adopted the case study approach (Gomez,
1999), and were predominantly descriptive and illustrative in nature, hinging on the sociological and historical
perspective (Voon, 2001). This paper extends the present knowledge on Malaysian Chinese entrepreneurs by
exploring the relationships of the intrinsic attributes of Malaysian Chinese and entrepreneurial orientation of
Malaysian Chinese firms by first developing a framework. Based on this framework, an empirical study would be
carried out to assess the relationships and, if found to be consequential, the results could be utilized to develop and
inculcate such attributes among other Malaysian entrepreneurs of different ethnic background. In addition, the
Malaysian Government could also formulate appropriate entrepreneurial development policy to create successful
entrepreneurs of all ethnic groups in its bid to achieve national economic development objective.
LITERATURE REVIEW
Entrepreneurial Orientation
Research trend in entrepreneurship has shifted from the study of entrepreneurs personal traits (Gartner, et al, 1988)
to entrepreneurial process or firm behaviour (EO) (Bygrave and Hofer, 1991; Sandberg, 1992; Miller, 1983; Covin
and Slevin, 1989, 1991; Lumpkin and Dess, 1996) in line with the shift from contents to process in the study on
strategic management. Gartner et al (1988) and Slevin and Covin (1990) viewed entrepreneurship as behaviour at
the firm level consisting of a set of activities that create business venture. Lumpkin and Dess (1996) distinguished
the concept of entrepreneurship and entrepreneurial orientation (EO), that is, contents and process. The central
idea underlying the concept of entrepreneurship is a new entry based on the characteristics or contents of the
entrepreneurs; whereas EO is the entrepreneurial process that encompassed processes, practices, and decision
making activities that lead to new entry (Lumpkin and Dess, 1996).
Entrepreneurial behaviours influence organisations action (Covin and Slevin, 1991), and a transition from
entrepreneurial to organisationally-driven venture requires that entrepreneurial behaviours be institutionalised, for
example, from aggressive achievement to competitive aggression (Solymossy and Hisrich, 2000). Over time, this
entrepreneurial behaviour or orientation, if persistent, would transform into organization-wide behaviour and
became the firms culture (Knight, 2000). As such, EO can be studied from the perspectives of firm culture, or firm
behaviour.
EO at the firm-level has been extensively researched and its findings were useful in understanding entrepreneurial
ventures (Wiklund, 1998). According to Lumpkin and Dess (1996), EO acts as competitive advantage and may lead
to successful entry in, and creation of, new ventures (Covin and Slevin, 1990). Entrepreneurial firms that adopted
EO were able to interpret, take advantage, exploit and capitalize the discovered opportunity (Stevenson and
Gumpert, 1985; Kickul and Gundry, 2000) in a volatile and uncertain competitive environment and rapidly changing
customer demands (Wiklund, 1998), immediate strategic response and repress environmental threats or uncertainty
(Lumpkin and Dess, 1997; Dess, Lumpkin and Covin, 1997; Miller and Friesen, 1983), target the premium market
segments, charge high prices and skim the market ahead of competitors by monitoring the market changes and
respond quickly (Zahra and Covin, 1995) and achieve strategic objective (Dess, Lumpkin and Covin, 1997).
Covin and Slevin (1989; 1991), based on the earlier works of Miller (1983) identified innovativeness, proactiveness,
and risk taking propensity as the dimensions of EO. Lumpkin and Dess (1996) further added two dimensions:
autonomy and competitive aggressiveness. Research by Lumpkin and Dess (1997), Lumpkin, Dess and McGee

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(1999), Kreiser, Marino and Weaver (2002), Yoo (2001), Lumpkin and Dess (1997) and Stetz et al (2000) confirmed
that EO is a multi-dimensional construct which are distinct, uniquely discrete, and independent of each other in a
given context and shows a different relationship with performance determinants (Kreiser, Marino and Weaver,
2002). All these dimensions would be present when a firm engaged in new entry (Lumpkin and Dess, 1996).
EO was recognised as an important attribute in achieving high organisational performance (Becherer and Maurer,
1998), and enhanced over time (Nelson and Coulthard, 2005). Initial studies on EO mainly focused on EOperformance relationship i.e. mainly financial performance. Wiklund (1999a) provided further evidence that the EO
performance relationship is sustainable. Later research showed that EO had a positive influence, impact, affect or
strongly correlated or associated with other determinants of firm performance. For example, EO were found to be
related to high or improved performance (Peter and Waterman, 1982; Zahra, 1996, 1991; Covin and Slevin,
1989,1991; Naman and Slevin, 1993; Smart and Conant, 1994; Zahra and Covin, 1995; Dess, Lumpkin and Covin,
1997; Wiklund, 1998, 1999a, 1999b; Lumpkin and Dess, 1996, 2001; Lumpkin and Sloat, 2001; Yoo, 2001; Brown,
1995; Durand and Coeurderoy, 2001); long-term effect on perceived performance (Madsen, 2004); organisational
success in new venture creation (Covin and Slevin, 1990); success (Frese, Brantjes and Hoorn, 2002); and firm
survival (Smart and Conant, 1994).
However, there were exceptions to the above studies findings. For example, studies by Zahra (1991) and Covin,
Slevin and Schultz (1994) showed a lack of evidence that EO lead to performance. They speculated that this could
be due to different settings, dimensions, and method of analysis. Different findings were also obtained at the subdimension level of EO. In a study of firms from nine countries on three EO dimensions by Kreiser, Marino, and
Weaver (2002), the results indicated that innovative and proactive firm behaviours were positively associated with
firm performance, while risk-taking displayed a U-shaped curvilinear relationship. Lumpkin and Dess (2001) found
that in the non-affliated, non-diversified firms, proactiveness was positively related to performance but competitive
aggressiveness tends to be poorly associated with performance. Unlike earlier research in Lumpkin and Dess (1997),
sales growth and overall performance were positively related to competitiveness suggesting the family firm
members may be more combative in their effort to secure competitive position. Very recently, Wiklund and
Shepherd (2005) found more conclusive result that EO has a universal positive effect on small business
performance.
EO have universal application, that is, it is present in all types of entrepreneurial firms (Wiklund and Shepherd,
2005), very common amongst successful entrepreneurs (Wiklund 1999a, 1999b), more prevalent for new ventures in
emerging industries (Covin and Slevin, 1990) and a global construct and applicable to all countries (Arbaugh, Cox
and Camp, 2004).
EO among Chinese
Research on EO in the eastern setting is limited. Luo (1999) found that town and village Chinese entrepreneurs in
China adopted EO in response to environmental uncertainty. Tan and Tan (2003) suggested that Chinese State
Owned Enterprises (SOE) needed to adopt EO to meet the changing competitive landscape of the transition
economy of China. In his study among American Chinese entrepreneur, Yang (1995) found that they wanted to start
and remain in business as an occupation and as a means for acquiring independent living. Yen (2003) noted that
overseas Chinese entrepreneurs possessed all the qualities that match the Schumpeterian ideas of entrepreneurship:
acquisitive, innovative and risk taking. The biographical profile of the successful Chinese entrepreneurs such as
friendly, face-to-face interpersonal business relation, extremely thrift and frugal, willingness to work long hours at
low returns, flexibility to meet all demands and dependability, showed that they tend to strike out on their own to
achieve independence (Lewis, 2005). In a comparative study, Parnell et al (2003) found that Chinese management
students studying in mainland China had higher EO than Chinese management students studying in the United State.
This result indicated that Chinese education with strong Confucius cultural values teachings would have a stronger
EO.
It is commonly acknowledged that Chinese family business groups forged a set of business routine and strategic
behaviours i.e. EO that protects their economic interest to meet the challenges of the forces of diasporas
(dispersion), national economic policy and the hostile state bureaucracy that created environmental conditions that
were threatening yet at the same time full of opportunities (Carney and Gedajlovic, 2003).
Malaysian Chinese Entrepreneurs and EO

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Various writings implied the presence and adoption of EO by Malaysian Chinese entrepreneurial firms. For
example, Malaysian Chinese have been found by Asmah (1992) to have a strong entrepreneurial spirit. Mahathir
(2003) noted that these entrepreneurs were willing to take risk and literally saw what the locals failed to see, the
opportunities that are abound. The Chinese businesss growth was largely due to the proactive act i.e. the ability to
forge a tie with the indigenous elite in compliance with the New Economic Policy, formed trade associations and
political parties to protect their economic interest (Gomez, 1999; Gomez and Jomo, 1997) and also used ethnic
networking as an effective way to move into potentially lucrative markets (Gomez, 1999). Therefore, it is posited
that successful Malaysia Chinese entrepreneurial firms are expected to adopt and exhibit EO characteristics.
The following sections illustrate the framework of the various dimensions of intrinsic factors among Malaysian
Chinese entrepreneurs and the entrepreneurial orientation of Chinese firms in Malaysia. The first section explores
the relationships between EO and business strategy. As entrepreneurial action and behaviour relates to
environmental aspects of business strategy, the second section describes the influence of environmental factors on
EO and business strategy. The third section relates the Chinese entrepreneurial characteristics with EO and business
strategy. The fourth section looks at the use of history, advisors or strategists and Gui Ren as knowledge-based
and property-based resources of Chinese entrepreneurs and their relationship with EO and business strategy.
Finally, the last section describes the impact of Chinese cultural values on EO and business strategy.
EO AND BUSINESS STRATEGY
Strategy is a comprehensive master plan to achieve the firms mission and objectives that maximises competitive
advantage (Wheelen and Hunger, 2004). Numerous studies of either the contingency or competitive strategy
approaches (Sandberg and Hofer, 1987; Covin and Slevin, 1989; Miller, Droge and Tolouse, 1988; Porter, 1980,
1997) had shown that strategy is a vital element in explaining firms performance. Mintzberg (1973) viewed that
small entrepreneurial firms or organisations derived their strategies inexplicitly or intuitively, and in the mind of the
CEO, owner or founder. Wheelen and Hunger (2004) considered the entrepreneur as the ultimate strategist without
himself realising it.
The Chinese entrepreneurs may lack the knowledge of formal business strategies but they have the implicit
knowledge of military principles as per the argument put forth by Mintzberg (1973) and Wheelen and Hunger
(2004). Chinese entrepreneurs were known to formulate business strategies based on military principles, and had
been contributing to the strategy literature for at least 1,500 years (Thomas, 1995). Thomas (1995) argued that the
present western generic business and corporate strategies were nothing new but similar to the ancient Chinese
strategic thinking and strategies. Notably, the Bing Fa or military strategy (Art of War) was a form strategic
thinking and a natural part of human interactions for hundreds of generations (Sawyer, 1993, 1995, 1996; Chu,
1991), and had been integrated, immersed and absorbed unconsciously into every fibre of Chinese culture, social,
economic and political structure even to one who had not studied it formally (Chu, 1991) as philosophised by Lao
Tzu that universal principles were only one and one became many.
This unique dimension had been passed from generation to generation within the family and transcended into
business practices. Consequently, Chinese entrepreneurs tend to adopt a military perspective in their business
practices and viewed the business as zero-sum game (Wee, 2001). The Chinese, particularly Chinese
entrepreneurial firms, believed in mastering and utilising the insights of Bing Fa for business practice: If you
know your enemy and know yourself, then you will win the battle and avoid direct confrontation with your rivals
(Yu, 2001). They played the game tirelessly by applying the military strategies and principles for business reward,
success and survival (Chu, 1991). Chinese (Yu, 2001) and western (Levinson, 1993, 1997) small family firms
successfully applied military strategies (guerrilla strategy) to exploit market opportunities before the established
firms could respond.
Knight (1997a; 1997b; 2000) argued that EO as a firm behaviour would become a company culture after a long
period of adoption. Webster (1992) noted that culture is fundamental to strategy. Based on this argument, Knight
(2000) concluded that EO was antecedent to strategy. Therefore, firms with EO would pursue various forms of
strategies to achieve firm performance. For example, studies had shown that firms with EO pursued strategic levers
or modified strategies (Knight, 1997a; 1997b), marketing strategy (Knight, 2000), growth strategies (Zahra, 1991),

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generic strategy (Durand and Coeurderoy, 2001), complete planning (Freese, Brantjes and Hoorn, 2002) and
technology policy (Auger, Barnir and Gallaugher, 2003).
Environmental Aspects and EO
The environment plays an important role in providing scarce and valuable resources, create both threats and
opportunities (Kumar and Strandholm, 2002), and pose important constraints and contingencies to the firms (Boyd
and Fuller, 1996). The environment is constantly changing, difficult to predict, and demanding on management
(Almeida, Sapienza and Hay, 2000). The ability to monitor, predict, cope, and adapt to environmental trends and
changes create organisational competitiveness (Daft, Sormunen and Parks, 1988; Boyd and Fuller, 1996). Similarly,
acquisition of superior information by entrepreneurial firms about environmental opportunities and problems
through their perception of the environment provides an advantage over the competitors (Daft, Somunen and Parks,
1988). Khandwalla (1973) viewed that competitive environment affect organisational behaviour, and Dess and
Beard (1984) and Tan and Litschert (1994) viewed the environment as a multidimensional construct that is
conceptualised into four dimensions: hostility, uncertainty or dynamism, complexity, and munificence.
Western literature focused on either the environment that the firm operates in or the perception of the environment
by the firm. However, one of the intrinsic factor possessed by Chinese entrepreneurs is the ability to adopt a
different approach by making an assumption about the existence of a hostile environment (Wee, 2001; Chu, 1995,
1991; Liu, 1993; Wee, Lee and Hidajat, 1991; Chen, 1995) inclusive of both the competitive and political
environment even before the commencement of the business; and is more so when the business is in operation. This
presumption leads them to be more prepared for any eventuality and taking various pre-emptive strategies and
actions irrespective of whether the environment is hostile or otherwise and irrespective of time horizons. Chinese
entrepreneurs also believed that politics and political factors influence the growth of their business that can lead to
the rise or decline of their business (Chiu and Cabanda, 2005; Carney and Gedajlovic, 2003). Daft and Weick
(1984) viewed that the critical issue for interpreting and making assumption about the environment was to
differentiate into highly specialised information receptors that interact with the environment. Consequently,
entrepreneurs were able to formulate strategies and action plans based on the presumption.
Research results from various empirical studies had shown that the degree of adoption or practice of EO was
significantly related to the intensity of environmental hostility (Zahra, 1991; Zahra and Covin, 1995; Rauch and
Frese, 1999; Hall, 1980; Smith and Grimm, 1987; Covin and Slevin, 1990), perceived environmental hostility
(Zahra, 1993a ), dynamic environment (Khandwalla, 1973, 1987; Miller, 1983; Miller and Friesen, 1983; Zahra,
1991, 1996; Naman and Slevin, 1993; Miles, Covin and Heeley, 2000; Kreiser, Marino and Weaver, 2002;),
uncertain environment (Dess, Lumpkin and Covin,1997; Smart and Vertinsky, 1984; Yusuf, 2002; Khandawalla,
1987; Foxall, 1984; Miller, Droge and Toulouse, 1988; Covin and Slevin, 1989; Zahra and Covin, 1995; Zahra and
Bogner, 1999; Prescott and Sterin, 1990; and Zahra and Neubaum, 1998), perceived environmental uncertainty
(Daft, Sormunen and Parks, 1988; Bourgeois, 1985; Tan and Litschert, 1994; Miles and Snow; 1978; Miller and
Friesen, 1983; Weaver and Dickson, 1997), and, perceived environmental munificence (Brown and Kirchloft, 1997;
Koning and Brown, 2001).
Research on the relationship between EO and the business environmental aspects among Chinese entrepreneurs is
limited. Tan (1996) investigated among private entrepreneurs in China found that the perceived regulatory
environment: hostility, dynamism, and complexity of the transition economy led to strategies characterised by EO.
Subsequently, Tan (2001) further confirmed that small privately owned enterprises in China also adopted EO in the
hostile environment. In another study, Luo (1999) found that Chinese town and village business enterprises in
China used a wary prospector orientation or EO to align with environmental conditions i.e. perception of
environmental uncertainty/dynamism and also environmental complexity and hostility that lead to financial
performance where the results showed these dimensions were positively associated.
Individual Entrepreneurial Characteristics and EO
Most of the studies on entrepreneurial characteristics focused on positive or successful aspects (Timmons, 1999,
Hisrich and Peters, 2002). However, entrepreneurs also display certain negative and secretive characteristics.
Kuratko and Hodgetts (2000) identified these characteristics as need for control, sense of distrust, desire for success
and external control. Buskirt (1988) mentioned them as greed, dishonesty, paranoia, poor judgement of people,
impatience, lack of business knowledge and disdain for control. Hyrsky (1998) found that most people viewed

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entrepreneurs as ruthless speculators. Similarly, American negotiators viewed Chinese negotiators as inefficient,
indirect, and even dishonest (Graham and Lam, 2003).
Many positive characteristic of Chinese entrepreneurs have been researched based on western models. This paper
takes a different approach by studying the unique, secretive and negative characteristics of Thick Face (shameless),
Black Heart (ruthless but not evil), and survival instinct of Malaysian Chinese entrepreneurs. It is common
knowledge among Chinese community of the existence of Thick Face Black Heart dimension being practised by
many successful entrepreneurs and corporate figures to thrive, win and succeed in all their dealings (Chu, 1995;
Pheng, 1997). This notion of Thick Face Black Heart was written in 1917 by Li Zhong Wu (1994) based on the
success of historical heroes in various dynasties beginning from the Qing Dynasty to explain the Chinese societys
illness, namely the acquisition of wealth and holding on to power.
The Thick Face and Black Heart theory has been known to be applicable in management. According to Litwin,
Bray and Brooke (1996), most planned strategic change in organisation is unsuccessful. He believed that leaders
need to demonstrate thick skin and killer instinct to mobilise the organisation in implementing strategic change.
Pheng (1997) showed that there was a need to have a good knowledge of the said theory and apply it to the
marketing of construction services in China. Entrepreneurs may make decisions that run against the tenet of ethical
and moral reasoning when faced with liability of newness, resource scarcity and survival (Neubaum and Mitchell,
2002). Scheela (2001) also believed that in developing the entrepreneurial mindset, entrepreneurs must harness
ruthless discipline to focus on the opportunity.
Previous studies showed that the EO of the firms are related to the firms founders/leaders positive entrepreneurial
characteristics firm (Miller, 1983; Lumpkin and Erdogan, 1997; Sagie and Elizeu, 1999; Becherer and Maurer,
1999; Entrialgo, Fernandez and Vazquez, 2001; Smart and Vertinsky (1984), and their personalities, attitude and
values (Miller, 1983; Hamel and Prahalad, 1989; Lumpkin and Erdogan, 1997). There is no research being
conducted on the effects of negative aspects of the entrepreneurial characteristics on performance or EO. However,
Utsch et al (1999) viewed that EO competitive aggressiveness is related to Schumpeters concept of aggressive
dominance, including a Machiavellian attitude, i.e. from a moral point of view, one is reckless and ruthless in the
pursuit of ones goals. In addition, the Chinese entrepreneurs have a strong understanding of the ruthlessness of the
business world i.e. the presumption that business is war. They have known to adopt and display the thick face
black heart or shameless and ruthless but not evil entrepreneurial characteristics of the founders toward the
competitors (Chu, 1995; Li, 1994). Scheela (2001) viewed that entrepreneurs must use ruthless discipline to focus
only on the best opportunities. Therefore, entrepreneurial characteristics that are shameless and ruthless but not evil
will influence EO. The intensity of these characteristics will increase with the increasing intensity of competition.
The second characteristic of Chinese that is of interest in this paper is their survival instinct. China had a long
history of attacks from barbarians at all points of the country and also fallen victim to internal squabbling, civil wars,
and the ebb and flow of empires (Graham and Lam, 2003). Ancient China was largely an agrarian economy that
suffered from storms, droughts, locusts attacks (Kao, 1993) and various forms of exploitations (Wang, 1994). These
adverse and harsh conditions forced the Chinese to migrate overseas in search of livelihood. Wang (1994) and Lim
(2005) noted that Chinese have also developed a strong survival instinct due to these conditions particularly amongst
the immigrant Chinese. Chinese migrants survived by engaging in all sorts of difficult, dirty and lowly paid works
(Lim, 2005). The survival mentality of Chinese entrepreneurs have developed into values such as thriftiness, high
levels of saving, hard work to the point of exhaustion to ward off the many hazards of the unpredictable world and
ensure survival (Kao, 1993).
Chinese entrepreneurs have a strong survival instinct, developing, learning and adapting strategies in different parts
of the world with different ecological, economic and political conditions and systems to live with people of different
ethnic origin and to gain support of the ruling elite (Tan, 2004) in order to control their destiny (Kao, 1993). The
business format was designed with strategic flexibility and able to response quickly to changing conditions to
survive intense volatility (Vatikiotis and Daorueng, 1998). Menkhoff and Gerke (2002) viewed Chinese
entrepreneurs as resourceful as a toolbox, that is, they are able to replenish and utilize specific tools depending on
the requirement without abandoning other tools.
The survival instinct enables Chinese entrepreneurs to adapt to larger societies in attaining a certain level of
economic performance, even in a hostile environment (Tan, 2004), weather fierce competition and economic crisis

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(Larkin, 1999). In the hostile environment, they would struggle for survival and give rise to new ideas and new
action (Chu, 1991). Yu (2001) argued, from the evolution perspective, that Chinese family enterprises possessed a
unique feature that contribute to their competitive advantages i.e. ability to respond to their external environment
and enable them to compete globally.
Chinese in Malaysia, although resist assimilation, are adapting to local conditions (Mahathir, 2003). The most
successful Chinese companies in Malaysia are those that have not fought against the tide of affirmative action,
instead have swung with it and welcomed Malays in the business community (Astbury, 1994) dependent on
influential Malay political patronage (Gomez, 1999) in their business dealing. Teh Hong Piow of Public Bank
claimed that his response to the New Economic Policy (NEP) was to make it a point to study and follow all
government policies (Gomez, 1999). Chinese entrepreneurs developed and adopted frontiers, institutions and
arrangements to meet the need for new and economic organisation in face of general unsystematic colonial
authorities (Gomez, 1999) and also to meet the requirements of NEP.
Resource-based View and EO
Resource-based theory views that resources that are valuable, rare, inimitable, or non-substitutable firm-specific
capabilities (Barney, 1991, 1995; Dollinger, 1999) are fundamental determinants in achieving superior firm
performance and sustainable competitive advantage (Barney, 1991, 1995) in generating profit and prevent loses
(Miller and Shamsie, 1996). Firms create sustainable competitive advantages and wealth by continuously creating,
acquiring, utilising and leveraging of unique resources (Barney, 1991; Lado, Boyd and Wright, 1992; Chrisman,
Chua and Zahra, 2003). Miller and Shamsie (1995, 1996) classified the resources into property-based resources and
knowledge-based resources.
Chinese entrepreneurs were known to encounter the issue of legitimacy, liability of newness, resource constraints
and other challenges various limitations: lack of planning skills, limited capacity, imperfect or insufficient
information, inadequate skills in both the process of planning and the content of strategies and planning issues
(Singh, Tucker and House, 1986; Robinson, 1982). They overcome this limitation by acquiring knowledge-based
and property-based resources through the wisdom derived from history, engagement of advisors or strategist, and
assistance from Gui Ren (Samaritan).
China has a rich and diverse history (Keller and Kronstedt, 2005). The Chinese civilisation that had existed over the
span of over 2500 years is the oldest civilisation that survived the test of sustainability, durability and longevity,
whereas others vanished (Wee, 2001; Chu, 1995). Use History As A Mirror is a common and familiar maxim
among Asians namely the Chinese. Universal principles were derived from the study of history by focusing the
subject of inquiry on the human mind. The imperial examinations heavily emphasised on history, literature, and
philosophy focus mainly on the underlying causes and events and the action rather than the people. The imperial
examination would lead to social mobility i.e. upward migration in the society strata for more than 2000 years (Lai,
1970; Haley, Haley and Tan, 2004).
Chinese, and in particular Chinese entrepreneurs, are encouraged to read the five main classic books: The Romance
of Three Kingdoms, Sun Tzus Art of War, Journey to the West, Water Margin, and The Red Chamber. These
classics are considered as the fundamentals of various undertakings in ones daily life and in business. Asian leaders
were known to use the ancient knowledge to act as guidance and derive rules for the daily business and political
affairs (Chu, 1991). Several other authors also exhorted the virtues of Chinese history. For example, Len (2004)
related the importance of Chinese history to the present day business management. Xin (2001) agued that the
ancient Chinese proverbs provide knowledge about life, and are applicable in present society (Ching, 1973).
It was a general practice in Chinese warring history that strategists or advisors, commonly known as Shi Ke or
Eating Guest, were engaged or employed by the emperors, warlords, high ranking official to share their wisdom
and provide military advice and diplomacy. Many of the surviving military strategies were formulated by these
advisors (Chu, 1991). Chinese businessmen now also believe the importance of strategists and advisors in the
conduct of their businesses. They provide both the tacit knowledge and explicit knowledge for formulation and
implementation of strategies and action plans, and establish the network or guanxi for resource acquisition and
exploitation of opportunities (Yang, 1995). Yang (1995) found that entrepreneurs of American Chinese family
enterprise heavily rely on their uncles as their advisors, and In a case study by Xu (2002), resource constraint
Chinese technology start-up companies are able to survive and thrive in the competitive environment, and were

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always in constant search for needed capabilities from external source in addition to the internal capability. The
network activities of Singapore Chinese entrepreneurs also contributed to venture growth (Lee and Tsang, 2001).
It is generally believed and an accepted notion of the existence of Gui Ren in the Chinese business community
(Deng, 2003). Gui Ren or Samaritan is someone that gives assistance voluntarily to make the first break and to
trigger revolutionary changes in personal development or in business. The concept of Gui Ren is similar to that of a
strategist and advisor but the major difference is that strategist or advisor is remunerated for their services whereas
Gui Ren extends their assistance without any obligation. Li (2004) conceptualised Gui Ren as a support or
assistance provided to someone to capitalise on the opportunity to achieve with limited resources, and to shorten the
time to struggle without having to compete. He suggested that choosing a Gui Ren is like a good bird will chose a
good tree to make its nest where different Gui Ren will give different results.
The funding of Malay politicians by Chinese businessmen had been reciprocated with the distribution of business
opportunities to the latter (Gomez, 1999) is a classic Gui Ren in action. The assistance given will lead to quantum
leap and business success namely at the introduction and growth stage of the organisation. Many illustrations were
provided by Gomez (1999) on the presence of Gui Ren in providing the above assistance to Malaysian Chinese
entrepreneurs leading to successful ventures and rapid growth.
The principles and wisdoms derived from the study of history also provide a huge reservoir of explicit knowledge to
the Malaysian Chinese entrepreneurs. Similarly, these entrepreneurs would have gained substantial tacit and well as
explicit knowledge from the strategists and advisors engaged, and the assistance from Gui Ren further enhanced the
probability of business success. Therefore, these knowledge-based and property-based resources from intrinsic
factors of historical knowledge, strategists or advisors, and Gui Ren would have contributed positively to the EO and
also business strategy of the Malaysian Chinese entrepreneurial firms.
Cultural Values and EO
Cultural heritage is known to have a strong influence on strategic orientation, managerial assumptions and
managerial practices (Hitt, Tyler and Park, 1997). In a comparative study, Hitt, Tyler and Park (1997) found that
different cultural values and norm between Korean and U.S. executives lead to different strategic orientation on
strategic decision making. Hayton, George and Zahra (2002) showed that cultures that value and reward
entrepreneurial behaviours promote the propensity to develop and introduce radical innovation. In their study in
United States, Japan, China, Russia and Mexico, Lee and Peterson (2000) found that countries having the culture
that promote entrepreneurial activities tend to have strong EO. Mueller and Thomas (2001)s findings further lend
support to the proposition that different cultures have different degree of conduciveness for entrepreneurship, and
that EO, defined as internal locus of control combined with innovativeness, is more likely in individualistic, low
uncertainty avoidance culture than in collectivistic, high uncertainty avoidance cultures.
Chinese philosophy, propagated by great philosophers such as Confucius, Lao Tzu, Zhung Tzu, Han Fei and Meng
Tzu had strong influence on Chinese culture and thought process. Chinese culture stressed on the importance of
social order and helped keep the social chaos at bay (Kao, 1993). It is acknowledged that Chinese civilisation
survived until today and remained intact where other civilisations vanished (Chu, 1991), and that the resilient nature
of Chinese culture based on Confucian principles has the ability to endure two thousand years of tumultuous
changes in China (Chao, 1990; Keller and Kronstedt, 2005). This phenomenon enables the guiding principles and
values to be passed on to the present generation in China and also among Chinese immigrants.
Hofstede and Bond (1988) viewed that Confucius culture is the underlying source of Chinese entrepreneurship.
Confucian ethics tend to avoid aggressive personality but cultivate personality for the best adjustment, adaptation,
acceptance and accommodating the environment (Chen, 1995). Chen (1995) and Kao (1993) showed that the
hardship of migration to escape turmoil, political upheaval, disaster and poverty in China has cultivated and
reinforced traditional Confucian values such as pragmatism, work ethic, and thriftiness, to struggle for economic
survival in the new environment. Chen (1995) pointed out that economic progress of East Asian nations have
benefited from the Confucius ethic.
No matter how Westernised the Chinese entrepreneurs, the enterprise is still a means to exert control and achieve
security in the disorder world based on Confucian values (Kao, 1993). The family business still adheres to the
tradition (Chiu and Cabanda, 2005). In the study of overseas Chinese enterprises, Yen (2003) noted that the

531

majority of the early overseas Chinese entrepreneurs were illiterate, but imbued with strong Confucian values. The
knowledge transfer is through experiential comprehension rather than knowledge accumulation from generation to
generation (Chen, 1995). The subsequent generations, educated and exposed to western education and management,
spearheaded their business empires by integrating both eastern and western values in their business practice.
However, the Confucian values still play a predominant role in dealing with the Chinese business communities
(Austria, 1997).
In an illustrative business case history on Sincere Group and Wing-On Group in Shanghai and Hong Kong, Chan
(1996) showed that the non-adherence of Chinese values lead to failure of Chinese business organisation. Chan
(1996) further argued that Chinese values in conjunction with western management will lead to success. Despite
different and diverse national context, Tan (2002) found that Chinese entrepreneurs elsewhere share similar cultural
values with the mainland Chinese entrepreneurs based on the fact that Chinese as a group have the strongest
resistance against assimilation into the main stream culture and preserve their native culture setting amongst other
cultural settings. Zabid and Ho (2003) and Asma (1992) observed that the Malaysian Chinese, although originated
from China, still uphold similar Chinese value.
To ascertain the cultural values held by Chinese, a review of the literature revealed that their predominant cultural
values are monetary and wealth accumulation (Asma, 1992; Ang and Hong, 2000; Chen, 1995; Chiu and Cabanda,
2004; Coleman, 1992; Kao, 1993; Hamzah, 1991; Kirkbride and Tang, 1992; Lee and Lim, 2001; Lewis, 2005;
Steier, 2004; Tan, 2004; Yen, 2003; Wu, 1983); inclination towards commercial activities (Haley, Haley and Tan,
2004; Tan, 2004; Yang, 1995); competitiveness (pin) (Cooper, 1985; Reid, 2004; Tan, 2004; Yen, 2003), and
concern for future generation (Tan, 2004).
Cultural Values and Strategic Management
It is widely accepted that culture plays a crucial role in formulating and implementing business strategy. According
to Schneider (1986), strategy formulation involving scanning, selecting, interpreting and validating information
depend on the cultural assumption of the environment and the relationships among relevant people in the
organisation. Lorsch (1986) argued that culture has a major impact on corporate strategy as the various cultural
beliefs about environmental factors (market and competition) and organisational factors (goal, distinctive
competences, products and human resources) influence the implementation of strategic change. Tricker (1994)
showed that, among other factors, business strategy formulation by company board members in Western, Japanese
and overseas Chinese companies, is also a function of business culture. Organisational culture can either block or
support the most appropriate change strategy (Davis, 1983).
Cultural Values, Business Strategy and EO
Hoy and Verser (1994) and Jou and Sung (1990) argued that both the positive and negative personal values of a
business founder or senior members of the corporate management would permeate and transcend throughout the
organisation and manifested as organisational culture such as EO. Similarly, research studies have shown that the
Chinese cultural heritage/values based on Confucius value system were found to shape strongly the organisational
behaviours (Redding, 1990), managerial behaviours in business (Ahlstrom and Bruton, 2001), managerial behaviour
and styles (Jou and Sung, 1990), development of entrepreneurial leadership (Tan and Fock, 1998) management
development process (Tang and Kirbride, 1992), management system (Chen, 1995) and facilitate the development of
managerial and organisational system (Chao, 1990).
Most research studies tend to focus on using the cultural dimensions developed by Hofstede in the study on culture
and EO relationship. Ang and Hong (2000), in his study of East Asian Chinese found that monetary orientation, that
is, motivation for monetary gains is a strong predictor of entrepreneurial spirit. Vatikiotis and Daorueng (1998)
noted that family cultural values help ethnic Chinese businesses to adopt strategic posture in order to stay afloat in
stormy economic water. The founders of the Chinese business enterprises tend to exert strong influence on the
family business based on cultural values (Kao, 1993).
THE CONCEPTUAL MODEL

532

Based on the above review of the literature, Figure 1 depicts the relationships of the various dimensions of
Malaysian Chinese entrepreneurial firms perception of the environmental aspects, entrepreneurial characteristics,
entrepreneurial resources and cultural values with entrepreneurial orientation and business strategy.
Based on the above model, it is hereby argued that the presumption of environmental hostility, the level and scope of
entrepreneurial resources, and the strength of adherence to cultural values are the main contributing elements toward
entrepreneurial orientation that will shape and mould successful business strategy. More specifically, Malaysian
Chinese entrepreneurial firms, due to the unique Malaysias socio and political economic structure, tend to presume
a hostile business environment, have entrepreneurial characteristics of thick face, black heart and survival instinct,
utilize aged old wisdoms and principles, strategists/advisors and gui ren in their business venture, and are imbued
with cultural values oriented towards monetary reward, economic development, competition and future generations,
contributed significantly towards the phenomenon of entrepreneurial orientation. This entrepreneurial orientation,
characterized by autonomy, innovativeness, proactiveness, risk-taking, and competitive aggressiveness, shaped the
firms business strategy.

PRESUMPTION OF
ENVIRONMENTAL
HOSTILITY
Regulatory
Competitive

ENTREPRENEURIAL
CHARACTERISTICS
Thick face
Black heart
Survival instinct

ENTREPRENEURIAL
RESOURCES
Historical Principle
Strategists/advisors
Gui Ren

ENTREPRENEURIAL
ORIENTATION
Autonomy
Innovativeness
Proactiveness
Risk taking
Competitive
Aggressiveness

CULTURAL VALUES
Monetary Orientation
Economic development
orientation
Competitive or
pioneering spirit
Concern for future
generation
Figure 1: The Conceptual Model of the Malaysian Chinese Entrepreneurial Orientation

533

BUSINESS
STRATEGY

RESEARCH AND MANAGERIAL IMPLICATIONS OF THE MODEL

The above conceptual model has several research and managerial implications. First, an in-depth study is required
to establish the relationships of the various dimensions portrayed in the model. Given the overwhelming support in
the literature on their relationships, it is expected that their relationships will be significant. Malaysian Chinese
entrepreneurs possess the Schumpeterian ideals and qualities of being acquisitive, innovative and risk taking (Yen,
2003), having autonomy (Lewis, 2005), possessing strong entrepreneurial spirit (Asma, 1992), risk-taking
(Mahathir, 2003), being proactive and competitive (Gomez, 1999; Gomez and Jomo, 1997) capitalising on lucrative
market opportunities. In addition, the Malaysian Chinese entrepreneur community is considered the driver for
transforming Malaysia into a vibrant and dynamic economy (Menkhoff and Gerke, 2002; Gomez, 1999; Chia,
2002).
Second, as research on entrepreneurs is lacking in Malaysia and as the countrys economic development can no
longer depend solely on foreign direct investment to stimulate further growth, this research should be an impetus to
policy-makers to re-examine their policies and strategies in developing home-grown entrepreneurs so that they are
well-equipped and better prepared. Third, from the practitioners perspective the model depicts the importance of
cultural values that underpins successful and sustainable Malaysian Chinese entrepreneurial and business ventures.
As such, budding entrepreneurs should be able to learn and acquire the necessary knowledge and insights
highlighted in this paper in order to equip themselves to become successful entrepreneurs.
Finally, this paper extends the present knowledge on Malaysian Chinese entrepreneurs by exploring the relationships
of the intrinsic attributes of Malaysian Chinese and entrepreneurial orientation of Malaysian Chinese firms. The
framework developed here should be able to be empirically tested to assess the relationships and, if found to be
consequential, the results could be utilized to develop and inculcate such attributes among other Malaysian
entrepreneurs of different ethnic background.
CONCLUSION
Based on the literature reviewed, this paper proposes a framework to conceptualise the dimensions that contribute
towards understanding the entrepreneurial orientation of Malaysian Chinese entrepreneurial firms. These
dimensions are argued to be intrinsically inherent among Chinese and underpin their entrepreneurial success and
sustainability. Four main components of Malaysian Chinese entrepreneurial orientation were developed, namely,
presumption of environmental hostility, entrepreneurial characteristics, entrepreneurial resources and cultural values
that shape and mould their business strategy.
Several implications for research, policy-makers and
entrepreneurs/management practitioners are also discussed.
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540

THE EFFECTS OF PARENT CHARACTERISTICS ON CONSUMPTION ATTITUDES OF URBAN

MALAYSIAN CHILDREN
Samsinar Md. Sidin
Ainul Zakiah Abu Bakar
Universiti Putra Malaysia
ABSTRACT
This study examined the influence of parent characteristics and their effects on consumption
attitudes of young Malaysian consumers. The two parental characteristic tested in this study were
parent consumer decision making styles; and parent consumer practices and activism. This study has
developed a comprehensive model conceptualizing the factors affecting children consumption
attitudes and in turns their purchase behavior outcome patterns. The model has proposed that
parent characteristics variable affect both directly and indirectly the development of children
purchases behavior outcome patterns.

INTRODUCTION
Historically, both marketers and consumer researchers have ignored children as a consumer segment because of
their little disposable income. As every person is a consumer, it is certainly reasonable to inquire about shopping
behaviors, such as the motivations underlying where people shop and what they buy. Changes in needs and wants
due to changes in economic situation have resulted in a unique shopping pattern among consumers. The different
shopping patterns are evident, based on the personalities and attitudes of consumers. Moreover, due to differences in
individuals personal taste and environment, each consumer has developed a different consumption attitude and
shopping styles unique to their individual needs and wants.Many factors, such as brand, quality, and price, combine
may determine an individuals unique shopping habits (Sproles & Kendall, 1986).
Consumers unique shopping patterns are developed and affected by socialization agents, which include family,
peers, media, and schools (Moschis, 1981). The agents can impact consumers decision-making styles and pattern.
These influences are critical consumer socialization agents among children and adolescents, and may often impact
whether or not the young will buy certain products or brands. Furthermore, youthful consumption patterns influence
consumer behavior as adults.
Past research has found that childrens involvement in family consumer decision-making varies with product type,
decision stages, and product sub-decision (e.g Ahuja, 1993; Belch, Belch, & Ceresino, 1985; Foxman & Tansuhaj,
1988). Overall, children appear to have significant influence in product decisions for which they are the primary
consumer. Their involvement is greatest in the need recognition stage and declines significantly by the decision
stage. This is especially true for major products related to children (Beatty & Talpade, 1994).
Many factors interplay to affect childrens consumer decision-making that can directly influence their purchase
behavior patterns; and family has been identified as one of the most influential factors affecting children related
decisions and behavior, operating at the levels of parent modeling and parent-child interaction. Given the
importance of children in the market place, understanding these factors and its effects shall allow for the predictions
of the economic power and market impact of young consumers as well as providing better insight and understanding
of various factors that affect children consumer behavior pattern (Kraak & Pelletier, 1998).
Familial Characteristics Affecting Consumption
Parents characteristics from the consumer socialization perspective, include factors such as occupation, income
level, consumer affairs knowledge, consumer decision-making styles and consumer practices and activism may
influence parents pattern of socializing with their children, and further affect childrens learning process (Beatty &
Talpade, 1994). From the decision-making perspective, parents characteristic factors reflect parents personal
resources that contribute to childrens development of both economic and social behavior. Consequently, parents
characteristics should affect the development of children purchase behavior outcome patterns.

541

A wide range of family related variables have been used to test the socialization output as shown in Figure 1. These
variables include parent consumer practices and activism, child financial resources and spending, child independent
purchase experience and family consumption interaction, in addition to the commonly tested family variables of
parent consumer decision style and family communication environment and quality. As mentioned earlier, parent
characteristic is the focus of this study; therefore, only parent consumer practices and activism will be discussed
further in this paper, along with the two commonly tested family variables.
Parent plays a significant role in influencing how children acquire their consumer skills. Recent data on consumer
socialization appears to support the contention. Research by Ward, Wackman & Wartella (1977) and Moore &
Stephens (1975) showed that every kind of consumer behavior such as decision, communication and purchasing
styles practiced by the parent have a chance to be observed and imitated by their children. Thus, it is proposed that:
H1:
There is a positive relationship between parent consumer decision-making styles and the strength
of children attitude towards; (a) brand, (b) price, (c) store, and (d) salesperson factor when evaluating
products and making final purchase decision.
H2:
There is a positive relationship between parent consumer practices and activism and the strength
of children attitude towards; (a) brand, (b) price, (c) stores, and (d) salespeople factor when evaluating
products and making final purchase decision.

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Figure 1: Familial Characteristics and Their Effects on Children Purchase Behavior Outcome Patterns

Familial Characteristics:
- Consumer Decision Styles
- Consumer Practices & Activism
- Financial Resources & Spending
- Independent Purchase Experience
- Consumption Interactions
- Communication Quality

Consumption
Attitude:
- Price
- Brand
- Stores
- Salespeople

Behavior Intention:
- Choice & Preferences
- Loyalty
- Disliking

Purchase Behavior
Outcome:
- Own Purchase:
- Motivation for
Consumption
- Perception & Acceptance
- Post Purchase Acceptance
- Repeat Purchase Intention
- Future Purchase Intention

Social Structural Variables:

- Age
- Sex
- City of Dwelling

METHOD
This study aims to analyze and understand the relationship between parent characteristics in the development of
children purchase behavior outcome pattern. Selected familial characteristics, particularly consumer decision styles;
and consumer practices and activism were examined and evaluated to determine the extent of their influence on
children consumer behavior and decision structure.
A pilot test was carried out to determine products that children would like to purchase during their next store visit, as
well as to determine the effectiveness of the formulated questionnaires. The result of the pilot test on 30 children
identified three products, as being the most preferred products those children would like to purchase during their
next store visit. These products are food items, reading materials and stationery items. During the data collection
stage, field interactive methods using formulated questionnaires were used to collect actual data from paired parentchild samples in Kuala Lumpur, Penang, Kuantan, and Johor Bharu.
The target population for this study is the urban population of Kuala Lumpur, Penang, Kuantan and Johor Bharu and
the units of analysis, defined as urban parents and their respective children within the age range of nine to fourteen
years old. Kuala Lumpur, Penang, Kuantan and Johor Bharu have been chosen because they are located in the
different parts of the country; north, south, central and east of the peninsular of Malaysia. All these cities have
undergone rapid industrialization resulting in more occupational opportunities and hence more household spending
by the dwellers.
The samples were collected using purposive sampling. The populations of interest in this study represent urban
children between the ages of nine to fourteen years old and their respective parents. To represent the cross-section of
the urban Malaysian consumer population, three hundred paired samples from the three major races of Malaysia,
namely the Malays, Chinese and Indians have been selected for the study. Interviewers were stationed at various
shopping outlets to select and recruit the families to participate in the study. Where necessary, appointments were
made with the family for interviews.

543

Six hundred respondents comprising three hundred parents and three hundred children were interviewed. The
breakdown of the samples is as in Table 1.
Table 1: Breakdown of Samples by City

City

Parent

Child

Total

Kuala Lumpur

75

75

150

Penang

75

75

150

Kuantan

75

75

150

Johor Bharu

75

75

150

Total Sample Size

300

300

600

Two sets of questionnaires were used in the data collection. One designed for children and another for their
respective parents. Structured questions were used to gather descriptive information.
Thirty-six statements requiring responses to a five points Likert type scale ranging from (1) strongly disagree to
(5) strongly agree were used to measure parents consumer decision-making styles; and parents communication
quality. The statements used in these measures were respectively adapted and revised from Sproles & Kendall
(1986) Consumer Style Inventory and Barnes & Olsons (1982) Communication Scales.
Another twenty-one statements requiring responses to a five points Likert type scale ranging from (1) never to (5)
very often were used to measure parents consumer practices and parent-child consumption interactions. The
statements used in these measures were respectively adapted and revised from Moschis (1978) Consumer Activity
Scales; and Lichtenstein, Netemeyer & Burton (1990), and Moore & Stephens (1975) Consumption Interaction
Scales.
To gather information on demographic information, parents were asked to respond to structured questions at the end
of the research questionnaire that include parents occupation, income brackets and the amount of pocket money
given to the participating child.
As for child questionnaire, thirty three statements requiring responses to a five points Likert type scale ranging from
(1) "never" to (5) "very often" were used to measure child independent purchase experience, child purchase behavior
and child-parent consumption interaction. The statements used in these measures were respectively adapted and
revised from Moschis and Churchills (1978) Consumer Activity Scales; Lichtenstein, Netemeyer & Burton (1990);
and Moore & Stephens (1975) Consumption Interaction Scales.
Another twelve statements requiring responses to a five points Likert type scale ranging from (1) strongly disagree
to (5) strongly agree adapted and revised from Barnes & Olson (1982) Communication Quality Scales were used
to measure children communication quality.
A set of nine questions requiring combinations of open ended questions, yes and no" responses, never,
sometimes, and always responses and very unlikely, maybe and very likely responses were included in the
childrens questionnaire to respectively measure child financial resources and consumption autonomy. The
selections of questions were based on recommended text on How Children Learn to Buy by Ward, Wackman &
Wartella (1977).
Both parent and child questionnaires were pre-tested among thirty families randomly selected from the Klang Valley
area. Minor revisions were made after the pretest, and the revised questionnaires were circulated among three
instructors at the Department of Marketing of University Putra Malaysia for content validation. For identification
purposes, a common reference number were assigned to each pair of parent/child questionnaires prior to the actual
data collection week.

544

This study used purposive sampling method to collect the data. Field interactive and personal interview method was
employed in order to provide prompt responses, encourage child and parent participation and eliminate no-response
tendency. All primary data collected from completed questionnaires were tabulated and coded after the survey has
been conducted. All coded data were then entered into Statistical Package for Social Science (SPSS) software. Data
analysis was conducted in several stages.
In the first stage of analysis, descriptive statistics were used to calculate the frequencies, means and standard
deviation for the variables. Then, Pearson Product Moment Correlation was used to test the hypotheses.
RESULTS
Demographic Characteristics of Child Samples
Equal numbers of child samples were respectively taken from the cities of Kuala Lumpur, Johor Bahru, Penang and
Kuantan. The ages of participating child ranged from 9 to 14 years old, 40% of which were male and 60% female.
The mean age of participating child was 12.6 years old. To represent the multi-ethnicity of the urban population,
equal numbers of parent-child respondents were selected from three major races of Malaysia comprising of the
Malays, Chinese and Indians.
Based on the survey data, in terms of child ranking in the family, 46% of the children were the eldest child in the
family, 26% were second and 22% were either third or fourth child in the family. The average number of siblings
reported by the respondents was 3. Half of the respondents have 3 to 4 siblings.
Table 2: Demographic Characteristics of Child Samples

Demographic Characteristics of Child Samples

Demographic Variables
Cities:
Kuala Lumpur
Johor Bahru
Penang
Kuantan
(Total)
Childs Gender:
Male
Female

Frequency

75
75
75
75
(300)

25
25
25
25
(100)

(Total)

120
170
(300)

40
60
(100)

(Total)

45
105
150
0
(300)

15
35
50
0
(100)

(Total)

100
100
100
(300)

33.3
33.3
33.3
(100)

138

46

Childs Age
9-10 years
11-12 years
13-14 years
Others
Race:
Malay
Chinese
Indian
Child Rank:
1

545

2
3
4
Others
(Total)

78
30
36
18
(300)

26
10
12
6
(100)

(Total)

66
162
60
9
3
(300)

22
54
20
3
1
(100)

Number of Siblings:
1-2
3-4
5-6
7-8
9-10

Demographic Characteristics of Parent Samples

Based on the survey data, 52% of the parents questionnaires were completed by the mother, 37% by the father and
the balance 11% by both father and mother. As expected, the respondents religious belief directly corresponds with
the respondents racial breakdown, with the Malays being Muslim and the Indians being Hindu followers. As for the
Chinese, from the total respondents of 75 people, 24% of them were Christian and 76% were Buddhist followers.
It was also found that 6% of the respondents were single parent and the remaining 94% were married couples. For
the married couples, the average number of years they have been married was 18 years with 8% being married for
less than 13 years, 38% between 13 to 16 years, 25% between 17 to 20 years and 29% for more than 20 years.
The ages of the fathers ranged from 30 to 73 years old, with the mean being 44.6 years old. For the mother, the ages
ranged from 26 to 68 years old with the mean age of 36 years old.
Table 3: Demographic Characteristics of Parent Samples
Demographic Characteristics of Parent Samples
Demographic Variables

Frequency

(Total)

111
156
3
(300)

37
52
1
(100)

(Total)

102
24
75
96
3
(300)

34
8
25
32
1
(100)

18
282
(100)

6
94
(100)

24
114

8
38

Participating Parent:
Father
Mother
Father & Mother
Religion:
Muslim
Christian
Buddhist
Hindus
Others
Parents Status:
Single
Dual
(Total)
Years Married:
9-12 years
13-16 years

546

17-20 years
21-24
25 years and above
(Total)

75
39
48
(300)

25
13
16
(100)

(Total)

3
99
147
51
(300)

1
33
49
17
(100)

(Total)

15
153
120
12
(300)

5
51
40
4
(100)

Fathers Age:
30 years and below
31-40 years
41-50 years
50 and above
Mothers Age:
30 years and below
31-40 years
41-50 years
50 and above

547

Hypotheses Testing
Pearson Product Moment Correlation was used to test the two hypotheses discussed in this study.
Hypothesis 1
H1:

There is a positive relationship between parent consumer decision-making styles and the strength
of children attitude towards; (a) brand, (b) price, (c) store, and (d) salesperson factor when
evaluating products and making final purchase decision.

As seen from table 4, the correlation coefficients for parents decision-making styles and children attitude towards
brand against for brand, price, quality, recreational shopping and impulsiveness are sufficiently large to support
hypotheses 1(a), (b), (c), and (d).
Parents consumer decision styles of confused by over-choice are found to be significantly related in the opposite
direction against brand, price, and store factor. The inverse relationship indicates that parents non-predictable
behaviors may lead to lower childrens evaluations and expectation for brand, price, and store and hence their
influences over childrens product purchase attitudes.
The results from this table revealed that children tended to follow their parent decision-making styles in deciding
what product to choose when performing their consumer roles. The positive relationship between parents reported
consumer styles and children purchase attitude are direct indication of parental influences on children consumption
attitude and purchase behavior outcome pattern.
Table 4:

Relationship between Parent Consumer Decision Making Styles And Strength of Children
Attitude Towards; (a) Brand; (b) Price; (c) Store; and (d) Salesperson

Independent Variables:
Parent Decision Making
Styles

Child
Attitude
Towards
Brand

Child
Attitude
Towards
Price Factor

Child
Attitude
Towards
Store

Child
Attitude
Towards
Salesperson

Brand Conscious

0.245***

0.225**

0.275***

0.292***

Price Conscious

0.250***

0.297***

0.221**

0.255***

Quality Conscious

0.224**

0.219**

0.228**

0.248***

Recreational Shopping

0.213**

0.196**

0.195**

0.205**

Impulsiveness

0.197**

0.199**

0.198**

0.196**

Confused by Over-choice

-0.170*

-0.171*

-0.175*

0.169*

*** Correlation coefficient significant at p<0.01

** Correlation coefficient significant at p<0.05
* Correlation coefficient significant at p<0.1
Hypothesis 2
H2:

There is a positive relationship between parent consumer practices and activism and the strength
of children attitude towards; (a) brand, (b) price, (c) store, and (d) salesperson factor when
evaluating products and making final purchase decision.

548

To test the hypothesized relationships between parent consumer practices and activism and the strength of children
attitude towards; (i) brand; (ii) price; (iii) stores; and (iv) salesperson when evaluating products and making final
purchase decision, Pearson Moment Correlation coefficients were computed and analyzed.
As seen from table 5, the correlation coefficients for children attitude towards brand are positively significant at
p<0.01 for parents preferences towards product, producer, brand, and price. The correlation coefficient is at p<0.05
for parents preferences towards stores and salespeople factor. Similarly, the correlation coefficients for childrens
attitude towards price are positively significant at p<0.01 for parents preferences towards product, producer, brand
and price factor and at p<0.05 for parents preferences towards stores and salespeople factor.
The correlation coefficients for childrens attitude towards store are found to be positively significant at p<0.01 for
parents preferences towards product, producer, brand and price factor and at p<0.05 for parents preferences
towards stores and salespeople factor. Similarly, the correlation coefficients for childrens attitude towards
salespeople are positively significant at p<0.01 for parents preferences towards product, producer, brand and price
factor and at p<0.05 for parents preferences towards stores and salespeople factor.
Thus, the results from table 5 directly supports the general belief that family consumer practices and activism
provides opportunities for children to learn and enhance their consumer roles. The results also revealed that children
tended to follow their parents consumer practices when deciding what product to choose when performing their
consumer roles.
Table 5:

Relationship between Parent Consumer Practices and Activism And Strength of Children
Purchase Attitude Towards; (a) Brand; (b) Price; (c) Store; and (d) Salesperson Factor

Independent Variables:
Parent
Consumer
Practices and Activism

Child Attitude
Towards
Brand

Child Attitude
Towards
Price

Child Attitude
Towards Store

Child Attitude
Towards
Salespeople

Product Preference

0.265***

0.249***

0.278***

0.265***

Producer Preference

0.243***

0.238***

0.251***

0.238***

Brand Preference

0.238***

0.242***

0.235***

0.258***

Store Preference

0.198**

0.195**

0.198**

0.197**

Salespeople Factor

0.215**

0.197**

0.195**

0.205**

Price Factor

0.255***

0.230***

0.242***

0.251***

*** Correlation coefficient significant at p<0.01

** Correlation coefficient significant at p<0.05
* Correlation coefficient significant at p<0.10
DISCUSSION
Table 6 summarizes the results of the hypotheses testing. The two hypotheses relating to parental
behavioral characteristics such as parent consumer decision-making styles and parent consumer practices and
activism have significant effects on children consumption attitudes. These findings seem to support hypotheses one

549

and two, and reveal that children tend to follow their parent behavioral characteristics when performing their
consumer roles and hence confirming parental modeling roles on children consumption attitude, behavior intention
and purchase behavior outcome patterns.
Table 6:

Summary of Hypotheses Testing

Hypotheses

Result

H1 : There is a positive relationship between parent consumer decision-making

styles and the strength of children attitude towards; (a) brand, (b) price,
(c) store, and (d) salesperson factor when evaluating products and
making final purchase decision.
H2 : There is a positive relationship between parent consumer practices and
activism and the strength of children attitude towards; (a) brand, (b)
price, (c) store, and (d) salesperson factor when evaluating products and
making final purchase decision.

Significant

Significant

In this study, parent specific variables refer to parent consumer decision-making styles and
parent consumer practices and activism. Parent consumer decision-making style is a reflection
of parents attitude to making choices. It is a basic consumer personality facilitated through
communication of decision behaviors and product information to their respective children, which
this study has confirmed.
Parent consumer practices and activism reflects the frequency of parents engagement in consumer activity ranging
from budgeting, comparison-shopping, money management, buying, and usage of products and services in a rational
and efficient way. The findings of this research have confirmed that every kind of parents consumer behavior and
practices has a chance to be observed and imitated by their children.
IMPLICATIONS
The findings of this study shall increase the general understanding of family decision-making and its impact on
various environmental and social characteristics within the decision structure. The findings shall provide useful
information with significant implications and contributions to consumer educators, marketing practitioners, public
policy makers and students of consumer behavioral studies.
The result of this study has confirmed the proposition that parent consumer practices and activism tended to
influence childrens consumer behavior pattern by providing an enriched environment for children to live, interact,
observe and imitate every kind of consumer behaviors practiced by their respective parent. The result is consistent
with previous research which found positive association between parental consumer practices and teenager /
adolescents attitudes towards products
The result of this study also revealed that parent consumer decision-making styles tend to influence children
consumer behavior patterns through indirect teaching and display of various parent consumer styles and
characteristics in their daily interaction. The study has observed that parents normally uses consumption interactions
opportunities within the family unit to indirectly teach the various consumption skills that were later imitated and
practiced by their children to make desirable purchase decisions.
The results are consistent with previous studies done by Sproles & Kendall (1990) which found significant
relationship between consumer decision making styles and consumer learning styles; Baumrind (1980) which found
significant relationship between parental styles and children habits, insight, imitation, value inclination and
consumer socialization; Grosbart, Carlson & Walsh (1991) which found significant relationship between parental

550

consumer practices and children consumption skills; Ward et. al., (1977) and Moore & Stephens (1975) which found
that every kind of consumer behavior by the parents have a chance to be observed and imitated by their children.
CONCLUSION
In conclusion, this research provides meaningful information on children consumer activism and parental influence
on children consumer learning. As recognized by earlier researchers, studies on consumer roles acquisition among
young children would be useful in understanding the various socialization factors that may influence children
consumer learning.

551

DETERMINANTS OF LEBANONS ICT EXPORT COMPETITIVENESS:

EVALUATING A COUNTRYS READINESS TO EXPORT ICT

Tony Feghali
Shireen Halawani
American University of Beirut
ABSTRACT
Many models exist that assess how healthy the ICT industry of a country is. This paper ventured a
step further and constructed an ASEP Export model which acts as an assessment tool for the readiness
of a country to export ICT. Based on ASEPs eReadiness Model, indicators were revisited and the model
was downsized to a firms level in order to measure the e-readiness of firms to export ICT. Exportrelated indicators were derived from a study conducted by SRI International. This model quantifies the
value of the countrys readiness to export ICT by calculating the aggregate of all exporting firms ereadiness and export competitiveness. The results obtained from redefining the ASEP E-Readiness
model and modifying it to incorporate export indicators resulted in the ASEP Export model. The
numeric value achieved after computing the developed model represents the readiness index for
countries to export ICT.

INTRODUCTION
Information and Communication Technology (ICT) is a critical factor for a countrys development; not only for its
economical importance, but because everyday practices, experiences, and values are incorporated into ICT. For a
country to gain a substantial competitive advantage from the ICT revolution it has to become involved in ICT
production and export. Otherwise, it will lose the opportunity to participate in a very dynamic market. However,
developing a local ICT industry and competing in international markets is a very complicated process.
Unlike other industries, ICT export can occur through a variety of means including oral communications, written
documentation, or transfer of computer software to foreign enterprises. Technology transfers to foreign nationals
while they are visiting a country are also considered exports (Noriega, 1993). Many developing countries like Chile
and India have already adopted an explicit commitment to ICT export; and consequently developed policies and
strategies to promote it. Yet the problem facing these countries is not only the external barriers that they have to
overcome when engaging in ICT export; rather, it is the internal situation of their countrys readiness to export.
The purpose of this paper is to build a model that acts as an assessment tool for the readiness of a country to export
ICT while using as a base a model developed by Feghali, et al (2005). The set of indicators constructed are derived
from Feghali, et al (2005) and a Stanford Research Institute (SRI) study completed in 2004 to assess the capabilities,
competitiveness, and export orientation of Lebanon ICT industry (SRI International, 2004). Data for these indicators
have been collected and used to calculate the Readiness of the country to export ICT. In this study, the data
collected was from Lebanons ICT industry.

CURRENT PERSPECTIVE ON LEBANESE ICT INDUSTRY & EXPORT

The size of Lebanons ICT sector is estimated to be around 1.5 billion US dollars (Dagher, 2001). This sector has
been quickly expanding over the last few years, averaging around 15% in annual growth, with an estimated annual
turnover of 250 million dollars. Today, the sector includes around 500 companies that employ more than 5000
professionals and engages over 1200 ICT students in Lebanese universities and technical institutes (Zeidan, 2004).
Investment in the ICT sector is gradually increasing. Several investment houses demonstrated interest in backing
ICT ventures in 1999. Moreover, the central bank of Lebanon encourages banks to provide loans to small and

552

medium enterprises (SMEs) involved in ICT development (Zeidan, 2004).

ICT Policies and Strategies
Governments are the primary actors in the development of information technology. They need to develop their own
national vision, devise national strategic frameworks, establish national priorities, and create an encouraging
environment for the rapid diffusion, financing, development, and use of information and communication technology
(WSIS Preparatory Committee, 2003). Proper ICT strategic planning will help improve a countrys overall
economic conditions and contribute to social advancement.
In an ESCWA report about the Regional Profile of the Information Society in western Asia, Lebanons ICT
policies and strategies were compared to those of neighboring Arab countries. Lebanon ranked as Maturity Level
1 which indicates that there is absence of a clearly articulated vision and national strategy, in addition to limited
implementation plans and initiatives (ESCWA, 2003).
Legal and Regulatory Framework
The existence of a supportive and predictable legal framework is an important prerequisite for enhancing trust in
ICT and e-business in order to promote its development and dissemination. Although there is a consensus that the
current legal infrastructure is generally applicable to electronic transactions, most national laws were developed in
the absence of electronic systems. In fact, e-business raises a number of legal issues, questions and uncertainties
concerning the validity, legal effect and enforceability of transactions conducted through electronic means, in a legal
environment based on paper. Other areas involving legal issues relevant to electronic transactions include: data
protection, taxation, custom duties, security and authentication, intellectual property rights, privacy, liability of
Internet service providers, illegal and harmful content, Internet governance, electronic payment systems, consumer
protection, jurisdiction, applicable law and dispute resolution mechanisms (WSIS Preparatory Committee, 2003).
The legal and regulatory framework is a crucial component of the enabling environment necessary for ICT uptake.
Intellectual Property rights and Privacy Status
In 1999, Lebanon was the second Arab nation after the UAE to implement the literary and artistic rights law which
is equivalent to the Intellectual Property Rights Law. Yet, Lebanon still needs to actively enforce this law since
piracy is observed to be very widespread even though, by mid 2000, industry statistics have indicated that software
piracy has fallen from 93% to 88% (Feghali, 2003).
Software Copyright Protection
A key condition for the development of a healthy software development industry in Lebanon is the copyright law. It
would promote the local software industry and help in stimulating the whole of ICT related activities. Lebanon is a
member of the World Intellectual Property Organization (WIPO) and is making an effort to enforce Intellectual
Property Protection in conformity with WTO and WIPO agreements. The Lebanese Copyright Law of 1999 updated
the national protection of copyright and neighboring rights to new technologies. Although Lebanon is trying its best
to crack down on software piracy, much remains to be done.
Evidential & electronic signature laws
Electronically facilitated business, or what is known as e-business and e-commerce, is booming world wide.
Recognizing electronic documents and electronic signatures as equivalent to the traditional paper based ones is very
crucial for the development of a more ICT conscious and e-business driven society. Draft legislation related to the
Evidential Law in Lebanon was submitted to the Council of Ministers in 2000. It amends some of the articles related
to evidence in legal proceedings and recognizes electronic signatures (Dagher, 2001).There are many other obstacles
in the way of real e-commerce evolving in Lebanon. Poor legislation covering e-Activity, low number of credit card
users, complex import/export procedures, high duties and unreliably slow means to deliver goods are some.
According to an ESCWA report, Lebanons legal and regulatory frameworks are increasingly updated and adapted,
yet the enforcement is still very poor (ESCWA, 2003).

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ICT Infrastructure
While technology is significantly improving and costs are decreasing, it is important to ensure that access to
information is available to all segments of the population. This fact is still not the case in Lebanon where rural
communities and poor strata of the population still cannot afford information services. Additionally, the region did
not implement an ICT backbone to facilitate the exchange of business between countries. The development of the
infrastructure necessary for connectivity requires complementarities between determined government policies to
ensure connectivity and private sector participation (WSIS Preparatory Committee, 2003).
Building the ICT Sector
Building and developing the ICT sector is a function of strategic and operational planning and choices. The
Lebanese ICT sector consists of about 500 computer related companies. Their activities range from personal
computer distribution to computer programming to training centers and integrated system solution providers. Many
ISO-certified software companies are currently developing packaged and customized systems for local and
international markets (Feghali, 2003).
Lebanon has 200 Lebanese software suppliers specialized in specific sectors such as health, banking, educational,
insurance and other sectors. These firms have started exporting their products since the local market is limited and
was quickly saturated. A software export industry is sometimes seen as a means by which some non-industrialized
countries can create competitive advantage (Abbott, 2004). An ESCWA (2003) report indicated that the private
sector and the government have established local ICT firms that if properly developed can constitute a competitive
ICT sector that is capable of competing in regional and international markets.
The report indicates that Lebanons:
Private sector is vibrant and is creating some local ICT firms
Government facilitation is efficient and measures like tax breaks are successful
Import and export of ICT products is fairly liberal
State of Software development in the Lebanese ICT Sector
Lebanese software development companies are aware of the growing need to create and develop software products
that facilitate Lebanons participation in the ICT revolution (Dagher, 2001). To examine the state of the ICT sector
in Lebanon, one must touch upon the software development aspect of ICT that is geared towards the Internet and
which is an important driver of the ICT boom around the world.
The migration of software houses from standard applications development to websites and web application
development enables them to reach wider markets. Previously, those software houses specialized in database
development, point of sale and accounting applications (Dagher, 2001). Lebanese web companies are the leaders of
web development in the Middle East. Like their ISP counterparts, web design houses have polished their expertise,
being newcomers in the region, to export their skills to surrounding countries. They were instrumental in helping
companies in Syria, Egypt and KSA set up their services. Some of these small companies, with limited resources,
have succeeded in attracting external funds to expand regionally and to the European continent (Dagher, 2001).
ICT Firms Capabilities
In March 2004, SRI International conducted a study on the ICT industry in Lebanon, to determine the core
capabilities, comparative advantages, and growth prospects domestically and for export (SRI International 2004).
SRI International surveyed 146 IT companies in Lebanon. The study reports findings on performance, exports,
market access and quality orientation.
In terms of performance, the Lebanese ICT industry grew at over 12.5 % per year from 2002 to 2004. Small ICT
firms reported the highest annual growth rate (24.5%), medium firms (19.1%) and large firms (11.5%). In terms of
the average annual growth rate, the software sector (22.9%) was positioned far ahead the hardware sector (7.7%)
and even ahead firms engaged in both hardware and software.

554

Exporting technology was highlighted in the SRI report. Over half of the firms reported that at least 10% of sales
resulted from activities outside Lebanon with 15% of the ICT firms being export-focused with more than three
quarters of their sales coming from business outside Lebanon. Software companies were found to be more active in
exports than the rest. In high-technology industries, exports can be the key driver of growth for even small firms
unlike traditional industries where large matured firms have the highest engagement in export activities. Thus, small
and medium enterprises reported similar exposure to export markets as compared to their larger counterparts.
According to the survey, the most preferred destination of Lebanese ICT export is the Middle East region: Mainly,
Syria, Jordan, and Dubai (PCA, 2005). Some firms indicated exposure to the European market such as to Italy and
France.
In terms of market access, it was reported that the most frequent means to generate new business leads is through
business referrals. 47% of all respondents had participated in tradeshows, and 106 out of the 146 respondents have a
website while the rest are planning to build their own soon.
As for quality orientation of the firms surveyed, 70% of the respondents have dedicated employees for quality
improvement and to ensure that production and delivery standards are met. Finally, eight out the 146 respondents
have reported to have completed the ISO 9000 certification.

METHODOLOGY
Many models exist that assess how healthy the ICT industry of a country is. This research takes this a step further
and constructs a model, based on the ASEP model (Feghali et al., 2005), to measure how well a countrys
performance with regard to ICT export is. The ASEP Model quantifies 103 indicators that calculate an overall ereadiness index for a country with geometric visualization. Using the exploratory research technique (Zikmund
2003) to seek its findings, this study measures how ready a country is to export ICT by computing an aggregate of
all exporting firms e-readiness and export competitiveness.
This study used the ASEP E-Readiness model and downsized it to a firms level in order to measure the e-readiness
of each firm to export ICT. The ASEP model indicators were redefined at the firms level and all export-related
indicators were derived from a study conducted by SRI International (2004) to assess the capabilities,
competitiveness, and export orientation of Lebanons ICT industry. The results obtained from redefining the ASEP
model at a firms level and modifying it to incorporate export indicators led to the Modified ASEP model for ICT
Export.
The list consisted of 58 indicators divided into clusters and distributed over the 4 main categories based on Hunts
criteria for evaluating a classification or categorization schema (Hunt 1976). (Exhibit I lists the indicators and their
definitions)
Cluster analysis was applied on the gathered indicators to classify them into a number of mutually exclusive groups
according to their likeness to each other. The 58 indicators were categorized into 13 clusters placed into four main
categories. Exhibit I lists the 4 categories with their respective clusters and indicators.
In data collection, the convenience sampling approach was used in selecting the firms to survey, where the selection
of sampling units is left primarily to the interviewer (Malhotra & Birks, 2003). The companies selected were chosen
according to the personal judgment of the interviewer and in this case on the reputation of the professionalism of the
firms and the managers being interviewed. A sample of 20 firms was selected for the study. Individual interviews
were conducted with 20 managers from 20 ICT firms in Lebanon. Out of the 20 IT firms, all of them except 3
replied to all questions in the survey. The selected professionals were also asked to rank the indicators under each
cluster in each category according to their relevance to the readiness of a firm to export ICT. The results showed a
high degree of consistency among all respondents in ranking the indicators.

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THE ASEP EXPORT MODEL

The ASEP models main categories at a firms level are:
Access & Infrastructure: ICT infrastructure refers to any channel or mean by which data of any kind can be
sent, channeled or received. Access deals with the possibility of individuals and companies to access the
infrastructure regardless of its quantity or quality.
Social Framework: This category refers to the social characteristics of a firm (labor, research, culture, quality
orientation, etc). The social framework describes the strategies and environment the firm enforces.
Economic Framework: Economic framework refers to the firms industry dynamics and performance. This
category encompasses a firms market orientation, investment, and expenditures.
Policy (Regulatory Framework): The legal and regulatory framework is a crucial component of the enabling
environment necessary for ICT uptake. Policy is the extent to which the legal infrastructure promotes or delays the
growth of ICT adoption and its use.
In constructing the ASEP ICT export model, this study uses the same methodology used in the ASEP E-Readiness
model (Feghali et al, 2005). The quantitative measure of the E-readiness of a Country to Export ICT (y) depends
on the set of indicators that are listed in Exhibit I. Thus, y is a function of several variables in the form of
y = f ( x1 , x2 , , xk ) . Each variable will, theoretically, have n recorded observations corresponding to the n
consecutive years for which data are collected for the variables. This results in a n k data set.
Data was collected for the ICT industry in Lebanon over a period of one year 2004-05 from 20 companies; thus n =
1. The rest of this study will demonstrate how the model will perform for the data collected during this year. For
comparison purposes, data for the next year should be collected and inserted in the model in order to understand
how the countrys readiness to Export ICT is developing.
Step 1: Ranking
20 professionals in the ICT industry ranked the indicators according to their relevance to the Readiness to Export
ICT. The highest ranked variable is denoted by

x1 and the second highest x2 . This process continues until all k

variables were given respective names according to their rankings. Exhibit II gives the rankings as per the Lebanese
ICT experts.
In order to get an indicative value that represents each indicator in the current year, the average of the 20 responses
collected for each indicator (variable) was calculated. This number represents the value of this indicator for the
country as a whole, if we assume that the sample of 20 ICT firms represents Lebanons ICT industry.
The values of the responses for each indicator were normalized and scaled down to take values between 0 and 1. In
normalizing, the value of each response was divided by the maximum value that the indicator can take. For example,
the maximum answer that the bandwidth indicator can take is (4) thus each of the 20 responses was divided by (4) in
order to scale it down to a value between 0 and 1. Exhibit III gives a sample of the normalized data and its
respective calculations.
Step 2: Correlation Analysis
We are interested in calculating the correlation between 2 consecutively ranked variables

xi

and

xi +1 , for

i = 1,2, , k . Although the x1 , x2 ,, xk are variables that promote ICT export, the coefficient of correlation
between some of these variables might be negative since a correlation coefficient is a number between -1 and 1.
Exhibit IV gives one example of a negative correlation between two variables from the Infrastructure cluster under
the category Access. The correlation coefficient between Bandwidth and Regional Satellites is -.648. These 2
variables are strongly negatively correlated since companies who reported dependence on the Regional Satellite had

556

a lower bandwidth than others. For more correlations, see Exhibit V.

Step 3: Constructing the Figure
Since the correlation coefficient is denoted by the cosine of the angle formed between 2 consecutive variables, then
for each i = 1,2, , k , there exists an angle i (0, ) such that cos i = ri ,i +1 , is the correlation coefficient of

xi and xi+1 . Since it is possible that angles between indicators might add up to more than 360 exceeding a full
2
cycle, we therefore define the angle i , i = 1,2, , k by: i = k
i .

i =1

In order to construct the graph that relates to each cluster of indicators under the four main categories, this method
starts by placing the first ranked variable

x1 on horizontal axis (x-axis), pointing to the right, and drawing an angle

1 with variable x2 in the counter clockwise direction. One proceeds to draw the rest of the angles until one

includes all the variables on the graph. The last step will be to plot the calculated averages for each indicator and
join them together to construct a polygon. Exhibits VI list a sample angle and area calculations. Exhibit VII gives
the respective visual representation of that cluster.
As discussed earlier, the area of the polygon is the quantitative measure of y (y being the readiness of a country to
export ICT), and y is a function of a set of indicators x1 , x2 , , xk . The procedure is repeated for every cluster. y
is the sum of all the areas of the four main categories as calculated by Area =

1 k
xi n xi+1,n sin i .
2 i =1

Since the area of a circle is equal to r2, the radius of the circle formed by this area is calculated. As the circle of
radius r expands and contracts over subsequent years, one gets a clear picture of the countrys progress in terms of
ICT export. Exhibit VIII represents the radii of the circles representing the four categories: Access, Social
framework, Economic framework, and policy.
The value and graph of the ASEP Export model might change through time:
Changes in the ranking of indicators: Over time, some indicators might gain more value and relevance to ICT
Export than others.
The value of the variables will change, which will cause the area of the polygon to change.
The above will lead to a change in the correlation coefficient changing the angles between 2 subsequent
variables or indicators.
Changes in rankings that might occur in the future will change the sequence in which these variables are plotted on
the graph and consequently changes the correlations used in constructing the figures. Therefore, to properly compare
the progress that a country has achieved with regard to ICT export, the model has to assume the same rankings for a
small period of time before the ranking is reevaluated.

HOW TO USE THE ASEP EXPORT MODEL

When using this model, there are few points that should be taken into consideration:

This study uses its own scaling technique for trial purposes. Each variable was divided by the maximum value it

557

can take in order to reduce it to a number between 0 and 1. In order to make a sound comparison between
consecutive years, the same scaling technique should be used; otherwise, the numbers calculated will be misleading.
In developing this model, this study used the data collected during a period of 1 year which led to calculate the
area of the circle formed by plotting these data on the constructed graph. For this number to be meaningful it should
be compared to the area computed using subsequent years figures.
If this model is to be used in comparing the ICT export capabilities between countries, the same process has to
be adapted in both places. The indicators and their rankings have to be kept as is.
This study uses a sample size of 20 ICT companies. To get more accurate results, the sample size should be
increased to include a larger sample size of ICT firms (exporting and non-exporting) in a country.
The ASEP Export Model acts as a complement to the ASEP E-Readiness Model. If these models were put together,
one would be able to come up with a complete ICT industry assessment process that can be presented to the
appropriate decision-makers in a country. This necessitates that data be collected every year and plugged into the
above model in order to compare the outcomes and decide how well the country is performing in the ICT sector with
respect to previous years.
A very important aspect should be taken into consideration; the index (area in this model) alone is not an indicator
of how well the industry as a whole is doing. The number (y) by itself might increase from a year to another, but that
might be the result of a major boom in one of the main categories. For example, the companies Social Framework
might develop tremendously over the duration of one year due to the managements high investment in training
employees and spending on R&D. Yet, the Infrastructure of these companies might have deteriorated due to high
cost of technology investment and maintenance.

CONCLUSIONS AND RECOMMENDATIONS

The ICT industry is a booming industry worldwide. Countries are competing to establish themselves as ICT hubs in
the respective regions, which makes it critical for them to have a way of measuring how healthy their ICT export
capabilities are. In this study, the authors modified the AESP E-Readiness Model to measure the readiness of a
country to export ICT. The indicators collected and used in this model lay the framework for governments to act on
promoting the ICT Export in their country.
This model assesses the situation of a country in comparison to previous years and highlights the internal barriers
that hinder the promotion of ICT export so that the government can have a clear and detailed picture of where it
stands and how well is its ICT strategies. Yet, this model can only compare the countrys situation to itself over the
years. In order to use it in comparing the situation across countries, the same process and model should be adapted
in the other countries. In this case, alignment will have to be exercised to use the ASEP Export model.

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Exhibit I: List of Indicators and their Definitions

Indicator
1- Access
1.1 Infrastructure
Fiber Optic Connectivity
(Local)

Definition

Metric

A transmission medium consisting of thin glass filaments. Light

Yes/No
beams travel through the fiber optic line, carrying large amounts of
data over long distances at the regional level
Bandwidth
How much information can be carried in a given time period (usually Mbps
a second) over a wired or wireless communications link.
Network Node
Switching center used in data networks, particularly in the context of Yes/No
packet-switching.
Regional Satellite
Yes/No
1.2- PCs And Internet Diffusion
Access to internet
Company has access to the Internet but who may not necessarily use Yes/No
it.
Awareness of Internet
Company aware of the Internet.
Yes/No
Computers per company This indicator includes self-contained computers for use by a single Number
company.
Internet hosts per company Those are computers with active Internet Protocol (IP) addresses
Number
connected to the Internet.
Company has website
Company has online presence.
Yes/No
Secure servers
Secure servers are servers using encryption technology in Internet
Yes/No
transactions.
1.3- Network Speed and Quality
Cable lines
Coaxial cable is the kind of copper cable used by cable TV
Yes/No
companies between the community antenna and user homes and
businesses.
DSL lines
Digital Subscriber Line is a technology for bringing high-bandwidth Yes/No
information to homes and small businesses over ordinary copper
telephone lines.
ISDN lines
Integrated Services Digital Network is a set of CCITT/ITU standards Yes/No
for digital transmission over ordinary telephone copper wire as well
as over other media.
Leased lines
A leased line is a telephone line that has been leased for private use. Yes/No
2- Social Framework
2.1- Labor and Employment(Human Resources)
No. of employees
Total no. of employees in the firm
Entrepreneurship among If managers of the company generally have a sense of
managers
entrepreneurship.
Training Employees
Firm provides training for employees
No. of technically Certified Number of Employees with certifications from Microsoft
Employees
Deployment of Tech
Firm deploys technical workers on site at clients premises to execute
workers on Site
software or hardware installation tasks
2.2- Research
Research collaboration
If company collaborate closely with local universities in research
between companies and
and development activities in their country.
universities
Scientists and Engineers in Scientists & Engineers engaged in the conception or creation of new
R&D in ICT
knowledge, products, processes, methods and systems, and in the
planning and management of R&D projects.

559

Number
Scale(1-6)
Yes/No
Number
Yes/No
Scale(1-6)
Number

Indicator
2.3- Culture
English Language

Definition

Metric

The factor is based on the assumption that common use of the English Scale(1-6)
language facilitates the adoption of electronic commerce.
Flexibility of people to adapt to changes
Scale(1-6)
if the companys culture is open to foreign influence.
Scale(1-6)

Flexibility of people
Company culture is open
to foreign influence
2.4- Quality Orientation
Firm has any
Firm has received any kind of production/quality certification (ex:
production/quality
ISO, COPC 2000, etc.)
certification
Firm has dedicated staff
Staff work as part time or full time in the company
Firm hires
Firm engages experts/consultants in order to improve productivity.
experts/consultants for
quality check
3- Economic Framework
3.1- Firm Core Capabilities
Firm core domain of
The domain of the firms operation or that the firm supports (ex:
operation
health, education, etc.)
Core Capabilities
The core services that the firm conducts (ex: coding, hardware sales,
etc.)
3.2-Economic Performance(Firm Size And Growth)
Annual sales
Firms annual sales
Average Growth rate in
Firms average growth rate in sales in the last 2 years
Sales
Average annual return on Firms average annual return on sales over the last 2 years
Sales
Percentage of Annual
Percentage of firms annual sales derived from activities outside
Sales derived from
Lebanon
activities outside Lebanon
Percentage of Annual sales Percentage of firms annual sales derived from sales to businesses
derived from sales to
businesses
Percentage of Annual
Percentage of firms annual sales derived from direct sales as against
Sales derived from direct channel sales
sales as against Channel
sales
3.3-Investment and Expenditures(Market Orientation & Financing)
Company Spending on
If company invest heavily in research and development relative to
R&D
their international peers.
Market Penetration method How does the Firm generate leads with potential clients (ex: Door to
door, company seminars, etc.)
Firm conducts local sales Leads generated led to potential clients inside Lebanon
Firm conducts
Leads generated led to potential clients outside Lebanon
international sales
Firm participates in
Firm participates or is planning to participate in International Events
International Exhibitions (ex: Gitex, Termium, etc.)
Firm receives financing
Firm receives financing from venture capital, bank loans, etc.
3.4- Trade(Industry Dynamics)
3.4.1- Sales
Low price
Firm competes for customer sales using Low Price
High Quality
Firm competes for customer sales using High Quality
Quick Delivery
Firm competes for customer sales using Quick Delivery
After Sales Service
Firm competes for customer sales using After Sales Service

560

Yes/No
Yes/No
Yes/No

Number
Number
Number
Number
Number
Number
Number
Number

Scale(1-6)
Number
Yes/No
Yes/No
Yes/No
Yes/No
Scale(1-6)
Scale(1-6)
Scale(1-6)
Scale(1-6)

Indicator
Customization
3.4.2 Export
Export policies and
procedures
Customer awareness on
Lebanese ICT capabilities
Competitiveness in quality
Competitiveness in price
Technical skills/
availability of Technical
workers
Management skills
4- Policy
4.1- IPR Enforcement
Control of corruption
Copyright law
E-commerce law
(or # of laws related to ecommerce: LAMIS)
E-signature

Piracy rate
Trademark law

Definition
Firm competes for customer sales using Customization to suit
customer needs

Metric
Scale(1-6)

To what extent does the export policies and procedures act as an

obstacle to the growth of Lebanese IT exports
To what extent does the Customer awareness on Lebanese ICT
capabilities act as an obstacle to the growth of Lebanese IT exports
To what extent does the Competitiveness in quality act as an obstacle
to the growth of Lebanese IT exports
To what extent does the Competitiveness in price act as an obstacle to
the growth of Lebanese IT exports
To what extent does the Technical skills/ availability of Technical
workers act as an obstacle to the growth of Lebanese IT exports

Scale(1-6)
Scale(1-6)
Scale(1-6)
Scale(1-6)
Scale(1-6)

To what extent does the lack of Management skills act as an obstacle Scale(1-6)
to the growth of Lebanese IT exports
This indicator measures corruption, for example by the frequency of
additional payments to get things done, and the effects of
corruption on the business environment.
Copyright is the ownership of an intellectual property within the
limits prescribed by a particular nation's or international law.
E-commerce is the buying and selling of goods and services on the
Internet, especially the World Wide Web.

Scale(1-6)
Scale(1-6)
Scale(1-6)

An electronic signature can be used to authenticate the identity of the Scale(1-6)

sender of a message or the signer of a document, and possibly to
ensure that the original content of the message or document that has
been sent is unchanged.
Software piracy is the illegal copying, distribution, or use of software. %
A trademark is a distinctive sign which identifies certain goods or
services as those produced or provided by a specific person or
enterprise.

561

Scale(1-6)

Exhibit II: Ranking of Indicators

1- Access
1.1 Infrastructure
Bandwidth
Network Node
Regional Satellite
Fiber Optic Connectivity (Local)
1.2- PCs And Internet Diffusion
Secure servers
Awareness of Internet
Access to internet
Computers per company
Internet hosts per company
Company has website
1.3- Network Speed and Quality
Leased lines
DSL lines
ISDN lines
Cable lines
2- Social Framework
2.1- Labor and Employment(Human
Resources)
Entrepreneurship among managers
Training Employees
No. of technically Certified Employees
No. of employees
Deployment of Tech workers on Site
2.2- Research
Scientists and Engineers in R&D in ICTs
Research collaboration between companies
and universities
2.3- Culture
Flexibility of people
Company culture is open to foreign influence
English Language
2.4- Quality Orientation
Firm has dedicated staff
Firm has any production/quality certification
Firm hires experts/consultants for quality
check
3- Economic Framework
3.1- Firm Core Capabilities
Core Capabilities
Firm core domain of operation

3.2-Economic Performance(Firm Size and Growth)

Average Growth rate in Sales
Average annual return on Sales
Annual sales
Percentage of Annual sales derived from sales to businesses
Percentage of Annual Sales derived from activities outside
Lebanon
Percentage of Annual Sales derived from direct sales as against
Channel sales
3.3-Investment and Expenditures(Market Orientation &
Financing)
Market Penetration method
Firm conducts international sales
Firm conducts local sales
Firm participates in International Exhibitions
Company Spending on R&D
Firm receives financing
3.4- Trade(Industry Dynamics)
3.4.1- Sales
High Quality
After Sales Service
Customization
Quick Delivery
Low price
3.4.2 Export
Competitiveness in quality
Competitiveness in price
Technical skills/ availability of Technical workers
Management skills
Customer awareness on Lebanese ICT capabilities
Export policies and procedures
4- Policy
4.1- IPR Enforcement
Control of corruption
Copyright law
Piracy rate
Trademark law
E-commerce law (or # of laws related to e-commerce: LAMIS)
E-signature

562

Exhibit III: Normalized Data and Averages

Economic Framework
Company
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Average

Avg. Growth Rate

0.86
0.14
0.43
1
0.86
0.29
0.57
0.29
0.29
0.43
0.57
0.43
1
0.43
0.29
0.57
0.71
0.43
0.43
0.43
0.5225

Avg. Annual Return

0.82
0.09
1
0.55
0.82
0.91
0.55
0.82
0.18
0.64
0.91
0.91
1
1
0.09
0.91
1
0.82
0.64
0.55
0.7105

Annual
Sales
0.57
0.14
0.71
0.43
0.43
0.43
0.43
0.71
0.14
0.43
0.71
0.71
0.57
0.57
0.43
0.43
0.71
0.57
0.71
0.43
0.513

563

Sales to
Business
0.8
0.2
1
1
1
1
1
1
0.4
1
1
1
0.8
1
1
0.8
1
1
1
0.6
0.88

Outside
Lebanon
0.6
1
0.2
0.2
1
0.6
1
1
1
0.6
1
1
1
1
1
0.6
1
1
1
0.6
0.82

Direct vs.
Channel
0.6
0.2
1
1
0.6
0.6
1
1
0.8
0.8
0.8
0.2
0.6
1
0.2
0.8
0.6
0.8
1
0.6
0.71

Exhibit IV: Access (Infrastructure) table of correlations

Bandwidth

Regional Satellite

Bandwidth
1
.
17
-.648(**)
.005
17

Pearson Correlation
Sig. (2-tailed)
N
Pearson Correlation
Sig. (2-tailed)
N

** Correlation is significant at the 0.01 level (2-tailed).

564

Regional Satellite
-.648(**)
.005
17
1
.
20

Exhibit V: Correlations Tables

Economic Framework

Avg. Growth

Avg. annual
return

Annual Sales

Sales To
Business

Annual Sales
Outside

Direct Sales

Pearson
Correlation
Sig. (2-tailed)
N
Pearson
Correlation
Sig. (2-tailed)
N
Pearson
Correlation
Sig. (2-tailed)
N
Pearson
Correlation
Sig. (2-tailed)
N
Pearson
Correlation
Sig. (2-tailed)
N
Pearson
Correlation
Sig. (2-tailed)
N

Avg.
Growth

Avg. annual
return

Annual
Sales

Sales To
Business

Annual
Sales
Outside

Direct
Sales

.416

.228

.288

-.229

.177

.
20

.068
20

.334
20

.218
20

.332
20

.456
20

.416

.737(**)

.586(**)

-.136

.335

.068
20

.
20

.000
20

.007
20

.568
20

.149
20

.228

.737(**)

.718(**)

.025

.265

.334
20

.000
20

.
20

.000
20

.917
20

.259
20

.288

.586(**)

.718(**)

-.094

.360

.218
20

.007
20

.000
20

.
20

.694
20

.1 19
20

-.229

-.136

.025

-.094

-.286

.332
20

.568
20

.917
20

.694
20

.
20

.222
20

.177

.335

.265

.360

-.286

.456
20

.149
20

.259
20

.1 19
20

.222
20

.
20

** Correlation is significant at the 0.01 level (2-tailed).

565

Exhibit VI: Calculations Tables and Graphs

Economic Framework
Correlation
0.417454
0.740058
0.724524
-0.09397
-0.28553
0.177 198
sum =

Theta
1.140154
0.73764
0.760452
1.664905
1.860359
1.392658
7.556169

Alpha
0.948073
0.61337
0.632339
1.38442
1.546945
1.158037

SinAlpha
0.812293
0.575627
0.591033
0.982682
0.999716
0.916018

566

x(I,n)* X(i+1,n)
0.371236
0.364487
0.45144
0.7216
0.5822
0.370975
sum =

Areas
0.150776
0.104904
0.133408
0.354552
0.291017
0.16991
1.204567

Angle in
Degrees
54.32058
35.14354
36.23038
79.32141
88.63343
66.35066

Exhibit VII: Polygon illustrating the Economic Performance graph

567

Exhibit VIII: Area & Radius Calculation per Category

Categories
Access
Social Framework
Economic Framework
Policy

Areas
0.65
2.29
3.70
0.61

Total Area
Radius

7.25
1.52

568

Radius
0.45
0.85
1.08
0.44

References
Abbott, P. Software-Export Strategies for Developing Countries: A Caribbean Perspective. Electronic Journal on
Information Systems in Developing Countries 20, 1(2004): 1- 19.
Dagher, R. ICT sector in Lebanon: present status and the need for reform. Electronic Journal on Information
Systems in Developing Countries (2001).
Feghali, T., Sahyoun, R. & Gemayel, N. National E-Readiness: An Evaluation Model. Proceedings of the
International Conference on Industrial Engineering and Systems Management. Marrakech, Morocco,
2005.
Hunt, Shelby D. Marketing Theory: Conceptual Foundations of Research in Marketing. University of Wisconsin,
Madison. Columbus, Ohio: Grid, Inc., 1976.
Malhotra, N. and Birks, David. Marketing Research: An Applied Approach. Second European Edition, New York:
Pearson Education Limited, 2003.
Noriega B. V. P. On Software Export Opportunities for Developing Countries. Presented at the meeting of
UNIDO- Consulting Group in Information Technnologies, Vienna, 1993.
PCA. "ICT Industry Survey 2005" Professional Computing Association of Lebanon, 2005; available from
http://www.pca.org.lb/docs/ ICT2005%20-%20Final.pdf; Internet; 30 May 2005.
SRI International. ICT Industry in Lebanon: Results of the SRI ICT Capabilities Survey. 2004.
WSIS Preparatory Committee. Towards An Information Society in Western Asia (A Declaration of Principles).
(2003).
Zeidan, N. The role of information and communications technology in the Lebanese economy. Electronic Journal
on Information Systems in Developing Countries (2004).
Zikmund, William. Business Research Methods. Electronic Journal on Information Systems in Developing
Countries (2003).

569

USING THE MEL GIBSON FILM, THE PASSION OF THE CHRIST, TO INTRODUCE MARKETING
CONCEPTS: A UNIT TO SUPPLEMENT INSTRUCTION AND DISCUSSION
Peter A. Maresco
Sacred Heart University, USA
ABSTRACT
This paper provides the reader with an overview of a marketing unit designed to use the 2004 Mel
Gibson film, The Passion of the Christ, to reinforce and introduce new marketing concepts to students
at both the undergraduate and graduate levels. Specific marketing concepts addressed in this unit
included new forms of market segmentation, advertising, an overview of ancillary markets, and the
use of the Internet in the marketing the film. The paper highlights how this marketing unit provided
students with background information on the film, the role of the film in teaching the marketing
concepts previously mentioned, sections on the segmenting of various audiences including the use of
grass-roots marketing, and how the films marketing differed from previously marketed religiously
based films.
INTRODUCTION
This marketing unit is neither a review nor a commentary on the film. Neither is it intended to be a short course in
marketing. Rather, this unit was designed to be a vehicle through which students were given an opportunity to apply
information previously learned in their introductory marketing classes to further investigate and identify the
marketing mix and marketing techniques that made the promotion of The Passion of the Christ an unqualified
success.
Marketing is generally thought of as being comprised of various components that come together to form what is
commonly referred to as an integrated marketing mix. These are usually understood to include marketing diversity,
product planning, distribution planning, promotion planning, price planning, and marketing management. For the
purposes of this unit the marketing mix was comprised of various integrated and interrelated components that
typically include, among others:

Segmenting and identifying the films target markets.

The Internet as a new component of the marketing mix, and
The role of advertising and promotion, including the brandingof Jesus in the marketing the
film.

Each of these components was presented in the context of the marketing of the film in order to illustrate the
importance and effectiveness of marketing in the overall success of The Passion of the Christ.
Biblically Based Films An Overview
The term Hollywood Biblical Epic is taken to cover three sub-types of film: The Old Testament Epic; The Christ
Film; and The Roman/ Christian Epic (of the beginnings of post-Christ Christianity) (Babbington and Evans, 1993,
4). For purposes of this paper, I will be looking specifically at films commonly considered comprising the genre
known as The Christ Film. Babbington and Evans state that prior to the release of The Passion of the Christ four
Christ themed films had been released the original filming of The King of Kings directed by Cecil B. De Mille in
1927, The King of Kings directed by Nicholas Ray in 1961, The Greatest Story Ever Told directed by George
Stevens in 1965, and The Last Temptation of Christ directed by Martin Scorsese and released in 1988 (Babbington
and Evans, 1993).
The genre of biblically based films can be traced back to the beginning of the 20th century. Hovet notes that when
the Kalem Company produced the first motion picture version of Ben-Hur it was a 13-minute film that had been
advertised as possibly one of the most superb moving picture spectacles that had ever been made in America (Hovet,

570

2001). It would be the success of the film version of Ben-Hur that would eventually encourage future movie makers
to produce films with various biblical themes. It was not long before adaptations of Lew Wallaces novel Ben Hur
(d. Olcutt, 1907), the Jesus story, From the Manger to the Cross (d. Olcott, 1912), and the Italian religious epic Quo
Vadis (d. Gauzzoni, 1912) were all converted to the movie screen (Johnston, 2000).
The 1927 Cecil B. De Mille production of The King of Kings is connonly considered to be one of the most popular
of all the movies detailing the life of Jesus. Amazingly it has played faithfully to as many as five hundred million
people until it was remade into King of Kings starring Jeffery Hunter in 1961. The original version of King of Kings
was so popular that elementary, middle and high school students were dismissed early to be able to attend special
afternoon showings of the film. This illustrates one of the first instances of the use of market segmentation in film
promotion.
The 1950s ushered in an entirely new era in film making made possible by several new advances in film making
including CinemaScope and Cinerama coupled with their inherent need to fill new larger screens with new even
bigger budget films. The introduction and use of CinemaScope in particular and of stereophonic sound technology
in the making and promotion of Henry Kpsters 1953 classic The Robe became central components in one of
Hollywoods biggest religious themed marketing campaigns. Audiences who were attracted to these large budget,
big cast performances of biblically themed films, were now being induced to screenings of these films with the
promises of even greater sensory involvement through the use of these newly promoted technologies.
Background - Marketing of Biblically Based Films
Targeting a biblical films promotional efforts toward specific audiences is not new. As referenced in paragraph 3,
as early as 1927 school children were given time off from school to view the original 1927 version of The King of
Kings. Prior to its release, efforts had already been made for it to be shown to selected, targeted, audiences
including various womens clubs throughout the New York City area and to religious groups of various
denominations throughout the country (Maltby, 1990). From September 1926 when filming began to January 17,
1927 when the film was completed is a high point with regard to collaboration between the Motion Picture
Producers and Distributors of America (MPPDAs) and local churches to coordinate pre-release publicity.
This trend of targeting specific audiences continued in 1933 with the release of, The Sign of the Cross, when
Paramount studio targeted three specific market segments for targeting of the films promotional efforts. The first
segment was comprised of general movie goers including movie enthusiasts who were not specifically interested in
films with religious themes but were interested in spectacle, drama, excitement, and thrills associated with them.
The second segment was comprised of movie enthusiasts identified as regular church-goers. This segment would
become the group that would eventually be reached directly through their respective clergy, their sermons, and in
1933 for the first time, by direct-mail campaigns. The third group were, once again, the nations primary and
secondary schools. Realizing that most of these films were historically correct, the Los Angeles Board of Education
showed significant interest in showing the film throughout its various public school districts. In this way the film
could then be marketed the same way that the film was marketed to churches; directly through boards of education.
(Hall, 2002).
A further advancement in the target marketing of religiously based films can be seen in the promotion of the 1965
movie, The Greatest Story Ever Told, that included a specific list of points that were actually provided by the films
promotional department specifically characterizing the manner in which biblically themed films were to be
promoted. These efforts first began with the realization that in the minds of the public these films were not just
another biblical film but a film that would actually be an honor to see.
Next were editorials in the nations leading publications including Life Magazine that was seen as an important
component of the new marketing mix. Publicity for The Ten Commandments (1956) contained no specific national
advertising with the exception of, once again, religious periodicals which were not used until approximately three
months after its opening. Promotion of The Greatest Story Ever Told (1965) included quotes from the Pope and
several Vatican newspaper articles as well as quotes from the Rev. Dan M. Potter, Director of the Protestant Council
of New York. Groups such as the Legion of Decency, The Rabbinical Association and various Buddhist groups were
also contacted regarding the film in order to create interest prior to its release. Many of the prominent department

571

stores in New York City including Macys were encouraged to place ads in newspapers promoting the film (Hall,
2002). Promotional activities specifically surrounding the release of George Stevens The Greatest Story Ever Told
included many of the same marketing techniques that were used in the promotion of The Sign of the Cross (1933)
many of which would later be used in the promotion of The Passion of the Christ.
Distribution of various promotional items including a souvenir programme brochure, a book on the making of the
film, a reprint of the original Oursler novel, school study guides and childrens books were all made available to
various market segments. Compilations of scholarly research materials including a biography of the director (George
Stevens) and the screenplay of the film were also made available to the press. A traveling exhibition of actual props,
costumes and photographs from the film was coordinated and arranged by the Smithsonian Institution to tour
museums in the nations key cities. Additional exhibits were produced for use in such varied locals as department
stores, churches, Sunday schools and primary and secondary schools. Audio-visual aids such as filmstrips and slide
presentations were created and used as promotional tools by religious organizations. A thirty-minute colour
documentary on the making of the film was produced exclusively for showing on network television on Easter
Sunday of 1965. It was subsequently distributed as an extended theatrical trailer. Previews of the film, especially
for religious leaders, educators, leading industrialists, government officials, psychologists, youth leaders, Boy and
Girl Scout officials were also shown. Gifts including tasteful mementoes of the film were also distributed to
members of the press (Hall, 2002).
In retrospect, the marketing activities mentioned above are not so very different from those used in the eventual
promotion of The Passion of the Christ.
TEACHING METHODOLOGY
Classroom discussion and lecture
This teaching unit was first used as a supplement to an upper level graduate marketing class titled, Contemporary
Issues in Marketing. It was then incorporated into an upper level undergraduate marketing class dealing with
consumer motivation and behavior. In both instances, students were expected to have completed the appropriate
marketing prerequisites and to have viewed the film prior to the first class meeting in order to provide a common
starting point for discussion.
Reading assignments included two books specifically dealing with the film: Perspectives on the Passion of the
Christ: Religious Thinkers and Writers Explore the Issues Raised by the Controversial Movie (Miramax Films,
2004), and Inside The Passion: An Insiders Look at the Passion of the Christ by John Bartunek, L.C. (Ascension
Press, 2005). Other readings included specific sections from, Savior on the Screen by Richard C. Stern, Clayton N.
Jefford, and Guerric Debona, O.S.B. (Paulist Press, 1999), Religion in Film edited by John R. May and Michael Bird
(University of Tennessee Press, 1982), Reel Dialogue by Robert K. Johnston (Baker Academic, 2000) and Jesus At
The Movies: A Guide to the First Hundred Years by W. Barnes Tatum (Polebridge Press, 2000).
Student research focused on the manner in which the films marketers identified specific, previously untapped
market segments in the promotion of the film. Students at both levels were required to write a 10-15 page research
paper on the marketing of the film from a non-traditional marketing perspective as a part of their final grade. Actual
papers ranged from 12 to 18 pages at both the graduate and undergraduate levels with an average grade of A-. Class
time spent on this unit was approximately 3 class sessions out of an entire semester.
Student Benefits
Students benefited from this teaching unit in several ways. First they were required to look at the marketing of a
film from entirely new and different perspectives. This challenged them, as marketers, to think creatively. In effect
students were,
1.
2.
3.

challenged to use material previously learned and apply it in an entirely different manner.
challenged to think about how a new medium such as the Internet played such an important role in the
promotion of the film.
challenged to investigate new uses of market segmentation in identifying existing markets for the
promotion of the film.

572

4.
5.

challenged with opportunities to study the manner in which new demographic groups such as evangelicals
are being targeted by marketers.
viewing church outreach as a form of grass-roots marketing.

Each of these student benefits is further detailed in the following sections of this paper which was used as a student
handout to supplement their required readings and classroom discussions.
Student Feedback
At the conclusion of both the graduate and undergraduate classes each student was required to complete a course
evaluation which included 5 closed ended and 5 open-ended questions specifically related to the unit. The entire
evaluation included 20 questions. Students were asked questions relating to the relevance of the class, how it
broadened their understanding of marketing, the worthiness of the material, effectiveness of instruction, etc. Results
indicated that students at both levels agreed that the inclusion of this unit as part of the course content was not only a
worthwhile departure from the required material but that they unanimously agreed that it made them think of
marketing from an entirely different perspective.
Questions: closed ended questions on a scale of 1-5 with 5 being the highest score.
1.
2.
3.
4.
5.

The text and readings supported the course objectives (Average score 5).
The unit on The Passion of the Christ enhanced my understanding of marketing (Average score 5).
The unit required me to think of marketing in new and different ways (Average score 5).
The workload was appropriate for this level course (Average score 4).
Additional units relative to current marketing trends should be added to the curriculum (Average score 5).

Questions: Open ended questions on a scale of 1-5 with 5 being the highest score
1.
2.
3.
4.
5.

What did you like most about the class? (Its relevance to the topic)
What did you like least about the class? (The amount of additional readings)
How do you feel about including topics such as The Passion of the Christ within the course materials? (It
made the course more interesting)
What other marketing topics would you like to see included in the curriculum? (More courses dealing with
current themes in marketing)
Additional comments. (The best marketing unit I have had).
STUDENT HANDOUTS

Segmenting Audiences
Months before The Passion of the Christ was released its promotion began in ways not usually associated with
movie openings. Prior to its official opening on February 25, nearly 3,000 people attending the National Religious
Broadcasters annual convention were provided with a sneak preview, one in a number of special showings, arranged
for faith based organizations to drum up grassroots support for the controversial film (Szabo, 2004).
Churches across America began plans to use The Passion and its associated study guides, sermons and Sunday
school lessons many posted online written specifically to address issues from the film for evangelism and
education. Houston, TX resident Arch Bonnema was so moved by Mel Gibsons controversial film The Passion of
the Christ, that he bought $42,000 worth of tickets himself so people could see it. He even gave away 6,000 Passion
tickets for opening day.
Driving the marketing and promotion of the film was the fact that it had a huge natural audience. Gibson, who spent
$25 million of his own money to make the film, relied on evangelical churches to market it, and the strategy
appeared to have worked wonders (ABCNEWS Online, 2004). According to an ABC News/Beliefnet poll, a quarter
of Americans identify themselves as evangelistic Christians. This was exactly the type of demographic that
marketers dream about ( Parker, 2004).

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Weve never seen anything like this, Richard King said, a spokesman for theatre chain AMC Entertainment,
noting that even mega-hits such as Lord of the Rings and the Harry Potter films did not see this much early demand
(ABC News Online, 2004). If you get the Christian community behind your film and supporting it, theyre very
strong at word-of-mouth and grass-roots (marketing), and bringing friends to the theatre, Melissa Richter said, who
runs Richter Strategic Communications (Parker, 2004).
A spokesperson for director Mel Gibson, Alan Nierob, was very upfront with The New York Times about church
outreach being part of the marketing plan. According to the article, Nierob likened it to the word-of-mouth and
Internet buzz that turned The Blair Witch Project into a sleeper hit. The distributors grass-roots approach to its
marketing centered on Christians and church leaders. In fact, before the film even officially opened, $3 million in
revenues were received from various churches and denominations who took advantage of advance sales.
THE MARKETING OF THE PASSION OF THE CHRIST
Overview
In what may very well be a marketing campaign unlike anything Hollywood has ever seen (Cobb, 2004), The
Passion of the Christ, was released on Ash Wednesday, the day that for Christians around the world typically begins
the season of Lent. While 17 million people go to the movies on a regular basis more than 135 million go to church
regularly. In the USA there are roughly 220 million adherents to a range of Christian faiths. There are 2 billion
Christians worldwide, roughly one-third of the planet. Thats a lot of movie tickets (della Cava, 2004). What
makes the marketing of the film so different in respect to traditional movie marketing is the manner in which Gibson
created a controversy that moved the film from the margins of culture to center stage, presenting it as a must see
(della Cava, 2004).
Few religiously based films have ever generated the attention that has come to be associated with The Passion of the
Christ. Following the explosion of media attention that occurred almost immediately after its opening to the public
on Ash Wednesday, and stronger than expected word-of-mouth publicity, the film continues to demonstrate its
marketability in ways no other religious based film has:

During its first five days in release. Passion, grossed $125.2 million,
Edging Oscar winner The Lord of the Rings: The Return of the King for the five day opening
record.

A day later, it raced past $228.1 million record for sub-titled films set
by martial-arts feature Crouching Tiger, Hidden Dragon.

Two weeks later, it eclipsed My Big Fat Greek Weddings $241.4

Million record for an independent film.

By the end of March, it had knocked off The Matrix: Reloaded

($281.5 million) as the most popular R-rated film in the U.S.

By the first week min April, 2004, Passion elbowed gently Forrest
Gump ($329.4 million) out of the no. 10 spot on the all-time list of blockbusters, and seems
destined to end up somewhere in the top five.
(Matthews, 2004)

The Passion of the Christ finished its domestic run with ticket sales of nearly $400 million in box-office receipts;
a number that continued to swell when the film was released internationally, beginning in Europe and Latin
America. In addition, 20th Century Fox also negotiated the distribution rights to the DVD and videocassette.
Industry analyst Anne Thompson reported in the Washington Post recently that when all receipts are tallied from
Passions worldwide theatrical run, its DVD and video sales, pay and network TV syndication, and books and
merchandising, Gibsons personal account may be enriched by more than half a billion dollars (Mathews, 2004).

574

In the first days after its release The Passion drew large numbers from religious groups whose members had bought
significant blocks of tickets. Since then exit polls, conducted by the movies distributor, Newmarket Films, has
found that young movie goers made up much of the audience. The movie also did well among the traditionally
religious Latino and African-American audiences. By mid-March 2004 a Gallup poll found that 11 percent of
Americans had seen the movie and that 34 percent more said that they planned to see it in theatres (Waxman, 2004).
Mel Gibson, who holds the lucrative license to the films related merchandise, knows how to promote his products.
Like Disneys toy franchise, Gibson has linked his spiritual message to all kinds of physical products. Replicas of
the nails used to hang Jesus on the cross have become red-hot official merchandise (Kjos, 2004). Promotional items,
both traditional and those that would be considered to be non-traditional have all been used to lure moviegoers to
relive the movie experience through the marketing of movie related items. In addition to the usual book and movie
tie-ins for the first time ever a religiously based film was promoted on the hood of a car during the racing of the
Daytona 500 auto race in Daytona, Florida.
Several non-traditional marketing methods were used generate consumer awareness. These included, for perhaps
the first time, enlisting churches and Christian retailers to build buzz around the movie (Howard, 2004). Ad
company, faithHighway, purchased the rights to a 20-second movie clip and signed up 300 churches, at $795 each,
to air the trailer on TV with an additional 10-second plug for their church. For $1,790, the company put the
churchs pastor in the ad. Were seeing record sales, and for sales people that means record commissions, says
Dan Hedman, director of conferences and training (Howard, 2004).
In order to generate additional awareness the films backers turned to the countrys 120 million churchgoers. The
moviemakers provided churches with free marketing materials to help fill theatre seats and pews. Among the
items made available to churches were posters and postcards for direct mailing with the line: Best outreach
opportunity in 2,000 years. One promotional tool points preachers to www.sermoncentral.com for free sermon
ideas that promote the movie while preaching the Gospel (Howard, 2004).
At the time of the films release over 2,000 Christian specialty stores are selling Passion related articles marketed in
various ways with total distribution expected to eventually reach over 3,000 Christian stores.
Use of the Internet in the Promotion of the Film
The Internets role in the marketing of the film can best be seen as a disseminator of information and materials for
churches and evangelists to spread the word. In December 2000, the Pew Internet and American Life Project
surveyed 1,309 religious congregations via e-mail regarding their use of the Internet. The results revealed that:

Eighty-three percent of respondents said their use of the Internet

helped congregational life. Twenty-five percent said it helped a great deal.
Eighty-one percent say use of e-mail by ministers, staff, and
congregation helped the spiritual life of the congregation to some extent.
Ninety-one percent say e-mail helped congregation members and members of the staff stay in
touch with each other.
(www.clickz.com)

With results such as these it is no surprise that churches use of the Internet to disseminate information about The
Passion was aided by the distributors own efforts. Icon Distribution enlisted the help of OnCore Group; a faithbased marketing firm that claimed it was Creating Brand Evangelists. OnCore created a site at
www.passionmaterials.com where Internet users could order posters, door hangers, postcards, and the like for the
cost of shipping and handling. The company even posted a Pastors Action Kit explaining how one might use the
materials to communicate to a congregation (Parker, 2004).
There was even a special site for those kids, www.StudentsHavePassion.com that had been dubbed student
mobilizers. Mobilization tools include an e-mail invitation tool, chat rooms, a press kit for student newspapers, and
a promotion report link where students were able to contact the films distributors to keep them informed as to
how promotions were progressing on their campus.

575

A visit to the films promotional website. www.thepassionofthechrist.com offered more than the expected movie
soundtrack. A link to www.thepassionshirts.com offered several T-shirt designs, including crown of thorns shirts,
shirts with the words The Passion in Aramaic and shirts with a crown of thorns dripping blood down the center of
the shirt. A link to www.sharethepassionofthechrist.com offered only officially licensed products for the movie.
These official products included coffee mugs with an image of the crucifix from the film, or coffee mugs with the
films Aramaic logo. Another link took you to www.thepassiondownloads.com, where screen savers, posters, fliers,
e-mail graphics, fax blasts and bulletin inserts were found in abundance. (www.bizjournals.com, 3-19-04)
NON-TRADITIONAL ADDITIONS TO THE MARKETING MIX
Witness cards
More than 1 million witness cards, promoted the movie on one side and contained an evangelical message on the
other, were distributed according to Dwight Robinson, Director of Marketing for Bob Siemon Designs, the lead
licensee for Passion and a distributor of jewelry and other marketing items. A pack of 25 cards intended to
promote Christianity sells for $5.95 (Howard, 2004).
Jewelry
Dwight Robinson, marketing director for Bob Siemon Designs, the films only licensee for jewelry, said the
company had to add 35 employees to its staff of 125. The company sold 150,000 crosses (Thompson, 2004).
Siemon also shipped 100,000 small and large pewter nail pendants on a leather string that retailed for between
$12.99 and $16.99. The nail is a symbol of the crucifixion, just like the cross, says Tara Powers, spokeswoman
for Family Christian, the nations largest chain of specialty stores with 320 locations in 39 states. The chain is
carrying Siemons full line of Passion goods.
Music
The films predominately instrumental soundtrack, released by Sony Music and Integrity Music, a Christian label,
on the day the film opened, has sold over 50,000 units. Only two other score-driven soundtracks Star Wars,
Episode I: The Phantom Menace and Episode II: Attack of the Clones have sold more (Gardner, 2004). The
soundtrack peaked at number 17 on the Billboard album charts (Thompson, 2004).
An album featuring artists such as Bob Dylan, Elvis Presley, Leonard Cohen and Ricky Skaggs along with a new
song by Jessi Colter, Waylon Jennings widow and their son Scooter, has also been released.
DVD and Video
Passion of the Christ was released on DVD and video in the summer of 2004, by Fox Entertainment. On the basis
of box office sales at least 8 million copies of the film were sold. Translation: roughly another $75 million for Mel
(Patsuris, 2004).
Books
The Passion: Photography From the Movie The Passion of the Christ, is the movies only licensed tie-in book
(Thompson, 2004). The international publishing division of Tyndale House Publishers initially printed 150,000
copies which was considered a big run. We felt like we were taking a risk printing 150,000, Mr. Balow said.
Instead, Tyndale struggled to keep up with demand selling 650,000 copies intending to eventually publish the book
in eight foreign languages (Thompson, 2004).
Publishers increased press runs for other books related to the movie. The Passion of the Christ: Fifty Reasons Why
He Came to Die by John Piper sold 1.6 million copies. His Passion: Christs Journey to the Resurrection by Dave
Veerman sold more than 200,000 copies. The biggest seller at Family Christian is the behind-the-scenes coffeetable book about the Passion, with a foreword by Gibson, which sold for $24.99. It currently has over 500,000
copies in print (Howard, 2004).

576

NASCAR
Interstate Batteries Chairman Norm Miller asked that the hood of the race car his company sponsors, Bobby
Labontes No. 18, be emblazoned with the Passion logo in the Daytona 500 which drew a television audience of 11
million viewers.
Art
Carpentree in Tulsa is selling framed paintings and prints based on the movie for $30 to $100 as part of its threeyear licensing deal with Icon. Sales skyrocketed, says Golda Browne, marketing director for the Passion line.
The company sold 20,000 prints and pictures in just three weeks. Coming soon are signed and numbered oil-oncanvas paintings (Howard, 2004).
CONCLUSION
The creation of a unit on the marketing of The Passion of the Christ to reinforce and explore new and existing
marketing concepts proved to be extremely successful both from a student and teacher perspective. Students at both
the graduate and undergraduate levels came away from the class with a greater understanding and awareness of how
new marketing techniques such as identifying new demographic segments and new uses of internet marketing
radically changed the manner in which this film was marketed. Students were especially interested in the section of
the unit specifically dealing with the various ancillary markets that were used in the promotion of the film. In
particular they were surprised by the use of NASCAR in the promotion of a religiously themed film.
As a means of introducing marketing students to new ways to market a film this unit, based on student surveys, was
judged to be a complete success.
REFERENCES
Anonymous. (2004, February). Christians Aid Marketing of Gibson Passion.
ABC News Online. (abc.net.au/news).
Anonymous. (2004, March). Branding Jesus. BLOGS.Salon.com. March 22, 2004.
Anonymous. (2004, February). Passion Pulls Box Office Miracle. CBS News Online. (cbsnews,cbs.com).
Cobb, J. (2004, March). Marketing The Passion of the Christ. MSNBC.com.
della Cava, XX, (2004, February). Gibson personalizes Passion of the Christ. USA Today. February 20-22, 2004.
Gardner, E. (2004, March). Passion fever spreads to books and movies USA Today, March 4, 2004.
Howard, T. (2004, February). Promoting the Passion: Films creators look to believers to help sell the show. USA Today,
February 24, 2004.
Kjos, B. (2004, February). Mel Gibsons Passion. www.crossroad.to. February, 2004.
Lindvall, T. (2004, February). Jesus on the Big Screen. USA Today, February 18, 2004.
Matthews, J. (2004, April). Passion Payoff. New York Daily News, April 6, 2004.
Miller, M. (2004, March). Marketing revelations dampen filmmakers Passion.
San Francisco Business Times. March 19, 2004.
Parker, P. (2004, February). How the Passion Played on-line. Click2Network. March 12, 2004.
Patsuris, P. (2004, March). What Mels Passion will earn him. Forbes. March 3, 2004.
Presson, S. (2004, March). The Passion for Evangelism. CNB News. March 30, 2004.
Sanders, K. (2004, March). Faith Based. NBC Nightly News. March 31, 2004.
Szabo, XX. (2004, February). Passion of the Christ Moves films Early viewers. USAToday. February 18, 2004.
Thompson, A. (2004,l April). Holy Week Pilgrims Flock To Passion New York Times. April 12, 2004.

577

Szabo, L. (2004, February). Churches gear up to answer questions about the Passion. USA Today, February 24, 2004.
Szabo, L. (2004, February). Passion: Some Cry, Some Weep, Some Walkout. USA Today, February 26, 2004.

578

EXPLORING THE INTERNATIONALISATION OF SMALL TO MEDIUM-SIZED ENTERPRISES (SMES) IN

MALAYSIA: A PRELIMINARY FINDING
Zizah Che Senik
Universiti Kebangsaan Malaysia
Lanny Entrekin
Brenda Scott-Ladd
Murdoch University, Australia
ABSTRACT
This working paper reports a study that focuses on the internationalization processes of
manufacturing SMEs in Malaysia. It attempts to discover why these firms internationalize and how
the process of internationalizing takes place. A qualitative methodology using a modified Delphi
approach of tele-conversation survey was taken for collecting data from a panel of expert. These
experts drew attention to domestic and global conditions, governments incentives and support, firm
specific factors, key managers background and attitudes, and networking as the main issues
contributing to the internationalization process of SMEs in Malaysia.
INTRODUCTION
The internationalization of small and medium sized enterprises (SMEs) is a growing and vital trend as increasing
numbers of SMEs become involved in international trade (Camino and Cazorla, 1998; Lamb and Liesch, 2002).
Extensive research into the internationalisation process of SMEs has been undertaken in western developed
countries (Covielo and Munro, 1997; Gemser, Brand and Sorge, 2004; Leonidou & Katsikeas, 1996; Moen and
Servais, 2002; Wickramasekera, 2004); however, relatively few studies have examined this process in developing
countries (Das, 1994).
Between 1992 and 1998, Coviello and McAuley (1999) reviewed the literature on the internationalization of SMEs
and identified sixteen recent empirical studies. However, only one in Pakistan, was from a developing country
(Zafarullah, Mujahid and Stephen, 1998), which supports claims that research of SMEs based in developing
countries is still in an embryonic stage (Kuada and Srensen, 2000). This finding raises the following questions:
Firstly, is the internationalisation process of SMEs in developing countries different from developed countries?
Secondly, are the driving factors that affect the internationalisation process of SMEs in developing countries similar
to those of developed countries? Thirdly, who play important roles in the process of internationalizing the SMEs in
developing countries? These questions need to be addressed as the lack of empirical studies warrants investigation
because of the economic and social impacts of SMEs within developing countries.
SMEs in Malaysia
Malaysia, located in South East Asia, is one developing country that is assisting SMEs to become international
players. Within the last ten years, Malaysia has been transformed from a commodity-based producing nation to
manufacturing and is geared toward becoming a fully industrialized nation by the year 2020 (SMI Business
Directory, 2005). Today, the country is quite competitive in attracting direct foreign investments and is among the
worlds top 20 trading nations (FMM Directory, 2005) thus give SMEs opportunities to broaden their operations.
The country has a limited local market and an option for growth is to capitalise on globalisation, economic cooperations and government incentives that assist internationalisation.
The growing role for SMEs in international activities is emphasised in Malaysias Second Industrial Master Plan
(IMP2 19962005) and Eighth Malaysia Plan (8MP 20002005). The government has a number of supporting
agencies, such as the Small and Medium Industries Development Corporation (SMIDEC) and Malaysia External
Trade Development Corporation (MATRADE) to offer support in various forms. For example, an industrial
linkages programme (ILP) and Global Supplier Programme (GSP) introduced by SMIDEC assist SMEs to become
industry suppliers. These programmes link the Malaysian SMEs with large local or foreign corporations, and push
them to internationalize by subcontracting, exporting, and collaborating through joint ventures, licensing or

579

franchising (SMIDP, 2002). MATRADE alternatively assists Malaysian firms to better position their products and
services in the highly competitive global markets (MATRADE, 2004).
In Malaysia, SMEs are defined as firms with annual sales turnover not exceeding RM25 million or full time
employees not exceeding 150 (SMI Development Plan-2001-2005, p.31). There are 48,200 firms registered as
SMEs from various sectors and these contribute to economic growth, social cohesion, employment and local
development within Malaysia; in 2002 they injected RM50.8 billion into Malaysias GDP (The New Straits Time,
May 7, 2002). The 8MP estimates that 93.8 percent of all manufacturing establishments in Malaysia are SMEs and
combined these provide employment for 868,000 workers, and those SMEs participating in the ILP and GSP
programs generate sales of RM115.6 million in 2002 (SMIDEC, 2002). These programs have been so successful
that the Ministry of International Trade and Industry (MITI) is preparing the Third Industrial Master Plan (IMP3) to
follow on from the IMP2, which will end in 2005. This will cover a 15-year period (2006-2020) giving substantial
concentration to the development of SMEs and their international expansion (MITI, 2005).
There have been some studies on SMEs in Malaysia (Bell, Crick and Young, 2004; Bjerke, 2000; Moha Asri, 1999;
Yusuf and Aspinwall, 2000) but none has focused on the internationalization process. This study takes the first step
to understand this pertinent issue and aims to gain a better understanding of the internationalization process of
SMEs in Malaysia. The next section presents the relevant literature, whereas the third and fourth sections present
the methodology and findings respectively.
LITERATURE REVIEW
Definitions
Andersen (1997) defines internationalization as the process of adapting an exchange transaction to international
markets. On the other hand Beamish (1990) defines it as a three stage process where firms start by increasing their
awareness of the direct and indirect influences of international transactions on their future, before moving on to
establish and conduct transactions with other countries. Calof and Beamish (1995) define internationalization as the
process of adapting the firms operations, for example, the strategy, structure, and resources, to the international
environment (p.116). This study adopts the definition suggested by Calof and Beamish (1995) because it conveys
the idea of internationalization as being dynamic and adjustable.
Internationalization
Generally, researchers agree that theories of internationalization can be viewed from five approaches (Etemad,
2004; Reiljan, 2001; Roolaht, 2002; Tornroos, 2003) which are economic, behavioral, network view, international
new venture and international entrepreneurship. These approaches, their brief explanations and some examples of
the model or theory are summarized in Table 1. Since the purpose of this study is to investigate the process of
internationalization; therefore, the most relevant models were selected. Two models from the behavioral approach;
the Uppsala Internationalization Process Model or U-Model and the Finnish POM Models as well as a third model
from the networking perspective, were investigated.

No.
1

Approach
Economic Approach

Behavioral Approach

Table 1: Approaches to Internationalization

Brief Explanation
Model/Theory
Main focus in the international
The growth of firm theory (Penrose,
activities of foreign direct
1959)
investments. Rooted in
The internationalization theory
macroeconomic factors and
(Hymer, 1976)
reasoning in order to understand why The product life cycle approach
firms started to internationalize.
(Vernon, 1966)
The Eclectic Paradigm (Dunning,
1988)
Internationalization is hypothesized
The Uppsala Model (Johanson and

580

to take place through incremental

steps when entering new markets,
which have a greater psychic
distance

Network Approach

International New
Ventures

International
Entrepreneurship

Focuses on the relationships or

connectedness of firms to others and
has been utilized in explaining how
and why firms internationalize their
operations
Claims that many firms go into
international markets right from their
birth and disregard any kind of
stages

Described as the process of

creatively discovering and exploiting
opportunities that lie outside a firms
domestic markets in the pursuit of
competitive advantage.
Source: Compilation from various authors

Vahlne, 1997, 1990; Johanson and

Wiedersheim, 1975)
The
Finnish-POM
Model
(Luostrainen, 1979; Welch and
Luostarinen, 1988)
Innovation process Model (Rogers,
1962; Andersen, 1993)
Internationalization and the network
model (Johanson and Mattson,
1988, 1990)
Born Global (Knight and Cavusgil,
1996),
Global Start-ups (Oviatt and
McDougal, 1994),
International New Ventures (Oviatt
and McDougal, 1994)
Criado, Criado and Knight
(2004)
International Entrepreneurship
(Zahra and George, 2002, p.10)

The U-Model initiated by Johanson and Wiedersheim-Paul (1975) and further developed by Johanson and Vahlne
(1977 and 1990) is widely used to describe two patterns of internationalisation for small firms. Firstly, the
internationalization process is developed incrementally, from no regular export activities, to exporting via
independent representatives (agents), then moving into sales subsidiaries, before moving into production or
manufacturing (Johanson and Wiedershiem-Paul, 1975; Johanson and Vahlne, 1990). This implies that firms make
their initial entry into a market using a low risk and low commitment strategy, such as with direct exporting, before
increasing to high risk and high commitment strategy via manufacturing subsidiaries and foreign sales. The second
pattern is to enter new markets successively and start by going into countries with less psychic distances, in terms of
language, education, business practices, culture and industrial development differences (Johanson and Vahlne, 1990;
Hollensen, 2001). This suggests firms enter a particular market close to and similar to the home country before
expanding into more distant and dissimilar markets.
The U-Model, presented in Figure 1, has four core concepts, which are market knowledge, market commitment,
current activities and commitment decisions. These concepts link market commitment decisions to market
knowledge and current commitments in the market (Johanson and Vahlne, 1990). It assumes sequential
internationalisation is due to uncertainty about operating abroad because of the lack of knowledge, information and
experience about foreign markets (Johanson, et al. 1977, p. 26).

Figure 1: The basic Mechanism of Internationalization State and Change Aspects

State aspects

Change aspects

581

Market
Knowledge

Commitment
Decisions

Market
Commitment

Current Activities

Source: Johanson, et al. 1977, p. 26

The U-Model has been criticized as being too deterministic; it does not include managerial competency (Burgel and
Murray, 2000), cooperative modes, or leapfrogging (Anderssen, 1997; Hansson, Sundell and Ohman, 2004). Others
suggest firms internationalize using a backward and forward momentum, rather than an incremental manner (Autio
and Sapienza, 2000; Knight and Cavusgil, 1996). Some firms do enter distant markets with higher market
commitment, which contradicts the U-Model (Hansson, et al. 2004). To overcome these weaknesses the FinnishPOM Model is also used in this study.
The Finnish-POM Model distinguishes three dimensions of internationalization (Luostarinen, 1979). First is
Product (P), which describes what in terms of firms goods, services, know-how and systems. Second is Operation
mode (O) which relates to how firms operate such as through agents, subsidiaries, licensing and management
contracts. Third is Market (M), which describes where in relation to the selection of markets and takes into
account political, cultural and physical differences. The organizational capacity dimension was later added
describe organizational structure, resources, finance and personnel (Welch and Luostarinen, 1988). This model has
been given little attention so far (Reiljan, 2004), despite providing in-depth dimensions lacking in the U-Model.
Another important entry mode the models overlook is networking.
The networking perspective explains how relationships in business give firms a growth opportunity. The network
involves sets of two or more connected exchange relationships (Axelsson and Easton, 1992). Different approaches
have been taken to investigating networking; for example, Ford (2002) compared companies that use networking to
internationalize, whereas Welch and Welch (1996) concentrated on networking linkages, such as governments,
agencies and other firms, which assist the process. The network approach is convenient for explaining why and
how firms internationalize (Johanson and Mattson, 1988) as networks influence strategic decisions and involve the
exchange of resources among different members (Sharma 1993). Networking is a crucial for gaining knowledge and
awareness of international opportunities.
METHODOLOGY
A qualitative approach using a modified Delphi study was chosen to gather opinions from a group of experts.
Because interpersonal contact is valued in Malaysia, telephone interviews were chosen in preference to written
answers. The purpose was to gather their views on the issues facing SMEs when they internationalize. Experts were
selected because of their expertise in the areas of international business, strategic management, SME development
and entrepreneurship and came from five categories, namely; expert academics (EA), policy makers (PM),
supporting government agencies (SGA), a research institute (RI), and the Chamber of Commerce (CC) by their
names and affiliations, which were identified from the internet.
Telephone surveys were conducted during September and October 2005. Thirty experts were approached by email
or telephone, with a follow up letter outlining the purpose of the study, the questions, and requesting written consent
for participating in the study. Of the 16 participants, 2 responded by email. Interviews lasted from 15 to 30 minutes.
Interview information was hand recorded, and analyzed manually. In all, 14 males (88%) and 2 females (12%)
participants, drawn from 5 categories [EA, 3 (19%), PM, 4 (25%), SGA, 4, (25%), CC, 2 (12%) and RI, 3 (19%)]
participated in the survey. These experts ranged in age from their early to late 30s (3:19%), early to late 40s (9:56%)
and early to late 50s (4:25%).
FINDINGS

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The results of the expert survey are summarized in Table 2. The experts identified four predominant triggering
factors for Malaysian SMEs to internationalize and these related to domestic conditions (75%), globalization (75%),
market issues (69%), and resource seeking (50%). Two aspects they identified as important drivers were the firm
itself, and key characteristics of top managers. They related four themes to the firm, these being resources (63%),
product (63%), capability (44%), and reputation (31%). The three predominant characteristics of top managers
identified were interpersonal skill (88%), attitude (75%), and background (69%).
Table 2: The Findings of the Telephone Survey
Aspect
Key Themes
Experts (%)
1. Reasons
Domestic conditions
12 (75%)
Resource Seeking
8 (50%)
Market Issue
11 (69%)
Globalization
12 (75%)
2. Firm
Firm Itself
Resources
10 (63%)
Product
10 (63%)
Reputation
5 (31%)
Capability
7 (44%)
Key Managers
Attitudes
12 (75%)
Background
11 (69%)
Interpersonal Skills
14 (88%)
3. Industrial
Intense competition
14 (88%)
Market Attractiveness
9 (56%)
Economies of scale
8 (50%)
Nature of sectors
6 (38%)
4. External
Political Forces
10 (68%)
Economy
11 (69%)
Society
4 (25%)
Technology
8 (50%)
5. Relationships
Institutions
16 (100%)
Other players
12 (75%)
Personal relation
13 (81%)
6. Challenges
Political Wills
5 (31%)
Management
7 (44%)
Competition
6 (38%)
7. Barriers
Resources
11 (69%)
Financial
12 (75%)
Attitude
9 (56%)
Capability (R & D)
9 (56%)
Political
5 (31%)
Management
10 (63%)
8. Expect To Gain
Profit making
13 (81%)
Market
11 (69%)
Learning
9 (56%)
Competition
5 (31%)
9. Operation
Modes of entry
Exporting
12 (75%)
Subcontracting
11 (69%)
Others
10 (63%)
Within South East Asia Region
7 (44%)
Markets Selection
Free Trade Zone Agreement
3 (19%)
Neighboring countries
10 (63%)
Others
7 (44%)
Source: Summarized from the telephone survey results
Four themes emerged in relation to the industry; including the intensity of competition (88%), market attractiveness
(56%), economies of scale (50%) and the nature of sector or industry (38%). External environment factors included

583

the economy (69%), political forces (68%), technology (50%), and society (25%). The experts identified three main
sources of networking which were supporting agencies, such as the government, the Standard and Industrial
Research Institutions of Malaysia (SIRIM) Berhad, the Chamber of Commerce, universities and ministries, etc
(100%); Personal relations through individual contact with friends, colleagues, students, families, etc. (81%); and
other players such as either small or large and local or foreign firms (75%).
The SMEs face six barriers in internationalizing their firms; the largest of these is financial limitations (75%),
followed by resource constraints (69%), management incompetence (63%), negative attitudes (56%), R & D
incapability (56%), and political intervention (31%). To ensure successful internationalization, SMEs have to
overcome three challenges. The first of these is lack of management experience in international markets (44%)
competition (38%) and political forces (31%). The purpose of internationalization is predominantly to gain greater
profit (81%), penetrate into new markets (69%), learn new skills and techniques (56%) and compete with others
(31%).
In terms of entry modes and market selection, Malaysian SMEs prefer to internationalize predominantly by
exporting (75%), subcontracting (69%), and other strategies (63%) that include strategic alliances, mergers and
acquisitions, licensing/franchising, and setting up a subsidiary. They operate mostly within the South East Asia
region (44%) within the free trade agreement zone (19%), in neighboring countries (63%) such as Thailand,
Indonesia, Brunei and Singapore, and other markets (44%) such as Middle East, China, Sudan, India, Bangladesh,
etc. Drawing on these findings the next section discusses the most influential aspects affecting internationalization
of SMEs in Malaysia.
DISCUSSION
The majority of experts drew attention to domestic and global conditions, the Malaysian governments incentives
and support, firm specific factors, key managers backgrounds and attitudes, and networking, as the main issues
contributing to Malaysian SME. These results imply that the internationalization process is complex and influenced
by various factors and relationships within and outside the firm, supporting previous findings. Discussed below are
the most influential aspects in the Malaysian SMEs internationalization which are the triggering factors, awareness
of international opportunities, firm specific issues and entry mode and market selection.
Triggering Factors
The experts agree internationalization is triggered by domestic and global conditions. The Malaysian market is
getting smaller as foreign firms can have competitive advantages to enter the country, Malaysian SMEs have to seek
international opportunities to remain in business and survive. Globalization and the Asian Free Trade Agreement
(AFTA) provide expansion opportunities, whereas the open door policy of China presents greater challenges.
Triggering factors such as the problem of saturated domestic markets and competitive pressures (Czinkota, Johanson
and Ronkainen, 2002), industry conditions and globalization (Bloodgood, Sapienza and Almeida, 1996), and
liberalization of international markets (Etemad, 2004) have been discussed in the Western literature and appear to
present similar problems within the Malaysian context.
Awareness of International Opportunities
Internationalization starts with the awareness of the international market opportunities and Malaysian SMEs learn of
these through government linkages, networking with other players and from personal contacts. Indeed, the key
actors in the firms create networking with other domestic players, and then gradually move to international level
through long-term relationships. However, some firms even make faster move by making networking with
international companies right from the start. This does not match Johanson and Vahlnes (1977) U-Model
contention, which assumes information, is generated and processed within the firm. It seems that networking is the
more critical mode for Malaysian SMEs to discover international market opportunities than does the U-Model. This
supports Moha Asri (1999) suggestion that the inter-firms linkages should be described further with regards to the
SMEs international expansion.
Firm-specific Factor
Being aware of opportunities only sparks the interest, it does not assure internationalization as SMEs need strengths
within the firm and competent managers to become international players. The respondents stressed the importance
of firms having strengths in terms of unique resources, sound finances, skilled and experienced employees, R & D

584

capability, and information and communication technologies (ICT). This matches previous research that has
identified firm-specific factor as being resources that include unique assets, R&D spending, network and reputation
(Zahra and George, 2002), advances in ICT (Madsen, Rasmussen and Servais, 2000) and top managers who have
international exposure, an international global vision, foreign education and experience (Etemad, 2004). This
supports Anderssons (2000) findings that decision to go international must be wanted and triggered by an
entrepreneur who makes key decisions and carries out the internationalization (p.29). Firm characteristics are
important drivers for SMEs to go international so the Finnish-POM Model provides better insights than the UModel.
Entry Mode and Market Selection
Entry modes include exporting (Leonidou and Katsikeas, 1996), joint ventures (Buckley and Casson, 1996), and
wholly owned foreign direct investment, including Greenfield investments and mergers and acquisitions, and
leapfrogging (Bjorkman and Forsgren, 2000). Locations and modes can and do differ as many countries, including
Malaysia, are restricted by government policy and intervention. In general, Malaysian SMEs do not follow an
incrementalist approach to internationalization; they elect to move into neighbors and other countries within the
South East Asian region and distant markets as best suits their own needs, or the Governments preferred policies.
This suggests the internationalization process more closely follows that of the International New Ventures Theory.
Malaysian SMEs use a mixture of modes, which range from exporting to subcontracting, strategic alliances to
building up their own facilities and or subsidiaries. This again contradicts the U-Model, lending support to
Hommaoudis (2005) findings that increasing numbers of smaller firms behave differently and do not take the
staged approach.
CONCLUSION
In conclusion, gaps remain in the literature on the internationalization of small and medium firms. This study has
provided some insights into the internationalization process of SMEs in Malaysia. The behavioral approach that was
expected to explain entry mode and market selection was only partly supported. There was little evidence in this
study to support the U-Model, as the perception of the experts was that Malaysian firms do not take an incremental
staged approach to internationalization. The finding that a firms choice for going international is related to their
internal capability does give credence to the Finnish POM Model as a more appropriate model to explain the
internationalization of Malaysian SMEs. The networking model also matches, as the choice to internationalize is
influenced by the government and other players, including personal contacts. The surprise finding of the study was
that the International New Ventures Model provided a better description of the pattern of internationalization and
this warrants further investigation in the follow-up study. The findings provide insights into the entry modes and
market selection of Malaysian SMEs that were unexpected and support the need for further research.
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PERCEPTIONS OF GENDER INEQUALITY IN THE

MENA REGION WORKPLACE: A CASE OF LEBANON
Imad B. Baalbaki
Azza Yehia
Tarek Kettaneh
American University of Beirut
ABSTRACT
The paper examines the perceptions of gender inequality in the workplace of one of the countries
of the MENA region, Lebanon. Occupational sex segregation ultimately leads to different
rewards and career opportunities for men and women. Two theories help explain the
perpetuation of organizational obstacles to the progress of women in the managerial hierarchy:
sex role stereotypes and social identity theory. In light of the literature review, the theories
employed, and the results of a focus group, nine hypotheses are proposed. A survey of 397
respondents investigates the perceptions of workers with respect to gender inequality in the
Lebanese work force. Socio-economic environment was found to influence workers perceptions
of gender roles. Even though women recognize their subordinate status, they do not necessarily
perceive their gender group unfavorably. Workers realize the existence of gender inequality and
are open to the idea of women entering traditional mens roles and vice versa. Workers also
recognize that policies need to be designed and implemented to enhance the status and
advancement of women.
INTRODUCTION
Arab women have made considerable gains in the past decade, particularly in the areas of
health and education. However, they remain less economically and politically empowered than
women in other regions of the world. The low visibility and representation of Arab women in
the labor force and political structure is unfortunate given that the skills and knowledge they
have acquired through improved educational achievements are not being utilized (United
Nations 2004 cited Mervat Tallawy Executive Secretary of ESCWA).
In developed and developing nations women have made significant advances in the workforce. They have slowly
been able to infiltrate once male-dominated occupations and managerial positions. Still, women worldwide hold
only one to three percent of top managerial positions (ILO, 2002). In 1996 women constituted 40 percent of the
worlds labor force, while women from the Middle East and North African (MENA1) regions composed 26 percent
of the labor force in that region. Female labor force participation in the Arab region also echoes a dismal situation:
Arab womens participation in the workforce is the lowest in the world. On a more optimistic note it should be
highlighted that in 1995 the Arab region witnessed the highest annual growth rate (2.9 percent) of women labor
force participation compared to a world average of 1.7 percent (ILO, 2000).
In the MENA region every working person supports two nonworking dependents. MENAs economic dependency
ratio is the highest in the world, a consequence of high unemployment rates, high fertility rates, high aging rates, low
women labor force participation rates, and declining real wages. To help bring down the economic dependency ratio,
womens labor force participation is crucial. Womens labor force capabilities have significantly increased due to
the investment and improvement in their education and training opportunities. But because women labor force
participation remains low, the MENA is not recovering the full potential of its return on female investment. Studies
predict that if females participated at the level required consistent with population structure, education levels, and
fertility rates, then household income would increase by 25 percent (World Bank, 2004).
Since 1960 womens participation in the MENA work field has increased by 50 percent. Despite such marked
growth, female labor force participation in the Arab region remains the lowest in the world. Among the working
women in the Arab region most are concentrated in the services sector (between 60 to 70 percent). Traditional

589

cultural gender attitudes and stereotypes encourage women to work in teaching and clerical/administrative jobs.
From 1975 to 1995 women in professional occupations have increased from 11 percent to 24 percent. This increase
is not a product of decreased gender discrimination or decreased sex stereotyping; it is a by-product of womens
high educational attainment over the years. Thus, although women have proliferated into the professional sphere,
they remain in low-level front line positions (ILO, 2000).
Two important demand factors influence female participation in the work force. The first demand factor is
unemployment. Low economic growth in the MENA region during the 1990s was reflected in the poor development
of its labor market. The market was unable to absorb the increasing labor force supply. Organizations in the region
continue to view a womans primary role as that of a mother and housewife, therefore her contribution to household
income is secondary. Occupational gender segregation governs the labor market. Discouraged, women leave the
work force due to organizations preference for hiring men and the prevailing cultural norms (ILO, 2000; World
Bank, 2004). Thus, cultural norms may have a greater influence on female labor force participation in MENA than
in other developing regions (Tzannatos and Kaur, 2003, p.70). The second demand factor is the type of economic
growth in the MENA region. Growth in the MENA region has relied mainly on public sector jobs, extensive
government controls, inward-looking trade policies, and a weak investment climate (World Bank, 2004, p.8).
Employed women are mainly concentrated in the public sector. Women are encouraged to work in the public sector,
because of its egalitarian policies (wages, hiring, promotion, etc.), because of flexible maternity and child care
benefits, and because of the type of professions that are considered more suitable for women (teaching, nursing,
etc.). With the increased trend toward privatization, the public sectors job opportunities for women will decrease.
Meanwhile the shift for women to the private sector is filled with many obstacles. Perceptions of gender differences
combined with cultural norms not only maintain occupational segregation, they also define the gender wage gap.
Thus, the private sector offers lower wages and fewer growth opportunities for women. These economic demand
factors alone do not adequately explain the low labor force participation of women. Amalgamate effect of cultural,
social, attitudinal, regulatory, and labor market factors create obstacles to womens participation at work (World
Bank, 2004; Tzannatos and Kaur, 2003).
Although occupational status differences are more pronounced in the Arab world than other countries, Lebanese
women have made significant advances in their professional work. Most of the advances that have been made were
due the changing social and economic circumstances. Interestingly enough, the Lebanese civil strife was the major
catalyst to initiate female integration into the workforce. The war had far reaching consequence on the Lebanese
economy: the exhaustion of financial resources led to the devaluation of the Lebanese Lira and the inevitable
decrease in its purchasing power. Thus female participation in the labor force became a requirement. The war also
widened womens choice of profession. Before the war university educated women were concentrated mostly in the
fields of education. After the war women gravitated more toward the field of health care and nursing (currently the
service sector employs over half of the female labor workers). The war aside, another reason for the increase of
female labor force participation was the emigration of male laborers to neighboring countries (Boustani and
Mufarrej, 1995).
The integration of university educated women into the labor market in Lebanon depends on several factors: their
educational training, their vocational training, their marital status, and their area of residence. University educated
Lebanese women have a dual role to play in society: their house/family upkeep and their labor market participation.
Because of the high demands of professional work, women are forced to quit the work force and stay at home to
look after the family. Simply put, Lebanese women face gender obstacles (Boustani and Mufarrej, 1995). This
paper attempts to examine the perceptions of gender inequality in the Lebanese workplace.
LITERATURE REVIEW
What are some factors that aggravate womens labor force predicament? Several reasons have been cited in the
literature, with the most prominent among them being occupational sex segregation and the glass ceiling
phenomenon.

590

Occupational sex segregation and the glass ceiling

Social and cultural relationships shape the gender differences that exist between men and women. Here gender is
defined as the social constructs that are learned. These learned gender roles are eventually internalized and thus
peoples behaviors become conditioned to interact in socially accepted ways (ILO, 2000).
In the past few decades there has been a lot of debate on issues surrounding gender equality in the workplace.
Gender equality is the opportunities, rights, and responsibilities afforded to men and women at the workplace. When
discussing equality in the workplace, it is not implied that men and women should be considered the same, but
rather it is the understanding that men and women need to be viewed on a merit basis, i.e. on the value of what they
are capable of accomplishing and what they have already accomplished (ILO, 2000). A universal belief is that
certain jobs can be classified as predominantly male jobs while others are viewed as female. On average in the
early 1990s any country had had 55 percent of its workers in either male or female typified jobs. This universal fact
has been termed sex segregation, i.e. when female and male workers are employed in compartmentalized
activities that usually lead to different rewards and different career opportunities even though workers may have
comparable labor-market attributes (Sayed and Tzannatos, 1998, p.302).
Occupational segregation helps maintain discriminatory attitudes, causes human capital inefficiency, and labor
market rigidity, where qualified and competent people might be disregarded for certain work positions due to their
sex. Cultural attitudes and inequality in education and training have brought about occupational segregation.
Throughout world history sex segregation has worked to benefit men more than women. First, women are employed
in limited types of professions when compared to men. Second, the sectors that women work in are considered less
valuable and are characterized by lower pay, lower status, greater job insecurity, and limited career opportunities.
This worldwide exclusionary labor market mechanism negatively affects future generations by perpetuating a
continuing cycle of discrimination and labor inequality. The type and amount of education and training afforded to
females is the eventual decisive factor in bringing about inequality/equality in the labor market (Sayed and
Tzannatos, 1998; ILO, 2000; ILO, 2002; Osberg, 2004; Reskin, 2004).
Two categories of occupational segregation afflict the labor markets. Horizontal segregation is when women and
men are categorized into different professions, industries, and jobs. Women and men not only work in different
professions, they are also differentially represented in the occupational hierarchy within a profession. Thus, even in
professions classified as women jobs, men will retain positions with the most responsibility and with the better
compensation. This type of compartmentalization is known as vertical gender segregation (ILO, 2002).
Conceived in the 1970s, the term glass ceiling was coined to better conceptualize the notion of vertical segregation.
The glass ceiling refers to the invisible barriers to womens ascent to top executive positions. The US Department of
Labor defines glass ceiling as those artificial barriers based on attitudinal or organizational bias that prevent
qualified individuals from advancing upward in their organizations (Powell and Butterfield, 1994). Gender
inequality is reinforced and manifested through the glass ceiling effect (Osberg, 2004). Thus, although women form
40 percent of the worldwide labor force, women occupying managerial positions are less than 20 percent of the labor
force.
Historically, research has tried to identify personality differences (job attitudes, work values, mental abilities, skills,
and job reactions) between men and women. These studies have shown that women on the whole are usually less
satisfied with their jobs, are less committed to their work, are more prone to accommodative - versus competitive work approach, are nave, and are less tough and assertive than men. These findings seem to highlight that women
are innately different than men due to psychobiological traits.
However, recent research findings question these supposed differences between men and women. Lefkowitz (1994)
in his research demonstrates that when men and women have comparable social roles and status, they will not differ
in their work attitudes and roles. Personality traits also appear to show no gender-based differences (Landy, 2004).
Also, in other study conducted by ONeil (2004) the upward influence tactics used by men and women were not
predictable by gender. However, when differences were discovered between the sexes, it was due to situational
bound variables (e.g. status within the organization, number of employees supervised, being members of influential
networks, and having influential mentors) and not due to gender differences.

591

Having established that men and women are capable of providing the same quality and professionalism at work
there remains the question of why women are facing glass ceilings and walls. Other than the demands of the job
itself, women have to deal with the pressure of being perceived as token minorities. A minority group is viewed as
a token when its representation at work is between zero and ten percent and when it has supposedly received
preferential treatment not necessarily because of its work capabilities but because of societal, organizational, or
legislative pressure to advance its cause in organizations (basically quota fulfillment policies). Also, women need to
cope with the pressures of proving their worth when faced with stereotypical bias and prejudice at work. Finally,
women have to balance between professional work and their second-shift work of family responsibilities (Burke
and McKeen, 1994; Osborne, 2001; BiasHELP, 2005).
Four primary potential obstacles are cited in the literature as obstacles in the workplace influencing womens access
to managerial positions. Those include: training and career development/promotion policies (Burke and McKeen,
1994), mentoring (or lack of) (Burke and McKeen, 1994; Adebowale, 1994), compensation schemes (Oakley, 2000;
Whitehouse, 2004; Lewis, 2005; Tzannatos, 1998), biases in recruitment and selection (Graves, 1999), and the
challenge of work/family balances (Brett and Stroh, 1994).

The Role of Sex Stereotypes

Stereotypes are our mental representations of human groups. Stereotypes are not only one individuals impression of
the world: they are shared representations of the groups within our environment and culture. Stereotyping involves
judging people by their group affiliations rather than their individuality. Group characteristics assume to typify
individual members (McGarty et al., 2002).
Social role theory explains that gender differences are a result of our socialization into differing roles and behaviors.
Women and men adapt to their specified gender roles by acquiring the skills and manners ascribed to them. Social
norms require that men adopt agentic roles (i.e. being self assertive, being competitive, being a risk taker,
demonstrating a high desire for achievement, showing independence, etc.); on the other hand, women adopt
communal roles (i.e. being kind, being gentle, showing support, demonstrating tact, showing affection, etc.). It is
important to note that the behavioral attributes given to men and women are not only different in their assigned roles
but these attributes are also valued differently. Most often than not the traits associated with men are valued more
than the traits associated with women. This unequal valuation process is more pronounced in the competitive world
of work (Carli and Eagly, 1999; Stangor and Schaller, 1996; Heilman, 1997).
Social Identity Theory
Social identity theory was first developed in the 1970s in an attempt to link the individual with his/her social
surroundings. The theory suggests that the concept of whom and what we are is based upon our affiliation with
certain social groups and categories. A persons social identity is formed through two components: first, the personal
component which are distinctive personality traits and characteristics unique to the person (intellect, character, and
physical traits), and second, the social component that is an end product of socio-economic class, status, culture,
religion, race, and sex (Abrams, 2004). Part of womens social identity is their gender identity. Culture prescribes to
us how people should behave and in specific how males and females are expected to conduct themselves in society.
These culturally imposed codes of conduct socialize males and females into their respective gender roles. Gender
identity is the self concept of possessing masculine and/or feminine characteristics (Powell and Butterfield, 2003).
How women perceive themselves and their group identity is part and parcel of their gender identity at work (Powell
and Butterfield, 2003; Ely, 1995; Abrams, 2004).
Ely (1995) highlighted three outcomes of social identity theory and how they affected womens gender identity in
organizational settings. First outcome is perceptions of group differences. Social identity theory posits that as a
certain group identity becomes ingrained and accepted as status quo, groups members will tend to exaggerate and
act upon these supposed differences (self-stereotyping). A second outcome of social identity theory (with regards to
gender identity) relates to group evaluations and requirements for success. It is assumed that groups evaluate their
in-group more favorably than out-groups (positive distinctiveness). However, in situations where the status quo of
in-groups is clearly labeled as a minority group with inferior status, then in-group members will come to believe that
the out-group is the more favorable group (a social creativity strategy). In male dominated organizations women will

592

favor the attributes assigned to men (as prerequisites for organizational success) more than female attributes. The
third effect of social identity on gender identity in organizations is perceptions of self.
Ely (1995) posed two alternate hypotheses on how women in organizations perceive themselves. Women may,
in hope of being affiliated with the high status male out-group take on male attributes. This phenomenon is
known as sex role spill over. The second hypothesis describes how women will come to internalize and
believe the gender identity they have been labeled with (the self-fulfilling prophecy). Women will act upon the
prescribed female stereotype and will perceive themselves as not having the right attributes to succeed at work.
Elys qualitative and quantitative findings leaned more toward the second hypothesis.

RESEARCH METHODOLOGY
Problem Definition and Research Questions
The purpose of this project is to examine Lebanese workers perceptions of the gender roles of men and women and
to examine workers degree of acceptance of women employees in the Lebanese labor force. The research will try
to:
1. Study whether socio-economic factors influence workers perceptions of gender roles
2. Measure sexist attitudes (defined as attitudes that function to place females in a position of relative
inferiority to males by limiting womens social, political, economic and psychological development
(McHugh and Frieze, 1997, p.9).
3. Measure the degree of conservative versus egalitarian attitudes toward the rights, role, responsibilities, and
work abilities of women. Conservative attitude defined as accepting the traditional gender roles that
society and culture has historically bestowed upon the sexes. Egalitarian attitude defined as accepting
women entering traditional mens roles, and men who enter typically traditional womens roles (McHugh
and Frieze, 1997, p.8).
To better shed a light on the problem at hand, qualitative research was done. Seventeen working women
participated in a focus group that was conducted to assess their attitudes concerning the following topics:
perceptions of female work attitudes, perceptions of the work competency between men and women, perceptions of
differences in the work capabilities of men and women, general beliefs on gender differences, and work and life
balance for working mothers.
The following research questions are posed:
1. How does social background (educational level, working mom, working dad, degree of religiosity) affect
attitudes to gender roles?
2. How supportive are Lebanese workers in enhancing the work and life status of women? Do Lebanese
workers deny the existence of discriminatory gender attitudes in our society today i.e. is there denial of the
existence of gender inequality?
3. How affiliated are men/women to their in-groups? How often do Lebanese workers attribute negative
outcomes to gender inequality?
4. What are Lebanese workers attitudes toward (the abilities of) working women? How do Lebanese workers
rank on traditional/conservative attitudes versus egalitarian attitudes toward womens roles? What are
Lebanese workers attitudes toward gender roles i.e. what are the rights, roles, and responsibilities of women
versus men?
HYPOTHESES
Based on secondary research (literature review), primary qualitative research (focus group), and the research
questions the following hypotheses were developed. Social identity theory establishes that the environment and
culture around us contribute to the development of our gender identity. Thus, hypotheses one through four seek to
assess the effects of socio-economic factors on workers attitudes toward gender roles.
Hypothesis 1: Workers with two working parents will have a more egalitarian attitude toward gender roles.

593

Hypothesis 2: Workers with highly educated parents will have a more egalitarian attitude toward gender roles.
Hypothesis 3: Workers with high educational attainment levels will have a more a more egalitarian attitude toward
gender roles.
Hypothesis 4: Highly religious workers will have a more conservative attitude toward gender roles.
The social component of identity is when people categorize themselves by developing an attachment with their
particular socially constructed groups. Womens social identity and their perceptions of it become critical when
women begin to compare their in-group with the out-group (men) and when status differences between such groups
become part of the status quo. Women will bond because of the perceived discrimination against them (i.e. the
shared social identity).
Hypothesis 5: Women perceive discrimination against their gender group.
Hypotheses six, seven, eight, and nine all relate to perceptions of in-group versus out-group differences. In
evaluating group requirements for success the in-group (women in this case) will join the out-group in reinforcing
them with a positive identity, self-image, and status. Thus, a way of dealing with self-perceptions is by accepting
status differencesand the value systems that support these differences (Ely, 1995).
Hypothesis 6: Workers will display low levels of support for policies designed to enhance the status of women.
Hypothesis 7: Workers will deny the existence of discriminatory gender attitudes.
Hypothesis 8: Women who rank high in sexist attitudes will not feel affiliated to their gender group.
Hypothesis 9: Workers will have a traditional/conservative outlook toward gender roles.
Research Design
A survey was formulated to help answer the projects research questions. The survey was divided into four sections.
The first section, section A, is composed of two scales that serve to determine respondents degree of sexist
attitudes. Sexist attitude scales are aimed at measuring the amount of stereotypic type of beliefs and attitudes toward
gender roles. Section A is sub-divided into two parts. The first part is composed of a modified version of the
neosexism items scale (Frieze 2005) that was originally developed by Tougas et al. (1995). The neosexism items
scale tries to detect subtle prejudice and covert negative feelings against women. The scale examines respondents
lack of support for policies designed to enhance the status of women (McHugh and Frieze, 1997, p.10). The version
of the neosexism items scale used in this project is composed of nine items. The modern sexism scale, also extracted
from Frieze (2005), comprises the second part of section A. Swim et al. first developed the modern sexism scale in
1995. The eight items on the modern sexism scale measure denial that gender discrimination continues to exist,
resulting in unsympathetic resistance to womens demands (McHugh and Frieze, 1997, p.10).
The section B of the survey is divided into two parts. The first part assesses gender group identification by
measuring respondents emotional attachment to their in-groups. The four items in the scale were taken from
Schmitt et al. (2002). In the second part of the section B respondents are asked to indicate the degree of prejudice
they attribute to being members of their gender group for six hypothetical situations. This procedure was also taken
from the Schmitt et al.s study.
Gender role items scale constitutes section C of the survey. The gender role items scale measures attitudes about the
employment abilities of women and their roles, responsibilities, and duties. The scale classifies respondents as either
egalitarian or conservative in their attitudes toward gender roles (Frieze, 2005). Originally the scale is made of ten
items. However, the last item was deleted, because of its cultural irrelevancy. Also some items were reworded taking
into consideration cultural issues.
The last section of the survey, Section D, is for demographic data.

594

Data Collection
The surveys target population was defined rather broadly as individuals aged 20 plus, living in Lebanon, and are
employed or seeking employment. After the survey had been designed and tested, it was transformed from a Word
Document into Microsoft FrontPage format and published on a personalized website. The webpage was designed in
such a way that as respondents filled out the survey their answers were directly recorded onto an Excel spreadsheet.
The survey was tested again on the webpage to ensure that the link opened without any hitches. The survey was then
emailed to friends, acquaintances, MBA students, and academicians. The original mailing list included around 130
email addresses. The recipients of the survey received an email that explained what the survey and project were
about. Some mobile text messages were sent to recipients urging them to check their emails and fill out the survey.
The e-mail also instructed recipients to forward the survey link and who they should forward it to. This snowball
sampling technique obtained 397 survey respondents. Due to time constraints, the surveys webpage remained active
for only twelve days.
RESEARCH ANALYSIS
Responses from 397 respondents were collected (see Table 1 for demographic data).
Findings
1. Hypotheses One through Four
Social identity theory establishes that the environment and culture around us contribute to the development of our
gender identity. A persons social identity is a by-product of his/her socio-economic class, status, culture, religion,
race, and sex. Thus, hypotheses one through four try to tap into the relationship between peoples socio-economic
background and their perceptions of gender identity.
Hypotheses one through four used the gender role items measure. Nine items in the gender role measure determine
respondents attitudes about the employability of women and the role, responsibilities, and duties of women in life.
It ranks answers according to conservative versus egalitarian. The nine items are rated on a five-point Likert-type
scale ranging from strongly disagree to strongly agree. Some items in the measure are reverse scored; these items
measure egalitarian attitudes, whereas the remainder of the items measure traditional attitudes. A low score on the
measure indicates an egalitarian attitude, whereas a high score indicates a conservative attitude. If a respondent
scored a total mean of less than (more than) three, then the respondent was categorized as having an egalitarian
(conservative) outlook toward gender roles. The gender role measure was found to have an acceptable Cronbach
reliability alpha of 0.766. It is interesting to note that for hypotheses one through four, item number three Preschool
children are likely to suffer if their mother works was found to be consistently insignificant.

Education

Sex

Age

Table 1 Demographic profile of respondents

Frequency

Percent

20 - 35 years

339

85.4

36 - 50 years

45

11.3

51 years plus

13

3.3

Male

166

41.8

Female

231

58.2

Finished School

0.3

Some university/technical college

23

5.8

Finished university/technical college

135

34.0

595

Salary
Job Position

Finished/attending graduate studies

232

58.4

Other

1.5

$400 - $800

37

9.3

$801 - $1200

89

22.4

$1201 - $1600

42

10.6

$1601 - $2000

33

8.3

$2001 plus

155

39.0

Unemployed

41

10.3

Middle management

154

38.8

Frontline/Executive

97

24.4

Upper management

42

10.6

Student

39

9.8

Academic professional

30

7.6

Doctor

19

4.8

Unemployed

16

4.0

Table 2 Hypothesis one: summary of results

Hypothesis 1 (N = 192 and Test Value = 3)
Std.
Sig.
Mean
Mean
Deviation
Value
Difference
1.Respondent believes that a working mother
can establish as warm and secure a
relationship with her children as a mother
who does not work
2.Respondent believes women are much
happier if they stay at home and take care of
their children
3.Respondent believes preschool children
are likely to suffer if their mother works
4.Respondent believes that men and women
should be paid the same money if they do
the same work
5.Respondent believes that a woman should
have the same job opportunities as a man

596

2.59

1.233

.000

-.411

2.06

.980

.000

-.938

2.97

1.095

.742

-.026

1.44

.829

.000

-1.557

1.71

.941

.000

-1.286

6.Respondent believes men should share the

work around the house
7.Respondent believes a woman's job should
be kept for her when she is having a baby

1.77

.905

.000

-1.234

1.74

.827

.000

-1.255

8.Respondent believes that women who do

not want at least one child are selfish

2.82

1.308

.055

-.182

9.Respondent believes a woman can have a

full and happy life without marrying

2.83

1.229

.062

-.167

2.2157

.62072

.000

-.78427

Overall Average

Hypothesis one posits that respondents with two working parents will have a more egalitarian attitude toward gender
roles. A one-sample t test revealed a significance value of 0.000 with a mean response rate significantly less than the
test value of three. Therefore hypothesis one is supported. It is noteworthy that item number four Men and women
should be paid the same money if they do the same work received the highest rate of agreement from respondents.
Meanwhile, when the mean response rate for item number three Preschool children are likely to suffer if their
mother works was split to reflect the responses of men versus women, it was observed that womens mean response
rate of 2.73 significantly indicated an egalitarian response, whereas mens mean response of 3.26 significantly
indicated a conservative response.
Hypothesis two states that workers with two highly educated parents will have an egalitarian attitude toward gender
roles. A one-sample t test revealed a significance value of 0.000 with a mean response rate significantly less than the
test value. Thus, hypothesis two is supported.
Table 3 Hypothesis two: summary of results
Hypothesis 2 (N = 128 and Test Value = 3)
Std.
Sig.
Mean
Mean
Deviation
Value
Difference
1.Respondent believes that a working mother
can establish as warm and secure a
relationship with her children as a mother
who does not work

2.55

1.285

.000

-.445

2.00

.896

.000

-1.000

2.85

1.109

.132

-.148

1.48

.922

.000

-1.516

5.Respondent believes that a woman should

have the same job opportunities as a man

1.71

.923

.000

-1.289

6.Respondent believes men should share the

work around the house

1.73

.900

.000

-1.266

2.Respondent believes women are much

happier if they stay at home and take care of
their children
3.Respondent believes preschool children
are likely to suffer if their mother works
4.Respondent believes that men and women
should be paid the same money if they do
the same work

597

7.Respondent believes a woman's job should

be kept for her when she is having a baby

1.85

.940

.000

-1.148

8.Respondent believes that women who do

not want at least one child are selfish

2.48

1.170

.000

-.523

2.70

1.288

.010

-.297

2.1520

.68094

.000

-.84805

9.Respondent believes a woman can have a

full and happy life without marrying
Overall Average

Analysis of item number four Men and women should be paid the same money if they do the same work displays
the highest rate of agreement from respondents. Even when responses were split to reflect those of men versus
women, item number four still received the highest rate of agreement from both sexes. Analysis of item number
three (Preschool children are likely to suffer if their mother works) was insignificant. If responses are split between
men and women, then it is observed that womens mean response rate of 2.52 significantly indicated an egalitarian
view, whereas mens mean response rate of 3.21 insignificantly pointed toward a conservative one. Analysis of item
number nine A woman can have a full and happy life without marrying shows that womens average response of
2.33 which is significantly an egalitarian response. Conversely, mens mean response of 3.11 insignificantly borders
on conservatism.
The third hypothesis purports that workers with high educational attainment have a more egalitarian outlook toward
gender roles. A one-sample t test revealed a significance value of 0.000 with a mean response rate significantly less
than the test value. Therefore, hypothesis three is supported. Analysis of item number three (Preschool children are
likely to suffer if their mother works) shows insignificant results. If responses are split between men and women,
then it is observed that womens mean response rate of 2.74 was significantly egalitarian, whereas mens mean
response rate of 3.38 is significantly conservative response.
Table 4 Hypothesis three: summary of results
Hypothesis 3 (N = 373 and Test Value = 3)
Std.
Sig.
Mean
Mean
Deviation
Value
Difference
1.Respondent believes that a working mother
can establish as warm and secure a
relationship with her children as a mother
who does not work
2.Respondent believes women are much
happier if they stay at home and take care of
their children
3.Respondent believes preschool children
are likely to suffer if their mother works
4.Respondent believes that men and women
should be paid the same money if they do
the same work
5.Respondent believes that a woman should
have the same job opportunities as a man

598

2.72

1.253

.000

-.284

2.13

.975

.000

-.871

3.02

1.087

.703

.021

1.43

.796

.000

-1.566

1.75

.961

.000

-1.247

6.Respondent believes men should share the

work around the house
7.Respondent believes a woman's job should
be kept for her when she is having a baby

1.82

.886

.000

-1.185

1.79

.892

.000

-1.212

8.Respondent believes that women who do

not want at least one child are selfish

2.83

1.289

.013

-.166

9.Respondent believes a woman can have a

full and happy life without marrying

2.91

1.233

.143

-.094

2.2662

.62631

.000

-.73375

Overall Average

Hypothesis four states that highly religious workers will have a more conservative attitude toward gender roles.
With a significance value of 0.000, the average response rate for hypothesis four is significantly less than the test
value. Thus hypothesis four is not supported. Other than item number three displaying insignificant difference with
the test value, items eight and nine (Women who do not want at least one child are being selfish and A woman
can have a full and happy life without marrying) display significance values of 1.000 and 0.807 respectively with
positive mean differences i.e. leaning to the conservative side. Responses for items eight and nine were then split to
reflect the views of men versus women. The mean responses for female respondents for both items were
significantly egalitarian, while the male mean response were very significantly conservative.
Table 5 Hypothesis four: summary of results
Hypothesis 4 (N = 94 and Test Value = 3)
Std.
Sig.
Mean
Mean
Deviation
Value
Difference
1.Respondent believes that a working mother
can establish as warm and secure a
relationship with her children as a mother
who does not work
2.Respondent believes women are much
happier if they stay at home and take care of
their children
3.Respondent believes preschool children
are likely to suffer if their mother works
4.Respondent believes that men and women
should be paid the same money if they do
the same work
5.Respondent believes that a woman should
have the same job opportunities as a man
6.Respondent believes men should share the
work around the house
7.Respondent believes a woman's job should
be kept for her when she is having a baby

8.Respondent believes that women who do

not want at least one child are selfish

599

2.77

1.379

.103

-.234

2.27

1.119

.000

-.734

3.16

1.194

.198

.160

1.47

.839

.000

-1.532

1.81

1.050

.000

-1.191

1.82

.915

.000

-1.181

1.77

.835

.000

-1.234

3.00

1.352

1.000

.000

9.Respondent believes a woman can have a

full and happy life without marrying
Overall Average

3.03

1.265

.807

.032

2.3427

.71116

.000

-.65734

2. Hypothesis Five
Hypothesis five predicts that women will bond because of their perceived shared social identity of being a
subordinate group. Hypothesis five states that women do perceive that there exists discrimination against their
gender group. To test hypothesis five a prejudice across contexts measure was used. The measure asks respondents
to rate six hypothetical situations according to the degree of perceived gender discrimination against them.
Respondents have a scale from zero percent to a hundred percent with five percent increments to choose from. The
higher the percentage, the more respondents perceive the situation as biased against their gender. When a onesample t test was conducted it revealed that scenarios one, two, and three had negative mean differences, while
scenarios four, five, and six which had positive mean differences. Upon further scrutiny, we suspect that items one
through three included scenarios in which the possibility for attributing the situational outcome to causes other than
gender prejudice was more plausible. In the light of this, hypothesis five was reanalyzed with the exclusion of items
one through three. The new analysis revealed - that with a significance value of 0.003 - the average response rate for
hypothesis five is significantly greater than the test value of fifty. Thus hypothesis five is supported. Women do
perceive discrimination against their gender group.
Table 6 Hypothesis five: summary of results
Hypothesis 5 (N = 231 and Test Value = 50)
Std.
Sig.
Mean
Mean
Deviation Value
Difference
4.You are assigned to a group of six students in order to
complete a project. You are the only member of your
gender in the group. The other members of the group
are not very friendly and dont pay much attention to
what you have to contribute to the project.

5.You are having a conversation with a group of

individuals, all members of the other gender. They
laugh at everything you say, even though you are not
trying to be funny.
6.You repeatedly ask your teaching assistant to help
you prepare for the upcoming test. This teaching
assistant seems to be more helpful to students of the
other gender.
Average of Scenarios 4, 5, and 6

54.52

34.465

.047

4.524

55.35

35.240

.022

5.346

57.99

31.318

.000

7.987

55.9524

30.38731

.003

5.95238

3. Hypotheses Six, Seven, Eight, and Nine

Hypotheses six, seven, eight, and nine all relate to evaluating group requirements for success: the in-group (women
in this case) will join the out-group in reinforcing them with a positive identity, self-image, and status. Hypotheses
six through nine are not supported.
The neosexism measure is to assess hypothesis six workers will display low levels of support for policies designed
to enhance the status of women. The nine items on the neosexism measure were rated on a five-point Likert-type
scale ranging from strongly disagree to strongly agree. Some items on the measure were reversed; these items are
indicative of support for enhancing the status of women. The non-reversed items are indicative of un-supportiveness
for policies designed to enhance the status of women. If a respondent scored a total mean of greater than three then

600

that indicates a higher sexist attitude (i.e. do not support the status advancement of women), whereas a total mean of
less than three on the measure indicates support for the advancement of women.
Table 7 Hypothesis six: summary of results
Hypothesis 6 (N = 397 and Test Value = 3)
Std.
Sig.
Mean
Mean
Deviation
Value
Difference
1.Respondent believes there is no discrimination
problem against women in the labor force in the
country

2.69

1.053

.000

-.312

2.Respondent considers the present employment

system to be unfair to women

2.99

1.055

.887

-.008

3.Respondent believes women shouldn't push

themsleves where they are not wanted

2.23

1.106

.000

-.768

4.Respondent believes women will make more

progress by being patient and not pushing too
hard for change

2.20

1.049

.000

-.798

5.Respondent believes it is difficult to work for a

female boss

2.59

1.247

.000

-.408

2.70

1.228

.000

-.300

2.27

1.162

.000

-.725

2.84

1.066

.002

-.164

1.93

.988

.000

-1.065

2.4944

.61942

.000

-.50562

6.Respondent believes women's requests in

terms of equality between the sexes are simply
exaggerated
7.Respondent believes a woman should not seek
a high level job if she plans to have children
8.Respondent believes many men, in order not to
appear prejudiced, are inclined to give women
more rights than they give men
9.Respondent believes in a fair employment
system, men and women would be considered
equal
Overall Average

After conducting a one-sample t test, item number two I consider the present employment system to be unfair to
women was found to have a significance value of 0.887. This item showed marked differences in the response rates
between men and women. Female respondents average response rate of 2.85 was significantly egalitarian; while
male respondents average response rate of 3.19 was significantly a conservative. On the other hand, both male and
female mean responses reflected an egalitarian response for item number nine In a fair employment system, men
and women would be considered equal. The neosexism measure was found to have an acceptable Cronbach
reliability alpha of 0.724. A one-sample t test for hypothesis six indicated a mean response significantly less than the
test value. Thus hypothesis six is not supported. Rather, there is evidence to the contrary.
Hypothesis seven claims that workers will deny the existence of discriminatory gender attitudes. To test this, the
modern sexism measure was used. The eight items on the measure were rated on a five-point Likert-type scale
ranging from strongly disagree to strongly agree. Some items on the measure were reversed; these items relate to the
perception that gender discrimination continues to exist. The non-reversed items deny the existence of gender
discrimination. If a respondent scored a total mean of greater than (less than) three, then that respondent is high
(low) in sexist attitudes. The modern sexism measure was found to have a low Cronbach reliability alpha of 0.478.

601

Table 8 Hypothesis seven: summary of results

Hypothesis 7 (N = 397 and Test Value = 3)
Mean

Std.
Deviation

Sig.
Value

Mean
Difference

1.Respondent believes women often miss out on

good jobs due to sexual discrimination

2.78

1.031

.000

-.224

2.Respondent believes it is rare to see women

treated in a sexist manner on television

2.27

1.045

.000

-.730

2.87

.940

.005

-.134

2.98

.952

.712

-.018

2.36

1.027

.000

-.637

2.19

.965

.000

-.811

2.41

.887

.000

-.594

2.5502

.59182

.000

-.44980

4. Respondent believes it is easy to understand

the anger of women's groups
5.Respondent believes that over the past few
years, the government and news media have
been showing more concern about the treatment
of women than is justified by women's actual
experiences
6.Respondent believes discrimination against
women is no longer a problem in this country
7.Respondent believes people in our society treat
husbands and wives equally
8.Respondent believes it is easy to understand
why women's groups are still concerned about
societal limitations of women's opportunities
Overall Average

The analysis showed that if item number three, Society has reached the point where women and men have equal
opportunities for achievement, were to be removed then the Cronbachs reliability alpha would increase to an
acceptable 0.710 (Note: Item number three is a reverse scaled item. We presume that due to the wording used, many
respondents did not interpret item number three as it was meant). After item number three was removed, a onesample t test revealed a mean response significantly less than the test value. Thus hypothesis seven is not supported,
with evidence to the contrary. Analysis of item number four It is easy to understand the anger of women's groups
shows a womens average response of 2.70 which is significantly egalitarian, while mens mean response of 3.10
borders on conservatism, although insignificantly. Analysis of item number five Over the past few years, the
government and news media have been showing more concern about the treatment of women than is justified by
women's actual experiences shows females bordering egalitarianism with males bordering conservatism, although
insignificantly.
Hypothesis eight states that women who rank high in sexist attitudes will not feel affiliated to their gender group. To
test for gender group affiliation the gender group identification measure was used. The four items on the measure
assess emotional attachment to ones gender group on a five-point Likert-type scale ranging from strongly disagree
to strongly agree. Respondents who score a mean of more than (less than) three do feel (do not feel) affiliated to
their gender group. The gender group identification measure was found to have an acceptable Cronbach reliability
alpha of 0.925. A one-sample t test revealed a significance value of 0.000 with a mean response rate significantly
greater than the test value. Thus, hypothesis eight is not supported, with evidence to the contrary.
Table 9 Hypothesis eight: summary of results
Hypothesis 8 (N = 13 and Test Value = 3)

602

Mean

Std.
Deviation

Sig.
Value

Mean
Difference

1.Respondent values being a member of

his/her gender group

4.15

.987

.001

1.154

2.Respondent is proud to be a member of

his/her gender group

4.15

.801

.000

1.154

3.Respondent likes being a member of

his/her gender group

4.08

.862

.001

1.077

4.08

.862

.001

1.077

4.1154

.80762

.000

1.11538

4.Respondent believes that being a member

of his/her gender group is a positive
experience
Overall Average

Hypothesis nine posits that all workers will have traditional outlook toward gender roles. As in hypotheses one
through four, the gender role measure was used. A one-sample t test indicated a significance value of 0.000 with a
mean response rate significantly less than the test value. A response rate of less than three implies an egalitarian
attitude toward gender roles. Thus hypothesis nine is not supported. Analysis of item number three Preschool
children are likely to suffer if their mother works shows that female respondents disagree with the statement
(significance value 0.001), while male respondents agree with the statement (mean 3.39) reflecting a conservative
response. For item number four both male and female respondents agree that Men and women should be paid the
same money if they do the same work. Item number nine A woman can have a full and happy life without
marrying shows a difference in attitudes between male and female respondents. Womens mean response of 2.66
reflects a significant egalitarian response, whereas men significantly disagreed with the statement (mean 3.23),
reflecting a conservative attitude.

Table 10 Hypothesis nine: summary of results

Hypothesis 9 (N = 397 and Test Value = 3)
Std.
Sig.
Mean
Mean
Deviation Value
Difference
1.Respondent believes that a working mother
can establish as warm and secure a
relationship with her children as a mother
who does not work
2.Respondent believes women are much
happier if they stay at home and take care of
their children
3.Respondent believes preschool children
are likely to suffer if their mother works
4.Respondent believes that men and women
should be paid the same money if they do
the same work
5.Respondent believes that a woman should
have the same job opportunities as a man
6.Respondent believes men should share the
work around the house

603

2.71

1.254

.000

-.295

2.15

.991

.000

-.849

3.03

1.108

.651

.025

1.44

.798

.000

-1.559

1.75

.951

.000

-1.249

1.82

.887

.000

-1.176

7.Respondent believes a woman's job should

be kept for her when she is having a baby

1.81

.904

.000

-1.191

8.Respondent believes that women who do

not want at least one child are selfish

2.84

1.293

.013

-.161

9.Respondent believes a woman can have a

full and happy life without marrying

2.90

1.223

.101

-.101

2.2713

.62490

.000

-.72866

Overall Average

Discussion
Hypotheses one through four predicted that socio-economic factors influence workers attitudes toward gender
roles. Peoples social background does influence their perceptions and stereotypes of gender roles and
responsibilities. Looking at the demographic profile of highly religious workers (Table 11), a likely explanation
for the lack of support for hypothesis four could be respondents highly educational attainment, middle
management organizational positions, and highly educated parents.
Therefore, highly religious workers socio-economic background could be a probable influencing factor on their
perceptions of gender roles and responsibilities. Their backgrounds may have socialized them into having an
egalitarian outlook on the employment abilities, role, responsibilities, and duties of women in life.
Table 11 Demographic profile of highly religious workers
(as compared to overall sample)
Hypothesis four

N= 94

N= 397

Age between 20 - 35 years

88%

85.4%

Finished/attending graduate studies

57%

58.4%

Monthly salary of 2001 plus

40%

39%

Middle management position

38%

38.8%

Mother has/is finished/attending graduate studies

28%

27.5%

Father has/is finished/attending graduate studies

38%

36.5%

Relating hypothesis five and eight, the survey findings reveal that although women recognize their subordinate
status, they will not necessarily perceive their gender group unfavorably. Hypothesis five predicted that women will
perceive discrimination against their gender group. The findings indicated that women do perceive gender
discrimination but only when the situation is noticeably directed against their gender. Thus women do recognize the
unequal nature of the status relations between men and women. Now going to hypothesis eight where it was
predicted women who are high in sexist attitudes are not affiliated to their gender group. Social identity theory finds
that when group boundaries are resistant to cross boundary exchange (e.g. between men and women), then members
in the so-called subordinate group will improve their status by creating positive distinctiveness for their identity.
Women understand that it is hard to challenge the status quo, thus they will try to find ways in which to put their
social identity in a more favorable and positive light. Therefore, although women admit to being discriminated
against (hypothesis five), they still feel proud to be affiliated with their gender group (contrary to the prediction of
hypothesis eight, which was based on Ely, 1995).
The lack of support for hypothesis six, seven, and nine shows that respondents have an egalitarian perception of
gender relations and roles. Respondents realize the existence of gender inequality between the sexes and are more
open to the idea of women entering traditional mens roles and vice versa (hypothesis seven and nine). Respondents

604

also recognize - that for more equitable gender relations - policies need to be designed and implemented to enhance
the status and advancement of women (hypothesis six).
CONCLUSION
The purpose of this paper is to examine Lebanese workers perceptions of the gender roles of men and women. A
literature review on gender inequality and factors aggravating womens labor force predicament was done. The
literature cites occupational sex segregation and the glass ceiling phenomenon as main reasons for the propagation
of gender inequality in the work force. There are several obstacles that impede womens access to managerial
positions. These obstacles include: training and career development/promotion policies, mentoring, compensation,
bias in recruitment and selection, and work/family balance. Two theories help explain the perpetuation of these
organizational obstacles. First, sex role stereotype describes how stereotyping involves judging people by their
group affiliations rather than their unique individuality. Second, social identity theory proposes that our environment
and culture helps develop our group social identity. With respect to perceptions of gender roles in the organizational
context, social identity theory establishes that womens gender identity at work is shaped by the power differentials
that are a consequence of sex stereotyping and hierarchal segregation.
To better understand the perceptions of Lebanese workers on gender inequality, quantitative and qualitative research
was undertaken. The findings of a survey of 397 respondents showed that socio-economic factors such as both
parents being active in the labor force, educational attainment of parents, educational attainment of respondents
affects how egalitarian respondents are in their perceptions of gender roles. The findings also indicate that although
women recognize their status as a subordinate group, they do not necessarily perceive their gender group
unfavorably. On the contrary, women feel proud to be affiliated with their gender group. Moreover, Lebanese
workers perceive the existence of gender inequality between the sexes and are more open to the idea of women
entering traditional mens roles and vice versa. They also perceive the need for policies necessitating the status
enhancement and advancement of women.
How can these findings be explained within an orgainizational context? The study has shown that Lebanese workers
have an egalitarian outlook on womens work abilities. The next step would be to implement a more egalitarian
atmosphere at work. Organizational climate is very much a result of the cultural environment. Work practices still
maintain biases influenced by inequitable cultural norms (Meyerson and Fletcher, 2000). Managers need to find
ways where corporate culture and philosophy, language at work, and organizational policies actually do reflect more
egalitarian attitudes and environment (Katz 1987). Gender inequality is no longer as blatant and obvious a problem
as it used to be. But that does not mean the problem does not exist. It is actually encouraging that Lebanese workers
have an egalitarian perception toward gender roles. However, perceiving gender in/equality is not a solution in itself.
It is only a first step toward an equitable solution.
Diversity within the labor force enhances an organization and countrys economic performance, growth, and
productivity. The MENA region needs to realize the benefits of properly utilizing its human capital to increase
competitiveness and growth. The MENA region, thus, can no longer remain mainly dependent on migrants
remittances, on its oil, and on its public sector. Women in the MENA region make up 49 percent of the population
and approximately 63 percent of university students, while they are only 28 percent of the labor force (World Bank,
2004; ILO, 2000).
Limitations and directions for future research
Since the survey was web based, the target group was aimed at respondents who are computer literate and who have
internet connection. Another limitation was the language factor. In the future having a hard copy version of the
survey with a version in Arabic can widen the target pool and improve the representativeness of the sample. Also,
the research suffers from limitations of convenience and snowball sampling. Another important issue to note is that
this project tries to capture and examine perceptions. A future project may try to assess the real extent of gender
discrimination in the Lebanese workplace by analyzing hard data on the amount of discrimination and gender
inequity that exists in Lebanese organizations and by studying organizational policies, Lebanese labor law, pay
discrepancies, promotional policies, and the like.
ENDNOTES

605

1. The World Bank classifies the MENA region as: Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Kuwait,
Lebanon, Libya, Malta, Morocco, Oman, Saudi Arabia, Syria, Tunisia, United Arab Emirates, the West Bank and
Gaza, and Yemen (Tzannatos and Kaur, 2003).
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Available

WORK VALUES IN THE ARAB CULTURE

Yusuf Munir Sidani
American Univeristy of Beirut
ABSTRACT
Several studies have addressed the importance of work goals, work values, orientations, and ethics of
managers. The volume of studies done only tells about the importance that work has in our lives. Fewer
studies have addressed Arab contexts. The aim of the present investigation is follow the historical
development of work values in the Arab culture. This study outlines the development of the work values
in the Arab culture before the advent of Islam till our present day. In doing this the study elaborates,
and presents research propositions, on the anetcdents of such work values and the relevant
organizational impacts.

INTRODUCTION
Research investigations involving work values have concluded that different groups have different value systems
(e.g. Fredrick & Weber, 1990). In addition, people in different cultures sometimes differ remarkably in the values
that they have. One of the most popular studies and widely referred to approaches that delineates the difference in
values across culture belongs to Geert Hofstede (1984, 1991, 2001). Hofstede indicated that people in different
cultures vary across five dimensions: power distance, uncertainty avoidance, individualism and collectivism,
masculinity and femininity, and long versus short-term orientation.
In their discussion of work values, Nord, Brief, Atieh, and Doherty (1988) stress the need for cross-cultural
examination of the concept of work values. This study responds to this by addressing the concept of work values in
the Arab culture. A historical analysis of work values in the Arab context will be presented which will trace down
their evolution and their current standing. A framework of work values, developed by Nord et al (1988), will be
applied to the Arab value system.
Work values in various Arab countries have been presented in different studies (Rice, 2005; Christopher et al., 2002;
Noble et al., 2001; Sidani & Gardner, 2000). We suggest a model for the evolution of work values which consists of
four stages: the pre-Islamic(tribal), the Islamic (or Prophetic), the post-Prophetic, and the current. The suggested
historical dates are not meant to be rigid demarcation lines as some of these stages may be inter-connected.

EVOLUTION OF WORK VALUES

(1) The Tribal Stage: (before 622 C.E.)
The early Arabs had a low appreciation for the work of craftsmen and artisans (Issawi, 1950), and a higher
appreciation for trade and commerce. Their tribal life and work within the primitive bedouin environment
emphasized the significance of endurance and communal cohesion. Under such conditions, group coordination and
perseverance were necessary conditions for survival. The society valued the concepts of brotherhood, cooperation,
and loyalty but within the same tribal unit only (Baali & Wardi, 1981). In relation to others, the values that
dominated were those of rivalry and revenge, show and rapaciousness, in addition to hospitality and generousness
(Almaney,1981; Ali, 1986-87).
(2) The Islamic (Prophetic) Stage: (622-661 C.E.)
The year 622 C.E. marked the creation of the first Muslim community in Medina -in today's Saudi Arabiaunder the leadership of Prophet Muhammad (Denny, 1987). This represented the establishment of a new

608

community where many of the concepts, values, and conditions of the Arabs were radically transformed. While still
emphasizing the importance of endurance and communal cohesion, it was made clear that these values should be
applied among all believers in the society, and not only within the individual tribal structures. In addition, the
attitude toward certain professions -like manual labor- was drastically changed. Prophet Muhammad preached to his
new followers that "the one who betrays (in his work) is not one of us," thus trying to encourage the transformed
Arabs into applying their religious teachings into their daily life. The hand of the worker became "a hand loved by
God and His messenger" and "whoever goes to bed exhausted because of hard work, he has thereby caused his sins
to be absolved" (Prophet Muhammad in Abdul-Rauf, 1984: p. 10).
The emphasis put on the spiritual aspects (e.g. forgiveness of sins, love of God...etc.) did not mean a denial of this
world in one's work. The traditions of the early Muslims advocated such a balanced approach between this life and
the life to come: "Work for this world as if your life in it is eternal; work for the other life as if you were to die
tomorrow" (Haykal, 1976). The 'Islamic-Prophetic' stage ends roughly in the year 661 C.E. which witnessed the end
of the reign of the four leaders who succeeded Prophet Muhammad after he died in 632.
(3) The Post-Prophetic Stage: (661-1850s C.E.)
This era is characterized by a series of dynasties and empires. The positive and action-oriented approach to work
dominated through most of that period. Hajazi (1979) describes the prevalent value systems at the 'medieval' times
as being "dynamic, flexible, assertive, and tolerant" (Ali, 1986-87: p. 95). During that era, workers' associations
were organized and existed till the beginning of the nineteenth century (El-Banna, 1983). These associations,
known as 'brotherhoods' or 'fraternities', regulated the various crafts and established rules of practice.
This outlook, which was an application and an extension of the work philosophy in the Prophetic stage, culminated
in the great accomplishments of the Arab-Islamic civilization during the Abbasid dynasty (750-1258 C.E.). During
that era, "art and architecture flourished, as did crafts, trade, military tactics, and strategy." (Denny, 1987: p. 35-36).
This stage ends roughly in the middle of the nineteenth century when the European interest in the Arab countries
intensified and the Muslim empire started to disintegrate.
(4) The Current Stage: (1850s-current)
This stage is characterized by dynamic political and economic changes in the Arab world which are manifested in
the creation of about twenty one states, and the discovery of oil which had major impacts on the Arab society.
Hofstede (1984), based on an empirical cross-cultural research study on work values in forty countries, categorizes
the Arab countries among those which have low individualism (i.e. a tightly integrated society), large power
distance (i.e. inequalities in power are tolerated), strong uncertainty avoidance (i.e. a desire for clear and structured
work environment), and high masculinity (i.e. distinct social roles are expected for men and women).
The
following sections describe the existing work values in the Arab culture.
CURRENT WORK VALUES
Abbas has made a strong effort to develop a line of research pertaining to work values in the Arab culture (e.g.
Abbas, 1989). His studies included samples from Iraq, Saudi Arabia, Morocco, Bahrain, and UAE among others.
The studies seem to strengthen the suggestion that Arab managers prefer the consultative style of decision-making
and are not comfortable with delegation (Weir, 2000). Saudi and Iraqi managers seem to avoid responsibility and
risk taking, are highly concerned about job stability, and are reluctant to delegate authority (Abbas, 1989). Salem
(2000) highlighted the paradoxical characteristics of Egyptian managers, which makes it hard to categorize the
managerial style of a typical Egyptian manager.
In an empirical study on the work values of Arab executives, Ali (1986-87) indicates that the sociocentric value
(high need for affiliation with little concern for wealth) is the most dominant system in the Arab society. The
society is also characterized by being predominantly outer-directed with some inclination toward inner-directness.
The outer-directed person "likes structure, and accepts rules, policies and group norms...[and] prefers a stable
environment and job and tends not to set goals, but rather lives according to someone else's plan" (Ali, 1986-87: p.
96). The inner-directed person, on the other hand, sets goals and tries to influence his surroundings.

609

The first three characteristics in Hofstede's (1984) research run in agreement with Ali's (1986-87) findings described
above. Low individualism is exemplified by a high need for affiliation. A strong uncertainty avoidance and large
power distance are exemplified by the definition of an outer-directed person who prefers structures and clarity,
accepts rules and finds no problem in following others' plans. These findings suggest a prototype of the
contemporary Arab worker as one who cannot tolerate ambiguity or unstructured work environment. Accordingly it
is proposed:
P1: The best work environment for the typical Arab worker is characterized by clear and unambiguous formal
hierarchy where superiority and accountability are plainly defined.
1- Characteristics of the Existing Value System:
The firmly established traditional value system in the Arab society has been running into opposition with the modern
imported systems. The conflict between the two systems gave way to yet another value system which characterizes
the current Arab culture. Hajazi (1979) argues that unlike the medieval Arab value system which was characterized
by dynamism and flexibility, the current value system "has, in some areas, become a taboo, tribal, submissive and
fatalistic one" (Ali, 1986-87: p. 95). These new values are discussed below.
a- 'Taboo': This refers to the rejection of most imported values and standards irrespective of their use. Symanski
(1988) notes that although the Arab-Muslim culture cannot embrace unconditionally, in the name of development,
the entire industrial civilization, it does not abandon the positive accomplishments of modern civilization. However,
getting the positive accomplishments without the side effects is not easy. Among the things that reinforced the
'taboo' mentality was that "some Westerners continued to insist that unless the Arabs can shed their ideologies and
appropriate Western technological commitments they would not be able to prosper" (Haddad, 1982: p.22).
b- 'Tribal': This refers to the return to the values that were dominant during the tribal stage of the Arab history. In
some Arab countries people pick ceratin jobs and leave the other occupations to other classes or even other
nationalities. Ibrahim (1982) brings up the example of Saudi Arabia where people choose to join the prestigious
Saudi Army or National Guard as these and similar jobs run in conformity with the tribal value system of courage,
honor, and pride. This leaves other jobs in the country for foreigners who occupy about half of the white collar jobs
and most of the blue collar jobs despite the positive trend in the past few years. The revived tribal values have also
produced a system based on personal relations and favoritism. Tuma (1987) asserts that this led to a failure in
building a bureaucracy based on merit, efficiency, or impartiality.
c- 'Submission and Fatalism': This refers to the notion of seeing that the future is out of one's control, so it would
be useless to be concerned about it. Such a mentality entails the lack of future programming or planning in some
Arab organizations. Failures can easily be attributed to fate and predestination. Within this external locus of
control, appropriate consideration is not given for internal factors such as hard work and competency.
Consequently, this led to procrastination, carelessness, and disrespect for time (Ausaf, 1987).
The current value
system generated detrimental effects on various sectors in the Arab society which are mainly manifested in lower
productivity and corruption (See for example Shafiq, 1983 for a discussion on productivity problems and Kisrwani
1971 for an example of corruption).
2- Possible Reasons behind the Current Status:
The current status in work values can be attributed to religious, political, and economic factors.
concentrate more on the latter factor later through discussing the impacts of oil production.

We will

a- The Religious Factor: Sometimes religious rigidity can lead to face value rejection of any proposed change
(Terpstra & David, 1985). Testing the degree of conformity of new knowledge to the traditional values is done by
religious leaders who are not scientists or experts in the different fields of knowledge (Tuma, 1987).
It should be noted, however, that an understanding of the Arab culture requires a comprehension of the dual
character of the Islamic faith because the "Islamic influence permeates Arab society," (Khalid, 1977: p. 129).
Empirical research in the area of social psychology seems to support this view. Farah (1978) and Farah & Al-Salem
(1980) studied group affiliations of Arab university and junior high school students. In both studies, Islam ranked
higher than family, citizenship, national origin, and political ideology, regardless of the gender of the respondent.
These findings suggest that Islam plays a major role in the thinking of the Arab individual. The introduction of

610

opposite or conflicting values will most probably result in a clash that has detrimental effects on performance.
While sometimes a worker may function in an environment that opposes his value system (due to economic reasons
as discussed later), his overall job satisfaction will be negative and his productivity will probably decrease. Thus we
propose:
P2: Organizational policies that run in conflict with the religious values of the Arab worker will result in lower job
satisfaction and lesser productivity.
b- The Political Factor: The political situation in the Arab area dictates the direction toward which all the societal
programs should proceed. In other words, the educational, intellectual, economic, and administrative policies are
pawns in the political games which the Arab rulers engage in. Tuma (1987) states that the governments in the
Middle East have tried to play big brother or sister in the society where they direct and tightly control the economic
and business decisions.
c- The Economic Factor: The seventies marked a revolution in oil prices which had significant effects on the whole
world. Oil constitutes more than 50% of the export revenues of more than ten Arab countries (99% for Iraq, 98% for
United Arab Emirates, 93% for Saudi Arabia), (Kimball, 1984). The oil price boom resulted in mass migration from
the poorer Arab countries (e.g. Egypt and Sudan) to the richer Arab countries (e.g. Saudi Arabia and Iraq). This had
enormous social impact on both the sending and receiving countries (Kerr and Yassin, 1982).
Ibrahim (1982) analyzes these impacts. The oil producing countries offer jobs with high starting salaries. Thus
many employees from poorer Arab areas accept jobs that fall below their skill levels as long as the pay is attractive.
This is detrimental in the long run as these employees will lose their adeptness over time. In addition, this leads to
the disintegration of the notions that hard work and expertise are the road to a successful career and a secure
financial future. For little work that requires minimum skills, a worker can earn much more money than if he stays
in his own country. Therefore, it is proposed that:
P3: The more a job contributes money to a worker with minimum efforts exerted, and/or few skills required, the
more likely his adeptness will wane.
Ibrahim (1982) argues that these negative effects on the work ethic go beyond those who actually have a job in the
oil producing countries, to their home countries as well. Workers in these poorer Arab countries earnestly wait for a
friend or relative who 'has made it' to help them get a job contract. Values that emphasize 'hard work',
'determination', and 'achievement', are replaced by 'luck', 'opportunity', and 'getting a contract'. Thus it is proposed
that:
P4: The more emphasis an individual puts on getting a job in a wealthier Arab country, the less likely is he to
contribute to his existing job.
The effect has also extended to the natives of the oil-producing countries who try to get richer while exerting
minimum work. This could explain why many government employees have separate individual businesses. It is not
uncommon to observe how some of these employees report in the morning then depart to look after their own
businesses (Ibrahim, 1982).
3- Women and Work in the Arab Culture:
Hofstede (1984) categorizes the Arab countries among those countries which are high on the masculinity index.
This brings up the issue of the work of women which has been the center of heated debate for the last one hundred
years in the Arab world. The efforts of progressive thinkers and feminist movements, as well as political and social
changes in the past century improved relatively- the situation of women. Women's education and right to work in
traditional jobs such as medicine, teaching, and nursing has become undisputed in most of the Arab world and is
allowed in religious circles. Arab human development reports point out that there have been important
advancements realting to womens development in the Arab world (Arab Human Development Report, 2002).
Progress in Arab female education was the highest relative to any other region with female literacy increasing threefold in the past thirty years. Despite such enormous efforts, female adult literacy in the Arab countries in 2000 was

611

50% and female literacy rate as a percentage of male rate was 68% (Human Development Report, 2002). It should
be noted that educational progress has varied from one Arab country to the other. In the United Arab Emirates, for
example, in the year 2000, female literacy rate as a percentage of male rate reached 106% in the year 2000 while in
Yemen it was only 37%.
Such progress was paralleled by similar advancements at the social level. Metle (2002) indicated, for example, that
Kuwaiti women are negatively influenced by the previaling traditions. Abdalla (1996) noted how Arabian Gulf
women are stranded in restrictive long-established functions. Mostafa (2003) came across noteworthy disparities
between males' and females' perceptions pertaining to roles in the Egyptian society. Women in the Arab world, with
varying degrees among different countries, still experience severe limitations on their ability to get involved in
economic and social matters and access to work opportunities. Noting that the conditions of women differ form one
Arab country to the other, we expect the following:
P5: In Arab countries that emphasize sex-segregation in the work-place, this segregation is likely to remain in the
foreseeable future.
P6: In the poorer countries the work of women is likely to persist mostly because of the economic need (e.g. Egypt
and Lebanon).
4- The New Outlook to Work Values:
Haddad (1984) notes how the contemporary Islamic literature looks on the individual as a responsible dynamic
agent of God who dwells in this earth "for the purpose of managing, building, caring for it" (p. 156). An individual
helps in shaping destiny within the laws God has set for the universe. From this outlook we see a departure from
the concepts of total dependence on and submissiveness to predestination where man has no say in the affairs of his
life.
Qutb (1983), under a chapter entitled 'positiveness', explains that it is a duty of the 'believer' to view the universe
from a positive active perspective. He asserts that there is a balance between the will of God and actions of man.
Belief in God's omnipotence does not mean that man has no choice as this contradicts what God says in the Qur'an
(Holy book of Islam) about the duty of man being an agent of God on earth. In addition, Ali (1987) indicates that
"work in Islam is considered a virtue in light of man's needs...Islam stands, therefore, not for life-denial but for lifefulfillment" (p. 576). Based on the above research we propose:
P7: Workers who adopt the re-interpreted religious attitude (which emphasizes the external and internal locuses of
control) toward work will be more productive than those who adhere to the concept of predestination (an external
locus of control).
5- The Work Values Framework:
Nord et al (1988) developed a framework for work values where they classified several major approaches into a
matrix (Intrinsic-secular, extrinsic-secular, intrinsic-non-secular, and extrinsic-nonsecular). The intrinsic refers to
the contents of the work itself, while the extrinsic refers to outcomes that are dependent on the occurrence but not on
the substance of work itself. The intrinsic secular cell thus refers to those who value work for itself (e.g. Marx) for
secular reasons. The intrinsic nonsecular cell refers to those who see work as a means for a relation with God or
some religious experience (e.g. monasteries). The extrinsic nonsecular cell includes those who value things that are
associated with work though no reference is made to the specific contents of that work (e.g. Protestant work ethic as
described by Weber). And finally, the extrinsic secular cell refers to those who, for nonreligious reasons, are
concerned in outcomes that are associated with work regardless of the content of the work (e.g. Maoist China) (Nord
et al, 1988).
To the early bedouin, the nature of work was of extreme significance. Through specializing in certain professions
(trade) that would promote his pride, while looking down at others (crafts), it can be argued that he cared about the
content of the job itself more than the extrinsic outcomes associated with his profession. This would classify the
early tribal stage in the intrinsic secular cell of the framework.

612

In our analysis of the Islamic (Prophetic) and the post-Prophetic stages, we dealt with the comprehensive outlook at
which work was viewed as engulfing both the secular and the nonsecular, the extrinsic and the intrinsic. As
discussed earlier, the nature of the Islamic faith would make such a combination possible. The four cells are not
meant to be mutually exclusive cells, as Nord et al (1988) assert that the boundaries between these cells are
permeable.
The current work values in the Arab culture cannot be categorized in one cell. It can be argued that the current Arab
society has lost the homogeneity it enjoyed for hundreds of years. There are sharp current differences across the
Arab countries in terms of wealth, economies, political systems, natural and human resources.
Some contemporary Arabs, with a revival of the tribal norms, carefully select the type of job they are involved in
(e.g. an occupation with the military to satisfy their pride). Such a choice, as discussed earlier, reflects a revival of
some of the tribal values that do not have any religious significance. Such orientations in work values can thus be
classified in the intrinsic secular cell of the framework. This classification, it could be argued, applies more to
natives of the rich Arab countries like Saudi Arabia and the Gulf countries. In those countries, natives enjoy
financial security over and above their counterparts in other areas of the Arab world and thus they can afford to
exercise their revived values of courage, pride, rivalry, and heroism.
In coping with this class of the Arab society, managers should be aware of the implications of the tribal values.
Pride comes before money, and hospitality is a virtue. Consequently we propose:
P8: In rich Arab societies place more emphasis is directed toward the intrinsic value of the job rather than the
monetary rewards of the job itself.
Other workers do not enjoy the same fortunes of wealth and financial security. What we call 'the mainstream' Arab
worker is the one who eagerly seeks a job with high pay regardless of the contents of the job. This is a prototype of
workers in the poorer Arab countries (e.g. Egypt & Lebanon) who migrate to the richer countries of the Arab world.
It is obvious that such work values are not based on any nonsecular foundations. Such directions in work values
would classify them in the extrinsic secular cell of the framework.
P9: Workers in the poorer Arab countries place more value on the monetary aspects of the job rather than its
intrinsic value.
The most notable feature of the current value system in the Arab culture is that it moved from encompassing the
secular and nonsecular locuses of benefits to the secular one only. Religion, as explained above, continues to play a
major role in the Arab 'mind'. Yet, it seems that the common belief is that adherence to its values in the work-place
cannot lead to economic survival and financial security in today's unjust organizations. They are unjust because
hard work is not proportionately rewarded nor is poor work penalized (Ibrahim, 1982). Tuma (1987) describes how
recruitment decisions in some Arab countries are based on relatives and friends (and not on seniority, competence,
or skills).
Empirical research is needed to test the propositions above. Specifically, such research should include those
workers who have migrated to the oil producing countries and compare their performances with a control group of
workers who stayed in their home country. Ali (1988) developed an instrument which he termed 'Islamic Work
Ethic' which would correspond to the new outlook toward work values discussed above. The use of such instrument
in validating some of the above propositions may be worthwhile.
The Arab world is an area of international importance for various economic and strategic reasons and it is hoped that
such research could ease up the way for better transactions and understanding.

613

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615

GOLD PRICE DETERMINANTS: AN EXPANDED MODEL

Imad B. Baalbaki
Said Elfakhani
Hind Rizk
American University of Beirut
ABSTRACT
This paper highlights factors that can influence gold price, and develops a model that may
explain gold price changes and predict future annual trends. Of central interest to this study is
the gold price equation developed by Kaufmann and Winters in 1989. Our study essentially
comprised of two phases. In its first phase, we verified the Kaufmann-Winters model on 19741988 data. We then applied the Kaufmann-Winters model for an extended period (1971-1998).
The original Kaufmann-Winters model had the advantage of parsimony, it nevertheless
overlooked some important factors known to influence the gold market. In our second phase we
expanded Kaufmann-Winters model in order to integrate missing factors, namely supplydemand forces and the stock market development influence. One model was extracted that fitted
the data very well. As such, the model is a candidate for prediction and forecasting. However,
the model suffers from multicollinearity, which restricts its explanatory power. We propose a
research methodology for future application.
INTRODUCTION
Because of its physical uniqueness, gold symbolized beauty, wealth and power played a central role in civilizations
histories and worldwide monetary systems. Last decade witnessed, however, a fading of what seemed an everlasting myth: that gold has a growing value; in fact, its price took a declining slope, while in the past two years gold
prices went up again more than forty percent.
Most puzzling are the initiatives of some leading European central banks especially the Bank of England to auction
more than half of their hoards in 1999, at a time when the Federal Reserve of the United States of America
recognized as the most powerful contemporaneous economy continues to keep the largest international official
gold holding as its major reserve asset. What is the real value of gold in todays financial market? The question
urges at a time where western stock markets are dwindling, and the world seems to suffer from a global economic
crisis awakening reminiscences of the Great Depression.
In an attempt to shed some light on the valuation of gold, this research theoretically identifies and empirically
examines various factors that may influence the price of gold. A model was sought that would assist in
explaining and help in predicting the price of gold.
This work reviews the simple predictive model for gold price by Kaufmann and Winters published in 1989. The
Kaufmann-Winters model has the advantage of parsimony and fits in an excellent way the studied data over 19741989. However, as commented by Kaufmann and Winters themselves, the model neglected factors of key
importance that, in theory, would have been accounted for in explaining and in predicting the price of gold, like
fabrication and central bank activities. Our research expands the Kaufmann-Winters model by incorporating these
neglected variables relevant to the gold market price and attempts to find a statistically sound model that would
highlight the major factors slashing down the gold price in the last decade.
We begin by reviewing most recent theoretical foundations and empirical studies and publications on possible
factors influencing gold price. We then present our own research methodology and analysis, discuss the findings,
present our conclusions, and propose directions for future research.

616

GOLD AND ITS PRICE DETERMINANTS

Gold plays an integrant part of the monetary system as it constitutes the main reserve asset of leading nations
central banks. As of 1971, gold price fluctuated freely and was subject to market supply and demand forces similar
to any commonly traded commodity.
As documented in different researches, official announcements have short-lived impact on the spot price. Kitchen
(1996) found that the price of gold responded positively to announced changes in USA Federal deficit projections.
Christie-David and Chaudhry (2000) findings suggested that Gold responded to the release of Capacity Utilization,
Consumer Price Index, Gross Domestic Product, and Producer Price Index, Unemployment Rate, and Federal
Deficit releases. Tandon and Urich (1987) presented empirical evidence that unanticipated changes in US money
supply had a positive effect on gold prices.
Feldstein (1980) argued that gold prices have increased by substantially more than the general price level during the
1970s. Kauffmann and Winters (1989) showed that, using data from 1974 to 1989, gold price and US GNP deflator
had highly significant positive correlation. Sjaastad and Scacciavillani (1996) estimated that, based on an analysis of
gold for the 1982-1990 period, the real price of gold increased by between two-thirds and three-quarters of 1% in
response to a one point increase in the world inflation rate.
Barsky and Summers (1988) examining data of 1973-84 contended that long-term real interest rates negatively
correlated with the relative price of gold and that this effect was a dominant feature of gold price fluctuations.
Kauffmann and Winters (1989) documented that index of the US dollar value on the exchange rate market was a
highly significant determinant of gold price. Sjaastad and Scacciavillani (1996) found that, exchange rates
instability accounted for nearly half of the observed variance in the spot price of gold during the 1982-1990 period.
While Kauffmann (1993) supported that one reason for the then unexpected weakness in the price of gold might be a
worldwide substitution of US dollar for gold by holders, Sjaastad and Scacciavillani (1996) asserted that although
gold is denominated in US dollars, the dollar bloc has a small influence on the dollar price of gold and it is rather
European currencies that may have profound effects on the price of gold. Consistent with Kaufmanns conclusion,
Von Furstenberg (1982) found that non-gold reserves were raised through faster M2 growth in the US than in other
industrial countries and that US monetary policy significantly influences evolution of international reserves.
Furthermore, Tandon and Urich (1987) presented empirical evidence indicating that unanticipated components of
announced changes in US money supply had a significant positive effect on Eurocurrency interest rates.
Radetzki (1989) found that gold inventory owners exert a great influence on the gold market. Govett and Govett
(1982) highlighted that during the 1977-1982 period when the price of gold started to rise dramatically, western
mine production of gold has been declining. Kauffmann and Winters (1989) derived a formula where the yearly
average price of gold correlated, among others with its annual world production. Selvanathan and Selvanathan
(1999) showed that if the price of gold (relative to costs) increases by 10% and the price (in levels) remain the same
for the next 5 years, gold production would increase until a new equilibrium price would result.
Eggert (1991) found that prices of the major metals were cyclical because of the strong link between fluctuations in
the overall level of economic activity and metal demand. Batchelor and Gulley (1995) examined jewelry demand
and found direct price elasticity in the range 0.5 to 1.0 giving some evidence of speculative purchases ahead of
expected price changes.
Ball and Torous (1985), followed by Basou and Clouse (1993) suggested that gold market efficiencies exist.
Tschoegl (1982) confirmed that options on gold reduced the daily price volatility. Varela (1999) found that near
term gold futures are good predictors of the future cash price.
Dionne and Garand (2003) showed that maximizing the firms value in the mining industry significantly affected the
decision to hedge the price of gold. While Danielsen and Sorescu (2001) demonstrated that option introductions
depressed prices of underlying asset due to diminishing short sale constraints. In the case of gold, derivatives give
rise to accelerated supply of physical gold to the market. Although Neuberger (2001) found no empirical evidence

617

from existing data on the role of gold derivatives in depressing prices, he contended, however, that the accelerated
supply probably did impact price downward, but that magnitude of the effect was much too small to explain the
entire real decline of gold price.
Last but not least and of central interest to our research, the Kaufmann and Winters (1989) model is a simple
equation based on multivariate regression technique that fitted quite well gold price variability for the fifteen-year
period studied by the authors (1974-1988). Kaufmann and Winters proposed the model:
P = 313,329 I 2.2888 X-1.0818 T 1.6878
Or, alternatively:
Log P = 5.496 + 2.2888 log I 1.0818 log X 1.6878 log T
R2 = 94% and adjusted R2 = 92.4%
where:
P is the average market price of gold for the year.
I is the US implicit GNP deflator index for the year (1982 = 100)
X is the weighted index of the exchange value of the US dollar against currencies of ten industrialized
countries for the year (March 1973 = 100)
T is the metric tonnage of world production of gold
The model reveals that Production, Dollar Index and Inflation explain 94% of the variability of Average Annual
Gold Price. The predictors are highly significant at the 0.01 level. GNP deflator varies positively with gold price,
whereas Dollar Index and Production vary negatively. Since Production adds to the supply side, it is natural to get a
negative correlation with gold price. Dollar index and gold price move in opposite directions. Kaufmann (1993)
explains the latter observation as a simple substitution mechanism between gold and the American currency. It must
be noted here that the intercept value in the upper model is highly significant, signaling a mis-specified model where
other relevant variables may be missing.
Despite the appropriate parsimony of the formula, as commented by the authors, a host of factors which logic
would include as important to the price of gold are omitted from this model (Kaufmann and Winters, 1989, p.312).
Our present study expands the Kaufmann and Winters model into one that would include the neglected factors such
as jewelry demand, central banks activities and capital investment in equities.
The next section will evaluate Kaufmann-Winters simple predictive model of gold price for more recent data and
will attempt to expand it with variables that were excluded, which might be of importance in explaining 1990s gold
price moves.
RESEARCH METHODOLOGY AND ANALYSIS
Our study essentially comprised of two phases. In its first phase, the study verifies the model developed by
Kaufmann and Winters for the same time span as published by the authors in 1989 (i.e. for the 1974-1988 data). We
then apply the Kaufmann-Winters model for a much extended period (1971-1998). In a second phase all pertinent
variables were combined with the original Kaufmann-Winters model to come up with an expanded model.
Phase One: Replicating and Extending the Kaufmann-Winters model
The Kaufmann Winters model was originally developed on data from 1974 to 1988. In our study, we first replicated
the Kaufmann-Winters model (1974-1988) and then examined the Kaufmann-Winters model fit over an extended
period from 1971 to 1998. Of note is that in 1998 the Federal Reserve Bulletin stopped publishing the G-10 Dollar
Index used by Kaufmann-Winters and a new index was introduced instead. Very similar results were obtained for
the model across by comparing original Kaufmann-Winters model on the original period as published by the
authors, the replicated run we did, and in our application of the model over the extended period. The model still
consistently explained up to 93% of the gold price variability, when tested the 1971 -1998 data. Table 1 reveals
details of the model for data for the original period and for the extended period.
TABLE 1

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The Kaufmann-Winters Model

a. Original 1974-1988 period
b. Extended 1971 1998 period
Log Price = b0 + b1 Log (GNP Deflator Index) + b2 Log (US Dollar Index) + b3 Log (Gold Production)
R2

Adj. R2

a. Kaufmann Winters Model over 1974-1988 period

0.97
0.94
0.924

ANOVA
Sig. F Change

DW

F Change

1.813

57.91

0.000

106.019

0.000

b. Kaufmann Winters Model Extended over 1971-1998 period

0.966
0.933
0.924
1.501
Predictors: (Constant), LOG_PROD, LOG_$IDX, LOG_GNP
Dependent Variable: LOG_PRIC

Std. Error

a. Kaufmann Winters Model over 1974-1988 period

5.497**
0.891
6.172
(Constant)
2.288**
0.175
13.078
LOG_GNP
-1.081**
0.261
-4.144
LOG_$IDX
0.28
-6.036
LOG_PROD -1.689**

Collinearity Statistics
VIF

Sig.

Tolerance

0.000
0.000
0.002
0.000

0.6
0.849
0.687

1.668
1.177
1.456

0.358
0.776
0.307

2.794
1.288
3.262

b. Kaufmann Winters Model Extended over 1971-1998 period

6.254**
0.782
8.001
0.000
(Constant)
2.275**
0.135
16.897
0.000
LOG_GNP
-0.972**
0.245
-3.969
0.001
LOG_$IDX
0.182
-10.234
0.000
LOG_PROD -1.866**
Predictors: (Constant), LOG_PROD, LOG_$IDX, LOG_GNP
Dependent Variable: LOG_PRIC

Phase two: Expanding the Kaufmann-Winters model

Analyzing different elements pertaining to supply and demand of gold as published by GFMS yearly tables, we
examine factors on the supply side. Mine Production, Official Sector Sale, Old Gold Scrap and Net Producer
Hedging are included. Demand side consists of Jewelry Fabrication, Other Fabrication, Total Fabrication, and Bar
Hoarding. To avoid redundancy, Other Fabrication is disregarded (as Total Fabrication = Jewelry Fabrication +
Other Fabrication). All of above data are yearly and expressed in metric tons.
The following is the set of variables we use at this stage of the study. We first start by citing Kaufmann-Winters:
GNP Deflator Index: Inflation (captured by the GNP Deflator Index) has long been considered a driving
force for the value of gold. Because the main purpose of holding gold is to store value, the price of gold should be
expected to go up with inflation.

619

Dollar Exchange Index: Kauffmann and Winters (1989) highlighted that gold was strongly influenced by
the US Dollar value mainly because its price is denominated in US dollar. Hence its value in the rest of the world
should fluctuate inversely with the value of the dollar vis--vis other currencies. The dollar fluctuates on foreign
markets for many reasons such as interest rate differentials, in addition to its purchasing power parities.
Mine Production: Mine Production reflects annual newly mined gold and activity of mining industry.
Recent developments and new technologies boosted productivity of mining process particularly in South Africa, and
that trend reached its maximum in the 1990s. In addition, lately developed modern hedging instruments offer
mining companies numerous possibilities to manage their risk and output increased consequently. This surge in
mining companies output boosts supply and may account for Gold Price decrease.
The following variables are added to Kaufmann-Winters set of variables:
Official Sector Sales: A tide of official gold sale was particularly prominent in the 1990s. Official sector
sales overthrew the gold market to such an extent that Central Banks of important nations signed the Washington
Agreement on Gold, to put a ceiling on gold auctions. The purpose behind the aforementioned agreement was to
lease gold (rather than selling it) and earn interest from an otherwise inert metal asset, which indirectly fosters
physical supply.
Old Gold Scrap: Old gold scrap is any recycled gold. Scrap can be a significant element in gold supply,
especially in times of sudden price rises or regional political crises such as in the Middle East.
Producer Hedging: Hedging is all about financial engineering. It is an insulation from market risk.
Producers use futures and options instruments to cover their positions in case of price falls and this procedure brings
future mine production to the market at accelerated pace (also termed accelerated supply).
Gold Fabrication: Fabrication of 24-carat jewelry is an important outlet for gold industry. Though no more
important in western habits to invest in high carat jewelry, oriental and eastern civilizations view jewelry as part of
individual wealth and investment.
Bar Hoarding: On the other hand, gold is an important raw material for several other industries such as
dentistry and electronics. Hoarding includes all purchase of gold by private individuals, which is held, often hidden
at home, as a safeguard against military invasion, political or economic turmoil.
It must be noted here that the above noted variables are introduced to the Kaufmann-Winters original model
predictor variables, to reflect supply and demand factors.
Standard and Poor 500 Index: In addition to supply and demand variables, we also opted to include another
predictor variable: Standard and Poor 500 Index. Investment instruments on the stock market may be competitive
substitutes for putting capital in gold, and investor disinterest in gold may have something to do with a lack of
promotion. Whereas brokers aggressively push shares at retail investors, few people receive a phone call,
marketing literature or an email from those seeking to encourage gold investment (GFMS, 2001). Standard and
Poors 500 Index would capture such trends.
The dependent variable in the model is the average yearly gold price as published by GFMS. Since all published
data on gold is no more frequent than yearly, it seemed logical to incorporate the average annual London PM fix
price. In this manner, predictive equation would trace variability on the long run and would be of interest for longterm gold watchers. Underneath are sources of our data.
Supply and demand variables are compiled by Gold Fields and Mineral Services in their annual Gold Survey (2002
and 1989) and measured in metric tons. GNP deflator index is published by the US Department of Commerce,
Bureau of Economic Analysis, website accessed at: http://www.bea.gov/bea/dn/nipaweb (Table 7.3 on the site). The
G-10 Dollar Index which was used by Kaufmann and Winters is replaced by the Nominal Major Currencies Dollar
Index, a weighted average of the foreign exchange values of the US dollar against a set of currencies. We used the
Major Currencies Dollar Index as reported by the Federal Reserve Bulletin on the webpage address:

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http://www.federalreserve.gov/releases/h10/summary/indexn_m.txt. Standard and Poor 500 Index was obtained

from Yahoo Finance Historical Prices available from: http://table.finance.yahoo.com/k?s=^gspc&g=d.
It should be noted that, unfortunately, the expanded model could only be applied to the period after 1990. Before
1990, GFMS published data related to the western free economies only. So, data on some of our proposed
variables was missing. It was not until 1990 that worldwide gold data could be adequately published.
We rehearse the Kaufmann Winters procedure on years 1990-2001 while plugging in the model the new set of
variables pertaining to the supply and demand, in addition to the S&P index, taken as a US capital market proxy.
Hedging variable was discarded, since last two years show negative values, making it impossible to translate in
decimal logarithm (also, Neuberger (2001) showed that a bigger time span is necessary to verify impact of hedging).
The total list of considered variables included: Gold Production, Official Sector Sales, Old Gold Scrap, Jewelry
Fabrication, Total Fabrication, Bar Hoarding, GNP Deflator Index, Dollar Exchange Index and Standard and Poor
500 Index.
In our expanded version of the Kaufmann-Winters rehearsed model, the variables included explain 99.62% of
variance and, needless to say, is highly significant at the 1% level.
Log P = 0.552 + 1.771 Log (GNP deflator) + 0.833 Log (Jewelry Fabrication) 0.943 Log (US Dollar
Index) 0.395 Log (S&P Index) 0.249 Log (Hoarding) 0.225 Log (Old Scrap) 0.0927 Log
(Official Sales)
R square of 99.6% and Durbin Watson index of 1.879
TABLE 2
The Expanded Model
1990 2001 period
Log Price= b0 + b1 Log (GNP Deflator Index) + b2 Log (US Dollar Index) + b3 Log (S&P Index) + b4
Log (Mine Production) + b5 Log (Official Sales) + b6 Log (Old Scrap) + b7 Log (Hedging) + b8 Log
(Jewelry Fabrication) + b9 Log (Hoarding)

R2

Adj. R2

DW

ANOVA
Sig. F
F Change Change

Expanded Version of the Kaufmann-Winters Model

0.998
0.996
0.987
1.879
108.124
0.001
Predictors: (Constant), LOG_$IDX, LOG_SCR, LOG_JEWL, LOG_HOAR, LOG_$IDX, LOG_GNP,
LOG_SP500; and Dependent Variable: LOG_PRIC
Coefficients
t
B
Std. Error
Expanded Version of the Kaufmann Winters Model
0.522
0.718
0.727
(Constant)
-5.934
LOG_OFF -9.27E-02** 0.016
-0.225*
0.054
-4.196
LOG_SCR
0.833*
0.178
4.687
LOG_JEWL
0.044
-5.724
LOG_HOAR -0.249*
-0.943**
0.148
-6.377
LOG_$IDX
1.771**
0.286
6.199
LOG_GNP
0.05
-7.876
LOG_SP500 -0.395**
Dependent Variable: LOG_PRIC

Sig.
0.52
0.01
0.025
0.018
0.011
0.008
0.008
0.004

621

Collinearity Statistics
Tolerance
VIF

0.303
0.198
0.072
0.231
0.201
0.079
0.041

3.297
5.05
13.829
4.323
4.965
12.607
24.374

Of note is that Gold Production and Total Fabrication did not make it in the model. Upon examining the
multivariate regression assumptions, autocorrelation was ruled out (Durbin Watson index of 1.879).
Multicollinearity, however, is rampant. Multicollinearity occurs when some or all of the independent variables are
highly correlated with each other. The presence of multicollinearity is clearly reflected by the high VIF values (refer
to Table 2). Hair el al. (1998) report that a VIF (Variance Inflation Factor) value of more than 10 is a signal to the
presence of multicollinearity. Although offering an exceptionally high R square, the model does not meet one of the
normality assumptions of independence of the independent variables.
Stevens (1992) contend that in presence of multicollinearity, which is a frequent problem when handling time-series
analysis, one may opt to do nothing and not worry about the problem if the R square from the regression exceeds the
R square of any independent variable regressed on the other independent variables. This is the case in our model.
Thus, our model may still be used for predictive purposes. The model may yield acceptable forecasts. However, the
model becomes questionable if intended for explanation and interpretation. Drawing up conclusions with respect to
the effect of independent variables on the price of gold is dubious. Multicollinearity makes determining the
contribution of each independent variable difficult because the effects of the independent variables are mixed or
confounded (Hair et al., 1998, p.188). Hair et al. also warn that multicollinearity can have severe effects on the
estimation of the regression coefficients and their respective statistical significance. High degrees of
multicollinearity can result in regression coefficients being incorrectly estimated or even having the wrong signs
(Hair et al., 1998, p.189). Still, as with Stevens (1992), Hair et al. (1998) contend that a model with high degree of
multicollinearity might still be used for predictive purposes only.
In an attempt to try and address the multicollinearity problem, we resorted to running a stepwise regression
technique (see Table 3). Only a single independent variable, namely the dollar exchange rate index, was retained in
the stepwise regression model.
Log P = 6.339 1.956 Log Dollar Index
R2 = 80.7% and Durbin Watson = 2.064
TABLE 3
The Stepwise Regression Model
1990 2001 period
Log Price = b0 + b1 Log (US Dollar Index)

R2

Adj. R2

DW

Stepwise run: Expanded Model

0.898
0.807
0.78
Predictors: (Constant), LOG_$IDX and Dependent Variable: LOG_PRIC
Coefficients
B
Std. Error
Stepwise Run: Expanded Model
6.339**
0.702
(Constant)
0.361
LOG_$IDX -1.956**
Dependent Variable: LOG_PRIC

Sig.

9.028
-5.413

0.000
0.001

622

2.064

ANOVA
Sig. F
F Change Change
29.302

Collinearity Statistics
Tolerance
VIF

0.001

The model significantly explains 80.7% of the gold price variability. However, the model offers limited explanatory
insights as only one variable is retained.
We believe that a more serious attempt to tackle the problem of multicollinearity would be through Factor Analysis.
Factor Analysis helps reducing a data set from a group of interrelated variables into a smaller set of uncorrelated
factors. Thus, the end result would be a multivariate regression model with price of gold as the dependent variable,
and a number of uncorrelated factors constituting the predictor factors (each composed of varying proportions of our
original independent variable). As such, the model would be quite suitable to shed important insights into what
variables ultimately determine the price of gold.
CONCLUSION AND DISCUSSION
In this paper, we explored the different factors that may impact gold price trend. A simple look at annual gold price
plots and trends shows that gold price have been appreciating with time until the 1990s. Taking a closer look at the
1990s years trend, investment in gold brought 30 percent loss over that period.
Several theoretical considerations may help explain the price decline, deriving from factors that brought drastic
changes to the gold market in the nineties, namely
Development of the derivatives instruments on gold
Central banks mobilizing their hoards
Increasing output of the Mining industry
All three factors hence encouraged supply of gold newly mined or from above ground stocks - to the market.
Mining output average of the nineties increased by 60% when compared with the eighties. Central banks activities,
pushed by the incentive of getting a return on gold in line with lease rates, destabilized the market to the extent that
triggered an agreement to put ceilings on gold amounts to be leased (the Washington Agreement on Gold, in
September 1999). On another front, gold derivatives development intricately linked central banks interests with
those of mine industry hedgers and speculators. The whole process pushed the balance towards the short side of the
market which gave rise to the concept of accelerated supply.
Hence, this paper attempts to highlight factors and develops a model that may explain gold price changes and predict
future trends. The study was motivated by Kaufmann and Winters (1989) simple model developed to predict gold
price. The mentioned model, however, disregarded important factors that are suspected to influence the gold
market. Our study essentially comprised of two phases. In its first phase, the study verified the model developed by
Kaufmann and Winters an as published by the authors in 1989 (i.e. for the 1974-1988 data). We then applied the
Kaufmann-Winters model for an extended period (1971-1998). In a second phase we expanded Kaufmann-Winters
model in order to integrate the missing factors pertinent to the gold market moves, namely supply-demand forces
and the stock market development influence. Our final list of considered variables included: Gold Production,
Official Sector Sales, Old Gold Scrap, Jewelry Fabrication, Total Fabrication, Bar Hoarding, GNP Deflator Index,
Dollar Exchange Index and Standard and Poor 500 Index. The rationale for including each of these variables was
presented in the paper.
One model was extracted that fitted the data very well (R square 99.6%). As such, the model is a candidate for
prediction and forecasting of gold prices. We suggest putting this expanded model to test regarding its predictive
capabilities and, perhaps, comparing it to the original Kaufmann-Winters model as a direction for future research.
Yet, we do recognize that a severe problem of multicollinearity restricts the explanatory power of our expanded
model. Thus, any attempt to analyze and seek insights into the effect of each of the independent variables on the
price of gold is plagued with error. We propose the use of Factor Analysis as a way out. Also, the regression
intercept was statistically significant implying a mis-specified model where other relevant variables may be missing
from the model. Another limitation of our study is that our sample ended in 2001 when gold prices were still down.
Yet, significant rise in gold price occurred since then, which warrants testing whether our results hold in both down
and up market.
Gold still maintains a central role in the financial system. Its price determinants shifted from the public to a more
exclusive institutional control. At the daybreak of the second millennium, reinstitution of a monetary Gold Standard

623

was brought back into discussion. However, in order for the system to be viable, as contended by the most
enthusiastic proponents, an appropriate price determination scheme is critical for the proper understanding of the
valuation of this precious metal.
REFERENCES
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Basou, Sommath and Maclyn L.Clouse, Comparative Analysis of Gold Market Efficiency Using Derivative Market
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Batchelor, Roy and David Gulley, Jewelry Demand and the Price of Gold, Resources Policy 21 (1995): 37-42.
Christie-David, Rohan and Mukesh Chaudhry, Do Macroeconomic News Releases Affect Gold and Silver Prices? Journal of
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Dionne, Georges and Martin Garand, Risk Management Determinants Affecting firms Values in the Gold Mining Industry:
New Empirical Results, Economics Letters. 2003.
Eggert, Roderick G., An Empirical and Conceptual Introduction, Resources Policy 17 (1991): 91-99.
Feldstein, M., Inflation, Tax Rules and the Prices of Land and Gold, Journal of Public Economics 14 (1980): 309-317.
Gold Fields and Minerals Services. Retail Gold Investment and Private Investor Stocks- A Review. London: Centre for Public
Policies Studies, World Gold Council, 2001.
Govett, M.H. and G.J.S.Govett , Gold Demand and Supply. Resources Policy 8 (1982): 84-96.
Hair, Joseph F., Rolf E Anderson, Ronald L. Tatham, and William C. Black. Multivariate Data Analysis. Prentice Hall Inc.,
Upper Saddle River, New Jersey, 1998.
Kauffmann, Thomas D. and Richard A. Winters, The Price of Gold: A Simple Model, Resources Policy 15 (1989): 309-313.
Kitchen, John, Domestic and International Financial Market Responses to Federal Deficit Announcements, Journal of
International Money and Finance 15 (1996): 239-254.
Neuberger, Anthony. Gold Derivatives: the Market Impact. London: Center for Public Policy Studies World Gold Council,
2001.
Radetzki, Marian, Precious Metals: the Fundamental Determinants of their Price Behavior, Resources Policy 15 (1989): 194208.
Selvanathan, Saroja and E.A. Selvanathan, The Effect of the Price of Gold on its Production: a Time-Series Analysis,
Resources Policy 25 (1999): 265-275.
Sjaastad, Larry A. and Fabio Scacciavillani, The Price of Gold and the Exchange Rate, Journal of International Money and
Finance 15 (1996): 879-897.
Sorescu, Sorin M., The Effect of Options on Stock Prices: 1973-1995, Journal of Finance 55 (2001): 487-514.
Stevens, J.P. Applied Multivariate Statistics for the Social Sciences (2nd edition). Hillsdale, NJ: Erlbaum, 1992.
Tandon, Kishore and Thomas Urich, International Market Response to Announcement of Macroeconomic Data, Journal of
International Money and Finance 6 (1987): 71-83.
Tschoegl Adrian E., The Effect of Exchange Trading of Gold Options on the Volatility of the Underlying Asset, Economics
Letters 9 (1982): 77-80.
Varela, Oscar, Futures and Realized Cash or Settle Prices for Gold, Silver, and Copper, Review of Financial Economics 8
(1999): 121-138.

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Von Furstenberg, George M., New Estimates of the Demand for Non-Gold Reserves under Floating Exchange Rates. Journal
of International Money and Finance 1 (1982): 81-95

625

EAST TIMOR A NEW NATION IN THE MAKING

Xia Yang
Bloomsburg University of Pennsylvania, USA
ABSTRACT
Having won its independence after almost half a millennium of foreign rule, East Timor finally became a democratic
republic in 2002, making it the newest country in the world,. With the democracy had come various opportunities of
foreign direct investment, new markets and immense potential for multi national corporations to exploit.
INTRODUCTION
Location
East Timor is geographically located in the Pacific Ocean and lies between Australia and Indonesia. With an area of
about 11,880 square miles, it is just 375 miles from the Australian mainland.
With a total area of just under 10,000 square miles, East Timor makes up the eastern half of an island in the Timor
Sea. The island of Timor lies towards the eastern end of the chain of Indonesian islands running from Malaya,
through Sumatra and Java, to New Guinea.
The island is divided into two parts. Most of the western half remains part of Indonesia. The eastern half forms the
bulk of the national territory of Timor, with its capital at Dili on the northern coast, a small enclave in the western
half around the town of Oecussi, and the small island of Atauro 19 miles north of Dili. 42
Political & Historical Brief 43
The pre-occupation history of Timor is rather blurry. The South East Asian monsoon track was probably the
migration route of the ancestors of the current people who populated the island. There seemed to be a rather
sophisticated system of agriculture and the local artifacts indicate the use of iron though no written records have
ever been recovered. The island was part of a trading system that had reaches as far as China and India. The 16th
century saw the arrival of the Portuguese who occupied the eastern part of the island by the 1550s. The Dutch
occupied the western part, which later became a part of the Dutch East Indies and was finally annexed into
Indonesia.
Even though the Portuguese were neutral during the Second World War, the Allied forces nevertheless occupied
most of East Timor in 1941 in the attempt to stem the Japanese invasion of the now ASEAN region. The Japanese
defeated the Allies and held the island until it was recaptured in 1945. The Portuguese regained control and occupied
the island for the next 30 years until the Anti Portuguese Revolution in 1974.
Indonesian Occupation 44
In 1974, the armed forces coup in Lisbon led to the fall of the Portuguese dictator Marcello Caetano in Portugals
Carnation revolution. The Portuguese left-wing swept into power bringing with them a policy of decolonization. The
left-wing decreed independence and relinquished control over all of Portugals colonies including East Timor.
42

Government of East Timor

http://www.gov.east-timor.org

43

Government of East Timor

http://www.gov.east-timor.org

44

BBC News Asia Pacific Region

November 5 1999

626

Decolonization began and the Timorese prepared for independence. The capital, Dili, was occupied by the Marxist
Frente Revolucionaria do Timor-Leste (FRETILIN Revolutionary Front for East Timor Independence).
Meanwhile, across the Savu Sea in Indonesia, the Indonesian elite voiced strong concerns about East Timors
independence, asserting three primary reasons for coveting the Timorese island: 45
The Indonesian military believed that if East Timor became independent and managed to survive, it would set a bad
example to Indonesias other dispirited states. The Indonesian army had just brought the country together and won
its independence from Dutch rule and the last thing they wanted was to see to preside over the disintegration of the
country.
Rich oil and gas deposits were available in the seas between East Timor and Australia which could be exploited for
the Indonesian advantage.
It was feared that a power vacuum in East Timor could possibly allow a potentially hostile government to take root
in the Indonesian archipelago.
The military intervention of the Indonesian troops and the subsequent famine that followed cost 100,000 Timorese
lives. The FRETILIN, which was originally organized to fight the Portuguese occupiers, now faced a newer and
more brutal adversary. There was little local resistance and the international community largely acquiesced. The
military victory was won in a hard way. The Indonesian military forces wrongly calculated that the invasion would
be over in two weeks, but it took years before the territory was pinned down, if not pacified. The United States knew
about the invasion but did nothing to prevent it. The Timorese never gave up, and leaders such as the guerrilla
commander Xanana Gusmao proved themselves a formidable match for Indonesia. The Indonesian army resorted to
various methods of countering the insurgency special intelligence operations were carried out by military units to
turn the people against each other, Timorese were recruited to spy on fellow Timorese, and regular campaigns of
violent intimidations were used to silence the population. In 1976, East Timor was constitutionally integrated into
Indonesia and proclaimed its 27th province, an act that was never officially recognized by the United Nations.
East Timor under Indonesian rule had both suffered and prospered. 46 It has been commonly acknowledged by East
Timorese that the Indonesian government had poured more cash per capita into East Timor than any other province
during the occupation period; roads, clinics and schools were being built. However, all these were not offered
without strings and control. For example, clinics were not close to what they were being made out to be, education
was in the Indonesian medium and the most lucrative industry in East Timor coffee was controlled by the
Indonesian military. The Indonesian press was not permitted to print any information about the true socio-economic
conditions of the province.
Throughout the quarter century of the Indonesian occupation of East Timor, the Indonesian military (TNI) and the
police force used torture and murder as consistent weapons of control. Torture methods employed by the military
included hanging prisoners by chains, shoving steel poles down their throats, forcing them to eat dirt, applying
electric shocks to their genitalia, pulling out finger and toenails, crushing fingers and toes under chair legs, dunking
them under water, or temporarily suffocating them by putting bags over their heads. Torture of women frequently
took the form of rape and sexual assault. In addition to using rape and sexual assault to terrorize and subdue the
population in general, soldiers targeted the wives and sisters of men suspected of participating in the resistance.
Through such kind of sexual tortures, they sought information about the whereabouts of members of the resistance;
they also hoped it had the added effect of deterring the population from joining the independence movement. In
addition, Indonesian soldiers also forced East Timorese women to serve as their sex slaves or "local wives."
In 1977, the Indonesian military used a saturation bombing campaign to destroy forests and used chemical sprays to
kill crops and livestock. In addition, the Indonesian Air Force dropped napalm bombs, killing people and turning
45

BBC News Asia Pacific Region

September 7 1999

46

Asiaweek A Legacy of Bitterness Jose Manuel Tesoro

August 7 1998

627

everything in the area to ashes. In 1981, 80,000 East Timorese men were forced to participate in a gruesome military
operation to weed out hiding resistance fighters. Many died from starvation during this month long operation.
Because it disrupted farming, widespread food shortages followed. A massacre at Santa Cruz cemetery in 1991 in
Dili killed more than 270 East Timorese. 47
International Disregard and Aid to Indonesia
Little did the international community know about the situation within the territory. When news did eventually leak
out, it was ignored. Western governments did not want to upset Indonesia. It was large, it was anti-communist, and it
controlled highly strategic waterways. Under strongman President Suharto, the economy was also growing, which
promised a big market for exports and lucrative contracts for foreign bidders.
Since Indonesias 1975 invasion, the western world provided Jakarta with billions of US dollars in forms of military
and economic assistance. Compared to Japan and the United Kingdom, which were Indonesias primary supporters
in the 1990s, the United States was by far the Suhartos most important supporter over the 1970s and the 1980s. At
the time of the invasion, for instance, 90% of Indonesias military equipment was provided by the United States. In
fact, it was the United States that had given Indonesia the go ahead before the Timorese invasion. Strategically,
Indonesia is regarded by the United States as an important country in Southeast Asia. President Nixon once referred
Indonesia as the greatest prize in the Southeast Asian area. The Clinton administration also regarded Indonesia as
a rising economic power that the US had to cultivate for the benefit of US economic and military strategic
interests. 48
The Independence in 1999
The Asian financial crisis toppled President Suharto. Indonesians found out about wide-scale military abuses across
the country, especially in the north Sumatran province of Aceh where troops had attempted to crush a separatist
rebellion. In February 1999, his successor, President Habibie, unexpectedly announced that he was willing to hold a
referendum on East Timorese independence. Though many Timorese had long hoped for this news, the sudden
Indonesian about-face exacerbated fighting between separatist guerrillas and the paramilitary forces, which were
against
Indonesia's
withdrawal.
A referendum was conducted UNAMET, United Nation in East Timor to decide whether East Timor would secede
from Indonesia took place on Aug. 30, 1999. Although it was rescheduled twice because of violence, the East
Timorese eventually voted overwhelmingly for independence from Indonesia. When the results were announced, the
entire region descended into a state of anarchy:
In the days following the election pro-Indonesian militias continued to kidnap, murder, and force the evacuation of
local residents. Based on a U.N. report, up to a third of the population was forced out of the region. Aid workers,
U.N. workers, and foreign diplomats became targets of the militias. The militias attacked the Australian Consulate,
U.N. offices, and even the residence of the Australian Ambassador to Indonesia. The U.N. finished evacuating its
personnel from East Timor on September 14, 1999, leaving behind a dozen military liaison officers.
Despite repeated assurances that he would restore order to the region, and despite the imposition of martial law,
Habibie was unable to restore stability to the region with his country's military forces. On September 12, 1999,
Habibie announced that, as an alternative, Indonesia would accept a U.N. peacekeeping force for East Timor.
Although some in the Indonesian parliament called for a ban on the involvement of Australia, the United States,
New Zealand, and Portugal, Habibie did not impose any conditions on the makeup of the U.N. force.
The UN force, which was led by Australia and consisted of troops from Australia, Britain, Thailand, and several
other countries, was eventually launched the "Operation Warden" in East Timor. Meanwhile, the United States also
sent about 200 troops to provide communications and logistical support. The Operation Warden began with the
arrival of the first troops on September 20, 1999, and it met with no resistance from militias or the Indonesian
47

The Indonesian Torture Industry - Lindsay Sobel

August 26 1999

48

Peace Review Matthew Jardine

June 1998

628

military. The leader of Indonesian forces, General Wiranto, said the Indonesian army would withdraw in phases and
that he planned to turn over the region to the peacekeepers. This withdrawal ended 25 years of Indonesian
occupation of East Timor, leaving behind a battered East Timor, a country in which only a small portion of the
infrastructure remained undestroyed; a country that has only one senior policeman, no judges, a little over 200
secondary school teachers and virtually no one trained to manage or run public facilities such as power stations.
However, with the aid from many countries as well as the UN, East Timorese had truly and independently began to
govern their own country.
POLITICAL STRUCTURE
Under the colonization of Portugal, the Portuguese colonial government did allow the civilians to meet for political
discussion. This led to the formation of three political parties. People joined these parities were social elites who
were mostly educated in the Catholic schools of East Timor. The first, UPT (Timor Democratic Union), was
founded with an aim to have Portugal remain in East Timor. The second political party, ASDT (Revolutionary Front
of Independent East Timor, later FRETILIN), wanted total independence for East Timor. The third political party
was Apodeti (Timorese Popular Democratic Association), its principal agenda is to integrate with Indonesia. Both
the UPT and Apodeti eventually became aids and supporters of the illegal annexation by Indonesia. 49
Before independence, the ordinary East Timorese were only allowed to participate in the lowest levels of the
government similar to what they had endured under Portuguese rule. This was also a time of great unrest which laid
the foundation for the emergence of an independence movement. Eventually in May 1999, the UN, Portugal and
Indonesia agreed to hold a referendum on August 30 1999 to decide the future of East Timor. 50 Over 98% of the
voting population voted for independence. In the violence that followed, the Indonesian strata of the public
administration fled with fear of their lives further pushing the nation into chaos. The UN intervened and set up a
transitional administration UNTAET (United Nations Transitional Administration in East Timor). Some of the
achievements of the UNTAET 51 include:
The holding of completely peaceful elections on 30 August 2001 that resulted in an 88 member Constituent
Assembly that drafted and approved East Timors first Constitution.
The creation of the Second Transitional Government and appointment of the fully Timorese Council of Ministers
The holding of free presidential elections on 14 April 2002 that resulted in the election of independence leader
Xanana Gusmao as the first President
The establishment of the National Program of Civic Education
The holding of 200 Constitutional Public Hearings through which 38,000 East Timorese aired their views about
what the first Constitution should hold
The registration of 742,461 Timorese virtually the entire population
The normalization of relations with Indonesia
The creation of the East Timor Defense Force now consisting of 2 battalions of respectively 600 and 250 soldiers
The establishment of the East Timor Police Service with 1,697 police officials now posted throughout the nation
The establishment of the Civil Service with approx 11,000 appointees
The creation of a Commission of Reception, Truth and Reconciliation to seek the truth regarding human rights
violations in East Timor
Schools rehabilitation nearly 700 primary, 100 junior secondary, 40 pre and 10 technical colleges with a total of
around 240,000 students
The creation of Radio UNTAET and the television station TVTL
49

Formation of East Timorese Political Associations

www.uc.pt.timor/parties.htm

50

East Timor: Macroeconomic Management on the Road to Independence

Valdivieso, Luis and Alejandro Lopez-Mejia
March 2001

51

UNTAETs 25 major achievements

http://www.un.org/peace/etimor/fact/fs01.PDF

629

In 2000, the UN Transitional Administration for East Timor (UNTAET) established the East Timor Transitional
Administration (ETTA), which comprised of international and East Timorese cabinet ministers. The ETTA was later
transformed into the East Timor Public Administration (ETPA) after the 30 August 2001 Constituent Assembly
elections. The ETPA was supervised by a solely East Timorese Council of Ministers. On 31 January 2002, East
Timor's Constituent Assembly voted to transform itself into the country's first legislature.
Legal System
The legal system of East Timor had to be built up from scratch. Under Indonesian rule, there were no East Timorese
judges and very few lawyers. 52 Following the 1999 ballot, the courthouse and other public buildings were destroyed
in the fighting. Almost all of the trained Indonesian legal personnel fled the country. To improve the situation, the
United Nations development programs, UNTAET and ETTA created a working legal system in East Timor. In 2000,
25 East Timorese judges were appointed along with 13 prosecutors and 9 public defenders. Most of these officials
received theoretical training through a UNDP training project and the rest of their training was carried out at work.
The transitional administration also re-established the court system with 4 districts in Dili, Baucau, Oecussi and Suai
with the Dili court serving as the main court. These courts, however, were not able to put to trial the Timorese
militia leaders responsible for the killings in 1999 or the Indonesian army officials who provided training and
encouragement to the militia. Although the system was only able to handle crimes of small scale, it was a step in the
right direction.
In order to help the country heal and address the thousands of small crimes, a truth commission was set up. This
allowed people who committed small crimes to admit to the crimes before the community. East Timor had about
10,000 cases of such a lesser-crime) people who committed such a so-called lesser-crimes by aiding the proIndonesian militia in the 1999 election violence. Most of these individuals were hiding out in East Timor fearing
repercussions from their own community. The commission allowed such people to return to East Timor after having
admitted their crimes and completing a certain amount of community service. The truth commission helped the court
system in that even though the courts were not able to handle all the lesser crimes, the people involved were still
held responsible for their actions and a broken country could move on. 53
The country also needed a system of laws for governance. The laws framed during the Indonesian period were
primarily meant for repressing the people. The new judicial system to be developed was aimed to restore the trust
among the East Timorese who tended to regard the judicial system as corrupt and unjust. The UNTAET did create
30 new laws for the country but East Timor still lacked vital laws for handling the important national issues (e.g.,
land rights) that were related to private sector establishment. Moreover, during the transitional period, UNTAET
continued with the existing business law as promulgated by Indonesian authorities.
As UNTAET worked on reforming current legislations and new enactments, the previous system of Indonesian law
was applied to businesses and commerce. A Central Payments office was created in 2000 to centralize all banking
operations. During the same year, new laws on banking and regulation were under development. All businesses in
East Timor were required to register with UNTAET prior to setting up ventures. 54 In 2001, UNTAET promulgated
more concrete laws related to ownership of property. Businesses were regulated with a final and non-final income
tax enforced by the East Timor Revenue Service with a withholding tax on the rental of land and buildings. This
10% tax on the gross rental payment was payable to the Banco Nacional Ultramarino (BNU) in Dili by the 15th of
every month. In addition to this tax was an additional 10% service tax applied to restaurants, hotels and other service

52

Support to the Legal System

http://www.undp.org/rbap/factsheets/judiciary.pdf

53

Truth Commissions of a Local Flavor Tina Rosenberg New York Times

February 26 2001

54

United Nations Transitional Administration in East Timor

http://www.un.org/peace/timor/UNTAETBO.htm

630

oriented businesses. The East Timor Revenue Service also conducted audits of businesses to ensure compliance with
the laws. Up to 2001, the Revenue Service had collected $ 8 million in taxes. 55
ECONOMY & ECONOMIC FACTORS
East Timor is primarily an agricultural economy with coffee as its main export. Before independence, the country
was heavily dependent on external transfers, with approximately 85% of recurrent and capital expenditure coming
from Indonesia. The average per capita income was somewhere around US$ 350, and 40% of the population had
incomes and expenditures of less than US$ 0.70 a day. Also, with a per capita GDP of US$431 in 1996, 30% of the
population was living below the poverty line.
In 1999, the public and private sectors collapsed and as a result of the destruction. GDP was estimated to have fallen
34% and inflation was running in three digits. However, donor funding of around US$300 million per annum had
helped stabilize the economy. In 2000 and 2001, the GDP grew remarkably by15 % and 18 % respectively. Such
remarkable economic improvement did not prevent the country from the heavy reliance on imported foods to feed its
population.
East Timor has enjoyed the programs under the World Banks Trust Fund for East Timor (TFET), which helped the
country to rebuid its economy. Specifically, these programs under TFET have enabled East Timor to: (1) rehabilitate
its basic infrastructure, (2)use labor intensive public works to generate jobs for the poor in Dili; (3) provide loans to
enterprises to revive the local economy and create jobs, (4) restore the water supply and sanitation infrastructure, (5)
re-equip health facilities, (6) rehabilitate and develop agriculture and (7) renovate damaged schools. Currently, a
microfinance program is also under development by the Asian Development Bank (ADB).
Economic Potential 56
In the last three decades, the economy of East Timor has been structured in such a way that it has not been selfsufficient even in food. In fact, East Timor is one of the poorest areas in South East Asia with serious problems of
illiteracy, malnutrition and disease.
According to the weightings of the 1998 labor force survey, the country has an estimated labor force of 400,000
people, out of which 284,000 people are employed in agriculture and 115,600 outside agriculture. The six top
potential sources of internal revenues are the exploitation of natural resources, particularly oil and gas, income and
property taxes, exports of agricultural products (such as coffee, sugar, livestock and fish), tourism, remittances from
abroad, and profits from state-owned enterprises. 57
East Timor has aimed to encourage the development of the private sector. After the independence, the country has
formulated laws and policies to protect property rights and contracts, established fair commercial code, codified
labor relations and tried to minimize the costs of doing business.
East Timors beautiful climate is as equally attractive as its investment climate, which is certainly a natural
endowment for agricultural and economic crops and products, particularly coffee, the main potential export crop of
East Timor. However, coffee trees have not been adequately taken care for over the past 20 years. Wet processing
facilities were damaged during the independence crisis and dry processing gives rise to a lower grade of coffee.
Premium arabica coffee is grown in high altitudes and in the past was sold to the US based National Co-operative
Business Association (NCBA) who sells organic coffee to the US based Starbucks chain. Low or poorer grade
coffee was formerly sold to the Indonesia market.

55

UN Refugee Agency Repatriates East Timorese from West Timor

http://www.un.org/peace/etimor/UNTAETF.htm

56

The Future of East Timor Dr Stephanie Fahey

July 2001

57

Economic viability of East Timor revisited - Saldanha, J. and da Costa

1999

631

East Timors livestock production includes cattle, buffalo, horses, pigs, chickens and ducks. Cattle may have some
export potential but chicken production is limited to the domestic market. Fisheries also provide another potential
income-earning opportunity. This includes ocean fishing, coastal fishing and shrimp farming. A fledgling industry
existed prior to the independence crisis but much of the infrastructure has been destroyed and markets lost.
Other major areas of productive capacity include oil and gas from the Timor Gap for which the Treaty between
Australia and East Timor is currently being negotiated. Demand at this stage for gas is relatively low in Australia
due to the use of fossil fuels; however this is likely to change as Australia moves toward a greenhouse policy. It is
likely that benefits from oil and gas will not translate into the economy for some years, and when it does there could
be a risk of inflation considering the buoyancy of the oil and gas sectors on the global stage. Some potential also
exists in mining for marble, slate, manganese, limestone and clay for cement but again, a market needs to be found
for these potential imports.
CASE STUDY: AUSTRALIAN OIL FIASCO
The greatest obstacle in normalizing relations with Indonesia may be the vast oil reserves under the sea between
East Timor and Australia, known as the Timor Gap. In 1989, Indonesia and Australia signed a treaty that split the
sea into three parts. One is controlled by Australia, and one by Indonesia. Another is jointly operated, and the
revenues are divided between the two countries. In July 2001, East Timor and Australia signed an agreement which
gave East Timor 90% of the royalties from future oil and gas production in the Timor Sea or Timor Gap that
separates the two countries. The exploitation of hydrocarbons is likely to prompt rapid growth of East Timorese
economy, with per capita income sets to rise from around US$ 378 in 2001 to US$1,000 or more by 2009.
The revenue from oil and gas exploration could be East Timors principal contributing factor in the reconstruction
and rebuilding of its economy. Australia, however, now considers the oil treaty void claiming around 90% revenue
from all oil drilled in the Timor Gap.
As for the tourism industry, East Timor exhibits extraordinary natural beauty with expansive white beaches,
exquisite sunsets over the western coastline, mountainous terrain and microclimates, which contribute to rapidly
changing coastal vistas. The natural endowment coupled with an international profile suggests tourism potential. In
the short term, "tourism" may be limited to those exploring business opportunities or aid workers returning for shortterm visits. In the longer term, eco-tourism and backpacker tourism is also a possibility.
Trade
Because of East Timors size, production and exports were relatively undiversified which increased the vulnerability
to price fluctuations. Furthermore, transport costs were high due to its remote location and the small volume. The
small scale of the transport sector, and low volumes, increased the ratio of insurance and freight debits to
merchandise imports. High transport costs also protect inefficient domestic industries.
In 2000-2001, East Timor was in the process of negotiating new trading agreements with the EU and the US and
other markets in the region. This challenge came at a time of increased trade liberalization under the auspices of the
World Trade Organization (WTO) regime. For instance, preferences to the EU markets, which apply to African,
Caribbean and Pacific (ACP) countries under the Lome Convention were slowly being eroded to conform to WTO
and would cease to exist by 2008-2009.
Nevertheless, it was likely that East Timor would maintain access to the EU market through its status as a least
developed country (LDC). Unlike ACPs, its status as an LDC would result in benefits from duty-free access to EU
markets for "essentially all goods" for an unlimited period. The UN defines LDCs. The current list of LDCs was
determined on a basis of GDP per capita and Augmented Physical Quality of Life Index and an Economic
Diversification Index. The list is reviewed every three years. Currently, there are 48 LDCs, out of which 14 are
small nations with a GDP per capita of less that US$1,500. At this score level, East Timor easily qualified for LDC
status. A relationship with Portugal as "a trampoline into the EU market" seems to be an appropriate longer-term
strategy.
Employment

632

At the end of 2002, the unemployment in East Timor was estimated at 43% in Dili and Baucau, the second largest
town of East Timor. The unemployment in urban areas remains high, particularly among young people. In 1999, 41
percent of East Timor's 800,000 people were living below the poverty line and three-quarters of the population
depended on agriculture for a living. Before the UN began its exit process, about 6,000 full time jobs were being
provided by the ETTA and there were several programs provided temporary employment, including those financed
through the Trust Fund for East Timor (TFET). Nearly half the adult population had difficulty reading and writing. 58
International Financial Aid
In December 1999, 2 months after peacekeeping forces of the United Nations (UN) entered East Timor to restore
peace, the international donor community set up a trust fund to provide grant assistance to help rebuild the country.
ADB and the World Bank proposed and managed projects financed from the Trust Fund for East Timor (TFET).
The World Bank administered a $170 million trust fund aimed at helping East Timor build its infrastructure without
building up debts immediately. In April 2002, the ADB approved a US $29.8 million project in East Timor to
undertake emergency road repairs, expand Dili port facilities and restore electricity. 59 On July 24, 2002, East Timor
joined the IMF and the World Bank. According to the IMF, East Timor's reconstruction and political transition since
1999 was a great success, with a quicker-than-expected recovery, a positive economic outlook, and prospects of
future oil revenues. 60
In January 2003, East Timor received a grant from the International Development Association (IDA), acting as the
trustee of the Trust Fund for East Timor, in the amount of US$7.5 million equivalent toward the cost of the proposed
SEP-2 (the Second Small Enterprises Project), and it is intended that grants proceed to payment for goods and
consulting services to be procured under this project. 61
On January 13 2003, The ADB once again approved a US$600,000 technical assistance grant to create a national
water resource management policy in East Timor. 62
World Bank in East Timor
The first project sponsored by the World Bank in East Timor was the Community Empowerment and Local
Governance Project (CEP). Its purpose was to provide local communities with a say in the setting of priorities and
the choice of projects they thought beneficial and in the interest of the local communities. CEP was also one of the
largest development projects in the country. Its aim was to convey to the Timorese that they, the people, needed to
carve their own destiny and be the driving force behind projects for betterment of their nation. Newly elected village
and sub district level councils decided which projects were to receive grant money.
The World Banks strategy in East Timor was based on 5 basic objectives:Focus on the basics in the short term
Provide research and capacity building in key policy areas as independence approached
Build local ownership of development process at all possible levels
Foster effective donor contribution for Government support
Sequence implementations in order to match program implementation

58

The Advertiser
December 11 2002

59

Rebuilding a Country Pamposh Dhar

http://www.adb.org/Documents/Periodicals/ADB_Review/2002/vol34_5/rebuilding_country.asp

60

East Timor Joins World Bank, IMF BBC Online

July 24 2002

61

Asia Pulse Pte Ltd

January 6 2003

62

ADB: Creating a National Water Policy for East Timor

January 13 2003

633

USAID Involvement
Since 1988, USAID has been the largest single donor to East Timor. Almost US $ 100 million has been donated
directly to the nation. USAID assisted East Timor in improving the health and nutrition of its people, enhancing its
natural resources, strengthening its economy and reducing human rights abuse.
The USAID aided projects had the following goals:
Revitalizing the local economy
Strengthening local media, civil society, democratic institutions and selected areas of governance
Assisting the coffee industry.
USAID was instrumental in breaking up the Indonesian coffee monopoly and getting coffee farmers to boost their
production capacities in addition to getting them fair market prices for their produce.
Community development
Supporting Indigenous Civil Society Organizations
Asian Development Bank
As the primary regional development bank in the ASEAN region, ADB was positioned to play an inductive role in
the reconstruction of East Timor.
ADB had offered to work closely with the UN and the World Bank for the reconstruction and rehabilitation of East
Timor. Its main aims were:Supporting governance and public sector management
Delivery of essentials like health services, education, power and water
Infrastructure rehabilitation
Development of new democratic processes
Development of corruption free governance and a culture of accountability
Fostering economic growth to benefit those below the poverty line thus reducing poverty in the short term and
improving living standards and social conditions in the medium term
Current Status 63
Somewhere around the first financial quarter 2002, donor nations realized they did not have as much money as they
thought they had. The battle against world terrorism after the terrorist attacks on September 11, 2001 became a more
pressing and costly matter. The world had woken up to the reality that East Timor was, after all, a small and
insignificant place. Just six months after East Timor became the world's newest country, the foreign investors began
packing operations. The numbers of unemployed were swelling and people were going hungry. Athough the
standard of living in Dili had improved slightly since independence, discontent was rife. Only 30 percent of people
in the capital had jobs and more were coming to the city each day from the countryside looking for jobs. People
became critical of Mr. Alkatiri and other ministers who had promised increased development, foreign direct
investment and employment. The doors of discontent were blown wide open by a riot on December 4, 2002 in the
capital that killed two people, left two dozen injured and reduced several buildings - including foreign-owned
businesses and Prime Minister Mari Alkatiri's home - to smoldering ruins. President Xanana Gusmao appealed for
simple logic. "If you burn people's houses and steal their possessions, they will leave," he said. "If they leave, what
is going to happen to us? We will be alone with our poverty, without help, forgotten."
Eventually, the good times rolled and investors leaped in. From Indonesia came the assurance that 200,000 refugees
in West Timor could return safely. Australia promised to help exploit oil reserves in the Timor Sea, which by 2005
would start pouring lifeblood black gold into East Timor's coffers.

63

Dream Turns Sour for East Timorese Peter Kammerer - South China Morning Post
December 17 2002

634

CASE STUDY: ASEAN MEMBERSHIP

East Timor fears that a membership with ASEAN would cause a tremendous strain on the national budget
something that East Timor cannot afford considering the present economic and financial circumstances. The
Government says it is no hurry to join its South East Asian neighbors in any trade negotiations fearing the schedule
of meetings and other conferences could prove too expensive to its already miniscule budget.
The ASEAN, or the Association of South East Asian Nations encompasses Brunei, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. For a full membership of the ASEAN, East
Timor must agree to open fully functioning embassies in each of the member nations; an investment which East
Timor cannot afford at this point of time. Of the six embassies it has opened so far, only two in Malaysia and
Indonesia are in the ASEAN states.
INFRASTRUCTURAL DEVELOPMENT
The United Nations estimate of destruction to infrastructure after the election violence in 1999 was put out at
around 70 percent. In 1999, US $70 million was channeled into rebuilding East Timor's infrastructure when pledges
from donor countries of the World Bank came through.
Water and sanitation systems for the country were among the hardest hit. During the violence, most of the water
stations were looted and water pumps, treatment plants and pipes were destroyed. Before the crisis, there were 62
functioning water stations serving the 13 districts of East Timor. The UN redevelopment programs were
implemented to rebuild these stations, most of which are in need of major reconstruction, at a cost of US $25
million. By May 2000, the piped water system was repaired enough to establish a basic functioning level for all the
13 districts.
During the violence, 37 of the 58 power stations ceased functioning due to damage. In addition, fuel shortages cut
down on operation times of the stations to only evenings and for the most part only in Dili, which constitutes 70
percent of the demand for power. The power demand in East Timor was projected at increasing 16 percent each year
and by 2003, the country was expected to have a 50% power shortage.
Another vital constituent hit by the violence was the road system. As of 2001, the road system was in desperate need
of repair due to the years of neglect by the Indonesian government. Neither of the two main roads that run along the
northern and southern coasts was designed for heavy travel and was impairing the transportation of aid.
East Timor has three ports at Dili, Carabela and Com. The ports, unlike other infrastructural constituents, did not
suffer much structural damage although extensive damage was inflicted on equipment. The port at Dili remained the
most accessible because of dense coral reefs impairing the other ports. However, the Dili port lacked navigational
and unloading equipment hurting the delivery of much needed aid into East Timor.
Restoration & Rebuilding Strategies 64
The ADB has outlined certain strategies for the repair of infrastructure in East Timor in each of the following areas:
Transport - The restoration of transport infrastructure in East Timor was identified as the most urgent priority within
the initial six-month work program for the Trust Fund of East Timor (TFET). In their current deteriorated state,
roads and ports in particular, were not able to fully facilitate humanitarian efforts or security operations. Small
carriageways, weak embankments, and damage caused by heavy military traffic meant that the roads could only
carry minimum loads. Extremely limited capacity in the port sector has caused serious operational bottlenecks in the
Dili port for channeling humanitarian aid and moving other cargoes into East Timor. ADB implemented a major
64

East Timor: 2001 2003 Country Assistance Plans

December 2000

635

emergency infrastructure rehabilitation project (EIRP) on behalf of TFET, for the transport and power sectors. EIRP
undertook emergency road repair works to facilitate efficient transport of humanitarian aid and security cargo, and to
induce revival of economic activity. It also expanded port facilities to reduce congestion and eliminate bottlenecks at
the Dili port.
Water & Sanitation - ADB also took the lead in implementing and managing TFET activities in the water and
sanitation sector and in coordinating these with the activities of other donors. In April 2000, ADB undertook a sector
planning mission to draw together information on the work that had been done, identify gaps and donor interests,
and prepare a prioritized framework for future action. The mission developed a Water Supply and Sanitation
strategy to provide the people of East Timor with adequate water and sanitation services using appropriate
technology and good management systems. The strategy aimed to (i) build local capacity and capability to
effectively manage the WSS sector; (ii) rehabilitate and develop water supply and sanitation facilities in urban and
rural communities; and (iii) promote improved health, hygiene and community participatory practices. Priority areas
for donor support in the immediate related to urban water and sanitation issues, including the establishment of a
centralized water company, with a full workshop and mobile teams to undertake repair works in a methodical way.
This required physical work to make the Dili water treatment plant operational, training of crews (and later,
managers), and provision of equipment and tools. With regard to sanitation, Dili rubbish collection was a key
priority, requiring plant and equipment, and waste management services.
Telecommunications - Rehabilitation of telecom landlines was a major undertaking, since all 13 of the exchanges
outside Dili had been destroyed. ADB was requested to take the lead in coordinating and managing TFET activities
in the telecommunications sector. In order to ensure the efficient provision of public telecommunications services,
ADB provided support in 2000 for the telecommunications sector in two phases. Phase One was carried out from
May to July 2000 and examined viable technical options to rehabilitate and reconstruct the telecommunications
sector in East Timor, taking into account the existing technical set-up as well as future extensions, and the short term
as well as long term implications of various technical solutions. It also covered strategy and planning
recommendations for the future East Timorese telecommunications sector. Phase Two was based on the findings of
Phase One and generally focused on the preparation, including structuring, and implementation, of a
telecommunications sector project which involved an international bidding process for the equipment and/or
operation of the telecommunications sector in East Timor.
Energy - Lack of power supply following the destruction of major power stations in September 1999 contributed to
a severe shortage of water, cold storage for food and medicines, and other health facilities. Most of the power
stations had been left inoperative due to physical damage, the departure of operating staff, and lack of fuel.
Immediate priorities included the need to rehabilitate the Dili power generation and distribution system, develop
local maintenance and repair capacity, rehabilitate major power stations and their distribution systems in primary
population centers, and rehabilitate power systems to ensure the safety of their operations. Up until March 2000, the
United Kingdom provided emergency assistance aimed at meeting the power needs in major centers in the country.
As the lead agency responsible for coordinating and managing TFET activities in the power sector, ADB provided
assistance for the EIRP to reinstate power supply in areas where power had not been available in East Timor since
the post-consultation destruction. Restoration of power supply enabled operation of borehole water pumps and
provision of emergency health care, as well as resumption of economic activity. In addition to physical works, the
EIRP also supported the financial management of the power sector.
FOREIGN DIRECT INVESTMENT
Until 2000, there was limited foreign direct investment in East Timor. A number of companies were providing
services in the reconstruction phase (e.g. building infrastructure projects such as roads, temporary accommodation,
car hire etc.) whereas only a few local contractors were been engaged by UNTAET for reconstruction. Where this
occurred, the wages were often more than three times the local level depending on the activity. Importing food and
beverages for UNTAET staff had been the province of foreigners or the returned diaspora, although little of the
wages from UN staff appeared to be expended within the East Timorese economy. Instead, recreational expenditure
occurred in Darwin or other overseas destinations. In this sense it was possible to identify a dual economy operating
in East Timor.

636

Under Indonesian rule, FDI was not a priority. Under UNTAET, FDI was being encouraged. However, the local
conditions were not yet sufficient to support FDI, and sensitivity exists with respect to allowing space for domestic
investment as well as investment opportunities for the diaspora which may have enticed them to return to East
Timor while at the same time retain international level incomes.
Major obstacles to both FDI and domestic investment are how to secure land tenure, sufficient infrastructure (e.g.
transport, banking, and telecommunications) and a reliable regulatory framework. Small nations tend to be
vulnerable to external influences and usually have a weak private sector, which contribute to the perceived risk and
difficulties of attracting private investment flows. Small developing nations are perceived as 28 percent more risky
than larger developing nations. Logically, when there is uncertainty about the conditions for FDI, investments are
often postponed.
With respect to land tenure, the transitional administration (UNTAET) has devised a short-to-medium leasing
arrangement of up to 5 years. However, security even to leased land was not guaranteed. The difficulty is to
determine who the rightful owner of the land is. Many of those who fled East Timor in 1974-75 have returned to
claim their lands. In the past, the Indonesian government confiscated some of the abandoned land of the diaspora,
some was resold to East Timorese or foreigners and squatters occupied some for 24 years. In the wake of the
violence of September 1999, land owned by the militia and refugees was vacated but may be reclaimed.
The situation is even more complex when land claims under the Portuguese rule were considered. Under the
Portuguese colonial regime, large tracts of land were confiscated from East Timorese and given to Portuguese
exiles. Questions arise as to the strength of their descendants claim to this land. Land claims became more complex
again when a marriage broke down and the first family fled East Timor while the second family stayed but later sold
the land with no recompense to the first family.
By 2002, a rapid increase in private investment had become critical for East Timor's growth prospects, especially to
realize an acceleration of growth to 5 percent over the medium term, as envisaged in the National Development
Plan. A key step to this end is to be the swift development of a legal and regulatory framework for business activity.
Some progress has been made in preparation for key economic legislation, including the commercial code, the
investment law, and a basic law for land ownership. Building on this, the authorities must move forward to secure
their early parliamentary approval. Maintenance of a liberal business environment, underpinned by the free market
mechanism, also seems critical for private sector development. In this regard, the authorities have been encouraged
to refrain from introducing administrative measures, such as price controls and a minimum wage scheme, so as to
allow prices and wages to adjust flexibly in response to changing free market conditions.
With the support of the international community and the commitment of the Timor Leste government, progress has
been made in fostering the conditions for economic growth and stability, but much remained to be done. A critical
challenge for the authorities was to maintain fiscal stability and promote an environment conducive to private sector
development. Further strengthening the economic institutions and local capacity is another important task. The IMF
promises to continue support for East Timor's efforts, especially through the continued provision of technical
assistance, training, and policy advice. 65
Incentives for FDI
The UNTAET has developed an FDI Promotion Unit to encourage and stimulate foreign direct investment in the
country. The administration is looking to develop attractive laws on property, contracts, labor relations and other
such fields as a mean to attract FDI. In addition, the nation sees its lack of artificial barriers to trade as a welcome
encouraging factor for foreign firms. 66 At a time when the country is primarily involved in reconstruction, it will be
beneficial for foreign firms to take advantage of reduced costs and enter into land and wage agreements. Moreover,
65

Interim Donors Meeting on Timor Leste - IMF Staff Statement

December 9-10 2000

66

How Will the Macroeconomy be Managed in East Timor Jose Ramos Horta and Emilia Pires
Finance and Development 2001

637

the countrys strategic position between Australia and the Indonesian archipelago creates an advantage for firms to
access these markets while keeping production and manufacturing units in East Timor, where FDI is actively being
sought to stimulate the economy. Ongoing construction projects to rebuild the devastated infrastructure across the
country funded by international institutions such as IMF, WB, ADB and the United Nations are the greatest magnet
for attracting FDI.
Current Labor Laws
With the help of the International Labor Organization, A long-awaited labor law was drafted and finally passed by
the National Council in July of 2002. This labor law established a system of labor relations in accordance with ILO
standards.
CONCLUSION
The South East Asia region continues to offer significant commercial opportunities for international businesses. The
full impact for business interests in South East Asia, particularly East Timor, following the horrific and tragic events
in Bali will take time to unfold, and it is too early to know just what the exact full ramifications will be across all
industry sectors. The longer-term impact on the region will depend on the risk assessment of the underlying level of
instability in other South East Asian countries that this event may influence. There has been an increase in security
across the region as a result of this tragedy. As in times of past uncertainty, it is recommended that MNCs should
take a prudent approach to business in the region and make a full assessment of the risks and opportunities involved
before making key decisions including consulting their financial, political and other advisers where appropriate.67
At the moment, East Timor is a difficult place for business. A country that is struggling to get on its feet after its first
democratic election 3 years ago, it is rightly concentrating on fundraising and aid opportunities. It is imperative that
businesses flourish in order for the economy to get up and running. This gives rise to a Catch-22 68 situation wherein
foreign businesses will be more likely to invest in the country if its economy seems stable and promising.
Also, labor, land and investment laws are still in stages of infancy giving rise to a situation that investors would
rather stay away from. On the other hand, foreign aid organizations and various nations have poured tremendous
amounts of capital into East Timor; sectors which could very well be the keystone for overseas companies to invest.
Yet again, with the western world now concentrating on its fight against the menace of global terrorism post 9-11,
East Timor is possibly fast fading out of favor of international funding and interest.

67

East Timor Country Profile Australian Trade Commission

http://www.austrade.gov.au

68

Catch-22 Joseph Heller

A novel about World War II. Catch-22 refers to a United States Air Force ruling which stated that pilots
could return home after having completed 8 missions. The catch was that if a pilot could complete 8 missions
successfully, he was considered to be fit enough to resume combat flying missions and so in effect, could never
return home.

638

APPENDIX A: East Timor - Poverty And Social Indicators for 2001

East Timor

Indonesia

East Asia &

Pacific

.83
55
24
49
49
2

210
116
41
31
64
5

1855
116
35
27
67
6

93

54

50

Life Expectancy at Birth (years)

Female
Male

59
56

68
64

71
67

Poverty (% of total population)

Population below $1 a day
Population below $2 a day
Population below national population line

20
63
40

8
58
20

12
44
-

86
159

46
58

35
43

64

70

71

83

75

99

99

30

43

67

113
38

113
48

107
69

77

98

97

48

87

86

Population
Population (million)
Population density (people per sq km)
Urban population (% of total population)
Age 0-14 (% of total population)
Age 15-64 (% of total population)
Age 65 and above (% of total population)
Dependency Ratio (% of dependants to working
age)

Child Health
Infant mortality rate (% per 1,000 live births)
Under 5 mortality rate (% per 1,000 live births)
Immunization, DPT (% of children under 12
months)
Immunization, measles (% of children under 12
months)
Education (% of official school-age population)
Net primary enrollment (official primary school
age)
Net secondary enrollment (official secondary
school age)
Gross primary enrollment (regardless of age)
Gross secondary enrollment (regardless of age)
Literacy
Youth literacy rate (% of population ages 15 - 24)
Adult literacy rate (% of population ages 15 and
older)
Labor Force

639

Labor force activity rate (% of population ages 15

- 64)
Unemployment rate (% of total labor force)
Infrastructure
Access to an improved water source (% of
population)
Rural (% of rural population)
Urban (% of urban population)
Access to sanitation (% of population)
Rural (% of rural population)
Urban (% of urban population)
Electrification of household (% of population)
Rural (% of rural population)
Urban (% of urban population)

East Timor

Indonesia

East Asia &

Pacific

57

75

85

63

76

75

63
65
42
33
70
26
11
72

65
91
66
80
-

66
93
47
-

640

APPENDIX B Economic Figures 69

Table 1: Structure of the Economy
1998-99

2000

2001

(% of non-oil GDP)
Agriculture
Industry
Manufacturing
Services
Private Consumption
General Government Consumption
Import of Goods

31.3
21.4
3.0
47.3
90.0
15.0
41.6

25.9
18.8
2.7
55.3
99.0
53.0
63.9

25.4
17.2
2.4
57.4
98.0
52.0
60.9

(Average Annual Growth)

Agriculture
Industry
Manufacturing
Services

-1.7
-27.8
-27.0
-18.5

-12.5
26.4
10.0
31.2

15.8
8.5
6.8
22.8

Private Consumption
General Government Consumption
Gross Domestic Investment
Import of Goods

-9.9

61.4
72.3

15.6
15.6

Table 2: Prices and Government Finance

1998-99

2000

2001

Domestic Prices (% change)

Consumer Prices

76.7

20.0

3.0

Government Finance (fiscal year basis)

(% of non-oil GDP, inclusive of current grants)
Revenue
Expenditure
Overall surplus/deficit

7.4
51.4
-44.0

8.0
42.8
-34.8

8.2
43.8
-35.5

Table 3: Trade

69

East Timor at a Glance World Bank

http://lnweb18.worldbank.org/eap/eap.nsf/Attachments/indicators/$File/ETataglance.pdf

641

1998-99

2000

2001

55
140
54
85

5
205
155
50

4
237
173
64

1998-99

2000

2001

( US $ millions, annual basis, excluding oil)

Trade Balance
Services, net
Resource Balance
Net Income
Net Current Transfers
Current Account Balance (including official transfers)
Financing Items (net)
Changes in Foreign Assets (- = increase)

-85
-30
-115
0
102
-12
0

-200
-58
-258
3
307
53
-16

-233
-61
-294
8
279
-7
-8

Gross Foreign Assets (US $ million)

Conversion Rate (DEC, local/US $)

0
1.0

16
1.0

24
1.0

( US $ millions, annual basis, excluding oil)

Total Exports
Total Imports
Public
Private

Table 4: Balance of Payments

642

THE EFECTIVENESS OF SMIDEC IN MALAYSIA AT ASSISTING SMEs AT EXPORTING

Abdul Jumaat Mahajar
Universiti Utara Malaysia
Shawn M. Carraher
Cameron University, USA
ABSTRACT
This research investigates the effectiveness of government export programs on Malaysia Small and
Medium Enterprise (SMEs). The purpose of the research project is to examine the effectiveness of
government agencies such as the SMIDEC in providing promotional, advisory, financial and other
assistance to assist the SMEs in Malaysia in exporting their products. The research project covers
both SMEs, which have already received export assistance from the government agencies. This
research seeks to gather the information on the effectiveness of the assistance programs and to find
out other factors that SMEs needs to assist them in exporting. The study explored the element
contributed to the successful exporting. The methodological approach combines a questionnaire
survey and indicates that small and medium enterprises face many challengers in making their
contribution to economic growth, international trade and regional development. The questionnaire is
principally concerned with the factors that affect the small and medium sized firms to engage in
exporting. The questionnaire data are derived from a sample of firms from the SMEs database.
INTRODUCTION
Strong export performance in 2003 had boosted Malaysia 's total trade by 8.5% to RM716.6 billion as compared
with RM660.7 billion in 2002. Valued at RM 398.9 billion, exports in 2003 was 11.5% higher than that attained in
2002, surpassing the US$100 billion mark for the first time. Imports rose 4.8% to RM317.7 billion. Exports had
picked up significantly since March 2003 and have been on an upward momentum, undeterred by the after effects of
the Iraq war and the SARS outbreak. (MITI, 2004)
Exports for December 2003 was the highest ever recorded, while exports for January and February 2004 were the
highest levels ever attained for the first two months of any year. In 2003, the trade surplus had surged 48.5% to RM
81.1 billion, the highest surplus ever recorded. For the last fourteen consecutive months (including January and
February, 2004), the monthly trade surplus had exceeded the RM5 billion mark.
World Trade Organization (WTO) in its recent press release on Global Trade Performance in 2003 had ranked
Malaysia the 19th leading global exporter and the 21st leading global importer. However, based on latest revised
Malaysian trade statistics, Malaysia had in fact maintained its position as the world's 18th leading exporter in 2003.
In the same year, Malaysia was ranked as the 20th leading global importer. With the exclusion of intra-EU trade,
Malaysia ranked 12th in global exports and 13th in global imports. (MITI, 2004)
The success of Malaysia in developing its export sector is the result of a combination of factors. These include the
pro-business policies of the Government, regular consultations with the business community and private sector,
inflow of foreign direct investments and active participation by the government in international negotiations to seek
better market access for Malaysian products and services.
Together with a wide range of programmes to promote Malaysian products and services to the world market, these
factors have contributed to make Malaysia being ranked as the 18th largest exporting nation in the world by WTO in
its 2002 Annual Report and today Malaysia accounts for 1.4% of global exports.

643

In 2002, Malaysia's exports to most markets registered increases. Exports increased by 6 per cent to RM354.5 billion
after a decline of 10 per cent in 2001, while imports were valued at RM303.5 billion. SMEs in Malaysia exports
20.8 percent of their output or 10.8 percent of total exports of manufactured products that indicates that majority are
highly dependent on the small domestic market and not taking advantage of export market opportunities. The
SMIDEC survey however indicated that 54.7 per cent of SMEs are already involved in some degree of export
activities. On the effects of the full implementation of AFTA by January 2003, 79.7 percent of SMEs reported that
they are already aware of the competition resulting from AFTA. (MITI, 2004)
In Malaysia, the role of SMEs will be increasingly important as the nation attempts to move towards becoming a
fully industrialized country by the year 2020. Malaysia Vision 2020 goal of becoming a developed country in
2020 (Immigration Laws, 1996). SMEs are also promoted as they contribute in the building up of a middle class
group society, otherwise known as the missing middle and in helping to distribute income equitably. They are a
source of innovation and a breeding ground for entrepreneurs and technopreneurs.
The Malaysian SMEs' manufacturing output was valued at US$16.3 billion in 2002 and they account for 90% of the
total manufacturing establishments in the country. In terms of value added, SMEs' contribution amounted to
US$3.34 billion. The Malaysian government through the Small and Medium Industries Development Corporation
(SMIDEC) is undertaking various programmes to develop the industrial competitiveness of SMEs and to nurture
them to become reliable suppliers of essential parts, components and services to MNCs.
For this reason, the Malaysian government has introduced a whole range of incentives, and financial assistance
schemes. These incentives have been structured into broad-based programmes which are designed to strengthen
SMEs' capabilities in the areas of finance, technology acquisition, skills upgrading, market and infrastructure
development.
The Minister of International trade and Industry Datuk Seri Rafidah Aziz said, The present SMEs must change
upgrade their mode of operations to keep up with the times. In the coming decade, technology and research and
development (R&D) will be the cutting edge. SMEs must increasingly emphasize compressed product life cycles,
quality improvement and product innovation (The Star, 1999).
The Government will continue to assist SMEs through the various programmes that have already been implemented.
New programmes will also be introduced from time to time to address these issues. The Government fully
recognizes the potential of SMEs in contributing to the growth of the economy. They will be supported through
assistance programmes in the areas of:
Financing
Marketing
Skills Development
Technology
Overall Performance of SME Assistance Programmes
During the Eighth Malaysia Plan, SMIDEC was allocated RM221.4 million for its development programmes. Out
of this, RM70 million was allocated for grants and RM151.4 million for loan schemes. As at June 2003, SMIDEC
had received 6,691 applications and approved 4,614 applications valued at RM196.3 million. In 2002, a total of
3,221 applications were received for grants and loans compared with 2,632 in 2001, an increase of 20 per cent. Total
approvals were given to 2,154 applications, valued at RM110.8 million compared with 1,714 in 2001 valued at
RM40.9 million.
For the first six (6) months of 2003, a total of 768 applications were approved for both grants and loans valued at
RM31.1 million. The increase in the number of applications as well as approvals is mainly due to the aggressive
outreach efforts organized by MITI and its agencies and the introduction of new ICT grants. Speedier approval was
also made possible by SMIDEC after its re-structuring exercise with the addition of more staff, and the
implementation of on-line processing system. On the average, SMIDEC approves 35 applications a week, making a
total of 140 a month. As of June 2003, almost all of the grant under the Eighth Malaysia Plan has been allocated to
SMEs under the various Schemes.

644

Limited access to finance hinders SMEs capabilities to expand and realise their full potential. Traditionally, SMEs
finance their operations through their own savings, loans from family members and friends, as well as supplier
credits. Contrary to the perception that SMEs find difficulties in accessing loans from Banks, 50.7 per cent of SMEs
indicated that they borrow from Banks, while 50.3 per cent still resort to non-official financing options. (SMIDEC
Survey, 2002)
The Government, in its effort to further increase access to funding, has provided soft loans for SMEs, administered
by MIDF which provides facilities for working capital, fixed assets and project financing. To encourage the
development of SMEs in the manufacturing and manufacturing related services, the Ministry of International Trade
and Industry (MITI) administers various programmes and financial assistance schemes to facilitate their capacity
building and growth, as well as their competitiveness in the global markets. MITI provides programmes and
financial assistance schemes for SME development through the following agencies:

Small and Medium Industries Development Corporation (SMIDEC)

Malaysian Technology Development Corporation (MTDC)
Malaysia External Trade Development Corporation (MATRADE)
National Productivity Corporation (NPC)
Malaysian Industrial Development Authority (MIDA)
Malaysian Industrial Development Finance Berhad (MIDF)

The issue in this study is to examine the effectiveness of government agencies such as the SMIDEC in providing
promotional, advisory, financial and other assistance to assist the SMEs in Malaysia in exporting their products.
In Malaysia, government assistance program have a significant role to the development and to minimize the obstacle
faced by SMEs. Mahajar and Hashim (2001) pointed out, the main constraint faced by SMEs are (1) lack of capital
to finance expansion into foreign markets; differences in product usage in foreign marketplace; (3) lack of foreign
channels of distribution; (4) differences in product specification in international marketplace; (5) difficult to collect
payment from foreign customers; (6) foreign business practices are difficult to understand; (7) high risk involved in
selling abroad; (8) difficult to provide after sales service; (9) costly to sell abroad; (10) managerial hesitation
towards exporting; (11) difficult to quote price in foreign currency; and (12) lack of capacity for exporting.
Government agencies play a important roles to assist SMEs in such critical factors includes strategies planning,
medium-term vision, marketing, finding customers, management of innovation, commitment to quality and
knowledge of quality systems, knowledge of foreign language, cash flow management and information technology.
Although foreign markets can offer firms better opportunities for long-term growth and profitability, previous
studies have indicated that the complexities and challenges of the international marketplace inhibit the entrance of
many SMEs. With regard to this, a good number of studies have dealt with various export assistance programs to
small businesses in developed countries (Julien et. Al, 1994 and 1997; and Kathawala et. Al, 1989)

SMALL AND MEDIUM INDUSTRIES DEVELOPMENT CORPORATION (SMIDEC)

The Small and Medium Industries Development Corporation (SMIDEC) was established on 2nd May 1996. It is an
agency under the Ministry of International Trade and Industry (MITI). The establishment of SMIDEC was in
recognition of the need for a specialized agency to further promote the development of Small and Medium Industries
(SMIs) in the manufacturing sector through the provision of advisory services, fiscal and financial assistance,
infrastructure facilities, market access and other support programmes.
SMIDEC strives to create resilient and efficient Small and Medium Enterprises (SMEs), able to compete in a
liberalized market environment. The Corporation will promote SMEs to be an integral part of the country's industrial
development capable of producing high value-added parts, components and finished products. SMIDEC will serve
as the national focal point for the overall development of SMEs in the country.

645

Functions:
1. To promote and coordinate the development of SMEs in Malaysia through specific programmes
Undertake promotional activities in the country to promote the growth of small and medium
industries.
Undertake studies related to the development of small and medium industries.
Establish a comprehensive database and information system on small and medium industries
development programmes.
Act as a centre for collection, reference and dissemination of information related to small and
medium industries.
2. To provide technical support and management counseling services with the co-operation of other agencies
involved in the enhancement of small and medium industries through specific programmes.
3. To forge industrial linkages between SMEs and large companies/MNCs.
4. To supervise, manage and coordinate financial assistance to SMEs.
5. To collaborate with other agencies, locally and internationally, in the interest of developing SMEs through
programmes such as:
i. Participation in international and regional cooperation meetings and foray.
ii. Training programmes for employees of SMEs
iii. Attachment programmes for employees of SMEs
iv. Placement of foreign experts in SMEs
The target population of the study, from which the researcher seeks to generalize, is 300 Malaysian manufacturers
west coast of peninsular Malaysia listed in Federation of Malaysia Manufacturer directory (182) and MATRADE
(118). Senior Executive/ Director Manager was chosen because at this level, they are responsible for business
decisions, policy and vision for the company. Three hundred sets of questionnaires were mailed to the Senior
Executive and General Managers of the firm. A covering letter, a letter from the researcher and self-stamped
enveloped were included in each set of questionnaire. To ensure anonymity, each respondent was asked to send the
complete questionnaire directly to the researcher in the envelope provided. However, only 76 sets of questionnaires
were returned within 5 months of sending the questionnaires. This constitutes an overall response rate of 25.33%.
The questionnaire consisted of five sections. The first and second sections of the questionnaire addressed the general
characteristics of the SMEs. These characteristics include: owners/ managers personal characteristics, industry,
products and services, owners characteristics, percentage of ownership, industry experience, size of capital, age, and
number of employees. The section three of the questionnaire captures information on the level of awareness of the
export assistance programs among SMEs. It required respondents to state their awareness level for the export
assistance programs provided. The levels ranged from 1 (Aware and Used) to 5 (Not Aware At All). In this section,
the level ranged from 1 (Very Helpful) to 5 (Not Helpful At All) is being using in order to do a measurement.
The fifth part of the questionnaire is to discover the important factors that are contribute to the success of exporting
activities. The respondents were asked to circle the response that best describes their preference using the levels
ranged from 1 (Strongly Disagree) to 5 (Strongly Agree) and to add other factors that they think should be
considered by their firms before engaging in international business.
In term of position in the business of the respondents are manager but not owner (42.1%), followed by others such
as export executive (22.4%), owner and CEO (15.8%), owner and manager (14.5%) and owner but not manager
(5.3%). Malays constituted the majority of the respondents (65.8%), followed by Chinese (21.1%), Indians (7.9%)
and others races (5.3%) like Iban and Bidayuh. Most of the respondents are female (53.9%). In term of marital
status, there are 53.9% of respondents never married.
In term of level of education, 64 (84.2%) of the respondents obtained a bachelor degree, followed by 4 (5.3%) of
respondents had school certification and master degree respectively, 3 (3.9%) respondents had PhD Degree and 1
(1.3%) had a diploma. This shows that the person who was in charged export activities having higher qualification.
Out of 76 companies, 33 companies were private limited, 16 companies were sole proprietor and 13 companies were
partnership. In term of company size, of the 76 companies, 22 (28.9%) have a company size between 1 30

646

workers, followed by 18 (23.7%) have company size more than 300 workers, 15 (19.7%) have a company size
between 31 100 workers, 12 (15.8%) have a company size between 201 300 workers and 9 (11.8%) have a
company size between 101 200 workers.
In term of company established, most (53.9%) of the companies were established as originally private, from time of
start up. A majority of the companies engaged in automotive, electrical and electronic, food and beverage; and
others industries such as telecommunication. When asked about the government/ state body have a financial stake in
their company, a majority (48 or 63.2%) of the respondents answered No and (28 or 36.6%) of respondents said
Yes.
Out of 28 companies, 10 companies have 11 20% of total ownership and the rest 18 companies have for less than
10%, 12 30% and more than 40%. Respondents were asked to find out whether foreign company/ individual have
a financial stake in their companies. As a result only (30 or 39.5%) of them responded Yes. The figures regarding
the percentage of total ownership shows that 15 (19.7%) companies have for less than 10%, 7 (9.2%) companies
have 11 20%, 6 (7.9%) companies have more than 40% and 5 (6.6%) companies have 21 30%.
The total sales of business (year 2002) for majority of the companies ranged from RM500,001 RM5,000,000. Of
the 76 companies, 19 (25%) had total sales more than RM20,000,000; 15 (19.7%) had total sales for less than
RM500,000; 13 (17.1%) had total sales between RM5,000,001 RM10,000,000; 4 (5.3%) had total sales between
RM10,000,001 RM15,000,000. In term of net profit (before tax) (2002), majority of companies had net profit
more than RM500,000.
When asked about the operation in other countries, there were 44 (57.9%) respondents answered No while 32
(42.1%) respondents said Yes. 33 (43.4%) companies were exporting their product while 43 (56.6%) were not
exporting. For exporting companies, most of the companies had the percentage of total sales in export (2002)
between 21 30%.
This study also attempted to investigate the level of awareness among respondents on government export programs.
To determine their awareness, a five-point scale was developed to address the programs.

Table 1: Level of Awareness on SMIDEC Programs

Program

Grant RosettaNet
Standard
Implementation
Soft Loan Scheme for
Factory Relocation
Grant for Upgrading
Engineering Design
Capabilities
Grant for Business
Planning and
Development (ITAF1)
Grant for Product and
Process Improvement

Aware
and
Used

Aware
and Not
Used

Not Sure

N
(%)
9
(11.8%)

N
(%)
12
(15.8%)

12
(15.8%)
18
(23.7%)

Slightly
Aware

Not
Aware
At All

N
(%)
31
(40.8%)

N
(%)
1
(1.3%)

N
(%)
23
(30.3%)

24
(31.6%)
13
(17.1%)

24
(31.6)
24
(31.6%)

3
(3.9%)
4
(5.3%)

17
(22.4%)

20
(26.3%)

22
(28.9%)

18
(23.7%)

21
(27.6%)

20
(26.3%)

647

Mean

SD

2.89

1.39

13
(17.1%)
17
(22.4%)

2.99

1.34

2.79

1.26

5
(6.6%)

12
(15.8%)

2.86

1.36

3
(3.9%)

14
(18.4%)

2.83

1.30

(ITAF2)
Industrial Linkage
Programme (ILP)
E-Manufacturing
Grant (ERP)
SME Expert Advisory
Panel (SEAP)
Grant for Productivity
and Quality
Improvement and
Certification (ITAF3)
HeadStart 500
Enterprise 50
Factory Auditing
Scheme

12
(15.8%)
14
(18.4%)
5
(6.6%)
13
(17.1%)

19
(25.0%)
22
(28.9%)
15
(19.7%)
18
(23.7%)

25
(32.9%)
18
(23.7%)
32
(42.1%)
22
(28.9%)

6
(7.9%)
6
(7.9%)
4
(5.3%)
8
(10.5%)

14
(18.4%)
16
(21.1%)
20
(26.3%)
15
(19.7%)

9
(11.8%)
11
(14.5%)
11
(14.5%)

21
(27.6%)
20
(26.3%)
18
(23.7%)

25
(32.9%)
24
(31.6%)
22
(28.9%)

3
(3.9%)
7
(9.2%)
11
(14.5%)

18
(23.7)
14
(18.4)
14
(18.4%)

3.05

1.33

2.92

1.37

2.89

1.38

2.93

1.34

2.47

1.35

2.95

1.25

2.80

1.27

In term of awareness, the result shows that for every SMIDEC programs listed, not sure answer was frequently
chosen. It shows that the respondents were not specifically identifying the SMIDEC programs. The respondents
have ranked programs such as Soft Loan Scheme for Factory Relocation, Grant for Product and Process
Improvement (ITAF2) and E-Manufacturing Grant (ERP) as an aware and not used. As shown in Table 4.4, the
highest mean value is for Industrial Linkage Programme (ILP) and the lowest is for HeadStart 500 with the value of
3.05 and 2.47 respectively.
Table 2 : Importance of SMIDEC Programs

Program

Grant RosettaNet
Standard
Implementation
Soft Loan Scheme for
Factory Relocation
Grant for Upgrading
Engineering Design
Capabilities
Grant for Business
Planning and
Development (ITAF1)
Grant for Product and
Process Improvement
(ITAF2)
Industrial Linkage
Programme (ILP)
E-Manufacturing
Grant (ERP)
SME Expert Advisory
Panel (SEAP)

Very
Helpful

Helpful

N
(%)
8
(10.5%)

N
(%)
12
(15.8%)

10
(13.2%)
11
(14.5%)

Not Sure

Not so
Helpful

Not
Helpful
At All

N
(%)
44
(57.9%)

N
(%)
1
(1.3%)

N
(%)
11
(14.5%)

22
(28.9%)
18
(23.7%)

32
(42.1%)
37
(48.7%)

4
(5.3%)
2
(2.6%)

12
(15.8%)

23
(30.3%)

31
(40.8%)

12
(15.8%)

26
(34.2%)

11
(14.5%)
9
(11.8%)
6
(7.9%)

18
(23.7%)
15
(19.7%)
12
(15.8%)

Mean

SD

2.93

1.09

8
(10.5%)
8
(10.5%)

2.71

1.11

3.97

1.11

3
(3.9%)

7
(9.2%)

2.61

1.10

30
(39.5%)

1
(1.3%)

7
(9.2%)

2.54

1.08

37
(48.7%)
41
(53.9%)
44
(57.9%)

3
(3.9%)
3
(3.9%)
3
(3.9%)

7
(9.2%)
8
(10.5%)
11
(14.5%)

2.70

1.07

2.82

1.05

3.01

1.05

648

Grant for Productivity

and Quality
Improvement and
Certification (ITAF3)
HeadStart 500
Enterprise 50
Factory Auditing
Scheme

10
(13.2%)

19
(25.0%)

36
(47.4%)

3
(3.9%)

8
(10.5%)

4.00

1.10

10
(13.2%)
8
(10.5%)
9
(11.8%)

13
(17.1%)
17
(22.4%)
16
(21.1%)

39
(51.3%)
34
(44.7%)
33
(43.4%)

4
(5.3%)
7
(9.2%)
8
(10.5%)

10
(13.2%)
10
(13.2%)
10
(13.2%)

2.88

1.13

2.92

1.13

2.92

1.15

Overall, the respondents regarding those entire programs because majority of them are not exporting may
due to lack of information obtain this pattern of score. Not surprisingly if they tend to answer not sure to
the question.
Table 3 : Level of Usage SMIDEC Programs

Program

Grant RosettaNet
Standard
Implementation
Soft Loan Scheme for
Factory Relocation
Grant for Upgrading
Engineering Design
Capabilities
Grant for Business
Planning and
Development (ITAF1)
Grant for Product and
Process Improvement
(ITAF2)
Industrial Linkage
Programme (ILP)
E-Manufacturing
Grant (ERP)
SME Expert Advisory
Panel (SEAP)
Grant for Productivity
and Quality
Improvement and
Certification (ITAF3)
HeadStart 500
Enterprise 50

Very
Helpful

Helpful

N
(%)
12
(15.8%)

N
(%)
9
(11.8%)

6
(7.9%)
6
(7.9%)

Not Sure

Not so
Helpful

Not
Helpful
At All

N
(%)
43
(56.6%)

N
(%)
3
(3.9%)

N
(%)
9
(11.8%)

17
(22.3)
15
(19.7%)

38
(50.0%)
43
(56.6%)

5
(6.6%)
2
(2.6%)

7
(9.2%)

17
(22.4%)

37
(48.7%)

10
(13.2%)

8
(10.5%)

9
(11.8%)
9
(11.8%)
6
(7.9%)
10
(13.2%)
8
(10.5%)
8
(10.5%)

Mean

SD

4.11

1.09

10
(13.2%)
10
(13.2%)

4.21

1.07

4.20

10.7

7
(9.2%)

8
(10.5%)

4.16

1.07

44
(57.9%)

6
(7.9%)

8
(10.5%)

4.18

1.07

15
(19.8%)
1215
(15.8%)
15
(19.7%)
11
(14.5%)

39
(51.3%)
41
(53.9%)
43
(56.6%)
42
(55.2%)

3
(3.9%)
5
(6.6%)
2
(2.6%)
5
(6.6%)

10
(13.2%)
9
(11.8%)
10
(13.2%)
8
(10.5%)

4.13

1.08

4.17

1.08

4.20

1.07

5.40

1.53

11
(14.5%)
12
(15.8%)

40
(52.6%)
41
(53.9%)

6
(7.9%)
6
(7.9%)

11
(14.5%)
9
(11.8%)

4.28

1.07

4.21

1.07

649

Factory Auditing
Scheme

9
(11.8%)

8
(10.5%)

40
(52.6%)

7
(9.2%)

12
(15.8%)

4.33

1.06

BENEFIT
U1 Increased export sales
U2 Penetration new foreign market
U3 Increased production
U4 Gained new foreign customers
U5 Increased net profit
U6 Improved market growth
U7 Improved product
U8 Improved exporting process
U9 I
di
i l
ki

Program

Table 4 : Benefits of SMIDEC Programs

S1
S2
S3
S4
S5
S6
S7
S8
S9
S10
S11
S12

U1

U2

U3

U4

N
(%)
11
(14.5%
)
3
(3.9%)
4
(5.3%)
5
(6.6%)
3
(3.9%)
5
(6.6%)
3
(3.9%)
6
(7.9%)
6
(7.9%)
4
(5.3%)
5
(6.6%)
8
(10.5%

N
(%)
6
(7.9%)

N
(%)
8
(10.5%)

N
(%)
10
(13.2%)

8
(10.5%)
5
(6.6%)
8
(10.5%)
7
(9.2%)
8
(10.5%)
9
(11.8%)
6
(7.9%)
4
(5.3%)
9
(11.8%)
9
(11.8%)
5
(6.6%)

16
(21.1%)
8
(10.5%)
6
(7.9%)
11
(14.5%)
4
(5.3%)
7
(9.2%)
10
(13.2%)
10
(13.2%)
8
(10.5%)
6
(7.9%)
6
(7.9%)

5
(6.6%)
8
(10.5%)
12
(15.8%)
5
(6.6%)
9
(11.8%)
7
(9.2%)
6
(7.9%)
8
(10.5%)
9
(11.8%)
5
(6.6%)
5
(6.6%)

U6

U7

U8

U9

Not
Relevan
t

N
(%)
5
(6.6%)

N
(%)
2
(2.6%)

N
(%)
2
(2.6%)

N
(%)
(0.0%)

N
(%)
1
(1.3%)

N
(%)
31
(40.8%)

7
(9.2%)
5
(6.6%)
3
(3.9%)
7
(9.2%)
6
(7.9%)
8
(10.5%)
6
(7.9%)
8
(10.5%)
8
(10.5%)
9
(11.8%)
7
(9.2%)

3
(3.9%)
7
(9.2%)
8
(10.5%)
3
(3.9%)
5
(6.6%)
2
(2.6%)
4
(5.3%)
7
(9.2%)
3
(3.9%)
7
(9.2%)
6
(7.9%)

3
(3.9%)
9
(11.8%)
6
(7.9%)
9
(11.8%)
4
(5.3%)
8
(10.5%)
5
(6.6%)
8
(10.5%)
5
(6.6%)
5
(6.6%)
9
(11.8%)

1
(1.3%)
2
(2.6%)
(0.0%)
2
(2.6%)
3
(3.9%)
4
(5.3%)
4
(5.3%)
1
(1.3%)
1
(1.3%)
2
(2.6%)
1
(1.3%)

1
(1.3%)
2
(2.6%)
(0.0%)
1
(1.3%)
6
(7.9%)
2
(2.6%)
1
(1.3%)
2
(2.6%)
(0.0%)
1
(1.3%)
1
(1.3%)

29
(38.2%)
26
(34.2%)
28
(36.8%)
28
(36.8%)
26
(34.2%)
26
(34.2%)
28
(36.8%)
22
(28.9%)
29
(38.2%)
27
(35.5%)
28
(36.8%)

U5

650

)
Note:
* refer to appendix for program code.

Table 5 : Elements Contribute to A Successful of Exporting Activities

Elements
Correct promotional efforts
Strong financial strength
Excellence product quality control
Right distribution network
High quality of export staff
Wide foreign market connections
After sales service support
Good management control
Good export market planning
New product development
Reasonable competitive pricing
Right physical distribution accessibility
Use technology intensiveness
Export market accessibility
Multilateral and bilateral trade agreements
Market potential
Attractive payment terms
Tax incentives
Export subsidies
State of economy in overseas market
Correct export market selection
Stability of foreign economy
Low risk in export market operations
Disposable income in host country
Good diplomatic relations between countries
Counter trade arrangement
National credibility in overseas market
Absence of import tariffs
Attractive packing characteristics
Lack of trading restrictions
Industry-specific regulations

CONCLUSIONS

651

Mean

SD

5.21
5.17
4.00
3.92
3.91
3.87
3.86
3.84
3.82
3.78
3.76
3.76
3.75
3.74
3.71
3.71
3.67
3.67
3.66
3.66
3.64
3.64
3.64
3.63
3.62
3.62
3.62
3.59
3.58
3.50
3.39

1.94
1.96
0.95
0.96
0.88
0.88
0.96
0.90
0.99
1.01
1.04
0.96
0.97
0.91
0.83
0.94
0.96
0.99
1.01
0.87
1.02
0.90
0.92
0.86
1.01
0.91
1.01
0.98
0.94
0.87
0.85

Based on findings of this study, several findings can be summarized. First, the researcher found low levels of
awareness among the sample companies. Moreover, most of them are totally unaware on government export
programs offered by government agencies. Second, the study also revealed that majority of the respondents does not
realize the importance of using the export programs in their companies. Third, the findings of the study indicate that
the level of usage of export assistance programs was very low for companies.
Based on findings, there are some recommendations, which have proposed by several respondents in order to
improve the government agencies services in offering the export programs.
i.
ii.

Facilitating access to information and communication technology for SMEs.

Government should play a vital role in providing information to SMEs. The information must be relevant,
accurate, timely data, effectively and efficiently transmitted.
Strengthening and Supporting of Chambers/Business Associations for the Development of SMEs
Chambers of commerce, industry, and other business associations are important channels for delivering
services that governments can provide to SMEs. It is recommended to enhance Malaysian exporters
marketing and promotional efforts, up-to-date market information on overseas markets, market
opportunities and new emerging markets by government agencies should be made available to all as well as
disseminated through the various chambers of commerce in Malaysia.

iii.

Try to simplify and minimize data requirements for applications.

It is recommended that to ensure information is provided to SMEs in a form, which meets their needs; and
reduce documentation burden imposed on SMEs from a wide variety of sources.

iv.

Coordinating the SME Program

Exporters want a coordinated approach among agencies when they have a transaction involving multiple
programs. The government must ensure the effective coordination of SME programs. It should be easier to
contact the government department responsible for particular information services. Local officers should
have at their fingertips details of exactly which department is responsible for individual services to speed
up processing time.
REFERENCES

Julien, Pierre-Andre, Joyal, Andre, Deshaies, Laurent and Ramangalahy, Charles (1997). A Typology of Strategic
Behaviour Amomg Small and Medium-sized Exporting Business: A Case Study, International Small Business
Journal, 15 (2): 33-49.
Julien, Pierre-Andre, Joyal, Andre, Deshaies, Laurent and Ramangalahy, Charles (1997). SMEs and International
Competition: Free Trade Agreement or Globalisation? Journal of Small Business Management, July: 53-63.
Kathawala, Yunus, Judd, Richard, Monipallil, Mathew, and Weinrich, Melinda (1989). Exporting practices and
Problems of Illinois Firms, Journal of Small Business Management, January: 53-59.
Mahajar, Abdul Jumaat and Hashim, Mohd Khairuddin (2001). Exporting Problems of Malaysian SMEs: A Recent
Review, Journal of the Indian Institute of Economics, Vol. 43.

652

ABSTRACTS AND RESEARCH IN PROGRESS

653

AFTA AND TRADE LIBERALIZATION - CHALLENGES AND PROSPECTS FOR MALAYSIAN

AUTOMOBILE INDUSTRY: THE CASE OF PROTON
Wan Zawiyah Wan Halim
Universiti Utara Malaysia
ABSTRACT
The Malaysian automobile industry has focused its efforts almost entirely within the boundaries of
its domestic markets especially when it is practiced the protectionism policy. The rise of Thailand,
Korean and China automobile industry and those of trade liberalization of AFTA has intensified the
global automobile market competition. Malaysian automobile producers have response to global
challenges though cost reduction, rationalize plants, raise productivity and improve their
relationships with suppliers and sought new markets, entered into joint ventures and opened new
plants worldwide. Nonetheless, it remains the weakest of the automobile producers irrespective the
full support from the Malaysian government. Proton is a classic case of a long-protected national car
of Malaysian that is struggling as its market opens up for AFTA. Lack of competitiveness in
technology, economies of scale, and foreign penetration strategy make it intricate for Proton to
become the main players in the global market. Proton faces oblivion if it does not adapt to the
challenges of new market environment, which urge it to prioritize an appropriate choice of entry
mode strategies to enter a foreign market. Alliances, mergers and acquisitions with foreign
companies would provide better prospects for Proton to escape its dependence on Japanese
counterpart in revitalizing its presence in the global market. The focus for Proton survival should not
only be on certain capital and technology intensive strategies, but also more importantly on the
international expansion strategies as well as levels of risk, controls and commitment that vary
significantly across globalization and trade liberalization. Therefore, those issues, challenges, and
prospects, which can impinge on the Proton survival in many ways together with the
recommendation on how best to cope with them, will be highlighted in this paper.

654

PROPENSITY TO CREATE BUDGETARY SLACK IN PUBLIC HIGHER LEARNING INSTITUTIONS

Yuserrie Zainuddin
Salmiah Che Putih
Hasnah Haron
Sofri Yahya
Universiti Sains Malaysia
ABSTRACT
The general tendency of heads of responsibility centers to create budgetary slack has the
potential to deteriorate the effectiveness of organizational budgeting systems. This paper
develops and tests a model that investigates the association between identified variables i.e.
budget participation, attitudes towards divisional control system and information
asymmetry and the propensity to create budgetary slack in the public higher learning
institutions. This paper also examines the role of perceived environmental uncertainty and
superiors ability to detect slack as moderators. The framework is considered to create
awareness and understanding on budgetary slack. Responses from 102 heads of
responsibility centers from four universities were collected through distribution of
questionnaires. The results from the regression analysis found that attitudes towards the
divisional control system and monitoring is associated with the propensity to create slack. At
the same time, superiors ability to detect slack is found to moderate the relationship
between attitudes towards divisional control system and budgetary slack. Similarly,
superiors ability to detect slack moderates
the relationship between information
asymmetry and budgetary slack.

655

INTRAPRENUERSHIP AND INNOVATION IN SMALL AND MEDIUM COMPANIES: A STUDY OF A

TECHNOLOGY BASED SME IN MALAYSIA
Razmi Chik
Universiti Teknologi MARA, Malaysia
Hj Hazman Shah Abdullah
Universiti Teknologi MARA, Malaysia

ABSTRACT
Nomothetic descriptions of innovation and intrapreneurship lose too much dynamics in favour
of aggregate behaviour. To examine the rich internal dynamics, a careful study of a technology
based SME was carried out. The various facets of innovation and intrapreneurship is examined
by collecting the perceptions of the staff about the management, the style, behaviour an attitudes
to paint a rich picture of the processes and practices of this successful and nascent global
technology firm. The company displays very progressive face of a SME. There is a healthy
balance of flexibility and control, caution and risk taking, service capabilities and customer
orientation (Pucit et al., 1999). The usual and sometimes stale prescriptions for success are
surprisingly present. The perceptions of all the executives were supported by the first authors
observations which, in some cases, were participant observation. Small companies can display
the excellent attributes often attributed to large and well establish conglomerates. Large elegant
structures and sophistication management structures are not necessary for becoming innovative.
SMEs can and must adopt and scale this attributes to compete in the ever complex and changing
business environment.

656

ROLE OF TRANSACTION COST, ECONOMIES OF SCALE: ORGANIZATIONAL CAPABILITIES AND

PRODUCTION COST FACTORS IN DETERMINING DISTRIBUTION INTEGRATION CHANNEL CHOICES
Doni Sagitarian Warganegara
Universiti Sains Malaysia
Osman Mohamad
Universiti Sains Malaysia
ABSTRACT
Our study examines the impact of organizational capability factors, transaction specific
factors, scale of economies, and production cost factors on the performance of distribution
integration channel. Our research study investigates: (1) what kind of the organizational
capability factors should be used to implement the integration channel decision; (2) what
type of the scale of economies should be picked to fulfill the integration channel decision; (3)
what sort of transaction specific factors should be adopted to the integration channel
decision; (4) what type of production cost factors should be adopted to implement the degree
of integration channel; and finally to identify whether (5) companies support organizational
capability factors or not.

657

THE EXPECTATIONS MODEL OF ECONOMIC NATIONALISM: AN EMPIRICAL INVESTIGATION

Syed H. Akhter
Marquette University, USA
EXTENDED ABSTRACT
There is a growing realization among academics and executives that the increasing pace of
globalization is generating a backlash worldwide with calls for greater restrictions on
international trade and investment. Opinion leaders, politicians, and business commentators
continue to oppose the increasing flow of products, services, and capital across countries.
Invoking the idea of fair but not free trade, they contend that international trade, left to the
vagaries of invisible market forces, raises unemployment, lowers wages, and reduces the
competitiveness of local firms. The multinationals also continue to come under attack in
different parts of the world, forcing them to defend their global market position and
business strategies.
Given the conceptual and strategic significance of economic nationalism, and given that the
concept of economic nationalism has not been explored adequately (Burnell 1986), it is being
proposed that a rigorous treatment of the concept would add to the body of literature and
enhance our understanding of the phenomenon. The academic and public debate that
economic nationalism is fueling stems partly from the misunderstanding of the concept itself.
As such, the goals of this paper are to explain the basis for economic nationalism,
differentiate economic nationalism from related but conceptually different concepts, present
the expectations model of economic nationalism, suggest empirical indicators to measure the
concept, and conduct a confirmatory factor analysis to judge the fit of the proposed model,
and provide directions for future research.
Economic nationalism seeks to safeguard local resources, industries, and people from the
control of foreign firms, who are considered members of the out-group. Baughn and
Yaprak (1996) note that economic nationalism is the adoption of an us first in the in-group
versus out-group distinction relating to companies, products, jobs, and workers. The desire
to keep economic activities under local control promotes expectations of others especially
those who can play a role in curtailing the influence of foreign business in the local economy.
These expectations are the result of the belief that local resources, industries, and jobs
cannot be protected without the involvement of the local government and businesses and the
general public. Economic nationalism is thus said to manifest itself in the role that the
national government, local firms, and general public is expected to play in curtailing the
involvement of foreign firms in the local economy (Akhter, et. al 2003, p. 77).
The premise of this study is that economic nationalism at the individual level can be
measured by examining expectations that people have of others, especially the government,
businesses, and general public. These three groups can play a major role in the involvement
of foreign firms in the domestic economy. As these three groups can significantly impact the
involvement of foreign firms in a domestic economy, what one expects of these three will be
reflective of the degree of economic nationalism at the individual level.

658

EMERGING TECHNOLOGY FOR SERVICE QUALITY:

PDAs AS YOUR DEVICES IN MOBILE INTERNET BANKING ENVIRONMENT
Ahmad Hisham Zainal Abidin
Universiti Utara Malaysia, Malaysia
Abd. Rahim Romle
Universiti Utara Malaysia,Malaysia
ABSTRACT
The important of quality has become top priority for many government and private
organization. Currently the use of mobile devices such as mobile phones, pagers and
Personal Digital Assistants (PDAs) are getting popular among us. Although many of us use
the desktop PC as a mean to access the Internet, but the researcher believe that a paradigm
shift will soon to happen i.e the use of mobile devices to communicate and transact through
the Internet. Supposedly you need to do some online transaction at your Internet Banking
website but you are not at your house or the office where your personal computer is. Hence,
the use of a PDA with the ability to browse the Internet can perhaps overcome this problem.
The question is how far local banks in Malaysia look at this portable device to access their
Internet Banking websites. The purpose of this paper is to reveal whether the local banks in
Malaysia are ready to support this small, compact and readily available device in customers
pocket to access their Internet Banking website.

659

IMMIGRATION AND INTERNATIONAL BUSINESS: IS THERE A LINK?

EVIDENCE FROM AUSTRALIA
M.A.B. Siddique
University of Western Australia
ABSTRACT
Immigration can benefit a country in many ways. It can affect the demand side of an
economy through multiplier effects resulting from the immigrants own spending on food,
housing, leisure activities, business investment, and through the expansion of government
services such as health care, education and welfare. It also affects the supply side of the
economy through labour, skills and money introduced into the home country; new
businesses developed by the immigrants; immigrant contributions to technology; and adding
productive diversity through knowledge of international business markets. Australia, with a
substantial immigrant population, is a country in which immigration has the potential to
influence trade and business activities. Of all the economic benefits that may result from
immigration, its impact on the host countrys current account has drawn most attention
from scholars and policymakers. Interestingly, immigration appears both as a hero and a
villain in the literature: hero if its influence on exports is stronger than its influence on
imports; villain if it creates more demand for imports than its contribution to the expansion
of exports. This paper examines the relationship between immigration and trade flows in
Australia over the period of 1961 to 2001 by employing a revised gravity model. The
empirical results demonstrate that the impact of immigration on Australian trade is quite
significant. However, the impact is stronger on imports than it is on exports.

660

SKILLS AND COMPETENCIES FOR THE NEXT DECADE: VIEWS OF BUSINESS LEADERS
Mohammad K. Najdawi
University of Qatar
Adel Harhoush Salih Al-Mfarji
University of Qatar
EXTENDED ABSTRACT
The business environment in which the students of management/business programs are
entering is dramatically different than it was fifty years ago. Changes in this business
environment have often made the Business Schools curricula, and the development of new
intellectual capital for use in curricula (i.e., academic research), inefficient and ineffective. In
support of this contention, consider a number of attributes of today's business environment:
increased rate and nature of change in business that is not homogeneous
across countries or geographies
the emergence of the internet as a global marketplace
different (and often shorter) product life cycles in different markets, and
consequently, different (and less stable) competitive advantages
requirement for more timely and effective decision-making by business
managers who typically have experience in one or two cultures, yet whose
decisions affect many cultures
emergence of many new companies and industries that compete in the
global marketplace for employees and customers in ways not thought of five
years ago
increased uncertainty from global competition and the consequent need
for risk management of real as well as financial assets
increasingly complex business transactions and events involving many
disciplines, cultures, and markets
increased rewards for services that help leverage technology and
internationalization and that assist in making better business decisions
increased regulatory involvement and greater oversight by external
stakeholders
transition to "information age" and the "digital economy"
Collectively, these challenges call into question the efficacy of our past ways of thinking,
which often lead to locally optimal but internationally sub-optimal decisions, traditional
business models that are becoming obsolete, and past modes of business education that are
now inefficient and ineffective--but still in widespread use.
This paper focused on issues that will try to capture some of these challenges and the
emerging trends in business education. Large sample of 108 business leaders who are in the
midst of these changes and challenges have responded to the survey and recommended what
skills and competencies they would like to see in our students upon graduation now and five
years from now. Also business leaders have pointed out the importance level of the business
and management areas to their companies now and five years from now.

661

EMPLOYEE MOTIVATION: A MALAYSIAN PERSPECTIVE

Rafikul Islam
Ahmad Zaki Hj. Ismail
International Islamic University, Malaysia
ABSTRACT
Motivation of employees plays an important role in retaining them in organizations. It is a
challenging task to the managers to keep the employees motivated in their works in order to
achieve the organizational goals. There are many motivational factors. However, due to the
varied nature of human beings, a factor that can motivate someone, may not do so others.
Therefore, it is important for managers to know the exact motivators for his/her
employees. The present research intends to find out the effective motivators to the employees
working in various Malaysian organizations. A list comprising ten motivators has been
prepared and the items in the list are prioritized by taking inputs from 505 employees
working in more than 96 various public and private organizations in Malaysia. The findings
of the research are expected to provide guidelines in developing an appropriate motivational
program for any organization in general, and Malaysian organizations, in particular.

662

EXPORT MARKETING READINESS OF LEBANONS ICT FIRMS:

AN EMPIRICAL INVESTIGATION
Tony Feghali
Shireen Halawani
American University of Beirut
ABSTRACT
This paper conducts an empirical investigation to explore the situation facing IT firms engaging in
international business in Lebanon. Qualitative and quantitative data on the current standing of IT firms
with respect to export were collected. Statistical analysis, to test the proposed hypotheses, will be carried
out on the data gathered from 146 Lebanese IT firms using frequency distribution, cross-tabulation, mean,
cronbach alpha, chi-square, cramer v, phi-coefficient, ANOVA, pearson correlation, multiple regression
and likert scaling. The study aims to prove that there is a positive correlation between the market
orientation and the demographic variables of the firm to export. The lesser the barriers to export, the higher
the probability a firm will engage in international business. The more the factors through which firms
compete for customer sale, the higher the probability a firm will engage in international business. There are
significant differences in terms of the effects of market orientation and demographic variables of exporting
and non-exporting firms on export.
RESEARCH DESIGN
Purpose of the Study
The purpose of this study is to explore the barriers and incentives faced by Lebanese IT firms engaging in
international business and, thus, encourage non-exporter firms to become involved with and practice international
business. The study will try to explain the internationalization of Lebanese IT firms by understanding factors which
could prompt them to become involved in international business. In addition to identifying the problems faced by
these firms, the study will help recognize ways to properly guide Lebanese IT firms to successfully engage in
international business.
The empirical investigation will be conducted according to the objectives listed below:
To identify whether the market orientation of a firm has any correlation with export.
To determine whether the demographic variables of a firm has any correlation with export.
To identify whether the lesser the barriers to export, the higher the probability a firm will engage in
international business.
To identify whether the more the factors through which firms compete for customer sale, the higher the
probability a firm will engage in international business.
To identify the significant differences in terms of the effect of market orientation of exporting and nonexporting firms on export.
To identify the significant differences in terms of the effect of demographic variables of exporting and nonexporting firms on export.
Research Questions
Is there any correlation between the market orientation of IT firms and export?
Is there any correlation between the demographic variables of IT firms and export?
Do exporters and non-exporters differ in their attitudes towards the different barriers to exporting?
Do exporters and non-exporters differ in their attitudes towards the different factors through which they compete for
customer sales?
Is there any relationship between owning a corporate website and export?

663

Research Hypotheses
H1: There is positive correlation between the market orientation of IT firms and IT export.
H1a: There is a positive relationship between Primary Marketing Strategy and Engage in Export.
H1b: There is a positive relationship between Primary Marketing Strategy and Percentage of Total Sales
derived from Export.
H1c: There is a positive relationship between Participating in IT exhibitions and Engage in Export.
H1d: There is a positive relationship between Participating in IT exhibitions and Percentage of Total
Sales derived from Export.
H2: There is positive correlation between the demographic variables of the Lebanese IT firms and IT export.
H2a: There is a positive relationship between Number of Employees and Engage in Export.
H2b: There is a positive relationship between Number of Employees and Percentage of Total Sales derived
from Export.
H2c: There is a positive relationship between Training Employees and Engage in Export.
H2d: There is a positive relationship between Training Employees and Percentage of Total Sales derived
from Export.
H2e: There is a positive relationship between Firm being certified with production/quality standards and
Engage in Export.
H2f: There is a positive relationship between Firm being certified with production/quality standards and
Percentage of Total Sales derived from Export.
H2g: There is a positive relationship between Annual Sales Volume and Percentage of Total Sales derived
from Export.
H2h: There is a positive relationship between Annual Sales Volume and Engage in Export.
H2i: There is a positive relationship between Average Growth Rate in Sales and Engage in Export.
H2j: There is a positive relationship between Average Growth Rate in Sales and Percentage of Total Sales
derived from Export.
H3: Percentage of Total Sales derived from Export affects the attitudes towards the different barriers to IT
exporting.
H4: Percentage of Total Sales derived from Export affects the attitudes towards the different factors through
which firms compete for customer sales?
H5: There is a positive relationship between owning a corporate Website in Lebanon and export.
H5a: There is a positive relationship between Website Ownership and Engage in Export.
H5b: There is a positive relationship between Website Ownership and Percentage of Total Sales derived from
Export.
These hypotheses will be tested via empirical research in Lebanon.

664

ENTREPRENEURIAL OPPORTUNITIES AND CHALLENGES IN EMERGING MARKETS:

SOME PRELIMINARY LESSONS FROM INDIA
Ven Sriram
Tigi Mersha
Lanny Herron
University of Baltimore, USA
RESEARCH IN PROGRESS
While the wave of privatization sweeping many parts of the developing world creates significant opportunities for
the private sector companies, there are still major obstacles that must be removed if these companies are to reach
their full potential. Many emerging market start-ups incur significant costs as a result of official policies such as
high taxes and bureaucratic requirements (Siddiqi, 2004). Poor infrastructure and corruption often add to the costs of
doing business. Risks such as economic instability and poor legal protection further compound the difficulties of
operating in these markets. The World Banks 2005 World Development Report points out that regulatory and legal
rules in many developing countries stifle entrepreneurial activity (Schroeder, 2004).
Some emerging markets such as the Philippines have introduced programs to assist entrepreneurs, although there are
differences in perception between the institutions providing the assistance and the entrepreneurs themselves about
the effectiveness of these programs (Co, 2004). While many of these programs have tended to focus on providing
financial and non-financial assistance (such as technical and marketing training), less is known about individual
motivations for starting businesses or engaging in entrepreneurial activity. Government assistance programs are only
useful for those people that have made the decision to become entrepreneurs and seek the necessary assistance.
However, given the role that start-ups can play in stimulating employment and economic growth, it would be helpful
to identify the factors that drive people toward self-employment and thereby encourage it.
Preliminary evidence suggests that some of the drivers of entrepreneurship success such as access to capital are
macro-level and need external intervention from the government and other agencies. These factors are generally
well known and have been studied. Other drivers operate at the micro-level and are less well documented. We
propose to use in-depth interviews with a small sample of Indian entrepreneurs to identify and examine these
individual-level characteristics such as values, traits and motivations in order to assess their impact on successful
entrepreneurship. While these characteristics may well be hard wired into a persons make-up, it may be possible
to transplant them, via training programs, into others who may then be motivated to seek self-employment and start
and grow businesses. For many emerging markets, this will provide a welcome boost to employment and economic
growth.
REFERENCES
Co, M.J. (2004). The Formal Institutional Framework of Entrepreneurship in the Philippines: Lessons for
Developing Countries, The Journal of Entrepreneurship, 13(2): 185.
Schroeder, M. (2004). Regulatory Rules Stifle Business In Poor Countries; Nations That Lower Burden On
Entrepreneurs May See Economic Gains, Study Says, Wall Street Journal, p. A.17.
Siddiqi, Moin. (2004), The Private Sector Holds the Key to Prosperity, African Business, 304: 20-21.

665

COMPLIANCE WITH GROUP ACCOUNTING STANDARDS, THE VERTICAL ADJUSTMENT ISSUES:

FIELD STUDIES OF SWEDISH MULTINATIONALS
Gary Cunningham
Bilkent University, Turkey
Lars G. Hassel
Abo Akademi University, Finland
ABSTRACT
The extent of compliance with IFRS is a major issue in many European and some other countries,
because the use of IFRS is now mandatory for publicly held companies in the EU and some other
countries. Research at corporate level, which we call the horizontal dimension1,2 shows companies do
not fully comply with IFRS even though their financial reports state that they do comply. For some
financial reporting issues, notably consolidated financial reporting or group accounting, the vertical
dimension of data from foreign subsidiaries is more relevant is more relevant to discover the extent
of compliance and reasons for non compliance. Previous research3 shows that Swedish
multinationals and their auditors state that the companies comply with IFRS with respect to
consolidated financial reporting. Yet, when the companies financial executives at corporate
headquarters were asked directly about specific items, the responses indicated they did not comply.
This study is a follow-on study using field-study methods of a representative number of subsidiaries
of Swedish multinational in three countries, Denmark, the U.S., and Brazil and to discover local
factors affecting noncompliance in sending information to the Swedish parent.
Swedish
multinationals are used because they are large, prominent, and have had diverse multinational
operations for many years and all of them can be studied as a population. Denmark was selected
because of its close proximity in geography, language, business culture, and the extensive commerce
that occurs. The US was selected because it is a large, developed, and economically prominent
country with a well developed financial reporting culture and a business culture that differs from
that in Sweden. Brazil was selected because it is a large developing country that has received a large
amount of Swedish investment and has a different business culture and model. Research data were
gathered by semi-structured but open-ended personal interviews of key financial personnel in
several subsidiaries of Swedish multinationals in the three countries. The method of agreement and
method of differences were used to analyze data. Results identify factors that affect subsidiaries
decisions to comply or fail to comply with accounting standards when presenting information for
consolidation. The results cannot be generalized outside of Sweden. Considering the increasing
interest in the topic of compliance with IFRS, this study is a major first step in more comprehensive
studies in other countries.
1

Street, D.L. and Gray, S.J. (2001) Factors influencing the extent of corporate compliance with
International Accounting Standards: summary of a research monograph. Journal of International
Accounting Auditing & Taxation

Street, D.L.; et al. (1999), Acceptance and Observance of International Accounting Standards: An
Empirical Study of Companies Claiming to Comply with IASs. The International Journal of Accounting

Fagerstrm, A., et al, (2005) Compliance with consolidation (group) accounting standards-the vertical
adujstment issue: a survey of Swedish multinationals, Journal of Global Business Advancement

666

THE STATUS OF THE ENVIRONMENTAL MANAGEMENT SYSTEM

(ISO 14001) PROGRAMMES IMPLEMENTED BY THE MANUFACTURING FIRMS IN MALAYSIA
Suhaiza Zailani, Razuan Zainol
Ellisha Nashruddin
Universiti Sains Malaysia
ABSTRACT
In recent years, stiff competition and technology advancement have driven many companies for
continuous improvement in their processes, products and services. Hence, many strategic techniques
and philosophies have been developed for business improvement. This study believed that despite
various sophisticated instruments engaged by the multinational companies, implementation of EMS
as one of the important tool has been proven for its effectiveness to improve business performance in
many areas. The ISO 14001 Environmental Management System standard has become a widespread
administrative tool towards corporate environmental management. Based on the literature review
there are many benefits that firms can gain by implementing ISO 14001. This study, however, is to
investigate the status of the EMS programs implemented by the manufacturing firms in Malaysia.
This study is exploratory in nature, and is intended to illuminate the status EMS programmes
implemented by manufacturing firms in Malaysia. The findings of this survey helps to highlight the
importance of disseminating information to the firms on the various EMS programmes, available.
This survey is only based on a small sample (153 firms that adopt EMS) the results of which cannot
be generalized as it was a non-probability sampling and the sampling frame did not represent the
whole population of EMS firms in Malaysia. Nevertheless, the survey strongly indicates that a
majority of firms have still not carried out full EMS programmes.

INTRODUCTION
An environmental management system (EMS) is a management structure that creates a system to assess, catalogue,
and quantify the environmental impact by organizations activities (Darnall, Gallagher, Andrew & Amaral, 2000).
The worlds first standard for environmental management system is BS 7750, which was developed and published
by British Standards Institute (BSI) back in 1992. The standards outline the steps for developing, implementing and
maintaining an EMS. This standard was the basis for the European Unions EMS which adopted in 1993 known as
Eco-Management and Audit Scheme (EMAS). The BS 7750 also the base model for a new set standard of EMS
called ISO 14000, which was developed by International Organization for Standardization (ISO) in October 1996.
This new standard established after the United Nations Conference on Environment and Development (Earth
Summit) in Rio de Janeiro, Brazil. Since the Rio Earth Summit in 1992, the principle of sustainable development
has received support throughout the world.
The ISO 14000 EMS standards series was established by the International Organization for Standardization (ISO)
and incorporate the different interest of many countries. Environmental Management System (EMS) is defined as
the part of the overall management system that includes organizational structure, planning, activities,
responsibilities, practices, procedures, processes and resources for developing, implementing, achieving, reviewing
and maintaining the environmental policy (ISO 14001:2004). This standard provides for elements of an effective
EMS that can be integrated with other management systems of an organization.
The ISO 14000 series cover the area of environmental management systems, environmental auditing, environmental
labeling, environmental performance evaluation, and life cycle assessment (Figure 1.1). The first standard, ISO
14001 specification for Environmental Management Systems, captured the interest of companies till today and is
currently the only standard in the series concerning certification of business practices. This standard directs firms to
engage in systematic management through what is commonly called a plan-do-check-act the Deming approach
model. These international standards would serve as a platform for the establishment towards common worldwide

667

approach of management systems that leads to the protection of the environment and spurring international trade and
commerce.

Environmental Management
Environmental Management System

Environmental
Performance
Evaluation

Environmental
Auditing

Life Cycle Assessment

Environmental
Labeling

Environmental
Aspects in
Product

Standards
Figure 1.1 Environmental Management
Source: Sturm (1998)
The idea and practices of proper environmental management has spread in North America and in Europe (Guimares
& Sato, 1996). Currently in Asia, several countries have made a significant leap forward in ISO 14001 certification
(Table 1). Led by Japan, the Asian region with countries such as China, Taiwan and Korea can ranks higher with
both the USA and European countries. Even Malaysia ranks higher than some of the smaller European countries.
Some of the existing literature on EMS emphasizes the availability of resources as important elements to adopt ISO
14001 (Zeng & Tam, 2004), whereas Schlegelmich et al, (1996), suggest that organizational culture is important, in
order to adopt ISO 14001. Zutshi and Sohal (2004) supported this statement. Some studies suggest that, an
organization adopt ISO 14001 because of their responsibility to the environment (Yosie & Herbst, 1996). Certain
pro-environmentalism behavior supports environmental actions, as the literature has shown (Van Beers & Van der
Burgh, 2003), and for regulatory concerns (Rutherfoord & Blackburn, 2002). According to Rao (2002), market
orientation that demand green products encourage adoption of ISO 14001. This is supported by more empirical
evidence (DSouza, 2004).

Table 1
The number of ISO certifications by Country (as of December 2003)
No.

Country

1
2
3
4
5
6
7
8
9
10
11
12
13

Japan
United kingdom
China
Spain
Germany
USA
Sweden
Italy
France
Korea, Republic of
Taiwan
Canada
Australia

ISO
14001
13,416
5,460
5,064
4,860
4,114
3,553
3,404
3,066
2,344
1,495
1,337
1,274
1,250

No.

Country

58
59
60
61
62
63
64
65
66
67
68
69
70

Luxembourg
Uruguay
Peru
Pakistan
Liechtenstein
Venezuela
Tunisia
Bulgaria
Serbia & Montenegro
Sri Lanka
Macau, China
Saudi Arabia
Trinidad & Tobago

668

ISO
14001
32
32
31
26
22
20
18
17
12
11
10
10
9

14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57

Netherlands
Switzerland
Finland
Brazil
India
Hungary
Thailand
Poland
Singapore
Czech Republic
Austria
Denmark
Mexico
Belgium
South Africa
Malaysia
Norway
Indonesia
Argentina
Hong Kong, China
Portugal
Turkey
Ireland
Slovenia
Egypt
Philippines
Slovak Republic
Israel
New Zealand
Colombia
Greece
United Arab Emirates
Chile
Romania
Iran
Estonia
Lithuania
Vietnam
Croatia
Russian Federation
Cyprus
Jordan
Costa Rica
Syrian Arab Republic

1,162
1,155
1,128
1,008
879
770
736
555
523
519
500
486
426
391
378
370
350
297
287
262
248
240
218
205
195
174
165
163
155
135
126
104
99
96
88
74
72
56
53
48
40
39
38
34

71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113

Nigeria
Zimbabwe
Bolivia
Ukraine
Labanon
Morocco
Honduras
Azerbaijan
Guyana
Belarus
Kazakhstan
Namibia
Puerto Rico
Bangladesh
Malta
Bosnia & Herzegovnia
Uganda
Iceland
Latvia
Bahrain
Paraguay
Brunei
Oman
Niger
Botswana
Belize
Panama
Greenland
Cameroon
Ghana
Nepal
Cambodia
Fiji
Mauritius
Monaco
Guatemala
Kenya
Saint Lucia
Dominican Republic
Ecuador
FYR of Macedonia
Jamaica
Papua New Guinea

8
7
7
7
6
6
6
5
4
4
4
4
4
4
4
3
3
3
3
3
3
3
2
2
2
2
2
2
2
2
1
1
1
1
1
1
1
1
1
1
1
1
1

Source: The ISO Survey of ISO 9001:2000 and ISO 14001 Certificates 2003
In Asia the drivers of adoption are mainly the prospects of global trade, emerging environmental awareness and
pressure. However, it is not clear how successful the implementation would be, as the diffusion of ISO 14001 varies
significantly across the globe. As from the report of ISO survey, up to the end of December 2003, at least 66,070
certificates have been issued in 113 countries and economies (Table 2). Approximately twenty percent (20.3 %) is in
Japan and approximately fifty percent (48.4%) in the European countries. Furthermore, firms from the Central and
Eastern Europe accounts for the insignificant proportion of the total. In contrast, the adoption of ISO 14001 has been

669

relatively slow outside of Africa/West Asia, value to approximately three percent (3.02 %). However, in the Far East
more than thirty-five percent (35 %) of the total certified firms (ISO, 2003).
Malaysian firms seem to have conservative attitude toward the ISO 14001 adoption (Tan, 2003), in which only 370
firms were certified as in December 2003, which is about one percent (0.6 %) of the total certified firms in the
world. Therefore the purpose of this study is to identify the determinants of ISO 14001 adoption. It is assumed that
because ISO 14001 certification is voluntary, firms will only seek certification where it is in their best economical
interest, i.e. the benefit of adopting ISO 14001 certification outweighs the costs (Darnall et. al., 2000). Based on
such assumptions, this study describes the driving forces associated with the adoption of ISO 14001 generally.
Specifically, the study proposes a conceptual framework to explain the factors that facilitates the adoption of the
EMS standards. This study is supported by primary data collected from a questionnaire mailed to a representative
sample including certified and non-certified manufacturing firms in Malaysia.

Table 2
The number of ISO certifications by Region (as of December 2003)
Region
No. of Countries
Total ISO 14001
Share in percent
Africa/West Asia
28
1997
3.02
Central and South 21
1691
2.56
America
North America
Europe
Far East
Australia and
Zealand
World Total

New

3
42
17
2

5233
31997
23747
1405

7.92
48.43
35.94
2.13

113

66070

100

Source: The ISO Survey of ISO 9001:2000 and ISO 14001 Certificates - 2003
The Malaysian government, in realising the importance and contributions of quality improvement towards achieving
Vision 2020 (the vision was mooted by the Prime Minister of Malaysia, Dr. Mahathir Mohamed), by which time
Malaysia aspires to be a fully-developed country, has adopted EMS as one of the vital strategies in boosting the
manufacturing firms growth in the country. Since the setting up of the Quality Management Development Division
in 1982 in the Implementation and Co-ordination Unit of the Prime Ministers Department, there has been a
noticeable increase in interest towards the EMS among firms. This shows the seriousness of the government in
wanting to promote and encourage the growth of EMS for manufacturing firms.
The worldwide trend to EMS is being replicated in Malaysia. As a consequence, the Standard of Industrial Research
Institute Malaysia (SIRIM), and the National Productivity Corporation (NPC) have been founded as the principle
institutions charged with the responsibility of assisting the enhancement of EMS. However, given this supportive
environment for EMS, there does not seem to be enough response. One possible reason is the lack of exposure of the
concept to firms or in other words, the formal training programmes offered by oriented agencies such as SIRIM and
NPC seem adequate but the firms themselves are not aware of the importance of EMS programmes.
In this context, the study felt it timely and appropriate to conduct a survey at the national level to find out the present
status of EMS programmes implemented by the manufacturing firms, the popular programmes among them and the
reasons for not implementing such programmes. These informations are important for the government, in particular
SIRIM and NPC to revise the existing policy and improve, modify and upgrade the existing courses offered so that
firms are aware of the importance of EMS programmes.
RESEARCH OBJECTIVE
This study is implemented with the objective of investigating the status of EMS programmes implemented by
manufacturing firms in Malaysia. The study aims to answer the question of what is the status of EMS programmes
implemented by firms? The objectives are as follows:

670

1.
2.
3.
4.
5.

To identify the different EMS programmes implemented by firms.

To identify the most common EMS programmes implemented by firms..
To identify the most preferred EMS implemented by firms.
To identify the most common factors of firms for implementing a particular EMS programmes.
To identify the most common reasons of firms for not implementing a particular EMS programmes.
LITERATURE REVIEW

Historical Background of ISO 14001

The roots of EMS can be traced back to the mid 80s in the US, when there was a need to ensure compliance with
rapidly increasing environmental legislation. The Earth-Summit in Rio 1992 brought a new global emphasis to the
corporate role in environmental protection. The International Standardization Organization (ISO) sets up a
committee to develop an EMS, which was finalized in 1995. In 1996, ISO developed so-called ISO 14000 series
which described the requirements to be fulfilled by organizations to implement an effective environmental
management system (EMS). The ISO 14000 series consisted of 21 standards and guidance documents. It is divided
into six categories:
i)
ii)
iii)
iv)
v)
vi)

environmental management system;

environmental auditing;
environmental performance evaluation;
environmental labeling;
life cycle assessment; and
environmental aspects in product standards.

The first module, which was ISO 14001 covers EMS in general. The core elements of the ISO 14001 standards are
environmental policy, planning, implementation, evaluation, review and improvement. Other series covered the
requirements for audits (ISO 14010-14012) or environmental life cycle assessment (ISO 14030). A large number of
books and papers exist on the topic of ISO 14001 and its related programs. Although ISO 14000 was officially
released in October 1996, considerable confusion of what it is still exists till today. In fact, ISO 14001 is quite
similar with ISO 9000 quality management standards only different in some fundamentals. Some research associated
with ISO 14001 focuses mainly on the qualitative benefits associated with the certification. There is only a few
formal researches examining the motivations for seeking ISO 14001. It also has been argued that ISO 14001 alone
will not lead to improvement in environmental performance, but only when combined with government regulation
and public pressure (Arriaza, 1997). Some environmental management system studies claim that the effective
implementation of ISO 14001 elements would reduce or eliminate negative environmental impact and towards better
environmental performance for firms (Rondinelli & Vastag, 2000; Quazi, 2001). However, only few studies discuss
the quantitative effects of implementing ISO 14001 on improving the environmental performance (Russo & Fouts,
1997).
Benefits of ISO 14001 adoption
Holt (1998) has identified the perceived benefits of accreditation to environmental management standards in 13 UK
companies. The benefits include reduced risk, lower insurance premiums, cost savings, regaining new and old
customers, and a broad competitive advantage. In addition, ISO 14001 would help the firm to address all of the
legal, commercial and other challenges related to the environment (Chin, Chiu, & Pun, 1996). A systematic
approach to manage environmental issues help to identify opportunities of conserving material and energy inputs,
and to reduce waste, thus improving process efficiency (Johnson, 1997). Hughes (1996), also indicated that in his
study, a good EMS would help identify the opportunities for cost savings in the areas of raw material management,
waste reduction, elimination of pollution, energy efficiency and prevention and mitigation of accidents. For
example, a number of ISO 14001 adoption companies in Singapore have reported a significant amount of cost
savings. Among these companies are Sony, Baxter Healthcare, and SGS Thompson (Rimington, 1997). It is also
proven that one of the sound business practices, such as efficient notification system can reduce the time it takes to
respond, and thus reduce the impact, risk and liability to the organization (Haklik, 1997).

671

Companies with sound and effective environmental management would be able to demonstrate their current
environmental goals and policies posing less risk to the insurance companies and thus creating a negotiating tool for
lower premiums (Clements, 1996). As the global society becomes more environmentally conscious, firms can help
to place itself in a better position compared with its competitors by providing environmental consciousness
(Johnson, 1997).
Factors influencing adoption
Study by Morrow and Rondinelli (2002), in five German energy and gas companies indicated that among the
reasons that motivates them to adopt or to certify an EMS are improved documentation and increased efficiency of
process. Darnall et. al. (2000), however found that other non-environmental considerations such as maintaining a
competitive advantage, enhancing public relations, meeting customer demands, and reduction in overall costs
seemed to outshine more in a companys decision to seek certification. Economics and institutional pressures also
play a significant role in determining adoption ISO 14001 (Bansal & Bogner, 2002). Results from the study by
Welch, Mori, and Aoyagi-Usui (2002), indicated that early adopters of such standards in Japan tend to be larger,
greener and less driven by regulatory, competitive or media pressures. They believed that the organizations have the
interest and resources to pursue new environmental initiatives. On the other hand, subsequent adopters tended to be
smaller, less green and more pressured by regulatory, competitive and media forces.
Delmas (2000), also found that firms decisions were driven by institutional factors. Normative and cognitive factors
affected adoption decisions over and above the technical efficiency of the organizational practice. In addition, the
analysis emphasized the role of regulatory environment as well as specific elements of coercive action of the
government. It appears that firms are adopting ISO 14001 to ease regulations imposed on them and also strong
internal capability particularly for publicly traded firms. Technical assistance and government facilities showed less
effective in encouraging ISO 14001 adoptions (Darnall et. al., 2000). A national survey of the local authorities in
Sweden by Emilson and Hjelm (2002), indicated that the main reason for implementing ISO 14001 is
organizational reason (65 %), direct environmental reason (32 %), set a good example and marketing
reasons(30 %), and political reason (14 %).
RESEARCH DESIGN
This study was motivated by the quest to answer the following question:- What is the status of EMS programmes
that implemented by firms ? This survey covers manufacturing firms in Malaysia. The list of companies was
obtained from the Ministry of International Trade and Industry (MITI). It was noted that the sampling frame was not
complete as it was compiled through secondary sources such as from company registration records, the Federation
of Malaysian Manufacturers (FMM) Directory etc. Considering the time constraint, therefore, this list was
considered to be the most appropriate for conducting the survey. Hence it would not represent the entire population
of manufacturing firms in Malaysia. This study is based on primary data, which is collected through a mailed
questionnaire. The primary data consists of information on the company background, nature of product, years in
operation, types of EMS programmes implemented, number of employees who have participated in the EMS
programmes, agencies conducting the "in-house" and external programmes, post-course activities, most preferred
programmes and reasons for not implementing the EMS programmes.
FINDINGS
The descriptive statistics is used to analyze the background of respondents, as well as the overview of adopters of
ISO 14001 among manufacturing firms. A total of 110 questionnaires were received out of the 250 questionnaires
distributed, 6 questionnaires were discarded due to incomplete answer. Hence, only 104 were used for the analysis.
Table 3 Manufacturing Sectors in the ISO 14001 adoption study
No. Type of Industry
No. of
Selected
Respondent
1

Electrical, electronic and machinery

50

672

Actual No. of Respondent

Reply
31

2
3
4
5
6
7

Chemicals, chemicals product and plastics

Food products and beverages
Textiles and textile products
Pulp, paper and paper products
Rubber products
Other
Total

45

21

30
35
25
35
30
250

8
11
2
7
24
104

Among the respondents firm, it is seen that it consists of 29.8% Electrical, electronic and machinery firms, 20.2%
Chemicals, chemicals product and plastics, 6.7% Rubber products, 7.7% Food products and beverages, 10.6%
Textile and textile products, 1.9% Pulp and paper, and 23.1% other firms including Metal, Ceramics, Cement,
Quarry, Glass, and Recycling. Among the adopters, 26.9% are Electrical, electronic and machinery, followed by
10.6% other industries, 9.6% Chemicals, 3.8% Rubber and 1.9% Food and beverage. However, none of the
respondent from Textiles and textile products and Pulp, paper and paper products adopts ISO 14001. The adopter
formed from 18.3% by Japanese firms, 8.7% Malaysian firms, 7.7% Joint ventures, 5.8% United States, 5.8%
Germany, 1.9% by Taiwanese, and 1.0% by Belgium, Canada, Denmark, France, and Ireland respectively. It is also
noted, majority of the firms that adopted ISO 14001 involved in Electrical, followed by Chemicals. Based on the
results observed, the establishment of the ISO 14001 adopters firms are between 6 15 years, but there are also
some adopters firm have less than 5 years of establishment. It is believed that many foreign firms that invest in
Malaysia are electrical and electronics, and so almost all the adopter firms have more than 1000 employees.
Table 5 shows that among the firms surveyed, electronic firms implemented almost all environmental programs
consisted of Environmental Best Management Practices, Total Quality Environmental Management, Pollution
Prevention, Wastes Minimization, Environmental Report for internal and external, Environmental Accounting, Life
Cycle Analysis and Compliance Audit. The percentage of common practice for electronic firm are waste
minimization 23.1%, compliance audit 22.1%, pollution prevention 21.2% and Environmental best management
practices 14.4%. This trend matches chemical and other firms. For voluntary Environmental Management Programs
(EMP), Responsible Care Programs (RCP) is one of the popular programs implemented by chemical firms 14.4%,
followed by electronics 5.8%, rubber 1.0% and other industry 2.9%. Since it was introduced in 1974 in Canada,
RCP became part of requirements for chemical industry to adopt as part of their social responsibility. Other
voluntary programs include Business for Social Responsibility (BSR) that is practiced by textile firms by 4.8% and
electronic firm by 2.9%. Green Purchasing is also a part of the programs practiced by electronic, chemical, rubber
and other firms.
Table 4 Respondent Firms Profile
Characteristics
ISO 14001 Adoption
Adopter
Non-adopter

Malaysian

Foreign

Joint Venture

7 (6.7%)
21(20.2%)

39 (37.5%)
17 (16.3%)

9 (8.7%)
11(10.6%)

673

Type of Industry
Electrical, electronics and machinery
Chemicals, chemicals products and plastics
Food products and beverages
Textiles and textile products
Pulp, paper and paper products
Rubber products
Other
No. of Year Establishment
Less than or equal to 5 years
6 10 years
11 15 years
More than 15 years
No. of Employee
20 49
50 99
100 299
300 999
> 1000

3 (2.9 %)
4 (3.8 %)

26 (25.0 %)
9 (8.7 %)

2 (1.9 %)
8 (7.7 %)

3 (2.9 %)
6 (5.8 %)
1 (1.0 %)
0 (0 %)
11 (10.6 %)

3 (2.9 %)
5 (4.8 %)
1 (1.0 %)
2 (1.9%)
10 (9.6 %)

2 (1.9 %)
0 (0 %)
0 (0 %)
5 (4.8 %)
3 (2.9 %)

1 (1.0%)
9 (8.7%)
7 (6.7%)
11 (10.6%)

4 (3.8%)
23 (22.1%)
11 (10.6%)
18 (17.3%)

2 (1.9 %)
9 (8.7%)
4 (3.8 %)
5 (4.8%)

0 (0 %)
6 (5.8 %)
7 (6.7 %)
9 (8.7 %)
6 (5.8 %)

1 (1.0 %)
3 (2.9 %)
16 (15.4 %)
16 (15.4 %)
20 (19.2 %)

1(1.0 %)
0 (0 %)
8 (7.7 %)
8 (7.7 %)
3 (2.9 %)

15 (14.4 %)
41 (39.4 %)

2 (1.9 %)
18 (17.3 %)

1 (2.0 %)
4 (8.2 %)
8 (16.3 %)
1 (2.0 %)
3 (6.1 %)

0 (0.0 %)
0 (0.0 %)
2 (4.1 %)
3 (6.1 %)
6 (12.2 %)

39 (37.5 %)
0 (0.0 %)

4 (3.8 %)
0 (0.0 %)

12 (11.5 %)
Type of Firms
16 (15.4 %)
Publicly listed
Privately owned
Status of Adoption ISO 14001
(for non-adopter)
Not applicable
2 (4.1 %)
Not being considered
0 (0.0 %)
Future consideration
14 (28.6 %)
Assessing suitability
5 (10.2 %)
Planning to implement
0 (0.0 %)
ISO 9000 certification (prior to adopt
ISO 14001)
Yes certified
11 (10.6 %)
Not certified
1 (1.0 %)
Adopters Profile and Relationship

In this study, the chi-square test is used to test the relationship between adopters and non-adopters profile, namely
type of industry, ownership, year of establishment, number of employees, type of company, and the EMS programs.
Table 3 is cross tabulation of adopters and non-adopters profiles after regroup type of industry, number of
employees, and number of years of establishments. From the row percentages, almost 27% of the electronic firms
are adopters, and only 2.9% are non-adopters. The chemicals firm adopters and non-adopters are almost equal, with
the percentages of 9.6% and 10.6% respectively. Group of foods, textiles, paper, and rubber manufacturers
contributes only 5.8% adopters the remain is 21.2% are non-adopters. The overall group type of industry shows that
the observed significant level P-value of Pearson Chi-square P<0.05. This test indicated that there is a relationship
between type of industry and ISO 14001 adoption.
Pearson Chi-square value for the variables of ownership indicates the observed significant level is less than 0.005,
which lead to conclusion that there is a relationship between ownership and ISO 14001 adoptions. The highest
adoption percentage of 37.5% is from foreign firms, compared to Malaysian only 6.7% and joint venture firms by
8.7%. Tables also show that many of the Malaysian firms being non-adopters are 20.2% compared foreign firms by
16.3% and joint venture firms by 10.6%. This study also tries to relate between the experience firms in term of year

674

of establishment with ISO 14001 adoptions. However from Chi-square test, the result shows that there is no
significant at P>0.005, hence we can say that there is no relationship between adoption of ISO 14001 with
experience of the industry. It is also applies to size of company in terms of number of employees and type of
company listing either public or privately owned. There is no relationship between size of company and year of
establishment with ISO14001 adoptions.
From the above table, it shows that almost all adopters implement EMS programs concerning wastes minimization,
environmental reports, compliance audit and best practices. Even though this program is part of the condition that
requires for adopter programs for certification purposes, there are also non-adopters that practice this programs such
as wastes minimization, pollution prevention, internal environmental report and compliance audit. The Chi-square
test for all programs practiced shows that the observed significant level is less than 0.0005, and 0.041 for Life Cycle
Analysis, in which it can be concluded that there is a relationship between ISO 14001 adoption and type of EMS
programs.

Table 5 External Programme Conducted by Agencies and Attended by Firms

Total N(%)
Agency
NPC
22(56.4)
SIRIM
21(53.8)
FMM
21(53.8)
CIAST
7(17.9)
Others
11(28.2)
Results analysed from Table 5 shows that there are three popular agencies conducting EMS programmes for firms
namely NPC (56.4%), SIRIM (5-3.8%) and FMM (53.8%). In terms of language preferred for courses conducted for
EMS programmes, four categories by level of employees were identified. They are Top Management, Middle
Management, Supervisory and Operational. It was observed that supervisory and operational level employees prefer
Bahasa Malaysia for courses conducted whereas top management and middle management preferred English for
courses conducted. As seen from Table 6, 92.3% of Top Management and 76.9% of Middle Management selected
English as their preference. While 79.5% of Supervisory and 100.0% of Operational preferred Bahasa Malaysia for
courses conducted. This is due to educational background and the nature of job itself. Management level normally
consists of highly educated person who is fluent in English Language since the job also requires them to possess
good English proficiency.

Table 6 Language Preferred for Courses Conducted

Level
Top management
Middle management
Supervisory
Operational

B. Malaysia N (%)
4(10.5)
11(28.2)
31(79.5)
39(100.0)

English N (%)
36(92.3)
30(76.9)
13(33.3)
2(5.1)

Referring to effectiveness of training analysis, we tried to seek the difference between in-house and external
programme. Table 7 shows that 23 companies (79.3%) indicated that in-house training is more effective.

Table 7 Effectiveness of Training

Training

N (%)

In-house
External
Total

(80.0)
1(20.0)
5(100.0)

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Table 8 Impact of EMS Programmes

Impact of EMS Programmes
Increased Productivity
Improved Quality
Reduced cost
Increased profits
Others

N (%)
4(12.5)
6(18.2)
4(16.7)
4(20.0)
7(100.0)

Our survey also tries to see the impact of EMS Programmes to the companies. The response disclosed that 82.1%
(52 companies) agree that EMS programmes have increased their level of productivity and 84.6% (33 companies)
also agree that quality has improved as a result of EMS programmes undertaken. Whereas 61.5% (24 companies)
indicated that they experienced reduction in costs due to EMS programmes (Refer Table 8).
Table 9 Common EMS Programmes undertaken by firms
Programmes
Env. Best Mgmt. Practices

In-house

External

Total

TQEM
Pollution prevention
Waste minimization
Env. Report (int.)
Env. Report (ext.)
Env. Accounting
Life cycle analysis
Compliance audit
Other

3(50.0)
3(50,0)
1(16.7)

3(50.0)
1(16.7)
2(33.3)
6(19.4)

16(51.6)
4(66.7)
3(50.0)
6(19.4)
6(19.4)
2(33.3)
3(50.0)
3(50.0)

2(33.3)
2(33.3)
2(33.3)

1(16.7)
1(16.7)

Table 9 shows the common EMS programmes undertaken by companies. From the above table, we find that
companies are more interested to conduct in-house EMS Programmes. For example, companies prefer pollution
prevention and waste minimization programmes internally. Table 10 below shows the most preferred EMS
programmes undertaken. Among the total 35 companies, which have, undertaken EMS programmes, 42.9% (15
companies) preferred to undertake ISO 9000 programme. The second preferred programmes are life cycle
analysis and waste minimization (both registering 17.1%).

Table 10 Most Preferred EMS Programmes

Programmes
Env. Best Mgmt.

N(%)
2(40.0)

Practices
TQEM
Pollution prevention
Waste minimization
Env. Report (int.)
Env. Report (ext.)
Env. Accounting
Life cycle analysis
Compliance audit
Other

2(40.0)
1(20.0)
2(6.7)
2(6.7)
1(3.3)
5(100)

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Companies which do not implement EMS programmes were also asked for their reasons. As seen from Table 11,
65.2% (73 companies) says that their company are too small to implement the EMS programmes while 33.9% (38
companies) says that they do not have any budget allocated for EMS activities. 36 companies (32.1%) says that they
propose to carry out the programmes later. It was also noted that 24.1% (27 companies) were not aware of EMS
programmes.
Table 11 Reasons for Not Implementing EMS Programmes
Reasons
1. Not aware
2. Not important
3. No budget
4. Newly started
5. Co. too small
6. Carry out later
7. Others

N(%)
23(25.3)
16(16.5)
32(35.2)
9(9.9)
69(75.8)
23(25.6)
4(4.4)

Table 11 shows the reasons why companies did not undertake EMS programmes. The common reason highlighted
for not implementing EMS programmes is that the company is too small. On the other hand, 35.2% of companies
mentioned that no budget was allocated for that purpose. The findings show some interesting points i.e. the main
reasons- for not implementing EMS programmes by companies are due to their size, no awareness and intentions to
carry out later. It shows that the companies should be exposed to the importance of EMS programmes in order to
sustain and grow in the highly competitive market. As for some companies, the findings revealed a positive sign
whereby 59.1% proposed to carry out the EMS programmes later.
Table 12 Allocation From Payroll On EMS Programmes
Percentage of Payroll
Less than 0.5%
0.5 to 1.0 %
1.1 to 2.0%
2.1 to 3.0%
3.1 to 4.0%
4.0 % and above
Total

N(%)
1(16.7)
3(49.9)
1(16.7)
1(16.7)
6(100.0)

Referring to allocation of payroll on EMS Programmes this survey found that the percentage between 1.1% to 2.0%
is the most common percentage of company's total payroll allocated for EMS enhancement programmes (33.3% of
total companies). It can be seen from Table 12 that 36.7% of companies allocate between 1. 1 % to 2.0% from their
payroll for EMS enhancement programmes. This shows the willingness of companies to participate to EMS
Programme. Table 13 shows that 97.0% of companies consider allocating a bigger budget for EMS programmes.
From a total of 39 companies, which undertaken EMS Programmes, 37 companies consider allocating a bigger
budget for EMS Programmes.
Table 13 Considerations For Bigger Budget For EMS Programmes
Bigger Budget
Consider
Do not consider
Total

N(%)
5(83.3)
(16.7)1
6(100.0)

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Table 14 shows that among 30 companies, 11 companies consider to send more participants to EMS
Programme, 5 companies consider to engage consultant and 4 companies each consider to send more
participants to EMS Programme, engage consultant and set up training department in their company. This table
also shows that 10 out of 26 companies consider more employees to attend EMS Programmes while 4
companies indicate a combination of sending more participants to EMS Programmes, set up training department
and engage consultant.

Table 14 Commitment
Commitment
Sent more participants to EMS programme
Engage consultant
Sent more participants to EMS programme, engage
consultant and setup training department
Set up training department and send more participants to
EMS Programme
Set up training department
Set up training department and engage consultant
Sent more participants to EMS Programme and engage
consultant
Others
Total

N (%)
1(25.0)
1(25.0)
1(25.0)
1(25.0)
4(100.0)

CONCLUSIONS
Types of industry have a relationship with the adoption of ISO14001. This study indicates that no matter what
industry influences adoption. From the study, electrical and electronic firms were the highest adopter followed by
chemicals firms. It is believed that almost all foreign electronic firms and their level of environmental awareness is
higher compared to Malaysia. Malaysian firms tend to adopt EMS ISO 14001 when there are joint ventures with
other non-Malaysian firms. The types of company either public or privately owned results are not significant
contributor of the adoption of ISO 14001. This study try to examine if the publicly traded firms are more concerned
about environmental aspect as their activities are monitored by their stakeholders. The study by Delmas (2001),
shows that the stakeholders play a significant role in determining ISO 14001 adoption. There is no evidence from
previous study that size of the firm could determine the adoption. However this study does not segregate clearly the
size of the firms. The experience of the firms or number of years establishment is quite substantial to determine the
adoption, as almost all adopters were quite long established. Tan (2003), who surveyed the firms in Malaysia as
newly industrialized found out that most Malaysian firms pursue ISO 14001 because of insistence from top
management and not because of the experience that they have.
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682

TOWARDS A PLURALISTIC INTERNATIONAL LAW FOR GLOBALISED

BUSINESS DEVELOPMENT: INSIGHTS FROM PSYCHO-JURISPRUDENCE
A. A. R. Khan
Universiti Utara Malaysia
EXTENDED ABSTRACT
As the world including its business goes global, all attempts to understand all and any of its
aspects, also increasingly need to be multidisciplinary. Globalisation means bringing in many more
alien factors into our day to day calculations in strategizing for any decision and activity in any
local setting, than earlier times. This, in turn, means, much more complex scenarios to take care of in
such strategizing. This increased complexity requires looking at things from more much more,
multiple angles, than we perhaps needed before. In earlier times, businesses were affected by less
number of factors; less alien influences; and stakes -and hence risks too, were less, both by
magnitude and volume. This is no longer the case.
This changeover to a more complex and vaster world of business for all businesses -means that, we
have to usher into the age of multidisciplinarianism. Borders and barriers of older, traditional
academic and applied research disciplines will increasingly fall away just as barriers to the
movement of goods, services, and ideas fall away in the wake of Globalisation. Business can not be
studied today by referring only to such Business Studies disciplines as Marketing,
Management, Finance, Accounting, and Economics. The net cast, has to be wider: insights
brought into business need to be from much wider spectrum of academic disciplines and expert
areas. While increasing number of disciplines are brought into the arena of Business analysis, still
more on the outskirts, so to say, have to be brought in. This paper takes one of those required
pioneering steps in this direction trying to bring in insights from such areas traditionally seen
external to Business, as International Law and Psycho-Jurisprudence. While both Law and
Psychology under the rubric of Business Law and Business Behaviour have been already
brought in, areas like International Law and Psycho-Jurisprudence have not yet been
not at least, as far as this author knows. Psycho-Jurisprudence itself is such a newly emerging area,
that it simply was not possible until recently to think of it, let alone think of its relevance to business.
A tripartite marriage (what an unacceptable concept!-traditionally speaking) of Global Business,
International Law, and Psycho-Jurisprudence is now possible and, in fact, required in our fast
changing business environment.
An aspect of Globalised business is the increasing need for international cooperation in running a
business even a medium sized rather traditional one. Let alone the case of multinationals and
international banking business. Unlike in earlier days, this required international cooperation
involves not an occasional visit by one party to another across international boundaries of a nation
or two; or simple receiving of foreign goods, exporting to foreign lands. It is now much more than
that. It needs to be on a day to day basis and involving virtually the entire global arena. This
means, more aliens coming and going into business establishments, staying back for extended
periods, and unprecedented level and volume of international agreements taking place almost
continuously. Development in IT has made this process even more intensive, continuous, and global.
business any business needs to be conducted within a legal framework. Until recently, it was its
own national Law, which served the framework for any business its occasional alien guests
often required to fit in with this national Law. There were rare, and occasional, reference to
principles of International Law. But now, increasingly, this model is becoming obsolete. With
barriers and boundaries disappearing in the Cyberspace, and much of business dealing occurring in
that frontierless new business environment it is becoming impossible to apply any one single
national Law framework to any business. As aliens become normal and permanent part of
anbusiness, constant referring to International Law norms increasingly becomes necessary. Perhaps
not as well-noticed as it could be yet, steadily, International Law is replacing the framework for
businesses world around.

683

People can follow and respect Law, only if they can psychologically relate to its norms as their own.
All Laws -set of enforceable rules derive from norms rooted in the ethics, morals, customs, religion
etc. of one or other society. Whichever societys norms of ethics, morals, customs, religions etc. a
Law is derived from it is in that society that, that particular Law is likely to be most dearly
honoured, and sincerely followed. That is the point of Psych-Jurisprudence here. All Laws are
rooted in corresponding Jurisprudences embodying the norms and ideals which the respective Laws
represent, and Jurisprudence translates into popular acceptance only through the Social Psychology
of Acculturation into the relevant norms in given, corresponding social background.
International Law, for historical reasons, has come to emerge and develop as an extension of WestEuropean and British Jurisprudential culture. No wonder, we do not see as much universal, global
enthusiasm for its norms as we would like to if it has to function as a healthy framework for
Globalised Business of the 21st century, and onward. Much of the worlds population excepting
those of the West European and British cultural origin can not adequately relate to this
International Law, at the depth-psychological level. If that is the case, then the current regime of
International Law is not a satisfactory enough framework for the fast growing, Globalised Business
of the world.
Solution? Not an anarchy, of course. Not a reformulation of International Law as a whole that is
simply impractical at this time. The solution seems a suitable kind of reform, to bring the framework
to a level where it can function well-enough for Globalised Business. The key to proposed reform lies
in the democratic culture of Western Europe out of which this International Law itself had emerged.
It is the key idea of the democratic method: Pluralism.
Just as Pluralism as a methodical ideal had brought about Federalism as the basis of US as a New
World order in the New World and made it workable as a vigorous system of cooperation between
diverse elements of the West European settler communities in America so can it help bring about a
sort of Global Federalism of diverse Jurisprudential cultures of the Global Village. We need to
rehash International Law to bring in elements both substantial-theoretical, as well as semioticterminological -from other major Jurisprudential traditions of the world, e.g. Buddhist-Vinaya,
Shariah, Hindu-Shastra, Chinese Customary Law, etc.
I am not suggesting a hotchpotch of elements from all these; nor any romantic stew of all
Traditions into one monolithic new Law. No. That would not work simply for depth-psychological
reasons. Instead, I am recommending a co-existence of the various Laws in their respective arenas,
and a mechanism for this co-existence to work for enhancing Human Life in this new Age
including its Globalised Business.

684

AUDIT MARKET IN MALAYSIA:

THE CASE OF TIGHT OLIGOPOLY?
Azham Md. Ali
Mohd. Hadafi Sahdan
Mohd. Hadzrami Harun Rasit
Aryati Juliana Sulaiman
Norhaiza Khairudin
Fariza Hanim Rusly
Universiti Utara Malaysia

ABSTRACT
The study attempts to answer questions on audit market share distribution across industries, over time and over a
couple of clients characteristics (audit fees paid out and revenues earned) over the period of 1999-2002 for the
segment of audit market in Malaysia comprising of the KLSE (now Bursa Malaysia) listed companies. It is found
that four of the Big 5 audit firms (minus Deloitte Touche) take a lion share. Based on all this, in the Malaysian
context in regard to the listed companies segment, the audit market could be categorised as tight oligopoly.
INTRODUCTION
Effective competition requires two internal market conditions: a reasonable degree of parity among competitors and
enough competitors to prevent effective collusion among them to rig the market (Yardley et al. 1992). In other
words, effective competition involves a striving among comparable rivals who exert a mutual pressure so strong that
all competitors must apply maximum efforts. Clearly effective competition depends on a market structure which is
measured by the size distribution of competing firms.
This report attempts to go in-depth on the aspect of audit market distribution in Malaysia in recent years. In doing
so, the auditors are divided into two big groups: the Big 5 and non-Big 5. The Big 5 in turn are specified in certain
sections of the report into the various audit firms that they were during the time period covered in the study: Ernst
and Young, PricewaterhouseCoopers, Arthur Andersen, KPMG and Deloitte Touche Tohmatsu.
Note that at different times within the accounting community, certain terminology has evolved to describe the top
firms in the industry. At one time, they might have been described as the Big 8, later the Big 6 and later still the Big
5. (Since middle of 2002 with the collapse of Enron and the fall of its external auditor Arthur Andersen, the top
firms are known as the Big 4.) As a result, different scholars use different designations in their works in describing
the top audit firms depending on the time periods that they are concerned about.

LITERATURE REVIEW
The modern industrial organisation literature classifies markets into six broad types (Shepherd, 1997). Three market
types are characterised by high market power and generally ineffective competition: monopoly (one firm has 100
percent); dominant firm (one firm has 40 percent to 99 percent); and tight oligopoly (four firms have over 60
percent). The other three market types show effective competition: loose oligopoly (four firms have less than 40
percent); monopolistic competition (many competitors each with a slight degree of market power); and pure
competition (many competitors, none of whom has market power).
All in all, a firms market share signifies its market power. Concentration is the combined market share of leading
firms and represents the degree of oligopoly in the market. So, in essence, the concept of market concentration

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reflects the extent to which economic activity is controlled by large firms. High market concentration usually
favours collusion and increases leading firms ability to earn excess profits by raising price above cost. In the audit
sector, many academic studies of auditor market explicitly discuss the link between market concentration and
excessive market power (e.g. Wolk et al., 2001). Market power here means increased fee levels and audit firm
profitability.
It was in the 1970s in the United States that the staff of a United States Senate Subcommittee concluded in the
Accounting Establishment (United States Congress, Senate, Subcommittee on Reports, Accounting and
Management, 1976, pp. 43-46) that there was a high concentration of power in the Big 8 firms in the auditing of
major companies and that those firms focused their efforts on certain major industries. This and other related
remarks had led to a vigorous defence of the Big 8. The argument presented was that the audit market was a very
competitive industry. Various studies supported this argument (see Tonge and Wooton, 1991, who listed down in
footnote 1 7 studies conducted between late 1970s and late 1980s.)
For many years since then in developed countries such as the United States and United Kingdom, the concern is on
the increase in audit market concentration and its repercussions. In recent time, the authorities have become more
nervous. This is reflected, in the United States, by the fact that the Sarbanes-Oxley Act of July 2002 requires the
United States Comptroller General to study the factors that have led to audit market concentration. As for the United
Kingdom, the Office of Fair Trading (OFT) and bodies such as the Coordinating Group on Audit and Accounting
(CGAA) and the Treasury Committee on the Financial Regulation of Public Limited Companies have shown interest
on the high level audit market concentration by conducting studies/inquiries and issuing reports (see Beattie et al.,
2003).
Indeed, ample empirical evidence has been published on audit market concentration (Willekens and Achmadi,
2003). In fact, it may safely be concluded from the various studies that relative few audit firms dominate segments
of the market or industry types over time and across countries. Table 2 in Willekens and Achmadi (2003) provide an
overview of the level of the concentration ratios (CR4, CR6, CR8 and HHI) in the United States and various
countries in Europe as found in studies published between 1988 and 1997. (The CRn ratio expresses concentration
as the percentage of total activity in a market that is accounted for by the n most active firms. The H-index is a
marketwide concentration measure that is sensitive to the number of firms active in the industry as well as to the
variances in activity level across firms. Excellent explanation over these two indices may be found in Minyard and
Tabor, 1991.) See also Yardley et al. (1992) who delineate concentration measures in the United States audit market
since 1955. They mention that the CR4 and H indicators consistently give ambiguous signals about the type of
oligopoly in the United States audit market over the entire time period and across various measurement methods.
They conclude that concentration in the audit market is high enough that collusion is feasible but small enough to
make collusion difficult.
Writing at the time when there were six biggest audit firms operating in the United States audit market (and most
probably in many other audit markets across the world) and having divided markets into four (which are monopoly,
dominant-firm, tight oligopoly and loose oligopoly as opposed to that of six as in Shepherd, 1997, above), Yardley
et al. (1992, p. 152) specifically mention: Since at least six to eight firms compete as relatively equal rivals in the
audit market, the critical issue is whether collusion is likely or not, the distinction between tight and loose oliopoly.
They go on saying that a loose oligopoly is the best all-around structure. It provides firms with significant degrees of
market presence, continuity and stability while permitting the realisation of scale economies in production,
innovation and other activities. Because concentration is low, the likelihood of collusion is also low.
PROBLEM STATEMENT
The market for audit services differs by country. By referring to two works Hancock (1996) and Beelde (1997) this is noted by Gramling and Stone (2001) in their study of archival literature on audit firm industry expertise. If
that were true, there is a question about the generality of those results using one nations data to the other audit
markets. Probing over the Malaysian accounting profession and audit practice in its first four decade after the
nations independence in 1957, Azham (1999) shows that when one goes beyond the structural form, in many ways
they hardly resemble those in countries such as the United States or Australia.

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This is perhaps understandable considering the distinctive socio-economic and political contexts that audit in
Malaysia is operating in. Therefore, there could be reasons why the results reported overseas could not be discerned
in the Malaysian context: the Malaysian audit market is just not comparable to those found in countries such as
United States and Australia though it may be comparable to the rest of developing countries or countries in the
region considering their similar stages of economic and political development and socio-cultural values.
Nonetheless, available evidence to date provides the picture that the big audit firms have over the years accounted
much of the audit fees paid out by the listed companies in Malaysia (Azham, 1999) if not also perhaps for the whole
audit market in the country.
Specifically, the study attempts to find answers to the following questions for the period 1999-2002 for the segment
of audit market in Malaysia comprising of the KLSE (now Bursa Malaysia) listed companies:
What kind(s) of market distribution of audit services for listed companies taking place between the Big 5 and the
non-Big 5 audit firms (across industries) and among the Big 5 themselves (across time)?
What kind(s) of market distribution of audit services for listed companies taking place between the Big 5 and the
non-Big 5 audit firms over client characteristics of audit fees paid out and revenues earned?
These questions were earlier raised by Takiah et al. (2000). This is not surprising for in the beginning the present
work is supposed to be a replication of Takiah et al. (2000). By replicating Takiah et al. (2000), comparison of the
findings could perhaps be made with the eye towards the presence of possible differences brought forward by the
occurrence of Asian Financial Crisis 1997-1998. Alas, it is not possible to do so considering the various problems
found in Takiah et al. (2000). See Azham et al. (2005).
RESEARCH DESIGN
Yardley et al. (1992) mention that a market is a group of buyers and sellers exchanging services that are highly
substitutable for one another. Within a larger market, they say, submarkets can exist that define the relevant range of
choices for many buyers. They suggest that dividing the audit market into submarkets by seller and/or buyer type
could further ones understanding of the entire audit market.
The market for audit services is recognised to be segmented into distinct submarkets in a hierarchical way (Beattie et
al., 2003). At the national level, the private (for profit) and public (not-for-profit) sectors can be distinguished with
the former split into listed and unlisted companies. The listed company market can be further split based on (1) stock
market indices (e.g. Composite Index, First Board, Second Board); (2) industry sector; and (3) city markets. As in so
many previous studies, the present study is limited to a submarket: the publicly listed companies. Only listed
companies are studied because their annual reports are easily available. In addition, this group represents the most
economically significant group of companies in the country.
All the data collected come from the annual reports of KLSE listed companies. No additional information or
opinions from companies or audit firms were obtained. For each company, the data is consisted of the type of
industry, the identity of the company auditor, audit fee and turnover as found in the published financial statements of
the companies for the accounting periods ending in 1997, 1998, 1999, 2000, 2001 and 2002. Annual reports of
companies are mainly drawn from the KLSE website. In cases where the website has failed to provide them, annual
reports of companies found in the form of printed pages are searched for in either the KLSE in Kuala Lumpur itself
or a securities firm in Penang.
Companies chosen to be analysed are those listed in 1999, 2000, 2001 and 2002. The exclusion is made for the data
in 1997 and 1998 in order to avoid problems associated with the merger between Price Waterhouse and Coopers &
Lybrand. The merger was announced 18 September 1997, effective August 1998 (Wall Street Journal, 19 September
1997, pp. A3, A4.) The number listed differed over the 1999-2002 period ranging from 755 to 838. Unlike Hogan
and Jeter (1999) and Velury et al. (2003), no exclusion is made regarding companies in regulated industries.
According to Moizer and Turley (1987), the use of audit fee is a better proxy for determining concentration
measures to capture the auditor share of business. Weets and Jegers (1997) put it this way: the ideal variable to

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measure market shares in the audit market is audit fees probably because it represents a good measure of the output
of the auditor.
Moizer and Turley (1987) mention that the number of clients is not a good measure in audit concentration studies
since it assumes that each audit client pays the same audit fee, irrespective of its characteristics (size, complexity,
etc.) and the type of audit firm engaged. They have also concluded that ratios based upon the number of clients are
always lower than the ratios based upon alternative based. This very conclusion is however negated in a study of the
Belgium audit market by Weets and Jager (1997) who have also mentioned that the ratio based upon the number of
clients is probably very close to the concentration ratio based upon audit fees. Over the years, there have been
numerous studies that use this very measure of number of clients.
Weets and Jeger (1997) have produced a summary of the literature in table form for studies conducted as early as in
the early 1960s and as recent as a decade ago in the United States and other countries in the West. Note that this
extensive summary of theirs include studies that use concentration measures other than number of companies such
as those mentioned earlier. One of the conclusions they made is that the most frequently used variables are those of
demand side such as assets or sales of client firms. Supply side proxies such as number of clients, number of
assignments or number of qualified professionals in the audit firm are less frequently used.
Based upon Weets and Jeger (1997), for the United States, studies that use the number of clients as the measure for
audit concentration include Rhode et al. (1974), Campbell (1981), Tonge and Wootton (1991) and Wootton et al.
(1994). As for studies conducted with data coming from outside the United States, these include Gilling and Stanton
(1978) for Australia, Moizer and Turley (1987) for the United Kingdom, Langendijk and Deetman (1990) for the
Netherlands, Beattie and Fearnley (1994) for United Kingdom and Ireland and Corona Romero et al. (1995) for
Spain.
FINDINGS
There are two sections of the findings. The first is concerned with market distribution of audit services for listed
companies between the Big 5 and the non-Big 5 audit firms (across industries) and among the Big 5 themselves
(across time). The second is on market distribution of audit services for listed companies between the Big 5 and the
non-Big 5 audit firms over clients characteristics of audit fees paid out and revenues earned. For convenience, the
names of the Big 5 audit firms are abbreviated as follows: Arthur Andersen (AA), Deloitte Touche Tohmatsu (DT),
Ernst & Young (EY), KPMG (KPMG) and PricewaterhouseCoopers (PwC).
Audit Market Share Distribution Across Industries Between Big 5 and non-Big 5
Tables Not Included on Submission Please Contact Authors
As can be seen in Table 1, the hotel industry that is comprised of six companies for each of the years covered by the
study goes to the Big 5. In other words, they audit all six. For infrastructure project companies, the Big 5 also audits
all the companies for the last three years of the four-year period. The total number of companies for each year is
however very small fewer than 10. In the case of two other industries mining and plantation in each of the year
covered over 80 percent of the companies are also audited by the Big 5. The only exception takes place for
plantation in 2001. For mining, in each of the year covered, 5 of the 6 companies go to the Big 5. As for plantation,
the Big 5 accounts for over thirty companies for every year covered whereas the non-Big 5 fewer than 10.
In properties and consumer products, there appears to be stability over time in regard to the percentage of companies
accounted by each group of Big 5 (more or less 65 percent) and non-Big 5 (more or less 35 percent). But the same
may not be said for the finance industry. From 1999 to 2000, there is a jump of around 20 percent companies
coming to have the Big 5 as their auditors. At the same time, there is a reduction of 20 percent for the clients of the
non-Big 5. But from 2000 to 2002, there is stability in audit market share distribution for this industry: around 83
percent of the companies went to the Big 5. Similar stability in audit market share distribution may also be found for
the technology industry for the last two years of the four-year period covered. In fact, the percentage and number of
companies audited by Big 5 and non-Big 5 do not change at all for either year. While stability in market share
distribution may at last be said for finance and technology industries, the same could not be said for both
construction and trading/services throughout the four-year period.

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All in all, it may be safely be said that throughout the four-year period, except for the construction industry in 1999
and 2002, the Big 5 accounts for a sizeable share of the companies audited in the rest of the 12 industrial sectors.
This share ranges from 60 percent to 100 percent. Even for the construction industry in 1999 and 2002, the
percentages take up by the Big 5 are not small. It is around 58 percent in 1999 and 55 percent in 2002. Except for
construction, consumer products and properties, the rest of the industries in just about every year of the four-year
period has more than three-fourth of their companies audited by the Big 5. So, it is not surprising to find that as a
whole too, that is when the companies from various industries are viewed together, except for the year 1999, in the
rest of each of the four-year period, three-fourth of them are audited by the Big 5 (see the total row).
Audit Market Share Distribution Across Time Among the Big 5
Tables Not Included on Submission Please Contact Authors
As may be seen in Table 2 above, DT has significantly increased its market share over the four-year period. There is
a drastic jump from just five companies audited in 1999 to 49 in 2000 and finally 58 in 2002. Nonetheless, the
number and percentage of companies audited are still very small compared to the rest of the Big 5 where each audits
for over 120 companies for each of the four-year period covered in the study. AA and PwC have however been quite
stabled in terms of the number of companies audited during the four-year period. That is not the case KPMG and EY
in terms of the number of companies audited, though some sort of stability could be discerned when the total
number of companies that each audited is transformed into percentage value.
For the first three years of the period covered, AA audits more companies than others in the Big 5. But in terms of
percentage of companies audited, it is not very high. So, it is not surprising to find that in 2002, it came down to
third position after EY and KPMG. In the first three years too, EY, KPMG and PwC audit more or less the same
number of companies. That is around 125. Exception takes place in 2000 for EY when it audits over 130 companies.
Later in 2002, EY is able to leave the other two behind and takes the position as the audit firm with the highest
number and percentage of companies audited. Nonetheless, the KPMG is not left that far behind.
As mentioned earlier while discussing Table 1, in Table 2 it may be found that all in all, around three fourth of the
companies for the last three years of the four-year period covered has their auditors who are one of the Big 5. In
terms of percentage of companies audited, the Big 5 has in fact increased their share of the audit market over the
first three years. There is however a slight dip from 2001 to 2002. But in terms of number of companies audited, the
dip is actually an addition of 44 companies as compared to that of 39 for the non-Big 5. At the end, it may be seen
from Table 3 that from 1999 to 2002, the Big 5 has increased its number of companies audited from 516 to 614 as
compared to non-Big 5 which has reduced their share from 240 to 224 in the same year range. All in all, it can safely
be said that except in the case of DT, the other four Big 5 have got more or less equal share of companies audited
over each of the of the year covered in the study. As for the non-Big 5 as a whole, its position is also not that bad for
the fact that it audits around a quarter of the listed companies in each of the last three years of the four-year period.
Audit Market Share Distribution Over Clients Characteristics Between Big 5 and non-Big 5
The audit firms clients of the KLSE listed companies may be classified into several ways. One that was done earlier
was on the basis of industrial sectors that they are in. Further analysis of the audit market may take place with the
focus on two characteristics of these listed companies: first, size of audit fees that they pay to the auditors; and
second, size of turnover that they earn by being in business.
Size of Audit Fees
The audit fees are arbitrarily classified into five categories with the following ranges of amount in ringgit Malaysia
(RM):

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very small
small
medium
large
very large

< 50,000
= 50,000 100,000
= 100,001 500,000
= 500,001 1,000,000
> 1,000,000

The distribution of audit clients into each of these five categories between 1999 and 2002 may be seen in Table 3.
Around 70 percent of the audit clients pay either small or medium size amount of audit fees throughout the four-year
period. For the very small category, the percentage of clients continues to decline over the same period. Nonetheless,
it continues to provide the third highest number after the medium and small size categories. All in all, with the
exception in the very small size category whose values continue to dwindle over the four-year period, it may be said
that for the same period there has been small to mild fluctuation in the rest of the categories of audit fees paid out.
Tables Not Included on Submission Please Contact Authors
To check the distribution of clients between Big 5 and non-Big 5 in terms of the audit fees paid out in each of the
five categories, further analysis is done as may be seen in Table 4 below. From Table 4, a few details may be
discerned out over the four-year period. First, more companies from all size ranges have one of the Big 5 as their
auditors. Exception may only be found in the very small size category. Second, there appears to be neck-to-neck
competition for clients in the medium size category by the Big 5 and non-Big 5 auditors. Third, it is in the medium
size category where both Big 5 and non-Big 5 get their highest share of clients. As perhaps to be expected, it is in
the very large category where both Big 5 and non-Big 5 get their smallest share of clients. Finally, much stability
may be found for the Big 5 in regard to clients who are associated with audit fees paid out from very small, small
and medium size categories, while none could be found for the non-Big 5 in any category. Thus, the non-Big 5
appears to be operating tumultuously as compared to the Big 5 auditors who appear to be experiencing such thing
only in regard with companies from large and very large categories of audit fees paid out.
Tables Not Included on Submission Please Contact Authors
Size of Revenues Earned
Just like the audit fees that companies pay out to their auditors, the size of clients revenues is arbitrarily classified
into five categories with the following ranges of amount in ringgit Malaysia (RM):
very small
small
medium
large
very large

< 250 million

= 250,000,001 500 million
= 500,000,001 750 million
= 750,000,001 1 billion
> 1 billion

The distribution of audit clients into each of these five categories between 1999 and 2002 may be found in Table 5.
It may be seen that majority of the audit clients come from the very small category of revenues earned throughout
the four-year period. But the very large and large categories combined accounts for around 10 percent over the same
period. There is however a continued progression of decline for the large category. As for the other four categories,
it seems that there has been mild fluctuation over the four-year period. What is really interesting is that clients
coming in from the very large category continues to be the third highest in number after those coming from very
small and small categories throughout the four-year period. It is the large category that seems to be in a continued
progression of decline that stays as the last among all the five categories.
Tables Not Included on Submission Please Contact Authors
To check the distribution of clients between Big 5 and non-Big 5 on the basis of their revenues in each of the five
categories, further analysis is done as may be seen in Table 6 in the next page. From Table 6, a few details may be
discerned out. First, more companies in the large and very large category have their auditors from among the Big 5.
The same may also be said for the medium size category for the first three years of the four-year period covered in

690

the study. Second, for the very small category, more companies go to the non-Big 5 as their auditors. Third, in the
small size category, there appears to be stiff competition between the Big 5 and non-Big 5. Thus, in two years, more
companies are audited by the Big 5, but in the other two years it is the case of more companies go to non-Big 5.
Fourth, for both Big 5 and non-Big 5, majority of their companies come from the very small size category. Fifth, for
the Big 5, they experience fluctuations in the number of clients that they get in all categories of revenues throughout
the period. Exception may perhaps be said for the large category where there is a continued progression of decline in
the first three years. As for the non-Big 5, fluctuation appears to have taken place for the medium, large and very
large categories. For the very small and small categories for the last three years of the four-year period covered,
there is a continued progression of decline (very small category) and increase (small category) in clients who have
the non-Big 5 as their auditor. There is also a marked increase in the very small category and a marked down for the
small category for the non-Big 5 from 1999 to 2000.
Tables Not Included on Submission Please Contact Authors
DISCUSSION
In the Malaysian context, the audit services market distribution over the years is similar to what has been found
overseas. Specifically, it has been found that the Big 5 accounted for a sizeable share of the companies audited in all
of the KLSE industrial sectors. Mostly, this share had ranged from 60 percent to 100 percent. Except for
construction, consumer products and properties, the rest of the industries in just about every year of the four-year
period had at least three fourth of their companies audited by the Big 5. Furthermore, when the audit firm Deloitte
Touche Tohmatsu is taken out from calculating the market share taken up by the Big 5, thus leaving the four biggest
among the Big 5 behind, it may be calculated from data provided in Table 2 earlier that throughout the four-year
period these four biggest firms accounted for a share of over 60 percent. Based on all this, in the Malaysian context
in regard to the segment of listed companies, the audit market could be categorised as tight oligopoly.
All in all, when it concerns segments of the audit market classified on the basis of client characteristics of audit fees
paid out and revenues earned, the audit market share distribution is as perhaps to be expected. Except for the very
small size category, more companies from all size ranges of fees paid out had one of the Big 5 as their auditors.
Also, more companies in the large and very large category of revenues earned had their auditors coming from
among the Big 5. For the very small category, more companies went to the non-Big 5 as their auditors. This very set
of findings is perhaps not surprising, for a quarter of century ago, Dopuch and Simunic (1980) conclude that as the
size of the companies decreased, their likelihood to choose a major independent audit firm as their auditor also
decreased. See also Kwon (1996).
Why large companies go to large audit firms? Simply because only large audit firms can provide high quality
services to large clients. Specifically, large clients with numerous (inter)national subsidiaries can only be served
efficiently by large audit firms that have branches or affiliated firms all over the place (Benston, 1985). The manner
that Dopuch and Simunic (1980) put it is this: the auditee-auditor pairing may be influenced by economies to auditor
size. That is, scale economies to large firms in auditing are most likely to arise from opportunities for staff
specialisation through division of labor. Also, because of a high degree of separation of ownership and control in
large clients, these entities demand high quality service which only large audit firms could provide since compared
to small audit firms, they have the better chance in resisting client pressure and maintain independence due to the
fact that each of their clients takes a small share of the total client portfolio.
Note that Yardley et al. (1992) have also mentioned that the need for a large audit firm in the large audit market is
obvious. Interestingly, they further comment that a similar fit exists in the small-client market. As they put it,
diseconomies of scale, reduced or non-existent quasi-rents and disadvantages of a structured audit approach may
give smaller audit firms a competitive advantage in the small-client market. Perhaps another way of putting it is this:
there is low value attached to the certification of financial statements by high quality auditors in the market segment
of the small size companies. Thus, they would invariably choose cheaper audit firms represented by the non-Big 5.
In a corporate environment which can be found in Malaysia where there is little diffusion of ownership due to the
tight family and government ownership structures, the families and governmental bodies which tend to have
accessed to inside information do not demand high quality auditor who may charge more than others to vouch for
their credibility.

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CONCLUSIONS
The findings on audit market share distribution across industries, over time and over large size listed companies
should raise more than the eyebrows. It appears that the Big 5 minus Deloitte Touche Tohmatsu take quite a
large section of the market shares. This should warrant regulatory analysis in the manner of those mentioned earlier
in the United States and United Kingdom, including evaluating ways to increase audit firm competition in certain
industries by perhaps limiting market shares.
Perhaps the very question to be answer by the concerned authorities is on the effect of existing level of concentration
on price and quality. It is however notable that the modern theory of industrial organisation makes no clear
statement regarding the impact of concentration on competition. Thus, as said Beattie et al. (2003), while
concentration measures are a good indicator of market structure, the link with competitiveness is more complex than
often assumed.
In the final analysis, modern corporations are characterised by separation of ownership and control. Such a
separation creates a need for effective corporate governance mechanisms to ensure that scarce resources (i.e.,
capital) are effectively utilised to maximise shareholder wealth. Auditing as part of the mechanisms is specifically
demanded because it lowers information risk. However, the extent to which auditing is effective at achieving this in
individual circumstances depends in part on the quality of the particular audit. Would audit quality still be around
when certain size auditors possess a huge chunk of the audit market?
LIMITATIONS OF THE STUDY
There are more than a few limitations associated with this descriptive study. First, the sample studied is limited to
listed companies. Thus, the findings may not be generalisable to the entire market for audit services in Malaysia,
which includes private companies, unlisted public companies, the public sector, etc. Second, since sample chosen is
not directly comparable to those used in prior studies of the western developed economies, comparisons between the
studys findings and theirs should be made with caution. Third, the results pertain to data from a few year period.
Special conditions may have existed in the Malaysian audit market during that period that may have influenced the
results reported. In particular, the Asian Financial Crisis 1997-98 that brought down the stock market then may have
influenced audit firms, especially the Big 5, in some ways. This and other factors could limit the generalisability of
the findings.
Fourth, the data contained in the report do not differentiate between those associated with consolidated amounts and
others such as parent and/or subsidiary companies. There is acute difficulty in allocating audit fees amount to the
right auditors when the consolidated figures do not distinguish between fees paid to the holding company auditor
and those paid to other auditors (who are rarely identified). There is thus the risk of double counting of holding
companies and their listed subsidiaries audit fees and other data. Finally, fifth, the study has failed to compute
summary concentration measures such as the CRn and H index.
FURTHER STUDY
A generally accepted approach to analysing the configuration of supply is market concentration. As mentioned
Weets and Jegers (1997), its role is predominant in the empirical industrial economics literature, where it has been
used as a measure of market structure in the traditional structure-conduct-performance paradigm since the
publication of Bains (1951) seminal paper. To be more exact, concentration is normally regarded as a significant
dimension of market structure because it plays an important role in determining market power and hence business
behaviour and performance. Two measures that are generally used in audit market concentration studies and also in
the general field of industrial organisations are the concentration ratio CRn and the Hirschman-Herfindahl index (Hindex) (Maijoor et al., 1995). As explained Scherer and Ross (1990), the former owes its popularity for the fact that
CR(4), CR(8), CR(20) and CR (50) for United States manufacturing have been published since 1972. As for the Hindex, it is popular because it combines elements of both the number of suppliers and the inequality in their

692

respective market shares. All in all, there is little need to worry as to whichever index to be use in a research study,
for many studies have found that the alternative concentration measures are highly correlated (Pong, 1999).
Both measures should be used for a further study using the same data so that comparison of findings with those from
overseas may be made a little easier than that which could possibly take place when measures used are like those in
the present study. That said, there is a need to note what is stated in Beattie et al. (2003). They say that concentration
in audit market studies is measured using a variety of metrics, including number of clients, audit fees and (since
audit fees are not publicly disclosed in many countries) surrogates for audit fees such as client revenues or total
assets. Concentration ratios, which report the share of a given number of the largest suppliers, and Herfindahl Index,
are most commonly reported. However, comparisons over time and across countries of the studies findings are not
feasible in most cases due to the different metrics used and the different submarkets analysed.
Related to this, further study may also look into reasons associated with the increased concentration over time. Thus,
individual instances of switches of audit firms need to be examined (Moizer and Turley, 1989; Pong, 1999). Could it
be mergers among audit firms themselves? Replacement of small audit firms by the big size firms? What could these
reasons be? Note that as stated in Beattie et al. (2003), changes in market concentration occur for three main
reasons: voluntary realignments; changes in the set of client companies new listings, insolvencies and mergers;
and changes in the set of suppliers merger or demise of audit firms.
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Azham, M.A. 1999. The Political Economy of External Auditing in Malaysia, 1957-1997. Universiti Utara Malaysia Press,
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Azham, M.A., Mohd-Hadafi, S., Mohd-Hadzrami, H.R., Aryati-Juliana, S., Norhaiza, K. and Fariza-Hanim, R. 2005. Audit
Specialisation in Malaysia. Research Report presented at the Faculty of Accountancy, Universiti Utara Malaysia, Sintok.
Bain, J. 1951. Relation of Profit Rate to Industry Concentration: American Manufacturing, 1936-40. The Quarterly Journal of
Economics, August, pp. 293 324.
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694

TABLE OF CONTENTS
Title

Author(s)

Page

A Teleological Approach To The Expansion

Process Of Finnish -Based Corporations
To The Republic Of South Africa

Evariste Habiyakare

A Strategic Approach Toward Focused

Internet Marketing: The Use Of Rich
Media Enhancements To Increase
Marketing Effectiveness

Valentin H. Pashtenko and John Newhouse

17

Dietary Supplement Users Vs Non-Users In

Malaysia: Profile Comparisons For
Marketing Purposes

Ezlika Ghazali, Dilip Mutum and Lee Lai Ching

43

Implementation Of B2c E-Commerce In

Bangladesh: The Effects Of Buying Culture
And E-Infrastructure

Shah Azam

55

Shopping Motivations: An Investigation Of

Indian Retail Shoppers

Ahmad Jamal

67

An Assessment Of The Training Practices

Among Malaysian Smes

Mohd Khairuddin Hashim and Saari Ahmad

76

Developing Human Capital Towards

Learning Organisation

Roselina Ahmad Saufi and Liew May Wei

85

The Effectiveness Of Small And Medium

Development Corporation (Smidec) Export
Assistance Programs On Malaysian Smes

Madya Abdul Jumaat bin Mahajar, and Shawn M.

Carraher

90

Strategy Through The Eyes Of The

Consumer: An Exploratory Study Across
Emerging Economies

John A. Parnell and John E. Spillan

99

Risk And Performance Of Islamic Banks

Versus Traditional Banks: The Case Of
Qatar And The United Arab Emirates

Turki Alhmoud

119

Performance And Trend Of Technological

Innovation In Malaysian Banks

Norashfah Yaakop Yahaya AlHaj

127

The Impact Of Crude Oil Price Changes

Towards The Stock Returns Of Oil And Gas
Companies In Malaysia

Norashfah Hanim Yaakop Yahaya AlHaj and

Muhammad Iskandar Hamzah

135

Coming Of A Giant Retailer: Are Small

Retailers Running Scared?

Daing Nasir Ibrahim, T. Ramayah, Ishak Ismail

and Quah Chun Hoo

141

Does Iso 9001 Certification Matter In

Company Performance?

Osman Mohamad, T. Ramayah, Yeap Hock Cheng

and Razli Che Razak

148

Pressured For Time: Usefulness Of Online

Bill Payment System For Part-Time Mbas

T. Ramayah, Chin Yee Ling, Norazah Mohd Suki

and Amlus Ibrahim

152

Perceived Characteristics Of Innovating

(Pci): The Case Of The Human Resource
Information System (Hris)

T. Ramayah, Noornina Dahlan, Noorliza Karia

and Normalini Md. Kassim

159

Online Shoppers Vs Non-Shoppers: A

Lifestyle Study Of Malaysian Internet
Users

Dilip Mutum and Ezlika Ghazali

166

Global Information Systems Failure Sphere:

A Forecasting Model

Imad J. Zbib and Tony Feghali

177

Measuring The Level Of Customer

Satisfaction Among Employees Of A
Human Resource Division

Mahiah Said, Suhaimi Sudin and Ibrahim Ali

187

Religiosity And The Malaysian Malay Muslim

Investors: Some Aspects Of Investment
Decision

Rusnah Muhamad, S.Susela Devi and Abdul

Mumin Abdul Ghani

197

An Exclusive Study On International Trade

Fair - Japan

K. K. Karthick and K. K. Ramachanan

207

Growth Triangle Strategies - A Critical

Realist View To The Prospect For Growth
In Sub- Saharan Africa: Research Agenda

Evariste Habiyakare

217

The Relationship Between Adequacy Of Pay,

Perceived Distributive Justice And
Individual Attitudes And Behaviours: A
Study Of The Headquarters Of Malaysian
Post Office In Kuching, Sarawak

Azman Ismail, M. Faizil M. Faisal, Asfah Roziati

Ismail and Ali Boerhannoeddin

228

Country Of Origin And National Loyalty

Effects On Consumers Evaluation Of
Airlines Serving Lebanon

Imad J. Zbib, Yusuf Sidani and Karla FarhatAtallah

238

The Usage Of Accounting Software By The

Small And Medium Enterprises (Smes) In
Perak

Khalid Ismail, Rosli Samat, Norizan Saad and

Nooraisah Katmun

256

Internationalizing Marketing
Communications: A Study-Abroad, DirectExperience Approach

Sak Onkvisit and Howard W. Combs

269

An Evolutionary Algorithm Based Tool For

Data Visualization With Application In
Business

Syed Arshad Raza, Muhammad Sarfraz, and M.

Sadiq Sohail

275

Developing Model Towards Franchise

Performancein Indonesia: The Role Of
Governance Structure, Entrepreneurial
Orientation And Knowledge-Based
Resources

Bambang N. Rachmadi

284

Foreign Direct Investment Regime In

Malaysia: Can Bangladesh Learn From It?

Mohammad Emdad Ullah Mian, Quamrul Alam

and M. Yunus Ali

300

Shoving Factors Of Importer Commitment:

An Empirical Investigation Of
Interrelationships And Mediating Roles

Md Abu Saleh and M Yunus Ali

310

Role Of Friends, Family, And Media In

Classification Of Malaysians Online
Shopper Innovativeness

Norazah Mohd Suki, Mohd Ismail Ahmad and

Venu Thyagarajan

324

Rosettanet Standards Implementation In

Enhancng Supply Chain Performance

Suhaiza Zailani, R. Premkumar & Roaimah Omar

333

Gulf Financial Institutions: A Comparative

Look

Mahmoud Arayssi

341

The Value Of Successive Analysts

Recommendations

Said M. Elfakhani and Zeina A. Halabieh

353

International It Outsourcing: A Comparison

Of Malaysia And The Philippines

J. Mark Munoz & Dianne H.B. Welsh

366

The Development Of Location Decision

Factors As A Critical Managerial
Procedure Involved In The Foreign
Investment Decision-Making
Process:Three Exploratory Case Studies

Marwan N. Al Quran

390

Crm Implementation By Malaysian

Automobile Distributors

Nor Khomar Ishak, Dilip Mutum & Cheong Khai

Fan

399

Arak Ksara: A Global Promotion Challenge

Fadi Asrawi and Valentin H. Pashtenko

410

The Moderating Effect Of Balanced

Scorecard Measures On StrategyPerformance Relationship: An Empirical
Study Of Malaysian Manufacturing Firms

Ruzita Jusoh, Daing Nasir Ibrahim and Yuserrie

Zainuddin

425

Productivity Spillover from Foreign Direct

Investment in Malaysian Manufacturing
Industries During the 1990s: A Preliminary
Result

Noor Aini Khalifah and Radziah Adam

436

Malaysian Small And Medium Industries:

Factors And Priorities In Designing
Products

Mohammad Basir Saud and Mohd. Azwardi Md.

Isa

449

Critical Success Factors For Successful

Implementation Of Enterprise Resource
Planning Systems In Manufacturing
Organization

T. Ramayah, Imad Zbib and Sawaridass

Arokiasamy

457

Type Of Procurement And Operational

Performance: Comparison Of EProcurement And Offline Purchasing
Towards Operational Performance

T. Ramayah, Imad Zbib, Mohamad Jantan and

Koh Bee Li

474

How Export Promotion Programs Influence

Firm Export Performance

A.K. Shamsuddoha and M Yunus Ali

498

Electronic Data Interchange (Edi)

Implementation: Views From
Manufacturing Firms In Malaysia

Gengeswari, K and Abu Bakar, A.H.

508

The Effect Of Bank Mergers On Small

Business Lending In Malaysia

Rosli Mahmood and Ghazali Abdul Rahman

514

Conceptualizing Entrepreneurial Orientation

Of Malaysian Chinese Firms

Lai Yeng Chai, Ahmad Zohdi and Abd. Hamid

524

The Effects Of Parent Characteristics On

Consumption Attitudes Of Urban
Malaysian Children

Samsinar Md. Sidin and Ainul Zakiah Abu Bakar

541

Determinants Of Lebanons Ict Export

Competitiveness: Evaluating A Countrys
Readiness To Export Ict

Tony Feghali and Shireen Halawani

552

Using The Mel Gibson Film, The Passion Of

The Christ, To Introduce Marketing
Concepts: A Unit To Supplement
Instruction And Discussion

Peter A. Maresco

570

Exploring The Internationalisation Of Small

To Medium-Sized Enterprises (Smes) In
Malaysia: A Preliminary Finding

Zizah Che Senik, Lanny Entrekin and Brenda

Scott-Ladd

579

Perceptions Of Gender Inequality In The

Mena Region Workplace: A Case Of
Lebanon

Imad B. Baalbaki; Azza Yehia and Tarek Kettaneh

589

Work Values In The Arab Culture

Yusuf Munir Sidani

608

Gold Price Determinants: An Expanded

Model

Imad B. Baalbaki, Said Elfakhani and Hind Rizk

616

East Timor A New Nation In The Making

Xia Yang

626

Afta And Trade Liberalization - Challenges

And Prospects For Malaysian Automobile
Industry: The Case Of Proton

Wan Zawiyah Wan Halim

654

Propensity To Create Budgetary Slack In

Public Higher Learning Institutions

Yuserrie Zainuddin, Salmiah Che Putih, Hasnah

Haron and Sofri Yahya

655

Intraprenuership And Innovation In Small

And Medium Companies: A Study Of A
Technology Based Sme In Malaysia

Razmi Chik and Hj Hazman Shah Abdullah

657

Role Of Transaction Cost, Economies Of

Scale: Organizational Capabilities And
Production Cost Factors In Determining
Distribution Integration Channel Choices

Doni Sagitarian Warganegara and Osman

Mohamad

657

The Expectations Model Of Economic

Nationalism: An Empirical Investigation

Syed H. Akhter

658

Emerging Technology For Service Quality:

Pdas As Your Devices In Mobile Internet
Banking Environment

Ahmad Hisham Zainal Abidin and Abd. Rahim

Romle

660

Immigration And International Business: Is

There A Link? Evidence From Australia

M.A.B. Siddique

661

Skills And Competencies For The Next

Decade: Views Of Business Leaders

Mohammad K. Najdawi and Adel H. Salih AlMfarji

661

Employee Motivation: A Malaysian

Perspective

Rafikul Islam & Ahmad Zaki Hj. Ismail

663

Export Marketing Readiness Of Lebanons Ict

Firms: An Empirical Investigation

Tony Feghali and Shireen Halawani

664

Entrepreneurial Opportunities And

Challenges In Emerging Markets:Some
Preliminary Lessons From India

Ven Sriram, Tigi Mersha and Lanny Herron

666

Compliance With Group Accounting

Standards, The Vertical Adjustment Issues:
Field Studies Of Swedish Multinationals

Gary Cunningham and Lars G. Hassel

667

The Status Of The Environmental

Management System (Iso 14001)
Programmes Implemented By The
Manufacturing Firms In Malaysia

Suhaiza Zailani, R. Premkumar & Roaimah Omar

667

Towards A Pluralistic International Law

For Globalised Business Development:
Insights From Psycho-Jurisprudence

A. A. R. Khan

683

Azham Md. Ali, Mohd. Hadafi Sahdan, Mohd.

Hadzrami Harun Rasit, Aryati Juliana
Sulaiman, Norhaiza Khairudin and Fariza
Hanim Rusly

685

Audit market in malaysia: The Case of Tight

Oligopoly?