Research Paper The Effects of Government`s Financial Polices on

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Management and Administrative Sciences Review
ISSN: 2308-1368
Volume: 2, Issue: 4 (2013)
© 2013 Academy of Business & Scientific Research
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ISSN: 2308-1368
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ISSN: 2308-1368
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ISSN: 2308-1368
Volume 2 Issue 4
TABLE OF CONTENTS
1. The Effects of Government's Financial Polices on Economic Growth and Income Distribution
(Case Study: Iran)…………………................................................................................................336-342
Farhad Rahbar, Mostafa Sargolzaei, Razieh Ahmadi, and Marzieh Ahmadi
2. Ethical Excellence through Employees Diversity Management in Nigeria…………..…343-352
John. N. N.Ugoani, Ph.D
3. International Marketing Strategy: Standardization versus Adaptation.………………………353-359
Akmal Hussain and Shahbaz Khan
4. The Impact of Customer’s Attitude on Buying Behaviour………………………….…………360-370
Ali Iranmanesh and Elham Hadi Najafabadi
5. Estimated
Function
of
Labor
Force
Demand
in
Sistan
and
Baluchestan
Province……………………………………………………………………..…………………..….371-378
Mohammad Javad Mohagheghniya, Mostafa Sargolzaei, Razieh Ahmadi, and Mohammad Roshanroussain
6. Impact of Rewards and Leadership on the Employee Engagement: A Case Study from
Banking Sector of Pakistan………………………………………………………………………..379-390
Nadeem Iqbal, Komal Javaid, Naveed Ahmad, and Muhammad Ateeqn Azim
7. Mandatory Rotation of Auditors: The Nigerian Accountants Perception……..........................391-402
Okaro Sunday Chukwunedu, Okafor Gloria Ogochukwu, and Egbunike Chinedu Francis
8. Learning Organizations: A study of Learning Process of Small Firms of Pakistan…………403-412
Mian Muhammad Niaz Shakir and Habiba Saleem
9. An Investigation of Costs of Financial Distress in Case of On-going Manufacturing Firms of
Pakistan………………………………………………………………………………………..…….413-422
Bilal, Najm-Ul-Sehar, Javaria Khan, and Sumaira TufailHussain
ISSN: 2308-1368
Volume: 2, Issue: 4, Pages: 336-342 (2013)
www.absronline.org/masr
 Research Paper
The Effects of Government's Financial Polices on Economic Growth
and Income Distribution (Case Study: Iran)
Farhad Rahbar1, Mostafa Sargolzaei2*, Razieh Ahmadi3, and Marzieh Ahmadi3
1. Associate Professor, University of Tehran, Faculty of Economics, Tehran, Iran.
2. Ph.D. student of economics, University of Tehran, Faculty of Economics, Tehran, Iran.
3. Department of Accounting, Shirvan Branch, Islamic Azad University, Shirvan, Iran.
Due to importance of the effect of government policies in economic, influencing welfare of
people of society, herein this paper, we are to study the effect of financial policies of
government on economic growth and income distribution in Iran. For this purpose, we
use Vector Auto-regression Equations systems (VAR) in such a way as in this system of
equations; the variables of economic growth rate and inequity index (GINI’s Coefficient)
are inserted into the model as endogenous variables. Financial means of government (cost
credits, capital assets proprietorship credits, social expenses and tax incomes of
government) are inserted into the model as exogenous variables. The results of this study
reveal that tax incomes have meaningful inverted effects on economic growth and
eventually, they have caused raise of inequity in society. Government expenditures have
meaningfully caused decrease of economic growth. However, they have had no meaningful
effects on income distribution. Moreover, civil expenditures of government have
meaningful effect (at the level of 10%) on increase of economic growth. But, they have had
no meaningful effects on distribution of income and social expenditures of government
have had no meaningful effects on economic growth and income distribution.
Keywords: Government expenditures; tax incomes; economic growth rate; VAR Method;
Income distribution;
INTRODUCTION
Attention to welfare of all classes of people in
society through study of the extent of economic
growth, income distribution and wealth, and
respective variables affecting the same are among
concentrated economic concepts in the recent
decay. Because one of the most important goals of
any economic policy making is to improve public
welfare and particularly, to promote welfare
among those classes of people who benefit from
such welfare less than others.
Extension of poverty and undesirable economic
conditions in developing countries in the 1950s
and 1960s attracted much attention of many
economists. The spirit governing economic
thought of the said period was too much attention
to the problem of economic growth because many
economists were of this opinion that poverty and
its extension have been originated from low
economic growth rates. For many years,
development has equaled to swift promotion of
national production discarding the fact that how
distribution of incomes earned through such
*Corresponding author: Mostafa Sargolzaei,
Ph.D. student of economics, University of Tehran, Faculty of Economics, Tehran, Iran.
E-Mail: [email protected]
336
Manag. Adm. Sci. Rev.
ISSN: 2308-1368
Volume: 2, Issue: 4, Pages: 336-342
growth is taken into consideration. It was hoped
that higher growth rates could solve the problem
of unemployment and its consequences such as
poverty. Thus, during two decays, “Growth
Manship” was the method and manner of life in
many undeveloped countries.
In 1970s, we have witnessed a noticeable turn in
attitude toward the problem of poverty. The
strategy of “Growth Manship” as a medicine
treating the problem of poverty has been doubted.
Because of many countries of the third world that
had relatively high growth rates, compared to
historical standards, gradually came up with this
conclusion that such growth have had trivial
advantages for their poor people. Life level of an
extensive group of people in Africa, Asia and Latin
America has remained unchanged. In a few
countries and in the view of real conditions, such
level has been decreased. The difference of income
between poor and rich people has been
aggravated. All people and even economic
thinkers have come up with conclusion that swift
economic growth has not been successful in
eradication and even decrease of poverty. The
thought of “abandonment of national gross
production” as main goal of economic activity has
been extended to a great extent. In stead, more
attention has been paid to the problem of poverty
and equality of the main subject in the 1970s.
During the said period, it has been emphasized on
contradiction between growth and distribution
and requirement for involvement of government
in growth process management. In the middle of
the 1970s, more emphasis was attached to the fact
that if such policies are run precisely and property,
there will be no need for the contradiction between
swift growth and distribution in short-term or
long-term period. At the end of this stage, which
lies upon us, it is predicted that the possibility of
„Trade Off” between distributive consequences of
short-term strategies and its consequences on
growth are of great interest (Kanbur, 1996, page 5).
In consideration of swift changes in global
economy, revision and reform of developing
economic functions and structure are inevitable.
Especially, economic polices of international
monetary funds and other monetary and financial
organizations, which are applied within the body
of development movements, demand the
governments to execute a series of economic plans
for privatization, adjustment and limitation of
public sector (Richardson, David, 1995). Here, in
spite of emphasis on and considering distributive
strategies in the said plans, mostly feedback
policies and adjusted mechanism or security tours
don‟t act properly and they always put the logical
relationship between growth and social justice in a
challenging status. This demands governments to
establish social justice throughout the society, in
consistence with global economy, benefiting from
their financial means (De Nardi, Mariacristia, Ren,
Liqian and Wei, Chao, 2000).
RESEARCH BACKGROUND
Kuznets (1955) studied the effect of economic
growth on income distribution and established
study of the effects of macro-economy variables on
income distribution. Having benefited from
statistics and information of the three countries of
UK, Germany and USA, he made an experimental
estimation on the effect of economic growth on
income distribution. Respective results have
revealed that during primary stages of economic
growth, income distribution would become
unequal. While upon continuation of economic
growth and in a long period, this inequality shall
be subsided. This pattern was later called as
“Kuznet‟s U-Inverted curve”. Moreover, Kravis,
1960, Oshima, 1962, Paukert, 1973, Ahluwalia,
1976, Papane & King, 1986, RAM, 1988 and Anand
and Kanbur, 1993 have studied the effect of
economic growth on income distribution, while a
few studies have emphasized on the study of the
role of income distribution on economic growth.
For example, Alesina, A. and D Rodrik, 1994 are of
this belief that unequal increase of income and
earned wealth cause that tax rate is determined
higher that its optimum rate. This shall lead to
decrease of investment and eventually, decrease of
economic growth rate accordingly. Alesia A, and P
Perotti, 1996 have come up with this conclusion
that increase of inequality shall decrease economic
growth and this will lead to decrease of economic
growth through social-political instability and
insecurity in political-economic environment,
which cause decrease of investment.
Farhad Rahbar et al.
The Effects of Government's Financial Polices
Vedder, R.K and Gallaway, L.E 1998 have
experimentally
shown
a
non-symmetrical
relationship between size of government and
economic growth. They have expressed that this
non-symmetrical relationship is in form of an
Armey Curve. Small size of government functions
toward protection of private sector and provision
of general goods. Moreover, exceeding increase of
size of government causes an extra investment
which leads to a crowding effect for investor of
private sector, resulting in tax pressure and raise in
rate of interest accordingly. This shall result in
decrease of economic growth simultaneously.
However, a small size of government shall have an
encouraging effect on economic growth as well.
They have found that the relationship between size
of government and economic growth is Uinverted. Due to such form, one can calculate
optimum size of government with utmost
economic growth accordingly. Benefiting from a
single square regression function, they have
calculated optimum size of US government as
17.45 from 1947 to 1997.
Engle, A Galetovic, C Raddatz, 1998 conducted a
research through which they study the effect of
combination of taxes on income distribution in
Chile. The results of the said research on direct
effects of taxes on income levels among families
indicate no remarkable changes prior to and after
execution of the same on GINI‟s coefficients.
In his article, David Fiaschi, 1999 assumed that
persons enjoys different primary provisions and
financial policy is determined by unanimous
decisions and also policy making is financed by
means of two types of taxes on income of
workforce and capital taxes. The results of the said
article has shown that there is a positive (negative)
relationship between economic growth and
workforce taxes and there is also a negative
(positive) relationship between rate of workforce
tax (capital) and income inequity.
Hanna Tanin (1999) wrote an article titled “Income
inequity, government expenses and economic
growth” and studied the relationship between
income distribution and economic growth as well
as government expenses and economic growth in
form of a synchronous equations system. In his
research, he used data of fifty two countries within
Research Paper
a period from 1970 to 1992. Non-linear relationship
between the ratio of government expenses through
domestic gross production and economic growth
(in such a way as in low ratios of government
expenses to domestic gross production, the effect
of increase of such ratio in economic growth is
positive and it is negative at high ratios), and there
is a positive relationship between inequity increase
and raise of relative government expenses.
Chu, Davoodi and Gupta (2000) has indicated that
income distribution prior to taxes in developing
countries, compared to industrial countries shows
less inequity on average. Although contrary to
industrial countries, developing countries are not
able to use tax policies and transmission payments
for decrease of inequity. In the 1980s and 1990s,
many developing countries experienced increase
of income inequity. Elementary and intermediate
government health and education in developing
countries have not desirably targeted. However,
trend of their attitude is improving accordingly.
Jordan Shan (2002) has studied the effects of macro
economy function (such variables as money offer,
government
expenses,
inflation
and
unemployment) in form of a self-explainable
vector model (VAR) on inequity. Respective results
have revealed that government expenses and
unemployment, against other elements, are
regarded as more important resources for change
of income dispersion.
Layard and Griffith (2003) conducted a research
and studied the effects of tax policies and tax
combination on level of income distribution and
welfare. The results obtained from the said
research has shown that tax system structure, due
to existence of ascending rates compared to
proportional tax rates, changes social welfare and
income distribution in society to the favor of the
poor and low-income groups. Also, the results of
the said research have indicated that total income
tax has had the best effect on decrease of inequity
among tax combinations.
Hakura Dalia (2004) has taken sixteen countries of
the Middle Asia and North Africa (Mena) and
analyzed the effect of expenditures on economic
growth. The result obtained from the said research
has shown that government expenditures have a
negative meaningful effect of economic growth.
338
ISSN: 2308-1368
Study of Sonja Engeli Pippin, 2006: According to a
study titled “The effect of tax systems on income
distribution, poverty and social welfare”, he
studied the effects of various economic indices on
GINI‟s coefficient, poverty and social welfare
index is a few developed countries. The said
research has been conducted using ARDL method
during a 35-year period from 1965 to 2005.
The results of long-term estimations indicate that
inflation rate has had the most effect on GINI‟s
coefficient in such a way as upon increase of
inflation rate by 1%, GINI‟s coefficient will be
increased by 1.7%.
Where variables are defined as follows:
Ut-1: It indicates a part of error of long-term relation
(in fact IT coefficient indicates adjustment speed from
short term to long term).
GROWTH: Gross Production Growth Rate
GINI: GINI’s coefficient (Income distribution index)
LGI: Government investment expenses logarithm
LOIL: Government oil income logarithm
LSE: Government social expenses logarithm
LGC: Government expenditures logarithm
PC: Index of price of goods and services of consumer
EXPERIMENTAL RESULTS
Herein this research, we are seeking for
simultaneous study of financial polices of
government on the rate of economic growth and
income distribution. Since growth rate and income
distribute influence each other as well. For this
purpose and for the study of the role of financial
policies of government on the rate of economic rate
and income distribution, we use Vector Autoregression Equations system in such a way as
herein this system, the equations of the variables of
economic growth and inequity index (GINI‟s
coefficient) as regarded as endogenous variables
and financial means of government are considered
exogenous variables.
Data used in this article consists of period from 1977 to
2007 was Iran’s economy.
In this research, rate of economic growth and
income distribution index (GINI) as endogenous
variables. However, in order to study financial
policies of government (expenses and government
taxes) on rate of economic growth and income
distribution, financial means are inserted into the
said model as exogenous variables.
GROWTH=IT1Ut-1+β1GROWTH(-1)+β2(GINI)(1)+β3LGI+β4LOIL+β5LSE+β6LPI+
β7LGC+β8PC
GINI=TI2UIt-1+α1GROWTH(-1)+α2(GINI)(1)+α3LGI+α4LOIL +α5LSE+α6LPI+
α7LGC+α8PC
RESULTS OF ESTIMATION
Before the results of estimation of regression
equation are expressed, it should be noted that
GINI‟s coefficient index has been regarded as an
index for income distribution. Also, all exogenous
variables of the model were not sustainable. Thus,
we have inserted quantities into the model by
deducting done once.
TABLE 1 HERE
CONCLUSION
Relying on the results obtained, we can say that
unequal (equal) income distribution has
meaningful effects on economic growth in such a
way as increase of inequality in society has caused
increase of economic growth. However, economic
growth has no meaningful effects on income
distribution. Considering the effects of financial
policies, we can say that tax incomes have had
meaningful inverted effects on economic growth
and caused increase of inequality in society in such
a way as upon increase of the ratio of government
tax incomes to domestic gross production by 1%,
economic growth and income inequality are
increased by 0.23 and 0.03 units respectively. The
said result can be explained in such a way as since
government tax incomes have had inverted effects
on economic growth rate (because these incomes
were not supposed for reinforcement of economic
infrastructures and motivating producers), it has
been caused that growth rate of incomes of people
in society (the poor and the rich) has not been
increased in proportion to tax growth. However,
since in Iran most of taxpayers are among middle
and low deciles of the society, on the one hand and
on the other hand, according to Bergen‟s model as
these taxes are not supposed for educating the
poor in the society and cause decrease of
motivations for production, tax incomes would
result in increase of income inequality as well as
decrease of rate of economic growth.
Government expenses have meaningfully caused
decrease of economic growth. But, the same have
had no meaningful effects on income distribution
in such a way as upon increase of the ratio of
expenditures to domestic gross production by 1%,
economic growth is decreased by 0.23 unit. Civil
expenses of government have had meaningful
effects (at 10% level) on growth. In fact, upon
increase of the ratio of civil expenses of
government to domestic gross production by 1%,
economic growth is increased by 0.14 units. Social
expenses of government have had no meaningful
effects on economic growth and income
distribution.
REFERENCES
Research Paper
Baumol, W.J. (2007)” On income distribution
and growth” Journal of Policy Modeling, 29,
545-548.
Bergström - Willy- “Government and Growth”translated by Ali Hayati, Plan and Budget
Organization- Center for Economic-Social
Documents- 1st printing- 2008- pages 13-14
Chu, Davoodi and Gupta,(2000), “Income
distribution and tax and government social
spending policies in development countries.
IMF working paper 00/62 washington D.C,
International Monetary fund.
David Richardson,(1995),”Income Inequality
and Trade: How to Think, What to
Conclude”, Journal of economic Perspective,
Volume 9, 33-55.
De Nardi, Mariacristia, Ren, Liqian and Wei,
chao,
2000,”Income
Inequality
and
redistribution in five countries”, Economic
perspectives, Federal Reserve Bank of Chicago,
24(2):2-20
Diamond, J.(1989), Government expenditure and
economic growth :An empirical investigation,
IMF working paper, No. 89/45
Alesina, Alberto and Roberto Perotti “Growth
political economy: a criticism on modern
writings in this field”, translated by Rasoul
Adelzadeh- Planning and Budget MagazineIssue 45.
Engel, A Galetovic, C Raddatz (1998) “Taxes
and Income Distribution in Chile: Some
Unpleasant
Redistributive
Arithmetic”
(December 1998). NBER Working Paper No.
W6828.
Alesina.A and D.Rodrik (1994),”Distribution
politics and economic growth”,Quarterly
Journal of Economics, 109, 465-490
Fiaschi, David, (1999), “Growth and inequality in
an endogenous fiscal policy model with taxes on
labour and capital ”
Alesina.A and R.Perotti, (1996),”Income
distribution, political instability and
investment”, European Economic Review, 40
Hakura, Dalia S.(2004), “ Growth in the middle
east and noryh Africa”, IMF, wp/04/56,
April.
Andres, Walter, Cost-effectiveness of time series
through an applied approach- translated by
Sadeghi, Mehdi and Shaval Pour, Saeed,
published by Imam Sadegh University- 2nd
Edition- 2007
Jordan shan,(2002),” Income distribution in
China: a macroeconometric approach”.
Nilli, Farhad, “Economic growth and income
distribution in four decays after Kuznets
and Caldor, “Plan and Budget Magazine”Issues 34-38
340
ISSN: 2308-1368
Nilli, Masoud, 2008, “Government and economic
growth in Iran”, Nay Publication
P.Cashin,(1995)”Government spending, taxes
and economic growth”,IMF Staff Papers,
Vol. 42, No.2
Piraee, Khosrow and Pour Faraj, Alireza, “The
effect of change in structure of budget
financing on economic growth in Iran”Economy Magazine- Issue 65- Summer 2004
Rafiee, Hadi and Zibaee, Mansour “Size of
government,
economic growth and
workforce productivity at agricultural
sector”Agricultural
Economy
and
th
Development Magazine, 11 year- Issues 4344, Fall and Winter 2003-04
Research Paper
APPENDIX
Table 1: Estimation of the effects of financial policies on growth and distribution of income
Explainable
variables/Affiliated
variables
D (GROWTH) (-1)
D (GINI) (-1)
LGI
LOIL
LSE
LPI
LGC
LTAX
PCI
D (GROWTH)
D (GINI)
0.116(2.4)
-0.385 (-3.32)
0.172 (1.95)
0.13 (2.23)
0.362 (2.12)
-0.09 (-1.48)
-0.335 (-2.11)
-2.26 (-2.73)
7.81E-05 (0.49)
0.01(2)
0.03(1.55)
-0.017(-1.03)
0.01 (1.26)
0.006 (0.2)
-0.02 (-1.96)
0.07 )2.3)
0.04 (2.2)
2.31E-0.5(.75)
The figures given in the parentheses indicate t statistics of each coefficient.
342
ISSN: 2308-1368
 Research Paper
Ethical Excellence through Employees Diversity Management in
Nigeria
John. N. N.Ugoani, Ph.D
Coordinator, College Of Managements and Social Sciences, Department Of Management Sciences Rhema
University 153 – 155 , Aba Owerri Road, Aba, Abia State Nigeria.
The study was designed to explore the need for sound behavior and managerial excellence
through employed women and men in Nigeria and make necessary recommendations.
Managing diversity is about the realization of the potential of all employees. Diversity is
both an ethical question as well as a productivity issue. It is a combination that extends to
personnel and human resource management functions. Any organization that values and
promotes diversity creates a work environment that respects and supports employees with
non-traditional backgrounds so that they can contribute to their fullest productivity
potential. The survey research design was used while the questionnaire and personal
interview methods were used to generate data for the study. The respondents were selected
through the simple random sampling technique. Data analyses were done through tables,
frequencies, percentages and the X2 statistics. It was found that diversity management
was not being promoted among employed women and men in Nigeria. Eleven
recommendations were made based on the result of the study.
Keywords: Non-traditional; diversity management; Sensitivity; Diversity friendly
policies; Skewed appraisal; total quality, fantasy;
BACKGROUND
Diversity management can mean the ability to
recognize and respect the rights and preferences of
organizational members. An organization that
values diversity creates an environment that
respects and supports employees with nontraditional backgrounds and behaviours, so that
they can contribute to their fullest potential.
Promoting a diverse and inclusive workforce gives
the organization a broader and richer base of
experience. Diversity can provide a much richer
environment, a variety of viewpoints, and greater
productivity. Creativity and innovation can easily
result from combining different perspectives. It
can even make a company’s reputation to go up
and be highly appreciated both internally and
externally. But leveraging diversity requires
considerable empathy and sensitivity in addition
to other emotional intelligence and managerial
competencies such as flexibility and integrity from
managers and administrators. This is so because
the challenge is to bring this diversity to a
constructive focus that leads to greater creativity
instead of creating chaos in the super ordinate
organization.
(Milkovich&
Boudreau,
1997).Diversity management goes beyond social
category diversity like gender, age, religion,
*Corresponding author: John. N. N.Ugoani, Ph.D,
Coordinator, College Of Managements and Social Sciences,
Department Of Management Sciences Rhema University 153 – 155,
Aba Owerri Road, Aba, Abia State Nigeria.
343
Ethical Excellence through Employees Diversity Management
nationality, ethnicity, culture, etc to include
informational diversity such as differences in
terms of education, tenure, functional capacity, as
well as value diversity which includes personality
and attitudes (CIPD, 2003, Ward 2003, Wilson
2000, Woolnough 2000, Rana 2003).
At a time like this when management practitioners
and scholars alike expound about the accelerating
pace of change both within and around our
business organizations, most people will agree that
the ability to recognize and respond to diversity of
all kinds is a critical skill for success today and
well into the future. We are talking here about
diversity in the workforce and in the customer
areas and we are talking about diversity along all
dimensions. Once we acknowledge this reality, the
challenge becomes not whether to address and
adapt to diversity but how individuals and
organizations can do so effectively, efficiently and
productively. Here diversity is framed as an
opportunity to learn because the experience of
differences brings us up against the limitsof our
prior understanding and our previous ways of
doing
things.
(Gentile,
1998,
Ugoani,
2010).Diversity is both an ethical question as well
as a productivity issue. It is a combination that
extends to personnel and human resource
management functions, but generally policies that
address the issues are few and frequently amount
to no more than the legal and union requirements,
despite the clear advantages found in
organizations that patronize them with hope,
enthusiasm and commitment to their success.
Diversity management is imperative for optimum
productivity because equality drives total quality.
Statement of the Problem
The key to knowing others emotional terrain is an
intimate familiarity with our own, because the
twin abilities to send and read feelings have
played an enormous role in human evolution, both
in creating and maintaining the social order.
To a high degree, a great challenge for managers is
to recognize the need to treat human resources in a
fair and equitable manner. Today, the age, gender,
race, ethnicity, religion, sexual preferences, and
socio economic make up of the workforce present
new challenges for managers. Many businesses
Research Paper
have failed due to ethical problems like race
discrimination,
age
discrimination,
sex
discrimination, qualification discrimination, class
discrimination among other forms of managerial
imbecility. Diversity management would involve
the habits of critical thoughts and respectful
openness. It is believed that ethical soundness in
business decision-making is imperative for
business survival and prosperity.
Delimitation of the Study
The study designed to explore the need of
promoting diversity management in Nigeria was
delimited to a sample of 300 respondents in Aba,
Abia State. The study was also limited by bad road
network and lack of research grant in Nigeria.
Hypotheses
To guide the course of the study the following
hypotheses were formulated:
1. Diversity management is promoted among employed
women and men in Nigeria.
2. Diversity management is not promoted among
employed women and men in Nigeria.
LITERATURE REVIEW
According to Goleman (1995) the prerequisite for
empathy is self-awareness, recognizing the visceral
signals of feelings in one’s own body. The current
presence of a large number of women and the fact
that they have higher home responsibilities than
men has seemingly brought the matter of
diversity, gender and equity sensitivity to the front
burner. For example, there are signs of women
entering vocations previously held by men
only,like the priesthood, and men entering
vocations such as nursing and midwifery, but
without deep and continuing debates. There are
still few women in higher levels of management
and political positions and not many men are
secretaries. The problem remains that women who
manage to climb the organizational, political,
academic and even the ecclesiastical ladders still
face the challenges of home making, characterized
by child-rearing, caring for the aged relatives and
other members of the extended family. Also men
344
ISSN: 2308-1368
who find themselves in positions such as nurses
and others require cooperation from their
organizations.
In Nigeria, the majority of managers and
administrators or leaders are men and most
women remain in occupational groups such as
clerical and secretarial, catering, fashion, teaching
and cleaning and in some cases with less income.
Women leave employment at a much higher rate
than men not for domestic reasons only but also
because of the male dominated culture. Often men
are given high-viability jobs in industry and
financial services, whereas women are offered
non-profit organizational jobs, like health care and
retail. While women are assessedon their
performance levels men are assessed on their
potential but managing diversity is about the
realization of the potentialof all employees, the
challenge of meeting the needs of a culturally
diverse workforce and of sensitizing employees
and managers to differences associated with
gender is an attempt to maximize the potential
productivity of all employees (Torrington, Hall &
Taylor, 2005). Seeing issues from others
perspectives through the development of
emotional competence by managers cannot only
reduce stress levels but also increase performance,
productivity and encourage ethical behavior.There
are two different approaches to diversity
management. The first is where individual
differences are identified and celebrated, and
where prejudices are exposed and challenged
through learning and collaboration. The second
and more orthodox approach is where the
organization seeks to develop capacity of all
employees as to be able to appreciate individual
differences. Valuing individual differences and
being prepared to give special attention to others
who may be disadvantaged and lack self
confidence so that all in the relationship will feel
comfortable. Managing diversity skills emphasis
accommodating and utilizing differences which
reinforce equal opportunity to members in
employment relationship. Diversity management
approaches cannot be ignored by learning
organizations because they are the very differences
which hold people back. According to Young
(1990) if differences are not recognized, then the
norms and standards of the dominant group are
not questioned. Diversity awareness is important
as a competitive business practice and
organizations need to attract and retain the best
people bearing in mind of course that job stability
or continuity is important to success because
turnover costs money. To achieve this always,
individual self esteem is imperative to
productivity. People who are happy and feel
comfortable in their work environment are more
likely to feel confident in their ability to contribute
to business success. By searching for talent from
among the disabled, both genders, veterans, all
ethnic groups and all nationalities we gain access
to a pool of ideas, energy and creativity as wide
and varied as the human race itself. The more
productive employees are those who feel valued
for who they are at work and society. The belief
that diversity management is possible rests on the
fantasy that it is possible to imagine a situation in
which memories of privilege and subordination
achieved through such competencies as empathy,
love, humility, flexibility, collaboration among
others. Recognizing that women and men present
different cultures at work and that this diversity
needs to be managed is critical to promoting a
positive environment of equity which goes well
beyond merely fulfilling the demands of
organizational ethics. According to MasreliezSteen (1989) men and women have different
perceptions in their interpretation of reality,
languages and ways of solving problems which if
properly used can be of benefit to the whole
organization, as they are complementary. She
describes women as having a collectivist culture
where they form groups, avoid the spotlight, see
rank as unimportant and have few but close
contacts. Alternatively, men are described as
having an individualistic culture, where they form
teams, develop a profile, enjoy competition and
have many superficial contacts. The result is that
men and women behave in different ways, often
fail to understand each other and experience
“culture-clash”. Basically, the difference is about
now things are done and not about what is
achieved. (Liff, 1996, 1997, 1999, Thomas, 1992,
Cockburn, 1989, Newman & Williams, 1995,
Mattis, 2001, Benschop, 2001, Dickens, 1999,
Janman, 2002, Duggan, 2003, Kinumen&Mauno,
1998, Ellis and Sonuenfield, 1994, Lorbiacki& Jack,
John. N. N.Ugoani
2000, McCracken, 2000, Philpoh, 2003, Shapiro &
Austin, 1996, Snape&Fedman, 2003, Platman, 2002,
Ford, 1996, Hakim, 1993).
METHODOLOGY
The survey research design was used for the study;
and the simple random sampling technique was
employed to select 300 respondents. The
questionnaire and informal interview methods
were used to generate data for the study. The two
different methods were used for the purpose of
complementing, supporting and validating the
data through each other. For accuracy and
reliability the data generated were distilled and
coded before they were categorized. To achieve the
objective of the study, data were analyzed using
tables, frequencies, percentages and the ChiSquare statistics. The formula for the calculated
value of Chi-Square was;
X2
=
(O – E)2
E
Where:
O
=
Observed Frequency
E
=
Expected Frequency
The X2 calculated value was compared with the
table value @ 0.05 level of significance. The
investigator based opinions, recommendations and
conclusion on the result of the Test Statistics.
Presentation of results
From table 1, it was noted that 200 or about 66.67%
of the respondents were female while 100 or about
33.33% of the sample size were male.
TABLE 1 & 2 HERE
Table 2 showed the mix of the respondents by
occupation. From this blend it was obvious that
the respondents understood the issues under
investigation.
TABLE 3 HERE
From the test statistics in table 3, it was observed
that the X2 calculated value of 20.47 was
significantly greater than the table value of 9.48 at
0.05 level of significance and with 4 degrees of
freedom. From this empirical result it was found
Research Paper
that diversity management was not promoted in
Nigeria among employed women and men. The
result of this study reinforces the general
discontent among Nigerian employees with regard
to various types of discriminations such as
indigeneship,
sex,
age,
qualifications,
responsibility among others. For example, Some
State Governments in Nigeria followed the actions
of other states and disengaged so many Civil
Servants on the account of belonging to States
other than where they live and work. Also in the
Civil Service, of Nigeria there is discrimination as
to the type of paper qualifications an employee
should have to reach a certain grade level. For
example, school teachers who do not possess
University degrees cannot rise up to grade level 16
or the position ofDirector. They stagnate and retire
on grade level 14. Some banks in Nigeria do not
employ entry level graduates above the age of 30
years, and worse still some discriminate against
University and Polytechnic graduates on the basis
of B.Sc, B.A, and HND etc. Some women are
sexually harassed and when the “bubble is burst”
they are made to stagnate and frustrated out of
paid employment, those who remain do not even
see the glass ceiling talk less of breaking it. But
variety is intrinatically good. People have different
tastes, laws, education, and so on. Diversity or
variety is the very spices of life.This is necessary
because discrimination denies majority of the
workforce the chance for self actualization, which
is the total self fulfillment, the need to achieve full
potential. The implication for employers is that
productivity suffers because people who are not
recognized never put in their best productivity
ability. The old age or what is called the
“deadwood” mentality is polarizing workers
among themselves in Nigeria. While it is not a bad
idea to employ young people, it is equally not a
bad policy to treat older workers with respect.
Successful enterprises are built by older workers
who should be seen as matured assets instead of
deadwoods that must be thrown away. Hiding
under the umbrella of the Bell curve, older
workers get low scores of their performance levels
and such unfair practices only lead to their exit
without commensurate benefits. Organizations
that indulge in such unwholesome practices only
succeed in giving the wrong signal to the incoming
workers, and to protect themselves some “fast”
346
ISSN: 2308-1368
employees start early in their careers to plan about
how to defraud the organization. Through such
actions and inactions organization fortunes nosedive and may even lead to enterprise failure like
what happened in the Nigerian banking sector.
This result is interesting because even at the macro
level there is enough evidence that diversity and
ethical management should be emphasized in
Nigeria. For example according to Yinusa (2012)
insensitive or unethical business policy was
responsible for Dunlop’s exit from Nigeria”.
According to him sometimes our government does
not allow the continuity of fair processes. Also
Sekoni (2012) emphasized the need for diversity
management for the unity of the nation. Again, the
constant religious and ethnic clashes in the country
show lack of diversity tolerance (Osato, 2012,
Akowe, 2012, Chidiebere, 2012). The campaign for
diversity management is predicted on the
assumption that job satisfaction is a pleasurable
emotional reaction to a person’s work experiences,
and also that perceived justice reflects employees
beliefs that the procedures, outcomes and
interactions at work are fair.(Olajide, 2012, Nyako,
2012).Agbebaku (2012) has also advocated for the
abolition of anti-women laws in Nigeria.
According to her stoppage of all forms of cultural
and traditional discrimination against women was
key to the realization of vision 20:20:20. From the
test statistics in table 3, it was observed that the X2
calculated value of 20.47 was significantly greater
than the table value of 9.48 at 0.05 level of
significance and with 4 degrees of freedom. From
this empirical result it was found that diversity
management was not promoted in Nigeria among
employed women and men. The result of this
study reinforces the general discontent among
Nigerian employees with regard to various types
of discriminations such as indigeneship, sex, age,
qualifications, responsibility among others. For
example, Some State Governments in Nigeria
followed the actions of other states and disengaged
so many Civil Servants on the account of
belonging to States other than where they live and
work. Also in the Civil Service, of Nigeria there is
discrimination as to the type of paper
qualifications an employee should have to reach a
certain grade level. For example, school teachers
who do not possess University degrees cannot rise
up to grade level 16 or the position ofDirector.
They stagnate and retire on grade level 14. Some
banks in Nigeria do not employ entry level
graduates above the age of 30 years, and worse
still some discriminate against University and
Polytechnic graduates on the basis of B.Sc, B.A,
and HND etc. Some women are sexually harassed
and when the “bubble is burst” they are made to
stagnate and frustrated out of paid employment,
those who remain do not even see the glass ceiling
talk less of breaking it. But variety is intrinatically
good. People have different tastes, laws, education,
and so on. Diversity or variety is the very spices of
life.This is necessary because discrimination denies
majority of the workforce the chance for self
actualization, which is the total self fulfillment, the
need to achieve full potential. The implication for
employers is that productivity suffers because
people who are not recognized never put in their
best productivity ability. The old age or what is
called the “deadwood” mentality is polarizing
workers among themselves in Nigeria. While it is
not a bad idea to employ young people, it is
equally not a bad policy to treat older workers
with respect. Successful enterprises are built by
older workers who should be seen as matured
assets instead of deadwoods that must be thrown
away. Hiding under the umbrella of the Bell curve,
older workers get low scores of their performance
levels and such unfair practices only lead to their
exit without commensurate benefits. Organizations
that indulge in such unwholesome practices only
succeed in giving the wrong signal to the incoming
workers, and to protect themselves some “fast”
employees start early in their careers to plan about
how to defraud the organization. Through such
actions and inactions organization fortunes nosedive and may even lead to enterprise failure like
what happened in the Nigerian banking sector.
This result is interesting because even at the macro
level there is enough evidence that diversity and
ethical management should be emphasized in
Nigeria. For example according to Yinusa (2012)
insensitive or unethical business policy was
responsible for Dunlop’s exit from Nigeria”.
According to him sometimes our government does
not allow the continuity of fair processes. Also
Sekoni (2012) emphasized the need for diversity
management for the unity of the nation. Again, the
John. N. N.Ugoani
constant religious and ethnic clashes in the country
show lack of diversity tolerance (Osato, 2012,
Akowe, 2012, Chidiebere, 2012). The campaign for
diversity management is predicted on the
assumption that job satisfaction is a pleasurable
emotional reaction to a person’s work experiences,
and also that perceived justice reflects employees
beliefs that the procedures, outcomes and
interactions at work are fair.(Olajide, 2012, Nyako,
2012).Agbebaku (2012) has also advocated for the
abolition of anti-women laws in Nigeria.
According to her stoppage of all forms of cultural
and traditional discrimination against women was
key to the realization of vision 20:20:20.
SCOPE FOR FURTHER RESEARCH
Further research should focus on diversity and
hostility to see if it will help in reducing the
escalating religious problems among Christians
and Moslems in Nigeria.
RECOMMENDATIONS
These recommendations were based on the
findings of the study:
1. Ethical and productivity issues: It is ethically
wrong to discriminate against any employee based
on either age or place of origin; because such
policies demoralize and lead to low productivity
among employees.
2. Length of service: Number of years worked in a
particular employment should not constitute a
major yardstick for severing employment in
Nigeria. For example if one entered employment at
age 21 and worked for 35 such an employee
should not be forced out until the age of 60 for
public servants, 65 for non-academic staff of higher
institutions and 70 for academic staff. This will
enhance productivity in the respective areas.
3. Skewed Appraisal: Some organizations like the
banks in Nigeria hide under the cover of the Bell
curve and discriminate among old and new
employees. The trick is that old employees are
scored low so that they would be forced out while
new ones are scored high to earn promotions and
rationalize the reason for letting the old ones go.
This should be avoided.
Research Paper
4. Managing diversity is about the realization of the
potential of all employees. Therefore giving
preferential
treatment
on
group
based
arrangement is a form of poor human resource
management practice. This should stop.
5. The management of diversity should
concentrate on individual rather than groups and
includes the improvement of opportunities for all
individuals and not just those in certain groups,
like women, men, old or young indigenous or nonindigenous employees.
6. Gender and cultural sensitivity: Women are
different from men in ways of perception and
behaviours, and attitudes depend on background
and culture. Managers should be sensitive to these
issues in an attempt to maximize the full potentials
of all employees.
7. Judgmental responses: Organizations should
minimize judgmental responses to performance
based on pride, prejudice and knowledge.
Building self-confidence in employees strengthens
the management-employee relationship while
minimizing the emotional cost of performance
failures.
8. Positive sense of belonging: Giving employees a
good sense of belonging makes them have a sense
of self efficacy to organizational success.
9. The role model approach works:
In diversity
management employees need to understand that
some other people from their own group have
done something great in the perspective they find
themselves. The implicit message is that where the
employee finds himself is not a barrier.
10. The emphasis should be on learning: Diversity
management should place emphasis on the idea
that expertise and ability to grow on the job
requires learning and that competence increases
incrementally. This challenges the employees
notion that a person’s inherent capacity is limited
by virtue of their belonging to a certain group.
11. Diversity friendly policies: The governments in
Nigeria should evolve a diversity friendly
framework that would embrace the business
cultures and national identities of stakeholders in
the country for sustainable, cordial and productive
outcomes.
348
ISSN: 2308-1368
CONCLUSION
The result that diversity management needs to be
promoted in Nigeria explains the frequent
agitations by employees for harmonization of
terms and conditions of service as well as the
lifting of ceiling on entry and exit points in
employment. Treating employees on the basis of
ethnic origins and types of schools attended and
qualifications obtained presupposes in-equity,
demotivates employees and consequently leads to
low productivity. Women and men have different
ways of looking at and doing things therefore
these individual differences should be seen as
opportunities to be capitalized upon in managerial
decision making processes for the mutual benefit
of all parties. The whole idea of diversity
management emphasizes that women and men in
the workplace and other interested parties should
feel a sense of equity to the extent that would
make them comfortable and more productive. The
recommendations of this study will go a long way
in reducing tension in the workplace and enhance
employees productivity if implemented by
stakeholders.
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John. N. N.Ugoani
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Commentary: IRU, Warwick University.
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McCracken, D, (2000) “Wining the Talent War
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ISSN: 2308-1368
Disssertation Imo State University, Owerri,
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AUTHOR’S BIOGRAPHY
John N.N Ugoani holds a doctorate degree in
Management from Imo State University Owerri,
Nigeria. He presented the first-ever best PhD
dissertation in the department of Management,
Imo State University. He is listed among Ten Top
Authors by Social Science Research Network
(SSRN) New York. Before joining the academia, he
was a senior Manager in First Bank of Nigeria Plc.
until October, 2009. His research interests are in
the areas of emotional intelligence, managerial
psychology, bank management, as well as
knowledge management.
Yinusa,
J,
(2012)
“Insensitive
Policy
Responsible for Dunlops Exit from Nigeria.
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Young, I, M. (1990) Justice and the Politics of
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John. N. N.Ugoani
Research Paper
APPENDIX
Table 1:
S/N
1
2
3
Respondents
Male
Female
Total
Source:
Table 2:
Responses
100
200
300
Field work, 2012
Percentage
33.33
66.67
100%
Respondents by Occupation
Occupation
Responses
Banking
60
Health care
40
Educational
50
Public/Civil Servants
70
Others
80
Total
300
Source: Field Work, 2012
No
20
15
35
%
6.7
5
11.7
d/f
%
8.3
28.3
36.6
Level of
Sign
No
25
85
110
%
5
13.3
18.3
Table
No
15
40
55
Calculated
value
%
10
11.8
21.8
Total
No
30
35
65
4 Strongly
Disagreed
%
3.3
8.3
11.6
Analysis of Responses
3 Strongly
Agreed
1 Agreed
Male
Female
Total
No
10
25
35
2
Disagreed
Response
Table 3:
Percentages
20%
13.33%
16.67%
23.33%
26.67
100%
5 Neutral
S/N
1
2
3
4
5
6
Gender of Respondents
100
200
300
20.47
9.48
0.05
4
Source: Chi-Square Test Statistics
352
ISSN: 2308-1368
 Research Paper
International Marketing Strategy: Standardization versus Adaptation
Akmal Hussain1* and Shahbaz Khan2
1.
Faculty of Management Sciences, International Islamic University Islamabad, Pakistan.
2.
Department of Management Sciences, The Islamic University of Bahawalpur, Pakistan.
The debate on the standardization and adaptation of marketing strategy is not new, but
the researchers not yet came to an agreement that which strategy is better to serve the
international market. The aim of this research paper is to evaluate the previous researches
and evaluate that which international marketing strategy is better. After the extensive
research on the topic authors find out that standardization strategy is used to achieve the
economies of scale and it is used when the target market has the similar needs and wants.
While on the other hand adaptation strategy is appropriate when the consumers have a
different needs, wants and preferences and when there is a significant difference in the
socio economic conditions of the target market. The key to succeed in the international
market is to use the mix of standardization and adaptation strategy and try to create the
balance between the two.
Keywords:
International marketing; Globalization;
Marketing Strategy; Marketing mix;
Standardization;
Adaptation;
INTRODUCTION
In last few decades competition has been increased
at the international level due to the liberalization
of the trade policy, ease in monetary exchange
process and rise in the regional economic
cooperation and advancement in the means of
transportation and communication (Czinkota &
Ronkainen 2001; Keegan 1999). In such highly
dynamic and vibrant business environment it is
very difficult for the businesses to operate
internationally. According to Kotler (2009),
nowadays, global corporations face difficult
decisions regarding what marketing strategy to
adopt. A basic question arises what should be the
marketing strategy of the company when they go
global, whether they standardized their processes
or adapt their marketing strategy according to the
environment. Standardization versus adaptation of
marketing strategy at the international level is a
vital area of research for both the academicians
and for the practitioners. According to the
(Wierenga, Pruyn and Waarts, (1996) in the field of
marketing the concept of standardization and
adaptation or customization is intensively debated
usually in the American context. In the past
researches in the field of international marketing
extensively research the issue of standardization
and adaptation. In the view of Vignali and Vrontis
(1999) the discussion on the topic starts in early
1960, when Elinder (1961) write an article on global
advertising. In the earlier the standardized
advertising was at the heart of the issue (Kanso
and Kitchen, 2004). In the view of the earlier
researchers there should be a single or
standardized advertising campaign for the entire
*Corresponding author: Akmal Hussainl,
Faculty of Management Sciences, International Islamic University Islamabad,
Islamabad, Pakistan.
353
Standardization versus Adaptation
world. Then this debate move forward from a
standardized advertising campaign to the
standardized promotional mix and now the debate
encompasses the entire marketing mix (Schultz
and Kitchen, 2000; Kanso and Kitchen, 2004;
Kitchen and de Pelsmacker, 2004).
There is a difference of opinion among the
researchers on employing the standardization or
adaptation strategy at the international level. The
advocates of standardization strategy at the global
level propose that, markets in the international
level are homogenous and global in nature and
they believe that it is necessary for the continued
existence and growth at the global level, depends
on firm‟s ability to standardize their goods and
services (Fatt, 1967; Buzzell, 1968; Levitt, 1983; Yip,
1996). The bases of the arguments of the
supporters of standardization are that needs and
wants of the consumer do not vary significantly at
the international level. In their view the world is
becoming progressively more homogenous in
relation to the requirements of the customers and
environmental factors despite of their regional and
geographic location.
While on the other end supporters of adaption
says that it is very difficult to use the
standardization approach across the globe and
thus they support the adaptation approach to
efficiently and effectively fulfill the requirements
of the international markets (Kashani (1989;
Thrassou and Vrontis, 2006). The foundation
behind the advocates of the adapatition is that
there are significant differences in the countries
and even between the different regions of the same
country (Papavassiliou and Stathakopoulos, 1997).
Solberg (2002) suggests that the standardization
and adaptation is one of the key issues for the
international brand management is to create the
balance (trade-off) between the benefits achieved
by the standardization through economies of scale
and the cultural prerequisite of adaptation.
Although the issue of standardization and
adaptation is extensively researched but the
researchers are not yet came into the conclusion
that what approach is best to serve the global
marketplace. The aim of this research paper is to
investigate through the review of the prior
researches to evaluate the both approaches of
Research Paper
international marketing and find out that what
approach is best and why. The aim of this paper is
also to investigate that what marketing strategy
has positive relationship with the firm‟s
performance at the international level. This
theoretical research paper is divided into the 3
section; first section is consisting of the
introduction of the study. Second section of the
study will involves the literature review and the
formation of conceptual framework, whilst the last
and third section of the study will involves the
discussion and conclusion.
LITERATURE REVIEW
According to Bennet (2008) strategy can be defined
as “the actions managers take to attain the goals of
the firm”. Selection of the appropriate marketing
strategy at the national level as well as at the
international level is key to success. Hill (2002)
further argues that, Firms which compete at the
global stage usually face two kinds of competitive
pressures. 1) Pressure for cost reduction and 2)
pressure to be locally responsiveness. In this
section the authors will review the standardization
and adaptation of marketing strategy and their
advantages and disadvantages and what are the
factors that motivate firms to standardize or adapt
their marketing strategy.
Standardization
Standardization can be defined in different ways
but Medina and Duffy (1998), define it as, “the
process of extending and effectively applying
domestic target-market-dictated product standards
tangible and/or intangible attributes – to markets
in foreign environments”(p,229). While the
globalization is defined by Cherunilam (2009) as
“the process of integration of economics across the
world through cross border flow of factors,
products and information”.
According to Cavusgil et al., 1993, the global
market is becoming homogeneous in nature and
the homogenization of the international markets
allows the firms to adapt the standardization
strategy across the globe. There are number of
advocates of the standardization but among them
Levitt is one of the most strong advocates of
standardization. According to Levitt (1983) the
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standardization strategy emerges due to the
advancement in technology and communication
and due to changes in consumer taste and
preference and they became homogeneous
increased global competition is another reason for
standardization. According to Levitt (1983), “a
successful global marketing strategy consists of
having a common brand name, packaging, and
communication”. For example, Levitt (1983) in his
landmark paper suggests that standardization of
the marketing mix and the design of a single
strategy for the whole global marketplace help in
achieving economies of scale in the production
process.
Moreover, standardization has number of positive
effects on the performance of the firms as it helps
the firms in the achievement of the economies of
scales. It helps them to faster learning experience
which helps them to reduce the inventory cost, this
not only save cost but also helps firms to get
competitive advantage over the competitors.
Furthermore, standardization of the products will
enhance the chances for product innovation as
firm can apportion more of its resources to build
and develop the product portfolio rather than
allocating resources to adapting it to different
marketplace (Kotabe, 1990). Whitelock (1987)
suggests that standardization will leads to the
attentiveness of the technical research work, as the
process is standardized so less staff training is
required. According to Bennet (2008), firm which
employ standardization strategy will develop a
single product for all the markets in all the regions
and this kind of universal product will be suitable
where;
(1987), adaptation and customization are two
opposite terms. Medina and Duffy (1998) define
adaptation as “the mandatory modification of
domestic target market- dictated product
standards – tangible and/or intangible attributes –
as to make the product suitable to foreign
environmental conditions”. On the contrary
customization is defined by Medina and Duffy
(1998) as “the discretionary modification of
domestic target-market-dictated product standards
– tangible and intangible attributes – as to make it
economically and culturally suitable to foreign
customers”. The basic difference between the two
terms is that one is mandatory while the other is
discretionary. According to Kotler and Armstrong
(2008) “An international marketing strategy for
adjusting the marketing mix elements to each
international target market, bearing more cost but
hoping for large market share and return”. Kotler
and Armstrong (2008) write in their book most
marketer suggests that companies should adapt
the following policy, “Think globally but act
locally”. Companies must have to seek a tradeoff
between the standardization and adaptation.
Although both influence, either directly or
indirectly, a firm‟s international business
operations, the adaptation affects mostly the
tangible (or physical) attributes of a strategy
because it focuses on environmental conditions of
various markets. Customization on the other hand
is mostly affected by such factors as cultures and
therefore has a deeper impact than adaptation, on
the intangible (or non-physical) attributes of
products (Medina and Duffy, 1998).
3)Ther e are large markets which exist across the
world so cultural adaptation is not required
According to Bennet (2008), firms which operates
internationally have to made a basic/key decision
whether to go in the foreign markets with the
firm‟s current product or made necessary changes
in the products according to the requirements of
the foreign market, product adaptation will be
suitable in the case where,
4) Universal product has a strong international
brand image
1) There is a significant differences in consumer
needs and wants
Adaptation
2) Competition is intense, which force them to
differentiate their products
1) As the basic need is same so the product will
better satisfy the needs in international market
2) After sale services can be standardized
Customization is also interchangeably referred as
adaptation. According to Douglus and Wind
Akmal Hussain & Shahbaz Khan
3) To fulfill some necessary host country
requirements such as packaging, technical and
legal issues
4) These are also important reasons for product
modification/adaptation
,
climate,
living
conditions, customer lifestyle, literacy and income
level of the consumer.
The basic argument in the support of adaptation is
that it involves the individual approach as it
allows the firm to understand the needs wants and
preferences of the each consumer. Supporters of
adaptation approach convincingly advocate that
there is a significant difference in culture,
economic situation, rules and regulation, political
system and the lifestyle of consumer and their
values and belief system across the world these
things must be considered for the success Cavusgil
et al., 1993). The use of Adaptation of marketing
strategy helps the firms to achieve the competitive
advantage. (Cavusgil et al., 1993). Moreover, in the
view of some researchers, the eventual goal of a
company should not be cost reduction through
standardization, but long-term profitability
through higher sales accrued from a better
utilization of the different consumer needs across
countries (Onkvist and Shaw, 1990; Rosen, 1990;
Whitelock and Pimblett, 1997; cited by Theodosiou
and Leonidou, 2003). Lemak and Arunthanes
(1997),
opines
that
the
advocates
of
standardization does not have the conventional
wisdom of modern marketing. Despite many
arguments of increased consumer homogeneity, it
has been suggested that consumers are becoming
gradually more diverse and complex and do not
necessarily want to replace quality with price
(Douglas and Wind, 1987).
Product adaptation or modification strategy will
leads to increase in the sales volume of the firm in
foreign marketplace, by better satisfying the needs
and wants of the customers, by retaining the
existing customers by making the products up-todate and also by taking into consideration the
offerings of the competing firms.
There are also some negative impacts of product
modification or adaptation of marketing strategy
which are as follows;
Research Paper
a) Additional cost required for the promotional
activities
b) Duplication of the activities within the firm
c) Inexperience and limited knowledge about the
technical aspects of the different products and
know how regarding the marketing of the product
d) Extra resources will be required for the research
and development (Bennet, 2008)
In the following table the factors are highlighted
which encourage firms to use standardization
strategy or adaptation strategy at the international
level.
Factors encouraging
Standardization
Factors encouraging
Adaptation
Economies in product R Differing use conditions
&D
Economies of scale in Government
and
production
regulatory influences
Economies in marketing
Control of
program
Differing
buyer
behavior patterns
marketing Local initiative
motivation
implementation
“shrinking”
of
world marketplace
the Adherence
to
marketing concept
and
in
the
Source: Czinkota, Ronkainen, Moffett (2005)
DISCUSSION AND CONCLUSION
The aim of this paper was to determine that which
international marketing strategy (standardization
v/s adaptation) is appropriate for the firms which
operate
internationally.
The
topic
of
standardization and adaptation of international
marketing strategy is heavily/ extensively debated
in the past. Researchers are divided into two
schools of thoughts in the view of first school of
thought; standardization is the best solution to
serve the global marketplace, as the world
increasingly becoming more homogenous due to
the globalization. According to Levitt (1983),
standardization
of international
marketing
strategy means that performing the same
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marketing activities across the globe. Globalization
turned the world into a global village, one of the
main advocate/ supporter of standardization
Levitt (1983) argues that, advancement and
progress in the means of communication and
transportation “the world preference structure gets
pressed into homogenized commonality”. In their
view these are the bases for the standardization,
e) Adherence to the marketing concept
d) Standardization leads to the economies of scale
Both standardization and adaptation strategy have
their own advantages and disadvantages. Some of
the element of the marketing mix can be more
standardized as compared to others. As in the
view of one of the researcher product should be
standardized in order to achieve economies of
scale, brand name and brand message should also
be the same while these element of marketing mix
can be adapted such as packaging, pricing of the
product, sales promotion and distribution channel.
In short we can say that as it is also suggested by
Solberg (2002), that firms in order to get success in
the global market place create the balance between
the standardization and adaptation.
e) Economies in research and development ( Czinkota,
Ronkainen, Moffett, 2005)
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b) Standardization helps in work specialization
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On the contrary there is another school of thought
who supports the view of adaptation strategy in
the international marketing strategy. The argues
that although globalization made its impact on the
world, but still there is a significant differences in
the cultural, political and socio economic condition
of the countries, these differences are not only
found across the countries but within the country.
In a country there are different sub cultures and
different economic conditions so the whole world
can‟t be effectively and efficiently served with a
single marketing strategy. According to Kotler
(1986), most of the international products fail in
the international market due to the lack of product
adaptation.
Due to this reason Kotler and
Armstrong (2008), gives the concept of adapted
marketing mix “An international marketing
strategy for adjusting the marketing mix elements
to each international target market, bearing more
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a) Better satisfy customers’ needs and wants
b) Leads to product differentiation
c) Helps in achieving competitive advantage
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ISSN: 2308-1368
 Research Paper
The Impact of Customer’s Attitude on Buying Behaviour
Ali Iranmanesh1* and Elham Hadi Najafabadi2
1.
Young Researchers Club, Khorasgan Branch, Islamic Azad University, Isfahan, Iran.
2.
Executive Manager of Iranian Consulting Group (ICG), Iran.
This paper examines the potential role of attitude towards a Bank Mellat Customer Club
(BMCC) fan page on purchase intention. In this study, we tried to reveal how users’
attitudes towards social networking websites and brands are influenced by perceived
credibility, interactivity, usefulness and ease of use. To this end, we conducted an
experiment on a fan page of an international brand established in Tunisia (Pioneer
Electronics) from a sample of 174 internet users. The results confirm the positive role of
internet users’ attitude towards a fan page (social networks) on consumers’ buying
behaviour.
Keywords: Banking; Marketing; Social Networking; Buying Behaviour;
INTRODUCTION
Interpersonal communication is as old as history
itself and being thus it is rich with consumers‟
behaviour. Integrated in most models of decisionmaking processes, it is a component of our social
environment particularly enriched by consumers
(Filser, 1994).
Analysing users‟ behaviour
regarding transfer and reception of information as
well as studying its diffusion or within a broader
scale its effects on social networks is at the heart of
viral marketing. This latter consists of using
mouth-to-ear concept in a virtual environment and
finds in web 2.0, the new internet version, an
encouraging environment for diffusing messages.
Indeed, web 2.0 rests on considering three “new”
conditions; a much greater friendliness leading to
users‟
involvement,
taking
into
account
socialisation and the networks it creates, obtaining
content generated by users and thus more
appropriate to the expectations of each. This
tendency led to the emergence of what is known as
social networks sites (set up initially to enable
individuals the creation of their personal network
of friends and colleagues or relatives) which start
now taking on a new marketing-based orientation.
They favour participation, creativity and sharing
between members giving thus more chance to
spontaneously and massively diffuse information.
Accordingly, we witness the emergence of a new
approach which further value on the one hand role
of users, their interactions with applications and
their content and on the other hand their social
interactions among each other. In parallel to this
change in internet and emergence of social
networks sites, brands look more and more for
more reliable and less costly public-oriented
communication approaches. Internet users and
companies perceive social networks potential on
the net. Nevertheless, decision-makers ignore the
factors which explain best evolution of attitudes
towards the brand following this new use of new
technologies. Facing this increase in number of
social networks and their users, few researchers
devoted attention to study reasons and
consequences of attitudes towards a BMCC fan
*Corresponding author: Ali Iranmanesh,
esearchers Club, Khorasgan Branch, Islamic Azad University, Isfahan, Iran.
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ISSN: 2308-1368
page within a social network and its impact on
purchase intention.
THEORETICAL FRAMEWORK, MODEL AND
RESEARCH HYPOTHESES
Concept of attitude towards the BMCC page
Attitude towards BMCC page
Attitude is a complex concept, which alludes to
behaviours of an individual. It may be defined by
four components (Mendras, 2001):
a- It is an « inferred variable » that construct
after analysing opinions and behaviours.
b- Since it is a more or less durable tendency,
attitude relates to a person or a group, and
not simply their actions.
c- Attitudes are generally polarised, affectionloaded over a given topic, because of their
relationship with beliefs and values. There
is a with or an against attitude.
d- Finally, they are acquired and undergo
external influences.
Petrof (1988) indicates that an attitude raises the
probability that behaviour follows a predictable
path. Specifically and regarding attitudes towards
a web site, there are two large schools of thoughts:
research on internet users‟ satisfaction (Gonzales,
2001) and research focusing on internet users‟
attitudes towards the visited web site (Chen,
Clifford and Wells, 2002). Social networks sites are
initially web sites. Conducted research on these
latter may be applied to them.
Linking classic research on advertising and
research on internet, Chen and Wells (1999), as
well as Bruner II, Kumar and Stevenson (2000) and
Bruner II, Kumar (2000) suppose that the
relationship between attitude towards advertising
and attitude towards the brand can be applied in
an internet context.
Attitude towards a web site
Concerning evaluation of web sites, there are two
large schools: research on internet users‟
satisfaction (Muylle, Monaert and Despontin, 1999
; Szymanski and Hise, 2000; Gonzales, 2001) and
research on internet users‟ attitude towards the
visited site (Raman and Leckenby, 1998 ; Chen and
Wells, 1999 ; Chen, Clifford and Wells, 2002).
Social networks sites are initially web sites.
Conducted research on these latter may be applied
to them.
Linking classic research on advertising and
research on internet, Chen and Wells (1999), as
well as Bruner II, Kumar and Stevenson (2000) and
Bruner II, Kumar (2000) suppose that the
relationship between attitude towards advertising
and attitude towards the brand can be applied in
an internet context. Manu studies have focused on
people‟s attitudes and behaviour towards web
sites, either commercial or not (Hocque and Lhose,
1999 ; Boulaire and Ballofet, 1999 ; Chen and Wells,
1999).
Inspired by research conducted on attitudes
towards advertising, Chen and Wells (1999) were
the first to have studied attitude within an internet
context. They define this latter as “a predisposition
to respond in a convenient or inconvenient manner
to an internet site during a particular exposure
situation”. Chen and Wells (1999) pointed to the
presence of a multidimensional attitude that takes
into account in a web site:
• Reaction the web site offers
• Informative character of the site (through items
like ..
•Organisation
structure
which
evaluates
presentation and organisation of the site.
Gattiker et al (2000) assume that behaviour on a
web site is influenced by the individual‟s attitude
towards information technologies.
Perceived credibility
The study of perceived credibility is way before
conceptualising internet (Swan 2004). Hovland and
Weiss (1951) found that source trust significantly
affects accepting a message. Credibility refers to
competence and intention of the source,
communicator,
presenter,
message,
brand,
company and media. It reflects positive versus its
negative evaluation by consumer. It is not an
attribute of the source, but a subjective perception
of its personality and image made through
Ali & Elham
acquired information and experience with it as
Hass, (1981) and O‟Keefe (1990) indicate. Slater
and Rouner (1996) found that message quality
(how the message is presented), prejudice
(message‟s perceived form) and previous
knowledge (that the messenger knows of the topic)
all affect perceived credibility. Dynamism has been
added to the list of dimensions that affect source‟s
credibility. When the receiver perceives that the
message is dynamic, his/her perception of source
credibility increases.
Impact of perceived credibility on attitudes
towards a fan page and brand
Credibility is a source of information mentioned in
a context of a relationship between consumers and
a source of information. It leads to consumers
taking into account information in their
information processing process. This done by
means of perceiving information coming from the
business and social environment and leads the
consumer to question credibility that he/she might
allocate to the source of information. Ohanian
(1990) indicates that source credibility, like
experience, trust, and sponsor attraction lead to
two effects; one immediate and one delayed on
attitudes and behaviour. Bhate (1999) suggests that
a negative or a positive source (a high or low level
of credibility) may lead to a change in an attitude.
MacKenzie and Lutz (1989) show that credibility of
the source influences attitude towards advertising
and may even further influence attitude towards
the brand. Against this background we can
reformulate the following two hypotheses:
H1: Perceived credibility of the message is positively
linked to attitude towards a BMCC fan page.
H2: Perceived credibility of the message is positively
linked to attitude towards the brand.
Perceived interactivity
Interactivity is defined as involvement and
participation of users in modifying the form and
content of mediatised environment in real time
(Steuer, 1992). Interactivity is the most marked
attribute of advertising on the internet (Hoffman
and Novak, 1996; Helme-Guizon, 2001 ; Cho, Lee
and Tharpe, 2001; Yoon and Kim, 2001) in so far as
it is the unique means that enables a synchronised,
Research Paper
reciprocal and controlled dialogue between
marketer and user (Korgaonkar and Wolin, 2002;
Liu and Shrum, 2002 ; McMillan and Hwang,
2002).
Burgoon and Al (2000) define interactivity in terms
of its dimensions. The first dimension includes
structural properties (participation, mediation,
identification, parallelism, and synchronisation).
The second is the qualitative experience it
generates through cognitive, affective and
behavioural involvement engaged during an
interaction. Finally, it includes reciprocity and
individualism of communication. Interactivity is
mainly built around three components which we
present next (Shih, 1998 ; Steuer ,1995) :
a. Speed of interaction with the site
It relates to response time between user‟s inputs
and computer‟s outputs. This component includes
speed of connection, pages and files‟ downloading
time etc.
b. Range
It is the number of possibilities of action at any
moment (Steuer, 1992). It is the number of
hypertext links and clicks needed to surf the site.
Other web characteristics like customisation may
be attributed to this dimension (Klein, 2001).
c. Mapping
It is the visitor‟s ability to track the site‟s path in a
natural and predictable way (Steuer, 1995). It is
linked to the “degree to which users‟ human
actions are connected in a natural and predictable
manner to actions of the mediatised environment”
(Boulaire and Mathieu, 2000).
Impact of interactivity on attitudes towards
BMCC fan page
Interactivity enables customers the possibility to
modify content and shape of mediatised
environment in real time. It allows then for
creating a flow between information transmitter
and receiver (Steuer, 1992). A web site is a
multimedia product. It may contain audio, video,
graphs and text files (Wu, 1999). In the same is true
for social networks. It allows users to interact
among each other in real time (Wu, 1999).
According to Wu‟s conceptualisation of perceived
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interactivity (1999), there is a positive relationship
with attitude towards a web site. Hence the
following research hypothesis:
H3: internet user’ attitude towards a BMCC fan page is
positively influenced by perceived interactivity of this
latter.
Ease of use
Perceived ease of use refers to perception of the
effort to be deployed in the use of a system (Davis
et al., 1996). This construct refers back to Rogers‟
complexity construct (1995) which expresses the
degree to which innovation is perceived difficult to
understand or to use. Some studies show that an
individual interacts probably more with new
technologies when he/she perceives that few
cognitive efforts are going to be deployed (Adams
et al., 1992 ). Perceived ease of use represents the
intrinsic motivational aspect of human-computer
interaction (Davis, 1989).
Relationship between ease of use and attitude towards a
BMCC fan page
The previous studies confirm that the perceived
usefulness is an important factor because it
determines whether the perceived ease of internet
bank use will lead to increased use of the internet
bank (Ashtiani and Iranmanesh, 2012). Difficulty
of using a social network site or internet in general
may create in consumers a negative attitude
towards its use (Childers et al. ,2001). Chen et al.
(2002) show that ease of use and perceived
usefulness primarily determine attitude towards
online shops. Information system-wise, some
studies empirically checked that ease of use
directly determines attitude (Mathieson 1991,
Taylor and Todd 1996, Agarwal and Prasad 1997,
1999). Internet users, who perceive surfing or
accessing a social network site‟s rubrics easy, will
have a positive attitude towards it. Hence, the
following research hypothesis:
H4- perceived ease of use positively influences internet
users’ attitude towards a BMCC fan page.
Perceived usefulness
Davis defines perceived usefulness as the degree
to which a person believes that use of a given
system increases his/her work output. This
construct is a theoretical substitute to relative
advantage concept developed by adoption theory
(Chen et al., 2002). This latter is the degree to
which an innovation is perceived as a superior
advantage (Limayem et al., 2004). It may express
an economic profit, social prestige or other benefits
(Rogers, 1995).
Perceived usefulness indicates the advantages the
internet user thinks retain from using social
network sites like accessing or discovering
information or extra resources shared by other
users and diversified ideas on products or various
topics of which some are the user‟s interests. In
recent studies on online environments, some
researchers like (2001), or Agarwal and Karahanna
(2000) include perceived experience. It is an
intrinsic motivation variable in opposition to
perceived usefulness. Teo et al (1999), relying on
Triandis model (1971), show that perceived
enjoyment increases use of internet.
Furthermore, concept of usefulness refers back to
perceived profit (Au and Enderwick 2000) and to
positive consequences of behaviour (Davis et al.
1989). Generally, consumers‟ behaviour is
influenced either directly or often indirectly by
attitude (Malhotra and Mac Cort 2001). Internet
users, who perceive positive consequences of
using a BMCC fan page and think that its use is a
means of accessing efficient information that gives
them an extra advantage, develop a positive
attitude towards it and its use. Against this, we
formulate the following research hypothesis:
H5- perceived usefulness of a BMCC fan page positively
influences internet users’ attitude towards this social
network.
Attitude towards the brand
This concept corresponds to a positive or a
negative global evaluation of an advertised brand
or product. It depends on the brand capital
accumulated through time. Howard (1989) defines
attitude towards a brand as « the degree of
satisfying the needs the consumer thinks this
brand may provide”. Four elements may
characterise attitude towards the brand (Mendras,
2001):
Ali & Elham
Research Paper
a- It is an « inferred variable » that we
construct after having analysed opinions
and behaviour.
Joint impact of attitude towards the brand on
attitude towards a BMCC fan page and on
purchase intention
b- Since it is a more or less durable construct,
attitude characterizes a person or a group,
and not simply their actions.
Day (1969) is the first to highlight importance of a
mixed approach, attitudinal and behavioural, to
accurately measure brand loyalty. In his studies,
he indicates that prediction of purchases achieved
through combining a behavioural measurement of
loyalty and attitude towards the brand. This latter
generates a positive effect on purchase intention
on the one hand and on attitude towards the social
network on the other. Hence, the following
research hypothesis:
c- Attitudes are generally polarised and full
of affection on a given topic, because of
their relationship with beliefs and values.
There a pro and against attitude.
d- Finally, they are acquired and undergo
external influences.
Purchase intention
Intention is a desire process cognitively and which
leads to plan purchasing behaviour. It is a global
concept characterised by search for information,
choice of product and brand. Depending on the
product, one of these attributes will dominate
intention. Purchase intention is the critical measure
of behaviour which the most used to study impact
of marketing on connotative dimension.
Esparcieux-Morawe (2001) assumes that purchase
intention of a brand implies a willingness to
externalise a predisposition towards this latter
through a decision to act. Purchase intention
represents then a degree of consumers‟
commitment to the brand. The stronger this
intention is, the higher the chances of a future
behaviour are. This leads us to admit that our
study of the impact of social networks in terms of
brand perception should include purchase
intention as a measurement variable.
IMPACT OF
INTENTION
ATTITUDE
ON
PURCHASE
Relationship between attitude towards a bmcc fan
page and purchase intention
Bruner and kumar (2000) studied the relationship
between attitude and purchase intention. Intent
shapes behaviour. Intent is predicted through
attitude and subjective standards. The following
hypothesis represents these assumptions:
H6- Attitude towards a BMCC fan page positively
influences purchase intention.
H7- Attitude towards the brand positively influences
attitude towards BMCC fan pages and purchase
intention.
CONCEPTUAL FRAMEWORK
The previous analysis allowed us to better
understand the relationship between behavioural
variables of perceived credibility, interactivity,
perceived ease of use, perceived usefulness,
attitude towards social network site, attitude
towards the brand and finally purchase intention.
What follows is a model that summarizes these
relationships:
FIGURE 1 HERE
This model assumes that credibility, interactivity,
perceived usefulness and ease of use influence
attitude towards a BMCC fan page. Credibility
affects attitude towards the brand and these two
attitudes in turn affect purchase intention.
METHODOLOGY
Operation Variables
The previous theoretical analysis proposed a first
version of a measurement scale of the variables of
our model. These scales have been finalised after a
series of interviews conducted on a test sample to
examine external validity of our model. This same
qualitative study highlighted the explanatory
factors of internet users‟ attitude towards social
networks and the relevant brands as well as the
effect on purchase intention. This qualitative study
used psychometric scales issued from the
364
ISSN: 2308-1368
literature. This procedure enabled us to select
items for our questionnaire. It is to noted that the
scales used to operationalize the constructs of our
model have been mainly used by some relevant
past studies. Minor changes have been made to
adapt the instrument to the interviewed subjects.
The scales are summarized in annexe1.
RESULTS
Testing measurement scales
In order to test validity and reliability of our
measurement scales, a pre-test has been conducted
on 16 internet users. The retained scales have been
purified and adapted to the context of the study.
Confirmatory analyses have been conducted as
well.
Reliability of the measurement scale
The task was to check whether the items of the
scale measure the same construct chose (Hong &
Kim, 2002; Straub, 1989). Internal coherence of the
scale has been tested by computing Jöreskog‟s Rhô.
This coefficient is similar to Cronbach‟s alpha and
interpreted in the same way. Reliability results are
satisfactory in general. Indeed, Roh coefficients
range from 0.72 for perceived interactivity to 0.89
for attitude towards the brand. For all the
variables, rho coefficients are superior to the
critical threshold of 0.70 (Nunnally & Bernstein,
1994) (Annexe 2). Nevertheless, some correlations
register coefficients inferior to 0.70. These
coefficients are close to the critical value, then we
decided to retain all items of our scale.
Validity of the measurement scale
Validity test checks whether the scale measures
what it is meant to measure. The test led us to
several minor modifications on our questionnaire.
The subjects who participated to the exploratory
survey have been excluded from the final sample.
Convergent validity estimate (Rho of convergent
validity and explained variance percentage) are
satisfactory (Table 1).
TABLE 1 HERE
Internal coherence coefficients (Jöreskog‟s Rhô)
and convergent validity (Rho of convergent
validity and explained variance percentage) are
satisfactory (Table 2). Indeed, each construct
presents a satisfactory convergent validity with an
extracted variance superior to 0,50, with exception
of attitude towards the brand whose value is
slightly inferior (0,45). With such a result close to
0,50, this variable is retained for analysis.
The final sample
Our study has been conducted on a convenience
sample of 174 internet users. The sample consists
mainly of male internet users (122 males of 174
respondents, i.e. 70% of the sample). Majority of
respondents are young (81%) and with a university
education level (98%).
Validation of the research hypothesis
Most hypotheses have been tested simultaneously
using a structural equation modelling approach.
Parameters estimation is made in an iterative
manner with the maximum likelihood technique
and a Chi-square χ² analysis. This enabled us to
test the null hypothesis (observed data are related
by specific relationships within the model.
Computing the ratio χ² and its degrees of freedom
(χ²/ddl) is equal to 2.18 (parsimonious fit), neatly
inferior to 5. we may conclude that the model is
judged „reliable”. The AFC conducted on our
model indicates that the model register a good fit
quality as the following estimates indicate: (χ²/ddl
= 2,18 ; GFI = 0,946 ; AGFI = 0,915 ; RMSEA = 0,052
; TLI = 0,991 ; CFI = 0,961). These results attest for
the reliability of the model. Moreover, analysis of
estimated parameters indicates that all research
hypotheses are validated. Consistent with our
expectations, purchase intention is positively
influenced by attitude towards BMCC fan page.
Good fit quality leads us to conclude that the
formulated hypotheses are enough to consider the
phenomenon under investigation. The fact that all
structural coefficients are statistically significant
leads to the conclusion that all hypotheses are
validated.
Specifically, the results indicate that:
Purchase intention is directly influenced by
attitude towards BMCC fan page (0.653) and
attitude towards the brand (0.369). The impact is
more significant for attitude towards BMCC page
than for the variable “attitude towards the brand”.
Ali & Elham
The variable “attitude towards BMCC
page” is strongly influenced by “perceived
credibility of text displayed on the fan page” (0.24)
and by “perceived usefulness” (0.548) than by
„perceived interactivity” (0.321) and “ease of use”.
This result confirms conceptualisations proposed
by Bhate (1999). The joint cognitive and
connotative dimension seems to be the most
influenced. Users perceive BMCC fan page as
credible as it responds to their information needs.
Consistent with hypothesis 3, which links
perceived interactivity with attitude towards the
blog, most of our respondents find that page
setting is very clever. They appreciated flow of
information displayed on it. They find it amusing
and likeable.
- Attitude towards the brand directly and
indirectly influences purchase intention through
the variable “attitude towards BMCC page”. The
hypothesis which assumes that purchase intention
is positively linked to attitude towards a fan page
is tested (H6); the more attitude is positive towards
this fan page, the more purchase intention
increases. As for attitude towards the brand, its
impact on the relationship between attitude
towards the fan page and purchase intention is
positive; the more attitude towards the fan page is
positive, the more purchase intention increases.
Our results are consistent with those of Komiak &
Al, 2008.
DISCUSSION AND CONCLUSION
The main aim of this study is to better understand
the factors explaining internet users‟ purchase
intention and specifically to determine the role an
action on BMCC may play in improving attitude
towards the brand and purchase intention. In
particular, we tried to identify the explanatory
variables the contribute most to a good attitude
towards a BMCC fan page of a brand, degree of
influence of this latter on purchase intention and
the impact of the mediating factor of attitude
towards the brand. From a theoretical viewpoint,
this study highlighted the role the variable
“attitude towards a BMCC fan page” may play.
We rallied arguments pointing to the positive
impact this variable may have on internet users‟
purchase intention. We pointed as well to the
Research Paper
presence of simultaneous effects of the variable
“attitude towards the brand” equally on the
variable “attitude towards a BMCC fan page” and
the endogenous variable “purchase intention”.
From a managerial viewpoint, it seems that use of
social
networks
in
advertising
and
ecommunication are factors likely to modify
consumers‟ attitude towards products and
services. Indeed, our study pointed to the presence
of a positive relationship between a positive
attitude towards a BMCC fan page and these
internet users‟ purchase intention. These results
are interesting as they may contribute to guide
marketers‟ communication strategies. Moreover,
the obtained results may bring preliminary
responses to marketers on internet innovations like
social networks site and consumers‟ behaviour
towards them.
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APPENDIX
Table 1: Reliability, Convergent Validity and Discriminate Validity
Construits
Variance Extraite
PCFP
PI
AFP
EU
PU
AB
PCFP
0.71
0.79
-
-
-
-
-
PI
0.59
0.18
0.72
-
-
-
-
AFP
0.67
0.04
0.09
0.81
-
-
-
EU
0.66
0.25
0.08
0.20
0.87
-
-
PU
0.57
0.13
-0.16
00
00
0.76
-
AB
0.45
-0.1
-0.34
-0.08
-0.04
00
0.89
PCFP : Perceived Credibility of the Fan Page
PI
: Perceived Interactivity
AFP
: Attitude towards the Fan Page on BMCC
EU
: Ease of Use
PU
: Perceived Usefulness
AB
: Attitude towards the Brand
Ali & Elham
Research Paper
Figure1: Conceptual Framework
370
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 Research Paper
Estimated Function of Labor Force Demand in Sistan and Baluchestan
Province
Mohammad Javad Mohagheghniya1, Mostafa Sargolzaei2*, Razieh Ahmadi3, and
Mohammad Roshanro4
1.
2.
3.
4.
Assistant professor at Faculty of Management of Allameh Tabatabai, Tehran, Iran.
Department of Accounting, Shirvan Branch, Islamic Azad University, Shirvan, Iran.
M.A University of Sistan and Balochestan, Iran.
Estimating labor force demand models is of high significance for Iran’s economy,
especially the state’s provinces, in terms of identifying factors that influence labor force
demand and predicting labor force demand in the future. In order to create employment
for the labor force, the factors affecting the labor force demand must be identified so that
through proper planning, labor force demand increases up to an optimal level. This study
aims at identifying factors influencing labor force demand and estimating the function of
demand for labor force of Sistan and Baluchestan province. The years between 1979 and
2007 are the period under investigation. In this study, ARDL method was utilized
because of endurable and non-endurable variables and due to peculiar advantages of this
method compared to other methods. The results of the study revealed that the most
important factors influencing labor force demand in Sistan and Baluchestan province were
GDP (Gross Domestic Product) and capital per capita. GDP and capital per capita
showed respectively a significant positive correlation and a significant negative correlation
with labor force demand in Sistan and Baluchestan province, the latter result was obtained
because of replacement of labor force by capital.
Keywords: demand; labor force; capital per capita; GDP; ARDL;
INTRODUCTION
Employment and unemployment are among the
essential issues in each country’s economy; in a
way that increase in employment and decrease in
unemployment is considered as an index
indicating development in a country. Creating
employment and fighting against unemployment
crisis requires a thorough familiarity with the
country’s labor market which in turn demands
having access to valid and reliable information and
statistics. Investigating the main indices of labor
force such as unemployment rate, economic
participation rate, share of partial employment,
youth unemployment rate, etc. in the province
give a deeper understanding of the manner of
creating sustainable employment opportunities
considering the relative and local advantages of
the province. In accordance with official statistics
arising from public housing and population
census, statistical yearbook related to different
years and also the statistics from labor force census
plan in this province which is 187000 square
kilometers in area, this province is one of the
*Corresponding author: Mostafa Sargolzaei,
371
Estimated Function of Labor Force Demand
biggest provinces of the country whose spread is
equal with 11 provinces of the country. According
to census plan of the year 2006, the population of
this province is over 2405742 people from which
55.75% were men and 49.23% were women, 49.6%
lived in urban areas and 50.4% in rural areas.
METHODOLOGY
The statistics and figures were taken from the
sources published by Management and Planning
Organization, Central Bank and Statistical Center
of Iran. The data is analyzed by finding the unit
root of the variables through doing unit root test to
show that the model does not have the nonendurable variable problem. In case the variables
of the concerned model are non-endurable, there
will be the possibility that the study shows a
significant long-term correlation among the
variables. In fact, if the concerned variables are
non-endurable, the degree of their accumulation
must be determined; to do so, ADF test is utilized.
Since according to the study done by Chin & Sons
(2001), using ARDL method with adequate
intervals leads to estimating the coefficients of
long-term
compatibility
among
concerned
variables, in this study the same method was used.
REVIEW OF THE RELATED LITERATURE
Amini (1999) estimated labor force, men and
women apart, also with and without postgraduate
degrees separately during the time period 19761996. In this study, labor force demand was a
function of utilization of labor force with and
without postgraduate degrees index with interval,
capital balance with interval, real wage index, nonagricultural GDP, real price index with interval,
women labor force utilization index with interval
and GDP.
Zeranezhad and Norouzani (2005) estimated and
analyzed labor force demand in industries of
Khuzestan province using Johansen-Juselius
method. These researchers found that labor force
in industry sector was a function of value added in
industry, capital per capita, and livestock variable.
The results indicated that labor force demand in
industry sector of Khuzestan province had inverse
correlation with capital per capita and direct
correlation with value added of industry sector.
Research Paper
In a study on investigating labor market in
Golestan province and estimating employment
and unemployment, Ghavidel, et al. (2008)
examined some important issues in the labor
market of the province. One chapter of this study
is allotted to explaining labor force demand and
model estimate in the province. This study
targeted investigating the factors influencing labor
force supply and demand, predicting labor market
developments during 4th development plan and
finally anticipating unemployment rate of this
province through using the model and its
comparing with employment development
document of the province.
Nekab and Heshmati (1998) examined the factors
affecting labor force demand through offering
econometric model for factory industries in
Zimbabwe using Translog function. They found
that there was an inverse correlation between labor
force and efficiency. Moreover, the labor force had
more tendencies towards wage and capital balance
than production level.
Olegan(2000) in his article under the title “How
Total
Supply
and
Demand
Explains
Unemployment Fluctuations? France- United
States Comparison Case” used the capacity of total
structural supply and demand in interpretation of
unemployment fluctuations. In this study, a
structural
VAR
model
was
used
for
unemployment,
inflation
and
efficiency
development rates of France and the United States.
One of the key findings in this study was more
random shocks for France compared to the United
States.
Bruno, Falzoni and Rodolfo (2001) in their article
investigated the effect of globalization on labor
force demand tendency in OECD counties. In this
article, labor force demand was assumed a
function of wage rate, production rate and the
openness degree of economy. They concluded that
the effect of globalization on domestic
employment had little to do with wage tendency;
however that little effect caused a shift on labor
force demand’ curve. Moreover, the effect of trade
replacement on tendency of labor force demand
was only observed in France from among OECD
countries.
372
ISSN: 2308-1368
Nakanishi (2001) investigated labor force demand
for Japan labor market using an error correction
model. In this study, the relationship between
employment and work hours, labor force, labor
force input and work hours apart, was highlighted.
Falak (2001) estimated the function of labor force
demand in German industries suing the
generalized error correction model (GECM) and
based on a cost quadratic function. In this estimate,
the data from 26 factory industries for the time
period of 1976-1999 was utilized. The results
indicated that employment demand, short term
and long term, for groups different in terms of job
skill level was tensionless towards price
fluctuations.
Baltagi and Rich (2003) researched technology
changes and labor force demand in the United
States’ industries for the time period of 1959-1996.
The results of this study revealed that during the
time technology was neutral, the share of labor
force in production reached its lowest level. In
1980s, allocation-based technology led to transfer
of labor force demand.
MODEL SPECIFICATIONS
Introduction to Labor Force Demand Models
In this study, the introduced model was specified
using minimizing costs approach. Utilizing the
function of costs is another method for extracting
labor force demand function that is equal with
profit function method. Given that y, w and r
areprices of capital, labor force and production rate
respectively, the function of producer’s cost is
defined as follows:
C=c(w,r,y)
(15)
This cost function has direct correlation with each
of independent variables and is of primary
homogenous function type in terms of prices of
labor force and capital. If we take a partial
derivation from the above-said cost function in
proportion to w, the function of labor force
demand is found:
Ld=(әc(w,r,y))/әw=Ld(w,r,y)
(16)
The function of labor force demand, considering
homogeneity of the primary cost function in
proportion to the prices of inputs, is homogenous
from zero degree in proportion to the prices of the
inputs. In accordance with this feature, the
function of labor force demand can be written as
follows:
Ld= Ld(y,w/r)
(17)
Thus, labor force demand depends on two factors
that are production level and relative price of the
labor force. The relationship between labor force
demand and independent variables are as follows:
Ld
0
Ld
w
0 
y
, r
(18)
In other words, with rise in production level given
that the relative price of labor force is fixed, the
labor force demand increases. On the other side,
with rise in relative price of labor force given that
the production level is fixed, the labor force
demand decreases. Therefore, the variables used in
this study are GDP value added, labor force and
capital per capita.
Static Testing of Variables
In table (1), endurability and non-endurability of
variables were examined based on generalized
Dickey-Fuller test and in table (5-2) based on
Phillips Perron test. According to these tests, labor
force and GDP logarithm variables are endurable
in first-time intervals; however, capital per capita
variable is on endurable level.
TABLE 1 & 2 HERE
Short-term ARDL Test and Its Results
According to Chin & Sons (2001), using ARDL
method with adequate intervals leads to obtaining
the coefficients of long-term compatibility among
concerned variables in a model. The abovementioned method is done without considering
variables as l (0) and/or l (1). In the following,
short-term estimate of the function of demand for
labor force in Sistan and Baluchestan province is
examined. Based on SBC criteria, an interval was
considered for LL and an interval for LKL. As can
be seen, capital per capita variable with an interval
has significant positive effect on employment of
labor force in Sistan and Baluchestan province in a
short period of time. GDP also has a significant
Sargolzaei et al.
positive effect on employment of labor force in the
said province.
TABLE 3 HERE
For testing whether or not short-term dynamic
relationship tends to long-term one, total
coefficients should be lower than 1. For performing
the concerned test, No. 1 should be deducted from
the total coefficients with dependent variable
interval and divided by the total standard
deviation of the said coefficients.
Research Paper
effect on labor force demand in Sistan and
Baluchestan Province.
ECM Results in ARDL Method
On the basis of the obtained results, ECM
coefficient of labor force demand function is
statistically significant which shows high
adjustment speed. Furthermore, meaningfulness of
ECM coefficient indicates the existence of longterm significant relationship between the model
variables.
t=(-0.40073-1)/0.16= (-0.59927)/0.16= -3.75
t modulus obtained from modulus of critical
values, offered by Banerjee, Dolav and Master, is
greater, and the H0 stating lack of rejected
accumulation and existence of long-term
relationship is accepted.
TABLE 5 HERE
Stability and Diagnosis Tests
Diagnosis test was utilized in order to determine
stability of the model, functions as well as
structural stability.
RESULTS OF LONG-TERM TEST OF LABOR
FORCE EMPLOYMENT FUNCTION IN SISTAN
AND BALUCHESTAN PROVINCE
According to Hashem Pesaran (2002) and Bahman
Oskouei (2001), this test can indicate whether or
not the model is too much stable and/or stable to a
certain degree.
The following table displays estimate of LongTerm Labor Force Employment Function model in
Sistan and Baluchestan Province
As displayed in the following figures, the longterm permanent stability for the labor force
demand function will be acceptable.
TABLE 4 HERE
FIGURE 1&2 HERE
Equation of long-term labor force employment
function in the province is written as follows:
LOG (NT)= 8.2470+0.72044LOG (GDP)0.51923LOG (K/L)-0.15812DT+Ut (1-5)
As expected, according to the obtained results
increase in GDP in a long term leads to increase in
labor force demand in Sistan and Baluchestan
Province, and tendency toward labor force
demand is about 0.72 in proportions to GDP. In
addition, tendency toward labor force demand is
0.51 in proportions to capital per capita level,
which has significant negative effect on labor force
demand in the province; i.e., with increase of 1%
rise in ratio of capital to labor force demand, labor
force demand will decrease about 51%. Moreover,
for better specification of the model, Dummy
Variable (revolution and war) was added to the
model, which was significant; the relationship
between this variable and labor force demand was
negative according to economic theories, and
indicates that revolution and war have negative
CONCLUSION
Estimating labor force demand models is of prime
importance for Iran’s economy, especially the
state’s provinces, in terms of identifying factors
that influence labor force demand and predicting
labor force demand in the future. For conducting
the research, identification factors was recognized
using accurate and scientific methods of
econometrics to measure the variables and degree
of effect. Therefore, the experimental models of
labor force demand (employment) were estimated
for the province. The results indicated that value
added variable has a significant positive
correlation with the labor force demand. However,
capital per capita variable has significant negative
correlation with the labor force demand.
REFERENCES
374
ISSN: 2308-1368
Amini A. (1999). “Estimating and Predicting
Labor Force Demand Model in Iran’s
Economics during 1997-1999” Planning and
Budget Magazin, Nos. 7 & 8
Statistic Center of Sistan and Baluchestan
Province, Survey on Employment and
Unemployment
Characteristics
of
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Amini A &Falihi, N. (1998). “Examining Labor
Force Demand in Industry and Mine Division”
Planning and Budget Magazin, Nos. 28 &
29.
Zaranejad
M
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S.
(2005).
“Estimating and Analyzing Labor Force
Demand Function in Industries of Khuzestan
Province” Economic Research Journal, 7th
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Baltagi, Badi and Rich, Daneal, P. (2003), SkillBiased
Technical
Change
In
US
Manufacturing: A General Index Approach.
Working Paper, NO 841, Institute For the
Study OF Labour (IZA).
Boug, P, (1999), The Demand For Labour And The
Lucas Critique: Evidence From Norwagian
Manufacturing. Discussion Papers, Research
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Dispap: 256).
EbadollahVand, M. (2003).“Estimating Labor
Force Supply and Demand in Azarbayejan
Gharbi during 1996-2011” M.A. Thesis.
Falk Martin And Bertrand, Koebel (2001), A
Dynamic Heterogeneous Labour Demand
Model For german Manufacturing. Applied
Economis, NO, 33. PP. 339-348.
Farjadi, Gh. (1998). “Labor Force Project,
Teaching and Labor Market” 4th Report.
Heidarpour A. (2003). “Examining and
Determining Factors Affecting Labor Market”,
M.A. Thesis.
Iran Statistic Center, Census of Population and
Housing, Detailed Results of Sistan and
Baluchestan Province, 2006.
Mottaghi L. (1998). “Analyzing and Estimating
Employment Demand in Iran during 19711996”. Planning and Budget Magazine, No.
3
Noferesti M. (2008). “Unite Root and Cointegration in Econometrics”. Rasa Cultural
Services Institute.
Sargolzaei et al.
Research Paper
APPENDIX
Table 1- Examination of endurability and non-endurability of model variables based on generalized
Dickey-Fuller test (1979-2007)
variable
DLL
Constant and constant
trend
*
*
DLY
*
*
LKL
*
*
statistics
critical
-4.0174
-4.0293
-2.9798
3.8943
-89.9.2
-3.59
-2.9750
-3.5867
-3.2835
-3.3867
-3.2757
2998.8-
Note: Critical values of Dickey statistic – fuller is on 5% level.
Source: findings of the research
Table 2- Examining durable and non-durable model variables based on Phillips Peron (1979-2007)
variable
statistics
critical
DLL
-.97999
-293293
DLY
-299..8
-293293
LKL
-8972.2
-89783.
Note: Critical Values of Phillips Peron’s Statistic is at 5% level
Reference: Research Findings
Table 3- Examining coefficients of labor force demand function in a short period of time
variable
statistics
critical
DLL
-9.6744
-3.5875
DLY
-3.7902
-3.5875
LKL
-2.6313
-2.6251
376
ISSN: 2308-1368
Table 4- Examining coefficient of Labor Force Demand Function in Long Period of Time
standard
variable
coefficients
probability
deviation
LY
.72044
.055272
.0000
LKL
-.51923
.18201
.010
C
8.2470
.58879
.0000
DT
-.15812
.063704
.022
Table 5- Results of ECM Test
variable
coefficient
standard
probability
deviation
ECM(-1)
-.59927
.16372
.001
dLAV
.43174
.11975
.002
dLPK
-.66389
.095356
.000
dC
4.9422
1.3115
.01
dDT
-.094757
.036992
.001
Sargolzaei et al.
Research Paper
Figure 1- Labor Force Demand Function
Figure 2- Labor Force Demand Model
378
ISSN: 2308-1368
 Research Paper
Impact of Rewards and Leadership on the Employee Engagement: A
Case Study from Banking Sector of Pakistan
Nadeem Iqbal1, Komal Javaid2, Naveed Ahmad3*, and Muhammad Ateeq4
1.
Faculty of Management Sciences, Baha Uddin Zakariya University Multan, Pakistan.
2. & 4. MBA student Baha uddin Zakariya university, Pakistan.
3.
Faculty of Management sciences, Indus international institute, D. G. Khan, Pakistan.
Employee engagement has arisen as the prevalent executive conception in the current
centuries. That is the level of commitment and involvement of a worker to the association
and its principles. An engaged employee is conscious of occupational perspective, and
workings with co-workers to increase performance inside the employment for the profit of
the association. Employee engagement improves optimistic assertiveness between the
workers to the association. That paper emphases on several aspects which lead toward
employee engagement and whatever would corporation ensure to create the employees
engaged. Appropriate consideration on engagement policies will raise the organizational
efficiency in relations of sophisticated production, revenues, excellence, buyer
gratification, employee preservation and improved adaptableness. Two hypothesis and
also there are two objectives of our study and by using the statistical population of
Banking Sector which cover the 150 employees of 12 banks and facts was collected by the
standard questionnaire. Correlation coefficient was used through “ANOVA and IBM
SPSS” for the data analysis. There are the two independent variables of our study which
are rewards and leadership and one dependent variable which is employee engagement.
Results presented the Positive relationship between Rewards and Employee engagement
and also there is the Positive relationship between Leadership and Employee engagement.
Keywords: Rewards; Leadership; Employee Engagement;
INTRODUCTION
Now a days, people and professionals are
observing exceptional variation in relations of the
universal nature of exertion and the assortment of
the employees. The world establishments are
stirring
onward
into
the
boundary-less
atmosphere. Taking the precise aptitude in
essential persons at the accurate time is of planned
reputation, making dissimilarity to profits,
invention and establishment efficiency (Ashton
and Morton, 2005). Associations want the workers
who are stretchy, inventive, ready to pay and go
“below and outside the letter” of their prescribed
work explanations or agreements of occupation
(Hartley, et al., 1995). Engaged workers have
extraordinary intensities of vitality, are excited
about their exertion and are a lot completely
absorbed in their profession so that period flutters
(Macey and Schneider, 2008; May et al., 2004).
*Corresponding author: Naveed Ahmad,
Faculty of Management sciences, Indus international institute, D. G. Khan, Pakistan.
379
Impact of Rewards and Leadership
Employee engagement has arisen as a prevalent
executive conception in contemporary ages,
predominantly between consultant viewers (Saks,
2006; Bakker and Schaufeli, 2008). Furthermost
employee engagement is defined as responsive
and rational commitment to the establishment
(Baumruk 2004, Richman 2006 and Shaw 2005) or
the quantity of unrestricted work presented by the
workers in their work (Frank et al 2004).
Employee engagement is also clear as the
constructive expressive construction to a worker‟s
effort. Engaged employees are motivated to go
below and outside the request of responsibility to
support
encounter
corporate
objectives.
Engagement at exertion is intellectualized by
Kahn, (1990) as that is the „connecting of executive
participants‟ identities to their effort parts. In the
engagement, individuals work and direct
themselves
materially,
cognitively,
and
expressively through role presentations. Towers
Perrin (2003) (2005) also Shaffer (2004) state the
engagement as worker‟s will to pay unrestricted
work going on the employment. Walker
Information (2005) spaces the importance on a
worker‟s commitment to continuing through his or
her corporation.
While that is recognized and believed that the
employee engagement is the multi-faceted concept,
is proposed by Kahn (1990). Truss et al (2006)
describe employee engagement merely as the
“appetite for the work”; an emotional state-owned
that is realized to contain the magnitudes of
engagement argued by Kahn (1990), and releases
the conjoint refrain consecutively over all his
descriptions. Therefore Robinson et al (2004) clear
engagement as the „one step up after the
commitment‟. As the consequence, employee
engagement is the presence of existence
nevertheless additional trend or somewhat
influence appeal “the old wine in a new bottle”. In
the addition, without engagement of the
employees can exist comprehensively clear and
dignified, that neither be coped, nor can it be
recognized if exertions to increase it are employed
(Ferguson 2007).
Objectives
Research Paper
The main objective of our study is to develop a
model in between Rewards, opportunities and
Employee engagement.
There are two further objectives of our research
included:
a)
To determine the impact of rewards on
employee engagement.
b)
To determine the impact of leadership on
employee engagement.
1.2: Research Questions:
Our study has two types of research Questions;
Included:
a)
What is the relationship between Rewards
and employee engagement?
b)
What is the relationship
leadership and employee engagement?
between
Additionally, employee engagement is a
significant aspect for administrative efficiency.
Employee engagement is not have the probable to
significantly distress employee retaining, efficiency
and reliability; that is as well a significant linkage
to the buyer gratification, business repute and
complete investor worth. Therefore, to achieve an
economical
advantage,
establishments
are
revolving to the HR to establish the program for
the employee engagement and the employee
commitment.
That research suggests the improving occupied
states in completely its characteristics containing
bodily and expressive atmosphere, active
leadership alongside through developed team and
collaborator association consequences in the
workers having a well engagement by their effort.
So his or her performance as well rises that
donates to the efficiency of the establishment.
LITERATURE REVIEW
Rewards
Typically reward literature emphases on the
workers in common (e.g. Hiam 1999, Arthur 2001,
and Wilson 2003). That suggests the totally
workers are appropriate for the rewards. Several
writers as Armstrong (2002) stress the definite
kinds of workers who want extraordinary respect.
380
ISSN: 2308-1368
Such as, sales work and topmost executives are
predominantly appointed for the rewards payable
to nature of their work (Armstrong 2002).
Furthermore, that kind of work is likely to have an
extraordinary innovative character (Armstrong
2002). Amongst with others they will decrease the
period, and price and increase excellence
(Tinnirello 2001); they will reward individuals for
the significance they produced (Armstrong &
Murlis2004) and they will support transfer the
firm‟s standards and beliefs (Armstrong 2002).
The rewards based on competence emphasis on
“the capability to execute” (Armstrong 2002:231).
Rewards based on the performance are the
furthermost mutual kind of the rewards (IRS
Employment Review 2001 in Armstrong 2002).
Rewards based on the skill maintenance the
expansion of abilities. It creates logic when the
firms need stretchy workers (Gibson & Cohen
2003). Rewards based on results mean expense by
commission (e.g. Miller 1991, Ellemers et al. 2004,
and Rosenbloom 2001). Conferring to Gale (2004),
an establishment with a pleasant and supportive
culture must favour team based rewards. A
destructive and appropriate modest culture
stresses separate rewards.
Gale (2004) points out the significance of equally
executive and separate values (late in relations of
the personality) such as key aspects to choose if to
reward the workers. Slavin (1991) says, that job
characteristics
want
deliberation.
Rewards
remained only essential and valuable if skill
variety, task identity, task significance, autonomy,
and the feedback are little and therefore the work
is not inherently inspiring. Sheridan (1996)
recommends permanently rewarding the team and
the persons. Lastly, Appelbaum et al. (1999) advise
rewarding continually team and topmost
performers. The uncertain reward supporters
claim that no “comprehensively best preparation”
in the rewarding occurs (Armstrong & Murlis
2004: xi).
Leadership
Leaders are persons in the association who
established the quality and principles. Northouse
(2004) describes leadership as the procedure where
one person affects a cluster of persons to
accomplish a mutual objective. An active leader is
capable to inspire his or her groups to touch the
objectives of the association. Structuring the
association among a leader and his or her
admirer‟s needs gratitude from their leader on
behalf of individual beliefs of persons who would
remain ready to provide their vigour and
aptitudes to achieve common goals (Bass, 1985).
Several leadership philosophies have changed to
explain the features, behaviours, and graces of
many leaders and the leadership styles (Bass,
1985).
Leadership remained another key aspect
recognized to remain an important aspect to
absorb the employee engagement. Active
leadership is the higher-order, multi-dimensional
concept
containing
self-awareness,
stable
dispensation of evidence, interpersonal clearness,
and affected ethical values (Gardner et al., 2005,
Walumbwa et al., 2008). Study (Wildermuth and
Pauken, 2008, Wallace and Trinka, 2009) illustrates
the engagement happens certainly once leaders are
stimulating. Employee‟s feels engaged at that time
when their exertion is deliberated significant and
expressive. Therefore the job of the leadership is to
confirm that workers realize in what way their
precise job pays to the whole corporate
achievement. Realistic and sympathetic leadership
is hypothesized to effect employee engagement of
groups in the intelligence of aggregate their
participation, gratification and passion for exertion
(Gardner et al 2005, Schneider, Macey, and Barbera
(2009). The leadership influence involved pointers
on active leadership and supposed manager
provision.
Employee Engagement
Executives need to increase work engagement as
that inclines to top the work performance,
decreases work gross revenue and increases the
comfort of workers (Wright and Cropanzano, 2000;
Taris et al., 2003; Griffith, 2004; Michie and West,
2004; Macey and Schneider, 2008; Robinson et al.,
2004; Hakanen, 2008). The verb „to engage‟ takes a
several of significances, reaching from direct and
transactional (to employ somebody to ensure a
profession), to stirring and cryptic (to captivate
and attraction) (Robinson et al., 2004). According
to the Macey and Schneider (2008), assessing
Nadeem Iqbal et al.
engagement is problematic as it contains
considering compound state of mind and
excitement. Engagement is used to mention the
emotional state, enactment concept, personality, or
some arrangement of the overhead (Macey and
Schneider, 2008). Engagement can be designated
by the circumstances in which individual‟s effort
(Macey and Schneider, 2008).
Three key threads of the study are related to that
concept, once we consider of engagement such as
behaviour consequence. These contain person
extension and the interrelated concepts of active
performance (Crant, 2000), individual creativity
(Frese & Fay, 2001) and the organisational
citizenship behaviour (OCB) and associated
variations (pro-social performance, relative
performance, and managerial impulsiveness
(Organ, Podsakoff, &
MacKenzie,
2006).
Engagement in the character states to the one‟s
emotional incidence in or emphases on person
actions and which may be an imperative
component for active person act (Kahn, 1990,
1992). In that dated, employee engagement
remained also clear as the expressive and rational
commitment towards the establishment (Baumruk
2004, Richman 2006 and Shaw 2005) or the sum of
unrestricted work demonstrated by the workers in
their employment (Frank et al., 2004). Several
researches propose that the existence of complex
stages of the employee engagement meaningfully
decreases revenue objective (Maslach et al., 2001;
Saks, 2006). Schaufeli and Bakker (2010) describe
work engagement such as „the emotional state that
attends the interactive speculation of individual
vigour.
Hypotheses
There are two types of hypotheses of our study;
Included:
Hypotheses1: There is the Positive relationship
between Rewards and Employee Engagement.
Hypotheses2: There is the Positive relationship
between Leadership and Employee Engagement.
FIGURE 1 HERE
METHODOLOGY
In that paper we have firstly describe rewards and
leadership have the direct relationship with the
Research Paper
employee engagement according to the described
literature.
Research design
Numerous writers describe different problems
nearby the vital variables of the study by the
descriptive research or design. The purpose is to
collect broad and precise indication which
describes a contemporary incidence. That
descriptive research is approved in which banking
sector is occupied such as the population.
Target population
In our study target population which we
considered are the employees of the banking
sector. The illustrative residents are passing in the
table 1 to table 5.
TABLE 1 to 5 HERE
Sampling design
In the above conversation defines population as
simple random sampling remains use which
underwrites every component in population and
correspondent chance for the selection. 150
respondents were selected which characterize
population for that study. The essential evidences
for that research are become inexpensive and price
effective.
Data collection
Response is the significant evidence gathering
mechanism. The questionings remained arranged
to gather measurable evidences. Evidences must
been composed by the possessions of a distinctive
questionnaire which involves complete questions
(gender, age and level of education). Likert scale
fifth assortment from 1= strongly agree to 5=
strongly disagree in that survey is used in that
research.
Data analysis
Data analysis encompass the imperative kinds and
relationships of variables to make simpler them as
of the determine procedures of the performance
and complete magnitudes. The descriptive
research was occupied. Allowing to the
distribution of predictability evidences was
collected the assertion the principles of the
382
ISSN: 2308-1368
variables and activities in relationships of the
occurrence.
To find the validity of inspection we evaluate the
hypotheses, using the regression and correlation
analysis. To study the statistical evidences SPSS
software is used for the assessment. The features of
validity of survey are recognized above beliefs.
The survey reliability is accomplished by the
sample taking 150 respondents of employees of 12
banks.
FINDINGS
Our study has the 2 types of hypothesis and by the
SPSS findings we concluded the results as in detail
given below:
Hypotheses1:
Correlation outcomes obtainable in specify that
there is significant positive relationship in between
rewards and employee engagement (sig=.000
r=.917**). R is the multiple correlation coefficients,
among the pragmatic and anticipated beliefs of
rewards the dependent variable employee
engagement. In the range of 0 to 1 r value is
significant.
Hypotheses2:
Correlation outcomes obtainable in specify that
there is significant positive relationship in between
leadership and employee engagement (sig=.000
r=.918**). R is the multiple correlation coefficients,
among the pragmatic and anticipated beliefs
leadership of the dependent variable employee
engagement. In the range of 0 to 1 r value is
significant.
DISCUSSIONS
Engaged employees practice an extraordinary level
of the connectivity through their exertion jobs.
Employees struggle to task-related objectives that
are interweaved by their in role descriptions and
characters. Engaged employees are expected to
achieve additional role performance as they
remain capable to “free up” possessions through
achieving objectives and execution of their job
competently,
permitting
them
to
follow
accomplishments that are not portion of their
employment explanations. Engaged employees
furthermore study all characteristics of exertion to
be the portion of their province and at that time
they phase exterior of their roles towards exertion
to their objectives.
CONCLUSION
Employee
Engagement
is
an
optimistic
assertiveness detained through the employees to
the association and its principles. That is promptly
attainment status and reputation in the place of
work and effects establishments in various means.
An association would therefore identify workers,
other than several other variables, such as
influential givers to its reasonable location.
Engaged employees can support your association
to accomplish its task, complete its plan and
produce imperative corporate outcomes. Thus
employee engagement would be an unremitting
procedure of knowledge, enhancement, capacity
and accomplishment. That paper delivers several
significant suggestions for experts. It focuses on
the various factors which effect the employee
engagement. That has been witnessed the
associations with sophisticated intensities of the
employee engagement overtake their rivals in
relations of productivity. Engaged employees
provide their corporations key modest rewards—
containing sophisticated production, buyer
gratification and lesser employee gross revenue.
The affiliation among employee engagement and
the executive consequences would be solider if
improved procedures were using. Therefore,
associations want to improved comprehend how
diverse workers are exaggerated through diverse
aspects of the engagement and emphasis on
individuals in mandate to accomplish the
premeditated consequences as well as to increase
inclusive efficiency.
FUTURE RESEARCH DIRECTIONS
Therefore future research in that extent would try
to empirically exam the model established in that
paper to realize whether a reciprocally
emphasizing association occurs in among
employee engagement and rewards and
leadership. While that study emphases on the
association among rewards and leadership and
employee engagement, future research would
Nadeem Iqbal et al.
Research Paper
furthermore empirically check the effect of further
personality (e.g. locus of control, objective
orientation etc.), psychosomatic (e.g. executive
empathy)
and
situational
variables
(e.g.
managerial impartiality) on employee engagement
to accomplish a improved understanding of that
conception. Comparative research can be as well
completed by earlier models of the employee
engagement. Future research can as well deliberate
individual modifications such as variables that
influence to forecast the employee engagement.
Numerous behaviour variables, for example selfesteem, must been originate to be associated to the
model of „burnout‟; hence that might as well be
vital for the engagement, assumed that the
engagement is the optimistic reverse of the
engagement.
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it exist, and if so, how does it relate to
performance, other constructs and individual
differences?‟
[online]
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at:
http://www.lifethatworks.com/Employee-
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demands, job resources, and their relationship
with burnout and engagement: a multi-sample
study, Journal of Organisational Behaviour,
25, 293-315.
Northouse, P. G. (2004) Leadership theory and
practice (3rd ed.). Thousand Oaks, CA: Sage.
Bass,
B.
M.
(1985).
Leadership
and
performance beyond exceptions. New York:
Free Press.
Gardner, W. L., Avolio, B. J., Luthans, F., May,
D. R. and Walumbwa, F. (2005). Can You See
the Real Me? A Self-based Model of Authentic
Leader and Follower Development, Leadership
Quarterly, 16(3), 343–72.
Wildermuth, C.M.S. and Pauken, P.D. 2008. A
perfect match: decoding employee engagement.
386
ISSN: 2308-1368
APPENDIX
Table 1:
Frequency:
Statistics
GENDER
N
Valid
LOE
150
150
150
0
0
0
.50168
.68480
.69607
Missing
Std. Deviation
AGE
Table 2:
What is your gender?
GENDER
Frequency
Percent
Valid Percent
Cumulative
Percent
Valid
1.00
75
50.0
50.0
50.0
2.00
75
50.0
50.0
100.0
Total
150
100.0
100.0
Table 3:
What is your age?
AGE
Frequency
Percent
Valid Percent
Cumulative
Percent
Valid
1.00
21
14.0
14.0
14.0
2.00
71
47.3
47.3
61.3
3.00
58
38.7
38.7
100.0
Total
150
100.0
100.0
Nadeem Iqbal et al.
Research Paper
Table 4:
What is your education?
LOE
Frequency
Percent
Valid Percent
Cumulative
Percent
Valid
1.00
18
12.0
12.0
12.0
2.00
25
16.7
16.7
28.7
3.00
107
71.3
71.3
100.0
Total
150
100.0
100.0
Table 5:
Descriptive Statistics:
Descriptive Statistics
Mean
Std. Deviation
N
Rewards
1.0407
.11990
150
Leadership
1.0390
.13738
150
Engagement
1.0238
.07836
150
Table 6:
Correlations
Rewards
Rewards
Pearson Correlation
1
Leadership
Engagement
Pearson Correlation
Engagement
.892**
.917**
.000
.000
150
150
150
.892**
1
.918**
Sig. (2-tailed)
N
Leadership
Sig. (2-tailed)
.000
N
150
150
150
.917**
.918**
1
Sig. (2-tailed)
.000
.000
N
150
150
Pearson Correlation
.000
150
**. Correlation is significant at the 0.01 level (2-tailed).
388
ISSN: 2308-1368
Table 7:
Regression:
Hypotheses1: There is the Positive relationship between meaningful work and employee performance.
Model Summary
Mod
R
el
1
R
Adjusted R
Std. Error of
Square
Square
the Estimate
.917a
.840
.839
Change Statistics
R Square
F
Change
Change
.03141
.840
df1
df2
Sig. F
Change
779.116
1
148
.000
a. Predictors: (Constant), Rewards
Table 8:
ANOVAa
Model
1
Sum of Squares
df
Mean Square
Regression
.769
1
.769
Residual
.146
148
.001
Total
.915
149
F
779.116
Sig.
.000b
a. Dependent Variable: Engagement
b. Predictors: (Constant), Rewards
Table 9:
Coefficientsa
Model
Unstandardized Coefficients
Standardized
T
Sig.
Coefficients
B
1
Std. Error
(Constant)
.400
.022
Rewards
.599
.021
Beta
.917
17.803
.000
27.913
.000
Nadeem Iqbal et al.
Research Paper
Table 10:
Regression:
Hypotheses2: There is the Positive relationship between competency and employee performance.
Model Summary
Mod
R
el
1
R
Adjusted R
Std. Error of
Square
Square
the Estimate
.918a
.843
.842
Change Statistics
R Square
F
Change
Change
.03115
.843
df1
df2
Sig. F
Change
794.867
1
148
.000
a. Predictors: (Constant), Leadership
Table 11:
ANOVAa
Model
1
Sum of Squares
df
Mean Square
Regression
.771
1
.771
Residual
.144
148
.001
Total
.915
149
F
Sig.
794.867
.000b
b. Predictors: (Constant), Leadership
Table 11:
Coefficientsa
Model
Unstandardized Coefficients
Standardized
T
Sig.
Coefficients
B
1
Std. Error
(Constant)
.480
.019
Leadership
.524
.019
Beta
.918
24.636
.000
28.193
.000
390
ISSN: 2308-1368
 Research Paper
Mandatory Rotation of Auditors: The Nigerian Accountants Perception
Okaro Sunday Chukwunedu1*, Okafor Gloria Ogochukwu2, and Egbunike Chinedu
Francis3
1,2&3. Lecturer, Department of Accountancy, Nnamdi Azikiwe University, Awka, Nigeria.
The Purpose of this paper is to ascertain the perception of Accountants on the vexed issue
of mandatory rotation of auditors in Nigeria. A hand administered questionnaire survey
of 106 accounting professionals was undertaken. Descriptive statistics were used to find
out the most common reasons why respondents were agreeable or disagreed with the idea
of introduction of mandatory rotation of auditors in Nigeria. Multiple linear regression
analysis and the ANOVA test statistics were used to test the two hypotheses of study.
The questionnaire findings suggest that four factors ranked high in the respondents desire
to see mandatory rotation of auditors enthroned in Nigeria. They are that it will enhance
the independence of the auditor; give opportunity for periodic fresh look into an
institution by another auditor; help the auditor maintain his professional skepticism and
enhance the ethical behavior of auditors. The results also suggest that there is an
association between mandatory rotation of audit firms and auditor independence. Finally
the study found no significant differences in the perception of respondents about
mandatory rotation of auditors. This study has practical implication for the Nigerian
regulatory authorities especially the SEC who may want to know the reasons for the
clamour for mandatory rotation of audit firms in Nigeria and possibly extend it to all
listed companies in Nigeria. It also contributes to current global debate on mandatory
rotation of auditors from the view point of an emerging economy.
Keywords: Mandatory; Rotation; Auditors; Audit; Independence; Skepticism;
INTRODUCTION
The spate of audit failures in Nigeria and
elsewhere has elicited the search for effective ways
of enhancing audit quality. Experts believe that at
the heart of audit failures lie the issues of auditor
independence, objectivity and professional
skepticism. Many factors may tempt an auditor to
issue an unqualified report when the appropriate
report would have been a qualified one. These
factors include familiarity, threat of replacement of
an auditor and provision of book- keeping services
by the auditor (Adeyemi & Okpala, 2011).
An audit is an examination of the financial
statements of an organization by an independent
person ( the auditor) with a view to attesting that
such financial report( in his opinion) show a true
and fair view of the state of the affairs of that
enterprise for the period under review. An audit
adds value to financial statements by adding
credibility to reported information and thus
enables interested stakeholders to make economic
decisions using the information.
*Corresponding author: Okaro Sunday Chukwunedu,
Lecturers, Department of Accountancy, Nnamdi Azikiwe University, Awka, Nigeria.
391
Mandatory Rotation of Auditors
Following, disenchantment with the state of
corporate governance in Nigerian banks, the
Central Bank of Nigeria ( CBN) in 2006 introduced
a ten year tenure for audit firms that audit banks
in Nigeria (Nworji et al., 2011).
Controversy trails the issue of mandatory rotation
of auditors as a panacea for the independence of
the auditor. While some stakeholders see the merit
in mandatory rotation of auditors others ridicule
the whole idea. The problem is what is the
perception of very important stakeholders in this
matter? This question is relevant because the
success of any policy measure on such issue will
depend to a large extent on its stakeholders‟ buy
in.
Auditors, accountants and accounting
academics are very important stakeholders in this
matter. This study will therefore elicit their
perceptions on this matter.
LITERATURE REVIEW
Mandatory Rotation of Audit Firms
Mandatory rotation of auditors involves rotation
of audit firms after a fixed period of tenure
(Carrera et al., 2007).Independence is the
cornerstone of accountability. The challenge is that
corporate management hires, fires and pays both
their internal and external auditors. Auditors,
therefore, often develop harmonious relationships
with management to retain the job of the client
(Adeyemi & Okpala, 2011). Calls for a mandatory
rotation policy, therefore, traditionally emphasize
its potential to restrict managerial threats to
change “non- compliant auditors” (Craswell,
1988).
At the root of an audit engagement is the
independence
of
the
auditor.
Lack
of
independence on the part of the auditor will colour
his objectivity and cast aspersions on the
credibility of his audited financial statements. The
Company and Allied Matters Act (CAMA) of 1990
recognised this and made far- reaching
arrangements to ensure the independence of the
auditor. Such arrangements are covered in sections
357, 262 and 363 of the act.
Opinion seems to suggest that Nigerian auditors
may not be truly independent. It is posited that
some Nigerian auditors are unable to distance
Research Paper
themselves
from
overbearing
board
or
management so as not to incur their anger and put
their appointment at risk (Onosode, 2001). Another
reason adduced for apparent lack of independence
of the Nigerian auditor is that an unsatisfied board
will always find a way of effecting the removal of
the auditor at the annual general meeting
notwithstanding the provisions of CAMA 1990. It
has also been suggested that the Nigerian Auditor
is not psychologically free as a result of the fact
that the distinction between shareholders and
management has become so often blurred that the
appointment, remuneration and dismissal of
auditors is effectively decided by management,
who are the very people auditors may wish to
criticize in the course of their duties.
Those who argue for mandatory rotation of
auditors believe that the idea has a lot to commend
it. A major argument in favour of mandatory
rotation of auditors is that it ensures that
employees of the client firm and the audit firm will
not get too acquainted (Barton, 2002; Asien, 2007;
& Oscar et al., 2012). Other arguments in favour of
mandatory rotation of auditors include:
i.
ii.
iii.
iv.
v.
Economy in implementation compared
with other quality control measures.
Results in “periodic fresh look at the
institution” from an audit perspective
to the benefit of investors, regulators
and the public.
Its implementation in Nigeria may
avert a full
blown
regulatory
interference in the affairs of the
accounting profession in Nigeria.
It increases the chances that errors of a
previous firm will be detected and
corrected.
It will increase competition between
audit firms.
The major plank of the argument against
mandatory rotation of audit firms is that it will
result in increased cost to the audit firm and its
client and consequently the public. Another major
argument is that it will compromise quality if
audit firms are changed rather frequently as the
“learning effect will be lost” (Welch, 2011& Orlik,
2011). Other arguments against mandatory
rotation of auditors include:
392
ISSN: 2308-1368
i.
ii.
iii.
iv.
v.
vi.
vii.
Choice of auditors should be a function
of performance rather than on the need
to satisfy a legal requirement.
Loss of trust which rotation engenders
The field of auditors to choose from is
limited especially for the big Public
limited companies in Nigeria that
usually engage only the big four
Natural turnover of Management also
serves the purpose of rotation by
ending
lengthy
auditorclient
relationships.
Many countries all over the world are
yet to embrace the idea of mandatory
rotation of auditors
There is no guarantee that weak
auditors will still not make foolish
decisions even with mandatory rotation
of auditors in place
It may have a negative impact on
provision of non- audit services which
are often assigned as a result of the
brand name of firms involved in the
audit.
The Central Bank of Nigeria (CBN) and Mandatory
Rotation of Auditors
In 2010, the CBN reiterated its mandate that
external auditors of banks should be rotated. It
fixed the tenure of external auditors in a given
bank at a maximum period of ten years from date
of appointment after which the audit firm shall not
be reappointed in the bank until after a period of
another 10 years. In fact mandatory rotation of
auditors for Nigerian banks was introduced by
CBN for the first time in 2006 following its policy
of bank consolidation introduced in 2004, which
saw the number of banks plummeting from 89 to
24 post- consolidations. At the time, bank distress
was rife and often emasculated by fraudulent
financial reporting. Nigerian auditors of banks
were frequently indicted by the regulatory
authorities for failure to report cases of fraud in the
distressed banks (Otusanya & Lauwo, 2010). The
aim was, therefore, to further sanitise the banking
sector. It was hoped, by the regulatory authorities,
that the auditors will be encouraged by the
mandatory rotation policy to give the true reports
about banks financial position (Ujah, 2006). The
question of the effectiveness of mandatory rotation
of auditors in Nigeria has, however, remained an
empirical question apparently because of its
relative newness.
Using cross sectional data gathered from annual
reports of selected quoted companies in Nigeria,
the relationship between audit tenure and audit
quality was analysed utilizing the binary logit
model estimation technique. The finding was that
there is a negative relationship between audit
tenure and audit quality (Oscar et al. 2012).
However, a similar study on audit firm rotation
and audit independence, using paired sample ttest found no association between audit
independence and audit firm rotation (Adeyemi &
Okpala, 2011). A study on the role of mandatory
rotation of auditors in the South-South of Nigeria
found a positive association between audit quality
and mandatory rotation of auditors (Ebimobowei
& Keretu, 2011). The relationship between
mandatory rotation of auditors and audit quality
in Southern Nigeria was also examined using
binary logit model. A negative association was
established (Onwuchekwa et al. 2012). Yet another
study using cross sectional survey data found a
negative relationship with long audit tenure and
auditor independence in Nigeria (Adeyemi &
Akinniyi, 2011). A similar study did not find an
association between audit quality and mandatory
rotation of audit firms (Adeyemi et al. 2012). It is
clear that the issue of audit quality and mandatory
rotation of auditors in Nigeria is far from settled
thus further justifying this study.
RESEARCH METHOD
Sample
The results reported in this study are based on a
purposive sample of 150 accountants, auditors and
accounting
academics
in
the
South-East
Geopolitical zone of Nigeria. However, 106
responses were received comprising 27 auditors,
65 accountants and 14 accounting academics.
Respondents who had professional affiliations
with recognized accounting bodies in Nigeria were
particularly targeted. Members of the Institute of
Chartered Accountants of Nigeria (ICAN) were 68
while members of the Association of National
Chukwunedu et al.
Accountants of Nigeria (ANAN) were 19. Other
professional affiliations accounted for the
remaining 19.
Questionnaire
The questionnaire was developed with the
intention of identifying the arguments for and
against mandatory rotation of auditors given its
costs and associated benefits. The questionnaire
comprised two sections. Section A was aimed at
eliciting the demographic details of the
respondents in terms of experience, academic
qualifications and professional affiliations among
others. Section B was made up of 16 questions
arranged as per the Likert 5-point scales ranging
from strongly agree to strongly disagree. Question
17 was open ended and was meant to elicit further
information on mandatory rotation of auditors as
perceived by the stakeholders and not captured in
the questionnaire. The questions were carefully
selected to ensure that the respondents, who were
all professionals in their own right, would not
experience difficulty filling them.
Characteristics of the Respondents
The demographic section of the question was
aimed at obtaining data as to the characteristics of
the respondents. While auditors (27) accounted for
25.5% of the respondents, accountants (65)
comprised 61.3% while accounting academics (14)
were responsible for the remaining 13.25%. In
terms of experience credit, those who had less than
5 years (32) accounted for 30.2% of those polled.
Those with experience of between 5 and 10 years
(45) were 42.5% and over 10 years (29) constituted
the remaining 27.4%. All the respondents had a
first degree in addition to their professional
affiliations. While first degree holders only (68)
accounted for 64.25% of respondents, those with
additional qualification of a master‟s degree (36)
constituted 34% of respondents. Respondents with
doctoral degree additionally were mere 1.9% of the
population.
Hypotheses Development
Two hypotheses were developed for this study. A
relationship was sought in relation to mandatory
rotation and auditor independence. It was
hypothesized that “stakeholders perceive a
Research Paper
positive relationship between mandatory rotation
of auditors and auditor‟s independence”. The
following components of auditor‟s independence
which will be enhanced formed the variables in the
regression equation:
i)
ii)
iii)
iv)
v)
Maintenance of professional skepticism
A new institutional outlook to the
benefit of investors
Increased objectivity of the auditor
Enhanced ethical behavior
Reduced pressure to maintain longterm relationships.
A second hypothesis posited that “there are no
differences among stakeholder groups perception
of the effects of mandatory rotation of auditors”.
The ANOVA test statistics was used to test this
hypothesis.
RESULTS AND DISCUSSIONS
To ascertain the benefits and demerits of
Mandatory rotation of auditors in Nigeria,
respondents were enjoined to indicate on a 5-point
Likert scale the extent of their agreement or
disagreement with the16 benefits and demerits of
mandatory rotation in Nigeria listed in the
Questionnaire. Table 1 indicates that out of the 16
merits and demerits of mandatory rotation of
auditors listed for the respondents, the highest
ranked in terms of percentage of people who
strongly agree is statement number one (1) in part
B of the questionnaire which states that
“Mandatory rotation of Auditors will enhance the
independence of the Auditor” (57.5%).
Insert Table 1: Ranking Based on Strongly Agree
Perhaps, this is an indication that respondents
place high premium on the independence of the
auditor. The second most popular response is
statement no 16 that the benefits of mandatory
rotation of auditors outweigh its costs (52.8%). The
third most popular response is statement number 3
which states that mandatory rotation of auditors
will provide periodic fresh look at an institution by
another auditor to the benefit of investors (49.1%).
Statement number 2 that mandatory rotation will
help the auditor maintain his professional
skepticism while carrying out the audit was
394
ISSN: 2308-1368
ranked fourth (43.4%). Other significant responses
in that order include:
regression test was employed and the result is
shown in Table 3.
a)
There are benefits associated with
mandatory rotation of auditors (statement number
14 at 38.7%)
Test of Hypothesis One
b)
It will enhance the ethical behavior of
auditors (statement number 5 at 36.8%)
c)
Many audit failures in Nigeria stem from
long-term relationships (statement number 7 at
33%)
d)
It eases pressure on auditors to maintain
long- term relationships (statement no 6 at 32.1%)
e)
It increases objectivity (statement number 4
at 29.2%).
Interestingly, only 8.5% of respondents saw any
disadvantage in mandatory rotation agreeing that
it is anti-competition (statement number11 at
8.5%). This is followed by 5.7% which agreed that
there was no evidence that mandatory rotation
will improve audit quality (statement number 9).
Insert Table 2: The Descriptive Statistics of the
Responses
The results show that some of the reasons for
advocating mandatory rotation of auditors are
ranked the same as in Table 1. There are, however,
some differences. The ranking in statement
numbers 1, 2 and 7 are consistent in both tables.
However, some of the statements are ranked
differently. For example, statement number 14 is
ranked 3rd in Table 2 and 5th in Table 1 while
statement number 3 is ranked 2nd in table 2 and
3rd in table 1. Other differences exist.
The differences in ranking are ascribable to the
different ways of quantifying the significance of
the merits/ demerits of mandatory rotation of
auditors. It can be deduced that the four most
significant benefits of mandatory rotation of
auditors are that it will enhance the independence
of the auditor; it will give opportunity for periodic
fresh look into an institution by another auditor; it
will help the auditor maintain his professional
skepticism; it will enhance the ethical behavior of
auditors. In order to establish quantitatively the
relationship between mandatory rotation of audit
firms and the independence of the auditor a
H01: Stakeholders do not perceive a relationship
between auditor‟s independence and mandatory
rotation of auditors
Fitting the Hypothesis Regression Function:
Y (Mandatory Rotation & independence of the
auditor) = α + β X1 (Professional Skepticism) + β
X2 (Increased Objectivity) + β X3 (Enhance Ethical
Behavior) + β X4 (Reduced pressure to maintain
long-term relationships) + ei
Insert Table 3a: Model Summary
Insert Table 3b: Anova
Hypothesis One Conclusion
A multiple regression was used to assess the
relationship between Mandatory Rotation &
Independence of the auditors and factors related to
auditors‟ independence (Professional Skepticism,
Increased Objectivity, Ethical Behaviour and
Reduced pressure to maintain long-term
relationships). The ANOVA table showed a
statistically significant F-value of 7.790 (Sig .000).
Decision Rule: F Calculated >F Critical – Reject the
Null Hypothesis
7.790 > 2.45– Reject the Null Hypothesis
Therefore, the alternative hypothesis „Stakeholders
perceive a relationship between auditor‟s
independence and mandatory rotation of auditors‟
is accepted. This decision is strengthened by the
fact that the significant value of the F statistic is
less than 0.05, which invariably means that the
variation explained by the model is not due to
chance. R square the coefficient of determination is
0.236, thus approximately 23.6% of the dependent
variable is explained by the independent variables.
Test of Hypothesis Two
Table 4 shows the test of the second hypothesis
that there are no differences among stakeholder
Chukwunedu et al.
groups perception of the effects of mandatory
rotation on the independence of the auditor.
H0 2: There are no differences among stakeholder
groups perception on the effects of mandatory
rotation of auditors on the independence of the
auditor.
Insert Table 4a: Descriptives (Hypothesis 2)
Insert Table 4b: Anova
Insert Table 4c: Multiple Comparisons
Hypothesis Two Conclusion
A one-way between-groups analysis of variance
was conducted to explore the differences among
the stakeholder groups. The stakeholder groups
are as follows: Accountants, Auditors and
Accounting academics.
Decision Rule: F Calculated >F Critical – Reject the
Null Hypothesis
0.53 < 2.76 – Accept the Null Hypothesis
Therefore, the null hypothesis „there are no
differences among stakeholder groups perception
on the effects of mandatory rotation of auditors‟ is
accepted.
Question 17 required respondents to make other
comments in respect of mandatory rotation of
auditors as they deem fit. One respondent said that
“the period of 10 years required to change the
auditor of a bank is rather too long as many things
would have gone awry before the 10 years; 5 years
will be ideal” Another respondent averred that “it
will reduce the concept of “routine” assignment on
the part of the auditors/clients; new auditors will
come up with new objectives on assignments
which auditors and/or clients might have been
complacent after years of assignment on a
particular
organisaton”.
Finally,
another
respondent saw an opportunity for newly licensed
chartered accounting firms to make hay if rotation
of auditors becomes mandatory in Nigeria.
SUMMARY AND CONCLUSION
This study set out to find out the perception of
Auditors, Accountants and Accounting Academics
Research Paper
on the vexed issue of mandatory rotation of audit
firms in Nigeria. We used a questionnaire survey
to find out the opinion of 150 professional
Accountants working as Auditors, Accountants
and Accounting Academics in Nigeria. 106 usable
responses were received and used to arrive at the
result of this paper. We analysed and ranked the
results following two approaches. The first
approach ranked the importance of the 16
attributes of mandatory rotation based on the
highest percentage of people “strongly agreeing”
with each statement. We also analysed and ranked
the questionnaire after assigning values between
one and five,(1) for strongly disagree to (5)
strongly agree for questions 1-16 in part B. Both
the first and second approaches threw out four
common reasons why respondents were routing
for the introduction of mandatory rotation of
auditors in Nigeria. These, in descending order of
their significance are: Mandatory rotation of
auditors will enhance the independence of
auditors in Nigeria; benefits of mandatory rotation
of auditors outweigh its costs; it will provide
opportunity for periodic fresh look at an
institution by another auditor to the benefit of
investors; it will help auditors to maintain
professional skepticism. However, there were
some differences in the ranking by both methods
of some of the attributes of mandatory rotation of
auditors. Furthermore, the statistical tests of the
hypotheses of study reveal a positive association
between mandatory rotation of auditors and
auditor independence in Nigeria. We were also
able to establish that there were no statistical
differences in the perception of the various
stakeholders as regards mandatory rotation of
auditors in Nigeria.
Our results are consistent with extant literature on
mandatory rotation of auditors in Nigeria and
indeed globally. Empirical studies on mandatory
rotation of auditors, as noted earlier, show mixed
results. Our result is consistent with two studies,
quoted earlier in this study, on mandatory rotation
of auditors in the South-South of Nigeria and
another in Southern Nigeria.
Our result is,
however, at variance with two other Nigerian
studies, identified also in this study, which failed
to identify a relationship between mandatory
rotation
of
auditors
and
auditor
396
ISSN: 2308-1368
independence/audit quality. However, beyond
identifying a positive relationship between
mandatory rotation of auditors and the
independence of the Nigerian auditor this study
has identified significant reasons that informed the
choice of the participants. Interestingly, in the
celebrated case of Cadbury (Nig) Plc, accounting
scandal, the regulatory authorities severely
indicted the auditors of the company for, among
others, failure to demonstrate professional
skepticism in the conduct of the audit.
Our results should be interpreted in the light of the
limitations of the study. First the study is limited
to Nigeria. Second, although we offered the
respondents opportunity to add any further
thoughts, we may not be too sure what informed
their judgment when they were rating the
significance of the merits/demerits of mandatory
rotation of auditors. Despite these limitations, we
believe that this study has added to our
understanding of the factors that encourage the
demand for mandatory rotation of auditors in
Nigeria. The result should inform regulators in
deciding whether to extend mandatory rotation of
auditors beyond the banking sector in Nigeria. Our
work should also inform the current global debate
on whether mandatory rotation of audit firms will
improve audit quality from the view point of
emerging economies.
REFERENCES
Adeyemi, S.B. & Akinniyi, K.O. (2011).
Stakeholders‟
perception
of
the
independence of statutory auditors in
Nigeria. Serbian Journal of Management, 6(2),
247–267.
Adeyemi, S.B., Dabor, E.L. & Okpala, O.
(2012). Factors affecting audit quality in
Nigeria. International Journal of Business and
Management, 3(20), 198–209.
Adeyemi, S.B. & Okpala, O. (2011). The impact
of audit independence on financial
reporting: Evidence from Nigeria. Business
and Management Review, 1(4), 9–25.
Asien, A., (2007). Mandatory rotation of
external auditors. The Nigerian Accountant,
40(2), 20–23.
Barton, M. (2002). Analysis of the Mandatory
Auditor Rotation Debate. MSc Thesis.
Tennessee University.
Carrera, N. et al.( 2007). Mandatory audit firm
rotation in Spain : A policy that was never
applied.
Accounting,
Auditing
and
Accountability Journal, 20(5), 671–701.
Companies and Allied Matters Act (CAMA)
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APPENDIX
TABLES
Table 1: Ranking Based On Strongly Agree
S/N
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Mandatory Rotation of Auditors will enhance the independence of the auditor
It will help the Auditor maintain his professional Skepticism while carrying out the
Audit
It will result in a periodic fresh look at the institution being audited by another
auditor to the benefit of investors
Mandatory Rotation of auditors increases objectivity
It will enhance the ethical behavior of our auditors
It eases pressure on auditors to maintain long-term relationships
In Nigeria, many audit failures can be ascribed to long term relationships with the
client
It will result in a steep learning curve and loss of knowledge
There is no evidence that it will improve audit quality
It could in fact be detrimental to quality
It is anti-competition
It will result in increased costs to the client and/or the audit firm
It could boost the level of dependence on auditor‟s report
There are benefits associated with mandatory rotation of auditors
There are no costs associated with mandatory rotation of auditors
The benefits of mandatory rotation outweigh its costs
SA
61 (57.5%)
46 (43.4%)
1ST
4TH
52 (49.1%)
3RD
31 (29.2%)
39 (36.8%)
34 (32.1%)
35 (33.0%)
9TH
6TH
8TH
7TH
2 (1.9%)
6 (5.7%)
2 (1.9%)
9 (8.5%)
2 (1.9%)
27 (25.5%)
41 (38.7%)
12 (11.3%)
56 (52.8%)
14TH
13TH
14TH
12TH
10TH
5TH
11TH
2ND
Field Research (2013)
Table 2: The Descriptive Statistics of the Responses
Mandatory Rotation of Auditors will enhance the independence of the
auditor
It will help the Auditor maintain his professional Skepticism while
carrying out the Audit
It will result in a periodic fresh look at the institution being audited by
another auditor to the benefit of investors
It will enhance the ethical behavior of our auditors
In Nigeria, many audit failures can be ascribed to long term
relationships with the client
It is anti-competition
It could boost the level of dependence on auditor‟s report
There are no costs associated with mandatory rotation of auditors
Valid N (list wise)
N
Mean
4.4906
Std.
Deviation
.70704
MEAN
RANKING
1ST
106
106
4.3113
.70863
4TH
106
4.3868
.72468
2ND
106
106
106
106
4.1415
4.3019
3.9528
4.1038
.73600
.58830
.91944
.83870
6TH
5TH
8TH
7TH
106
106
106
106
106
106
106
106
106
106
2.4434
2.5094
2.0849
2.4057
2.3868
4.1415
4.3585
3.5660
4.3585
.91631
1.06230
.87416
1.19346
1.08295
.70964
.53787
.94636
.80698
11TH
10TH
14TH
12TH
13TH
6TH *
3RD
9TH
3RD *
Chukwunedu et al.
Research Paper
Table 3a: Model Summary
Model
R
R Square
Adjusted R Square
Std. Error of the Estimate
1
.486a
.236
.206
.63022
a. Predictors: (Constant), It eases pressure on auditors to maintain long-term relationships , It will enhance the ethical behavior
of our auditors, It will help the Auditor maintain his professional Skepticism while carrying out the Audit, Mandatory Rotation
of auditors increases objectivity
Table 3b: ANOVAb
Model
1
Sum of Squares
Df
Mean Square
F
Sig.
Regression
12.376
4
3.094
7.790
.000a
Residual
Total
40.114
52.491
101
105
.397
a. Predictors: (Constant), It eases pressure on auditors to maintain long-term relationships , It will enhance the ethical behavior
of our auditors, It will help the Auditor maintain his professional Skepticism while carrying out the Audit, Mandatory Rotation
of auditors increases objectivity
b. Dependent Variable: Mandatory Rotation of Auditors will enhance the independence of the auditor
Table 4a: Descriptive Statistics (Hypothesis 2)
95% Confidence Interval for
Mean
N
Mean
Std. Deviation Std. Error Lower Bound Upper Bound
Minimum
Maximum
Auditor
27
11.6296
1.05350
.20275
11.2129
12.0464
10.00
14.00
Accountant
65
11.5785
.63258
.07846
11.4217
11.7352
10.20
12.80
Accounting
14
11.5571
.85279
.22792
11.0648
12.0495
10.20
12.80
106
11.5887
.78064
.07582
11.4383
11.7390
10.00
14.00
Academic
Total
Table 4b: ANOVA
Sum of Squares
df
Mean Square
F
Sig.
Between Groups
.066
2
.033
.053
.948
Within Groups
63.920
103
.621
Total
63.986
105
400
ISSN: 2308-1368
Table 4c: Multiple Comparisons
95% Confidence Interval
Mean Difference
(I) Title of Job
(J) Title of Job
(I-J)
Std. Error
Sig.
Lower Bound
Upper Bound
Auditor
Accountant
.05117
.18037
.957
-.3778
.4801
Accounting Academic
.07249
.25945
.958
-.5445
.6895
Auditor
-.05117
.18037
.957
-.4801
.3778
Accounting Academic
.02132
.23211
.995
-.5307
.5733
Auditor
-.07249
.25945
.958
-.6895
.5445
Accountant
-.02132
.23211
.995
-.5733
.5307
Accountant
Accounting Academic
Chukwunedu et al.
Research Paper
Questionnaire
Mandatory Rotation of Auditors in Nigeria- The Perception of Auditors, Accountants and Accounting Academics.
Dear Respondents,
We are Accounting Academics, currently engaged in a research on the above subject matter. Following a spate of audit failures
with dire consequences for corporate survival, mandatory rotation of Auditors has taken a centre stage in public discourse
globally. In Nigeria the Central Bank (CBN) now requires mandatory rotation of bank auditors after every 10 years. The purpose
of this study is to find out the perception of stakeholders in respect of this vexed issued in order to inform policy action. We
solicit your co-operation in this regard. Your responses will be confidentially treated. Please do inform us if you wish to have a
copy of our findings. Our contact phone number is 08033803438. We thank you immensely for your anticipated co-operation.
Yours, Sincerely,
Okaro and Okafor and Egbunike
Section A
Demographic information
a)
b)
Title of Job [ Auditor] [ Accountant] [ Accounting Academic]
Number of Years experience in Present position [ less than 5 years] [ Between 5-10 years] [ Over 10 Years]
c)
d)
Academic Qualification [ Bsc] [ Masters degree] [ Phd]
Professional Affiliation [ ICAN] [ ANAN] [ Others]
Section B
Please tick (√) for your preferred Option
Strongly Agree = SA, Agree = A, Undecided = UD, Disagree = D, Strongly Disagree = SD
S/N
1
Statement
4
Mandatory Rotation of Auditors will enhance the independence of the
auditor
It will help the Auditor maintain his professional Skepticism while
carrying out the Audit
It will result in a periodic fresh look at the institution being audited by
another auditor to the benefit of investors
5
6
7
In Nigeria, many audit failures can be ascribed to long term relationships
with the client
8
9
10
It is anti- competition
11
12
13
There are costs associated with mandatory rotation of auditors
14
15.
Please add any other comments as you deem fit in respect of mandatory
rotation of auditors in Nigeria
2
3
SA
A
UD
D
SD
402
ISSN: 2308-1368
 Research Paper
Learning Organizations: A study of Learning Process of Small Firms of
Pakistan
Mian Muhammad Niaz Shakir1 and Habiba Saleem2*
1.
Lecturer at College of Commerce, GC University Faisalabad, Pakistan.
2.
MS Scholar at National University of Modern Languages Faisalabad, Pakistan.
The purpose of this study is to evaluate whether concrete learning process and practices is
implemented properly in the manufacturing sector of small firms or not. Learning process
is implemented at all levels of the firms that may be at group level or individual level or
organizational level. Through this research such variables are determined that has
influence on concrete learning process and practices. The average which is taken by the
means of the variables is considered as the score and this score is compared with the scaled
score that is given by David A. Garvin. In this study the result suggests that the learning
process and practices is implemented in the manufacturing sector of small firms but not
in a proper way. This article includes seven parts. These parts are introduction, literature
review, research methodology, variables and analysis, result interpretation, result and
discussion and conclusion.
Keywords: Learning Organization; Small Firms; Learning Environment; Pakistan;
INTRODUCTION
The “Learning Organization’ concept is new (Wells
& Schminke, 2001). A large number of firms have
implemented this concept for improving their
performance and by implementing this concept the
firms have become very successful. Charles
Darwin who is the originator of Evolution’s
Theory said that this concept is not very dominant,
nor very intense, but in this concept the reaction to
change is extremely significant. It has recognized
that the concept of learning organization has been
existing from the beginning of time, human
resources has developed by learning (Argyris &
Schon, 1978).
There are five building blocks of learning
organization that cover the concept of learning
organization. These blocks are system thinking,
personal mastery, mental model, shared vision as
well as team learning. The concept of system
thinking shows the system as a whole and all parts
of the system are observed within the system. It
means that the performance of the parts should be
evaluated as the parts contribute to the system in
spite of their distinctiveness as well as discover
prospects for the personal expansion and progress.
Personal Mastery is a concept which relates to the
consideration of individuals in circumstances they
discover by themselves. This concept also
summarizes the work of individuals on their
weaknesses in relation to increase their strengths.
Mental model shows the system of ideas that exists
in the minds of individuals these ideas are
considered as very important in the learning
process. If an individual faces a new idea that is
unknown to the individual, the individual try to
*Corresponding author: Habiba Saleem,
MS Scholar at National University of Modern Languages Faisalabad, Pakistan.
403
Learning Organizations: A study of Learning Process
learn about this new idea only if this idea match to
the network of the concepts that already presents
in the mind of the individual (Kalyar & Rafi, 2012).
According to Senge “Effective Learning” can only
be evolved when the concepts that already exist in
the mind of the individual have been broken and a
new system of concepts develops in the mind of
the individual.
Shared Vision is a concept in which ideas are
discussed. It involves a participative process. In
this concept the ideas are discussed to every
employee within the organization. In team
building it is considered that a group of members
cannot build a team until they do not discuss their
ideas and do not show their participation in the
working (Senge, 1997).
In learning the concept of generation is also
discussed which means to learn about the creation
of something new instead of learning only from
past experiences. It means that learning does not
only link to learn from past experiences but it also
focus on to create something new. There are four
processes that are involved in learning are plans,
practices, judgments and performing functions on
judgments (Gibb, 1997).
Small firms are significant group of enterprises
with numerous technical, social and economic
roles (Popescu, Chivu, Ciocarlan-Chitucea,
Curmei, & Popescu, 2010). Small firms are
considered as very important for the development
in a society. Small firms play a major role in the
national budget of the country. Small firms are
considered as the sources that increase the returns
of the population (Richman‐Hirsch, 2001). A major
portion of gross domestic product (GDP) is
provided by small firms in every country. Small
firms provide employment sources to the
population, such firms cover a large portion of
population which ranges from 55%-95% (Yamnill
& McLean, 2001).
In order to fulfill the requirements of changing in
environment there is a need that the firms should
focus on the changing conditions of the
environment. The firms should react rapidly
towards the environment changing conditions as
well as act competently instead of a situation of
doubt (Rafi, 2013). The learning can be information
based as well as action based. In action based we
Research Paper
learn from past experiences but the expression of
past experiences is not very easy. Therefore in
these days the managers pay full attention towards
the learning that is gaining from information. The
mangers of small firms give the employees such
opportunities such as training as well as resources
for attaining knowledge such resources includes
workshops, seminars and employees training
through which the learning of employees can be
increased (Richard Choueke & Armstrong, 1998).
The objective of the paper is to evaluate the level of
learning and training within the manufacturing
sector of small firms. This paper shows the
employee’s motivation through learning. This
paper evaluates whether the periodic training has
been provided to the employees when something
new has been commenced. Training has provided
to the employees when moving towards a new
position. The sharing of information outside the
organization and within the organization is
significantly important for the firms. This paper
shows that the firms test with new process of
work, collect information from competitors and
customers, analysis make to identify assumptions,
training provide to the new hired employees and
information transfer within and outside the
organizations.
The information collected through a questionnaire
from the employees of manufacturing sector of
small firms. This questionnaire consists of
questions that are relevant to experimentation of
new ways of work, information collection, training
and information sharing etc. Through this
questionnaire it is evaluated that proper training
and education is provided to new employees. The
questionnaire which is used in this research paper
is developed by David A. Garvin. This
questionnaire includes three building blocks of
learning organization. These building blocks are
supportive
learning environment, concrete
learning processes and practices and leadership
that reinforce learning (Garvin, Edmondson, &
Gino, 2008).
There are large numbers of benefits of learning for
the organizations. Learning is very important for
the growth and competition of small firms. The
employees attain information relevant to the
problems that the organization faces and spread
404
ISSN: 2308-1368
the information in the organization. Through
learning people come to know that how to develop
information, how to make this information as
informed preferences and how to make these
preferences internally committed. Through
learning the organizations make it clear that how
to compete with competitors.
LITERATURE REVIEW
In the field of management science as the concept
of learning organization is not new. The learning
organizations’ concept has not only been discussed
in the Peter Senge’s book “The Fifth Discipline”
but it also has been discussed in many other
publications in1990s. The concept of learning
organization has become an important image of
firms which consists of expertise for achieving,
increasing and releasing information through
which the firms are developed into learning
organizations. A tool was given by David A.
Garvin, in which there are three building blocks.
By using these building blocks the companies can
judge their learning level, the companies come to
know that how they can learn as well as what plan
is necessary, which plan the organization should
adapt and by which way the organizations can
follow these strategies in a suitable manner.
Through the research within the firms it has
shown that three major factors that are very
important for the learning of the firms. These
factors have been introduced by David A. Garvin
(Garvin et al., 2008).
Pedler introduced the learning organization’s
concept which is considered very important in
small firms. The concept of learning is considered
very important as through learning the attainment
of knowledge and conversion of knowledge is
made easy (Pedler, Burgoyne, & Boydell, 1991).
Significant features of connection within small
firms and higher education sector was introduced
by Field Research (RWE Choueke & Armstrong,
1992)
A realization for the substitute of business with
essential funding the change of “back ups” into the
“backing winners” (Storey, 1994) is necessarily
linked with the strengthening of maxim that the
proficiency of business is born but not made
(Jennings, Cox, & Cooper, 1994).
Stopford (2001) suggested that learning is essential
for competition in composite as well as altering
circumstances of environment. The firms that are
focused on competition entirely pay attention on
the improvement of performance. Learning due to
which the competitive strength of the firms is
increased, the rivals gain confidence and they also
show response. The firms that are engaged in
competition are entirely contributed in composite
planned relationships which depends upon what
should a firm performs in response to the rivals as
well as what rivals should perform in reaction.
This concept is also acceptable that the firms
having inadequate resources. It is necessary for the
firms that how to compete in changing conditions.
Barkema (2002) change the format of competitive
scene is known as globalization (Barnett & Hansen,
1996).
Mumford (1993) explained that the reflection and
performance are mutually complicated. The
procedure by which the management gain
knowledge and develop their effectiveness is
explained by development of management. This
concept is known as tripod’s third leg whereas
education of management and guidance of
management are considered as the enduring two
legs. The concept of organizational effectiveness is
mainly attached with purely stakeholders as well
as pay attention to shareholders contentment
(Richard Choueke & Armstrong, 1998).
Barnett and Hansen (1996) suggested that for
modernism learning is necessary, because for
success modernism is necessary. In order to attain
long term competitive edge modernism is
necessary. Many small firms find it difficult to
focus on modernism. For achievement of success
as well as competence modernism is necessary.
The firms can remove this difficulty by focusing on
modernism. Modernism is essential for the
achievement of effectiveness and efficiency
(O'Regan, Ghobadian, & Sims, 2006).
Argyris and Herbane (2005) gave the concept of
double loop learning as well as single loop
learning. The discovery and alteration of errors is
known as organizational learning. Any feature that
inhibits the learning process is known as error.
Whereas the processes of single loop learning
enable the firms to pay attention towards policies
Shakir, M.M.N. & Saleem, H.
and construct its motives successful. The learning
which is in response to crises is double loop
learning; the crises may be due to changing
environment.
RESEARCH METHODOLOGY
In this study manufacturing sector of small firms is
selected for data collection for evaluation the level
of training in manufacturing sector of small firms.
The respondents are the employees working at
lower, middle and upper level in the
manufacturing sector. As the small firms plays a
very important role in the development of country
that is why the organizations focus on providing
training to the employees. The collection of data
has been made from fifty respondents and these
respondents are working in small firms at lower,
upper and middle level. In this research the
questionnaire used for data collection is developed
by David A. Garvin. In this tool there are three
building blocks. These building blocks are
supportive learning environment, process of
learning and leadership activities. In this study
second block concrete process and practices of
learning is used. This block consists of
experimentation, information collection, analysis,
training and transfer of information. Five point
likert scales is used in this questionnaire. The
questions are close ended. In this study this
assurance has been given to the respondents that
the data collected from them has been kept in
secret. SPSS is used for numerical analysis.
Variables and Analysis
Different elements are used under the building
block of concrete learning process and practices.
Different variables are used for the data collection
of the elements of this building block. These
elements are:
Experimentation
Information Collection
Analysis
Research Paper
from competitors and customers, performance
comparison with competitors, analysis of the
attention pays to new ideas during discussion,
training provided to the new employees as well as
experienced employees, transfer of information
within and outside the organization. Calculation of
mean and standard deviation has been made. The
result of these variables shows the level of training
and information sharing in the firms. The average
of variables that lies in an element is compared to
the scaled scores given by David A. Garvin (2008).
Result Interpretation
For analysis of this study descriptive analysis is
used in which mean and standard deviation is
calculated. Descriptive analysis is shown in table 1.
This table shows the participation of each variable
in the manufacturing sector of small firms. For
evaluation of reliability Cronbach’s alpha is used,
as the value of reliability should be seven but in
some cases it may be six. The table 2 shows the
reliability test.
Element Interpretation
Concrete learning process and practice includes
five elements. All these five elements cover
different variables. Table three shows scaled scores
given by David A. Garvin and table four shows the
results for each element which is the result of
average of variables of elements.
Experimentation
The result in table 4 which is calculated from
different variables that are used for data collection
shows that the experimentation lies in first
quartile. New ways of working, new products or
services are experimented frequently. For
experimentation of new ideas different processes
are conducted. The value which is calculated is 52
which show that the experimentation lies in first
quartile. The value shows that the experimentation
has been made but some efforts are required until
now.
Education and Training
Information Collection
Information Sharing
The information collection lies in first quartile. The
information is collected on competitors, customers,
economic and social trends as well as technological
The variables which are used for data collection
are new products, new ideas, information collected
406
ISSN: 2308-1368
trends. The performance of the firms is compared
with competitors and best-in-class organizations.
In this study the value of information collection is
61. The result of information collection is
compared with scaled score given by David A.
Garvin. This value lies in first quartile which
shows that information about competitors is
collected but not properly.
Analysis
In this unit the analysis has been made on the
assumptions which are underlying during
discussion. In this unit it is tried to notice whether
frequent attention pays to the results which has
been evolved during discussion. The value of this
unit is 90 which lies in top quartile when
compared to the balanced score card given by
David A. Garvin. This value shows that the
analysis has been made during discussion.
Education and Training
Adequate training should be provided to the new
employees. The employees should have a complete
view of the organization so that the employees can
focus on the goal of the organization as a whole
not only to that part of the organization which is
belonged to them. Periodic training should be
provided to the new employees when something
new is going to be launched or before introducing
any new position in the organization. The
education can be provided academically that is
through seminars, by arranging programs that
provide education. Education and training both
are important for the organization because the
knowledge about which there is no complete know
how that how to implement in the organization is
useless. In this study the value of education and
training is 74 which lies in the second quartile
when this value is compared to the balanced score
card given by David A. Garvin. It means that the
training is provided to the employees in the small
firms.
Information Transfer
The employees should gain information from
different resources that may be within the
organization or outside the organization. The
expertise of the departments within the firms can
provide important information to the employees or
expertise can be hired outside the organization to
provide information about important issues. The
information about the new products, new ideas,
and new plans should be shared not only with the
employees but also to the suppliers, customers as
well as clients of the firms. In this unit the
information should be shared accurately as well as
quickly but on regular bases. In this study the
value of information transfer is 62 which lie in the
second quartile when compared to the balanced
scorecard given by David A. Garvin. This value
shows that the information is shared within and
outside the organization.
Result and Discussion
In this research it is noticed that the learning
process and practices is implemented in the
manufacturing sector of small firms. Learning
process is implemented in firms by using different
variables that cover different elements which are
discussed in second block. Through this study it is
noticed that all the elements are implemented in
the
organization
with
the
same
ratio.
Experimentation has been made on new ideas,
new products. Information collects on competitors,
customers,
technological
trends
and
the
performance of the firms is compared with the
competitors frequently. Analysis has been made on
assumption which are underlying during
discussion. Periodic education and training is
provided to new employees and adequate training
is provided to the experienced employees about all
the new products and new position which the firm
is going to introduce. It is also noticed that the
information is shared within the organization and
outside the organization about all important
issues. Further in this study it is noticed that the
manufacturing sector of small firms pays attention
towards the learning process but it is not according
to the level which is required by the firms. The
firms should invite ideas from the employees give
motivation to the employees that they can share
their ideas with confidence. The analysis should be
made on regular bases to notice that the attention
pays to the assumptions. Manufacturing sector of
small firms should provide training to employees
which are required on the regular basis.
CONCLUSION
This study provides a significant participation in
the literature as this study shows the results about
the learning process and practices in the
manufacturing sector of small firms. Nevertheless
it is very tough to give result about the learning
process and there is no proper score is given about
it but it has been calculated through different
elements and the value of these elements is
calculated through different variables. There are
five elements which are underlying in learning
process and practice. These five elements are
experimentation, information collection, analysis,
training and education as well as transfer of
information. The data has been collected for all
these elements through different variables from
employees of manufacturing sector to evaluate the
level of learning process in the small firms. This
study shows that continuous learning process is
required for the enhancement in performance and
making development in the firms. In this study it
is concluded that continuous efforts are required
and full attention should be paid to these efforts so
that the performance of the firms should be
increased. It is evaluated that enhancement in level
of learning is still required. This study helps the
small firms that how well the firms must
implement the learning process and what is the
level of their training that the firms should provide
through seminars and also shows that the firms
must enhance their level of learning. Different
researches can be made about learning process and
practices as this research can implement to
enhance learning process in small firms.
The findings of this research have implications for
manufacturing sector of small firms, both
generally as well as specifically with regard to
concrete learning process and practices. The
factors that are considered to be very important in
creating concrete learning process and practices in
manufacturing sector of small firms, this research
clearly shows these factors which includes
experimentation, learn not only from own
experiments but also from others, training should
be provided through seminars and so on. The
overall implication of this research is in the
manufacturing sector of small firms and it requires
that education and training is considered very
important for manufacturing sector of small firms.
The manufacturing sector of small firms should
Research Paper
provide such important sources such as seminars,
education programs through which small firms
and their networks learn that how to introduce
something new, how to compete in market. In this
way the challenge of competitiveness is very
important for the conversion of learning skills
needs of small firms into the requirements of
training for future. This study contributes towards
the enhancement of learning process, education
and training of manufacturing sector of small firms
by introducing the variables that can enhance the
learning process and practices.
REFERENCES
Argyris, C., & Herbane, B. (2005). Double loop
learning in organizations. Great Minds in
Management: The Process of Theory
Development, 13.
Argyris, C., & Schon, D. (1978). D.(1978):
Organizational learning: A theory of action
perspective. Reading.
Barnett, W. P., & Hansen, M. T. (1996). The red
queen in organizational evolution. Strategic
Management Journal, 17(S1), 139-157.
Choueke, R., & Armstrong, R. (1992).
Management
development
for
the
entrepreneur? Paper presented at the 16th
Small Business Policy and Research
Conference.
Choueke, R., & Armstrong, R. (1998). The
learning organisation in small and
medium-sized enterprises: A destination or
a journey? International Journal of
Entrepreneurial Behaviour & Research, 4(2),
129-140.
Garvin, D. A., Edmondson, A. C., & Gino, F.
(2008). Is yours a learning organization?
Harvard business review, 86(3), 109.
Gibb, A. A. (1997). Small firms' training and
competitiveness. Building upon the small
business as a learning organisation.
International Small Business Journal, 15(3),
13-29.
408
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Jennings, R., Cox, C., & Cooper, C. L. (1994).
Business
elites:
The
psychology
of
entrepreneurs and intrapreneurs: Routledge
London and New York.
Yamnill, S., & McLean, G. N. (2001). Theories
supporting transfer of training. Human
Resource Development Quarterly, 12(2), 195208.
Kalyar, M. N. & Rafi,
N. (2012).
Organizational Learning Culture: An
ingenious Device for Promoting Firm's
Innovativeness.
The Service Industries
Journal.
DOI:
10.1080/02642069.2012.716828.
O'Regan, N., Ghobadian, A., & Sims, M.
(2006). Fast tracking innovation in
manufacturing SMEs. Technovation, 26(2),
251-261.
Pedler, M., Burgoyne, J. G., & Boydell, T.
(1991). The learning company: A strategy for
sustainable
development:
McGraw-Hill
London.
Popescu, D., Chivu, I., Ciocarlan-Chitucea, A.,
Curmei, C.-V., & Popescu, D.-O. (2010).
Human Resources Development from
Small and Medium Enterprises within the
Knowledge-Based Economy. Intelligence,
27, 48.
Rafi, N. (2013). Is yours organization a
Learning One: Exploring Learning in
FMCG Sector of Pakistan. Management and
Administrative Sciences Review, 1(2), 43-53.
Richman‐Hirsch, W. L. (2001). Posttraining
interventions to enhance transfer: The
moderating effects of work environments.
Human Resource Development Quarterly,
12(2), 105-120.
Senge, P. M. (1997). The fifth discipline.
Measuring Business Excellence, 1(3), 46-51.
Storey, D. J. (1994). Understanding the small
business sector: CengageBrain. com.
Wells, D., & Schminke, M. (2001). Ethical
development and human resources
training: An integrative framework. Human
Resource Management Review, 11(1), 135-158.
Research Paper
APPENDIX A
N
New Ways of Working
Minimum
Maximum
Mean
Std. Deviation
50
14.28
100.00
53
25
50
14.28
100.00
52
26
50
14.28
100.00
51
28
50
14.28
100.00
68
24
50
14.28
100.00
50
27
50
14.28
100.00
64
26
50
14.28
100.00
60
28
50
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28
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62
21
Untried Approaches
50
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23
Performance Evaluation
50
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21
Attention
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67
25
Adequate Training
50
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100.00
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Periodic Training
50
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24
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50
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64
24
Experiments with New
Products
Formal Process for
conducting Experiments
Information Collects on
Customers
Information Collects on
Competitors
Comparison of
Performance with
Competitors
Analysis of Underlying
Assumptions During
Discussion
Identifies Assumptions
New views During
Discussion
Information Transfer to
Customers
Information Transfer to
Competitors
Valid N (list wise)
50
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Appendix B
Reliability Statistics
Cronbach's
Alpha Based on
Standardized
Cronbach's Alpha
Items
N of Items
.859
.860
16
Appendix C
Scaled Scores Given By David A. Garvin
Dimensions
Scaled Scores
Median
Third Quartile
Top Quartile
67-75
76
77-86
87-100
14-56
57-63
64
65-79
80-100
Analysis
14-35
36-49
50
51-64
65-100
Education and
38-80
81-89
90
91-95
96-100
26-68
69-79
80
81-89
90-100
Experimentation
Information
Bottom
Second
Quartile
Quartile
31-66
Collection
Training
Information Transfer
Research Paper
Appendix D
Results Shown by the Study of Manufacturing Sector of Small Firms
Dimensions
Scaled Scores
Bottom Quartile
Second Quartile
Median
Third Quartile
Top Quartile
Experimentation
52
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Information
61
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Education and
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Information
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 Research Paper
An Investigation of Costs of Financial Distress in Case of On-going
Manufacturing Firms of Pakistan
Bilal1*, Najm-Ul-Sehar 2, Javaria Khan3, and Sumaira Tufail4
1,2&4. Hailey College of Commerce, University of the Punjab, Lahore (54000), Pakistan.
3. University of Central Punjab, Lahore (54000), Pakistan.
The core objective of current study is to investigate the costs of financial distress of ongoing manufacturing sector of Pakistan. A panel of 146 manufacturing firms Pakistan are
selected for this study for the period of 2001-2011. Two most applicable panel data
techniques (fixed effects and random effects models) are utilized to investigate the costs of
financial distress and Hausman’s specification test recommended that fixed effects model
is most appropriated model in this study. The results of fixed effects model suggest that
financial distress of on-going firms of Pakistan has significant direct impact on
opportunity losses in case of Pakistan after control average collection period, total assets
growth, fixed to total assets ratio, tangibility of assets and sector distressed. The
upcoming studies must explore direct costs of financial distress and bankruptcy in case of
manufacturing as well as service sector of Pakistan.
Keywords: Financial Distress; Manufacturing Firms; Pakistan; Opportunity Losses;
INTRODUCTION
Financial distress means companies’ failure to
meet their operating as well as financial
requirements on due date or to the complete extent
these companies are facing difficulties in liquidity
and other short term obligations (Altman, 1984;
Davydenko, 2005; George & Hwang, 2007; Gordon,
1971; Pindado & Rodrigues, 2005). In literature
researches point of view towards financial distress
is that they treat financial distress as insolvency of
firm, or firms restructuring in case of any default
(Andrade & Kaplan, 1997; Wruck, 1990).
Purnanandam (2008) had suggested that the vital
factors that cause insolvency of the firm is financial
distress. Most of the researchers claimed that
financial distress inversely effect the value of the
firm (Pindado & Rodrigues, 2005; Stulz, 1990). As
financial distress has very high influence on the
performance and value of the firm, that is way
today lot of firms are incurring a lot of costs in case
of financial distress.
All over the world financial distress is view as very
costly process as it has significant impact firms’
performance while on the other hand it’s inversely
affects the firm’s capital structure. In literature
researchers categories these costs into two major
categories first one is direct cost of financial
distress in the form of bankruptcy like lawful or
organizational costs that suffer only in case of
default while the second category includes indirect
hidden costs or losses such as opportunity losses
and may be losses of productivity (Altman &
Hotchkiss, 2006).
Frist category of cost of financial distress is direct
costs are normally incur during bankruptcy either
in the process of liquidation or in case of any
*Corresponding author: Bilal,
Hailey College of Commerce, University of the Punjab, Lahore (54000), Pakistan.
413
An Investigation of Costs of Financial Distress
default made by the management of the company.
The major heads of these costs includes
remunerations or fee of legal advisors, auditors,
accountants, experts in the field of management or
administration and many others that are major
parties during liquidation or any default situation.
Although these costs are significant lower than
from indirect costs but in literature in case of these
costs firm bear losses around 3% to 25% in its
value. While Warner (1977) claimed that the costs
in case of any default are sufficiently lower than
the costs that incur in the case of bankruptcy.
Second category of costs of financial distress is
indirect costs which are not possible to measure
empirically such as opportunity costs and
productivity costs. But in literature most of the
studies had operated through different approaches
to measure these costs. The major problem during
measurement that had suffered by many
researchers is the separation between financial
distress and economic distress. Altman and
Hotchkiss (2006) claimed that bad performance of
a firm is occur due to its financial distress or due to
few economic aspects that leads the firm into
financial distress. So the performance of the firm
reveals either the financial distress losses or
economic distress losses but sometime it is the
combination of the both.
The work done on costs of financial distress is
normally done in developed countries while very
few studies had been done in developing countries
in this regard. According to best knowledge of
author current study is aims to fill this gap in
perspective of Pakistan. The main objective of this
study is to investigate indirect costs financial
distress in case of Pakistani manufacturing firms.
The remaining structure of paper focuses on the
followings; the section 2 covers literature review,
section 3 highlights the issues of data and
methodology, section 4 puts lights on results and
discussion while last section is conclusion of the
study.
LITERATURE REVIEW
In literature earlier studies had defined the
financial distress in terms of company’s inability to
pay its financial obligations at due date (Altman,
1984; Andrade & Kaplan, 1997; Wruck, 1990).
Research Paper
Andrade and Kaplan (1997) had categorized the
financial distress mainly into two kinds: first one is
firm’s inability to pay its financial obligations
when they actual date and the second category is
restructuring of firm’s capital structure in order to
avoid form default situation or bankruptcy.
Turetsky and McEwen (2001) had termed financial
distress as a multi stage process that was shared
into some continuous following stages that must
cover few specific injurious financial features.
During these unfavorable conditions businesses
shift towards following stage until touched their
completion point. They claimed that this process
begins from dividend reductions, operating losses
which leads towards negative profits then
subsequently this problem is become so large
which can harm the firms in the form of
bankruptcy or default. Purnanandam (2008) had
defined the financial distress with the help of
theoretical model in which they claimed that
financial distress is mainly a position which lies
within the solvency of the firm and insolvency of
the firm.
As described earlier direct and indirect costs or
losses of financial distress, Ang, Chua, and
McConnell (1982); Stanley and Girth (1971) had
worked on direct costs as bankruptcy of the firm
and they proved that the average costs or losses
bear by firm ranging from 7.5% to 24.9% reduction
in the value of the firm. Altman (1984) had worked
on direct cost in the form of bankruptcy and he
claimed that the average bankruptcy losses that
bear by the firm are 1.8 million and this losses are
almost 3.5% of the market value of the sampled
firms. Gilson, John, and Lang (1990) had worked
on direct losses by panel of 169 firms from 1978 to
1987as a final sample of those firms that want
restructuring the direct losses of the default firms
are almost 65% of the sampled firms book value.
All these evidence are the proof that direct losses
in case of bankruptcy and default can inversely
effects the value of the firm.
While on the other hand the indirect losses in case
of bankruptcy or default have also negative affects
the value or performance of the firm. These
indirect losses normally include the opportunity
losses and productivity losses and these losses can
results in decreasing the value or performance of
the firm (Sanz & Ayca, 2006). The first main
414
ISSN: 2308-1368
component of indirect losses is the opportunity
costs or losses and due to these costs or losses the
probability of losing customer loyalty is
established which in fact enhance the chance of
default of a particular firm as its sales or profit is
significantly reduces (Altman & Hotchkiss, 2006).
Likewise in respect of productivity losses the
George and Hwang (2007) claimed that whenever
a firm uses debt financing as their source of fund
then financial institutions can impose restrictive
regulations and these regulations can inversely
effects performance of the operations of a firm
which leads to productivity losses.
Throughout the world, researcher scholars claimed
that they were enabled in measuring empirically
the indirect losses due to their subjectivity and
complex nature (Andrade & Kaplan, 1997; Gilson
et al., 1990). Altman (1984) had worked on indirect
losses first time and he evaluated the extent of
bankruptcy losses while he also made a
comparison of tax benefits with the present value
of bankruptcy losses. He found that the ways to
measure His research provides basic information
to measure indirect costs and also proves that costs
of distress are enough significant that the indirect
costs of distress which is very useful in decision
making. Ofek (1993) had worked studied on high
leveraged firms with perspective to financial
distress and he claimed that the high leveraged
firms normally force to implement the operational
restructuring option in case of financial distress
otherwise these firms survive in business through
downsizing. Opler and Titman (1994) had also
worked on measuring the indirect losses of
distress. They distributed their work into 3 major
heads. The first main head was the constantly
reduction in the number of customers due to
higher risks of default of firm which can lower
down customers loyalty and sales volume of the
firm. They also claimed the problems of operations
can reduce customers and their loyalty as firms
unable to deliver the quality products on due
dates. The second major head was attacked of
competitors to gain the market share in case of
distress either it is financial or operational through
different pricing strategies and tactics. While last
major head was losses to the leveraged firms due
to their inefficient management which results due
to their poor performance in case of distress.
Babenko (2004) had worked on indirect costs of
distress and he claimed that default situation has
inverse impact on customer loyalty and
confidence.
Chen and Merville (1999) had investigated the
costs of distress in case of ongoing firms. At that
time that study was the only effective in terms of
measuring the losses of financial distress by
choosing the sample of all successful ongoing
firms. They debated that in the panel of ongoing
firms, the time variable also had a significant
impact on the value of the firms. The classified the
indirect losses in terms of opportunity losses to the
firms by losing their customers, key supplier,
cherished workforce and firms sacrificed
investment opportunities. They found that the
ongoing firms which had high chances of distress
would tolerate their value on average 10.3%.
Pindado and Rodrigues (2005) had worked on
panel data of 186 German firms, 1704 American
firms and 491 British firms to explored the indirect
losses of distress. They found that there is direct
relationship between the chances of firm’s
financial distress and its opportunity losses. While
George and Hwang (2007) had explored the losses
of distress with perspective of operating profit and
the returns on the stocks. They found that higher
leverage firms normally faced more losses or
negative profits as compered lower leverage firms.
The above literature shows the importance of
indirect losses of financial distress in the world.
While the current study is also wants to check the
opportunity losses faced by the ongoing
manufacturing firms of the Pakistan while keeping
in view the probability of financial distress,
DATA AND METHODOLOGY
Current study is primarily focuses on to
investigate costs of financial distress in
manufacturing sector of Pakistan. Pakistan’s
manufacturing sector is select for current study. A
random sample of 146 manufacturing firms
ongoing is picking through simple random
sampling approach for the time period of 2001 to
2011. Current study excludes the remaining
manufacturing firms as they do not have sufficient
data for analysis and also those which are default
firms. Simple random sampling approach utilize
Bilal et al.
because this approach provides equal opportunity
for selection to every firm, keep away from
sampling error and at last it facilitates in inferring
conclusion from whole population (Castillo, 2009).
So, final sample of the study includes a strongly
balanced panel data of 146 same manufacturing
firms covering from same time period from 2001 to
2011. Data of these manufacturing firms are
collected from the publications of State Bank of
Pakistan (SBP), from firm’s official websites and
from annual reports of these manufacturing firms.
As current study employing the panel data which
take contains same cross-sectional units (firms)
over a same time period (Wooldridge, 2009).
As panel data is a blend of both times series and
cross-section data. In econometrics there is lot of
techniques for conducting analysis with panel data
but the two most important and widely used
techniques are fixed effects model and random
affects model. In literature different authors
provided different justifications for adopting these
techniques. The most appropriate usage of fixed
effects model and random effects model in case of
random sample. As in current study authors have
drawn a random sample of 146 same
Manufacturing firms over the same time period of
2001-2011. Dougherty (2007) had recommended
that in case of balanced panel of random sample
one would apply both panel data approaches fixed
and random effects and then applied the Hausman
specification test in order to choose the best model
among both of them.
Fixed effects model is that panel data model in
which intercept of panel differs among the panel
while the slope coefficients are always constant.
While random effects model undertakes that a
single cross sectional unit or firm’s precise effects
are not related with explanatory variables. Both of
these models are as follows;
OLit1 = β0i + β1FDit+ β2ACPit+ β3TAGrwit +
β4STTAit + β5Tang it + β6SecDistit + uit
OLit2= β0 + β1FDit+ β2ACPit+ β3TAGrwit +
β4STTAit + β5Tangit + β6SecDistit + uit+ eit
Where;
Research Paper
OLit = Opportunity losses is measured as sector’s
sales growth minus particular firm’s growth of
firm i at time t.
FDit = Financial distress calculated through a
dummy variable and taken 1 in case firm have
negative EBT and otherwise takes 0 of firm i at
time t.
ACPit = The ratio of average age of accounts
receivables multiply by 365 to credit sales of firm i
at time t
TAGrwit = it is the ratio of total assets growth of
firm i at time t
STTAit = it is the ratio of sales to total assets of
firm i at time t
Tangit = the ratio of fixed assets to total assets of
firm i at time t
SecDistit = the sector distress measured as a
dummy variable and take it 1 if a particular
industry has negative EBIT or otherwise take 0 of
firm i at time t
β0i =
y-intercept of firm i
uit = Error Term of firm i at time tor between
firms error
eit =
Within firms error
Opportunity Losses
The opportunity losses as form of indirect costs of
distress act as a dependent variable in this study.
Pindado and Rodrigues (2005) had used the proxy
of opportunity losses as the average sales growth
of the sector minus average sales growth of a
particular firm. In this study we use this proxy for
measuring the opportunity losses which is as
follows;
Opportunity Loss = [(Sales it - Sales it-1) / Sales it 1] sector - [(Sales it - Sales it-1) / Sales it -1] firm
Financial Distress
The financial distress is act as an independent
variable in this study. In literature research
scholars has used different proxies to measure the
financial
distress. Asquith, Gertner, and
Scharfstein (1994) had used the proxy for
measuring the financial distress as any firms
whose interest coverage is lower than 0.8 for
416
ISSN: 2308-1368
current period. While DeAngelo and DeAngelo
(1990) had calculated the financial distress in terms
of losses bear by any firm in its 3 if that firm
accounts losses for three sequential years. In this
study financial distress (FD) measured as dummy
variable equals to 1 if respected firm show
negative EBT and 0 otherwise George and Hwang
(2007) had used the proxy for calculating financial
distress as a dummy variable and he taken 1 if any
particular firm suffer losses or negative Earnings
before Interest and Tax (EBIT) while he 0 if firm
has positive EBIT. Researcher adopt the proxy of
the George and Hwang (2007) to measure the
financial distress in this study.
Control Variables
To measure the exact impact of probability of
financial distress on opportunity losses in Pakistan
research include control variables. The Average
collection period, total assets growth, ratio of sales
to assets, tangibility and sector distress are the
control variables in this study. These variables
have direct and indirect relationship with
opportunity losses (Pindado & Rodrigues, 2005).
Three variables total assets growth, sales to assets
ratio and tangibility has inverse relation with
opportunity losses. While on the other hand
average collection period has direct relationship
with opportunity losses. As we earlier described
that few economic issues in external environment
may also leads to operational distress which
ultimate converts into the financial distress. To
control for such external factor researcher
introduces the sector distress as a dummy variable
and take it 1 if a particular industry has negative
EBIT or otherwise takes 0.
EMPIRICAL RESULTS AND DISCUSSION
This part of study includes the descriptive
statistics, Pearson correlation matrix and results of
models. First of all the descriptive statistics is
given in Table 1.
TABLE 1 HERE
This table contains the descriptive statistics of the
panel for all variables. Number of observation in
the panel is 186 for all variables as this data
contains a strongly balance panel of 146
manufacturing firms for 6 years from 2001 to 2011.
Average value of dependent variable opportunity
loss is -1.51%. Standard deviation which is
measure of dispersion shows that opportunity loss
of the firm in panel is deviate from its mean
around 25.93%. The least value of firm’s
opportunity loss is -1.14% while highest value of
opportunity loss of the firm in panel is 79%.
Likewise the average value, standard deviation,
least value and highest value of each independent
variable of panel is mentioned in this table.
Pearson’s correlation coefficient matrix is shown in
Table 3. Before running the panel data models it is
essential to check the correlation between
independent variables in order to confirm that
there is no multicollinearty problem is present. The
results in this table confirm that there is no chance
of multicollinearty in the models as the values of
correlation not exceeds from cut point 0.6.
TABLE 2 HERE
The next two tables depict the outcomes of both
panel data approaches. Table 3 describes the
results of fixed effects model under this model
financial distress is highly significant at 1% level of
significance while out of all control variables only
sector distress is not significant. The within R2 of
this model is 13.08%, between R2 is 0.36% while
overall R2of panel is 3.47%. Within R2 means that
independent variables explain 13.08% variations in
the opportunity loss in this panel from year to year
like 2004 to 2005. Between R2 meant that
independent variables explains the 0.36%
variations in opportunity loss from firm (crosssectional unit) to other firm. While overall R2
shows that independent variables explains 3.47%
variations in the whole panel. Model is a good fit
as F test 36.48 is significant at 1% level of
significance.
TABLE 3 HERE
Variable is significant at * 1%, ** 5%, and * **10%
level of significance (two-tailed).
Results of random effects model is provided in
table 4. Again financial distress is significant at 1%
level of significance while in control variables only
sector distressed is highly insignificant. The within
R2of this model is 7.36%, between R2 is 12.99%
while overall R2 of panel is 7.01%.
Bilal et al.
As both of the above model are significant at 1%
level of significant it is very hard to choose which
model is appropriate. To handle this problem
authors run a Hausman’s specification test in order
to decide the 1 appropriate model from two
possible options. The outcome of this table is
provided in Table 5. This outcome suggest that
most appropriate model is fixed effect model
because Chi2 value of this test 145.72 is significant
at 1% level of significance according to the criteria
of selecting a model describe earlier.
TABLE 4, 5 HERE
The outcome of fixed effects model suggest that
our independent variable financial distress is
highly significant and posive realted to
opportunity losses. Due to ever increasing
challenges of inflation, ploticial instalbility and
sever energy crisis in Pakistan, the onging
manufacturing firms of Pakistan unable to perform
effectively. Their sales growth is decresing as a
result of these challenges which leads to financial
and operating distress in Pakistan. If these
companies are unable to enhance their sales or
earnings they can bear very high costs of financial
distress in terms of opportunity losses.
CONCULSION
This study is conduct to explore the costs of
financial distress of ongoing manufacturing sector
of Pakistan. A panel of 146 manufacturing firms
Pakitan are selected for this study for the period of
2001-2011. Two most applicable panel data
teachniques (fixed effects and random effects
models) are utilized to investigate the costs of
financial distress and Hausman’s specification test
recommended that fixed effects model is most
appropriated model in this study. The results of
fixed effects model suggest that financial distress
of onging firms of Pakistan has significant direct
impact on opportunity losses in case of Pakistan
after control average collection period, total assests
growth, fised to total assets ratio, tangibility of
aessts and sector distresssed. The upcoming
studies msut explore direct costs of financial
distress and bankruptcy in case of manufacturing
as well as service sector of Pakistan.
Research Paper
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Bilal et al.
Research Paper
APPENDIX
Table 1: Descriptive Statistics
Variables
OLit
Observations
Mean
SD
Minimum
Maximum
1606
-0.0151083
0.2593276
-1.14
0.79
1606
0.3100872
0.4626731
0
1
1606
30.22592
33.80375
0
259
1606
0.1323064
0.2781118
-.69
3.28
1606
124.8714
87.18756
2.2
691
1606
0.5355434
0.2157053
.02
0.97
1606
0.5
0.5001557
0
1
FDit
ACPit
TAGrwit
STTAit
Tangit
SecDistit
Table 1: Correlation Matrix
Variables
FDit
ACPit
TAGrwit
STTAit
Tangit
FDit
1.0000
ACPit
0.0109
0.6625
-0.1293
0.0000*
-0.1933
0.0000*
-0.0656
0.0085*
-0.2302
0.0000*
-0.1030
0.0000*
1.0000
Tangit
0.2140
0.0000*
-0.2760
0.0000*
-0.1060
0.5216
-0.3537
0.0000*
1.0000
SecDistit
0.1023
0.0000*
-0.0900
0.0003*
-0.2070
0.2793
0.0232
0.3518
0.0845
0.0007*
TAGrwit
STTAit
SecDistit
1.0000
1.0000
1.0000
420
ISSN: 2308-1368
Table 3: Fixed Effects Model
Variables
FDit
ACPit
TAGrwit
STTAit
Tangit
SecDistit
C
Coefficient
Std. Error
T
P-Value
.0633788
.0160934
3.94
0.000*
.0020224
.0003731
5.42
0.000*
-.1520311
.0250025
-6.08
0.000*
-.0016913
.0001807
-9.36
0.000*
-.1322958
.075726
-1.75
0.081***
-.0108886
.0133714
-0.81
0.416
.2117113
.0562093
3.77
0.000
Notes: R-square within = 0.1308, between = 0.0036, and overall = 0.0347
F statistics = 36.48, and Prob. >F = 0.000*
Variable is significant at * 1%, ** 5%, and * **10% level of significance (two-tailed).
Table 4: Random Effects Model
Variables
FDit
ACPit
TAGrwit
STTAit
Tangit
SecDistit
C
Coefficient
Std. Err.
Z Stat.
P-Value
.1026553
.0141682
7.25
0.000*
.000582
.0002087
2.79
0.005*
-.1031832
.0230615
-4.47
0.000*
-.0002298
.0000841
-2.73
0.006*
-.1067937
.0342853
-3.11
0.002*
-.0061311
.0126467
-0.48
0.628
.0380722
.0299809
1.27
0.204
Notes: R-square within = 0.0736, between = 0.1299, and overall = 0.0701
Wald chi2= 120.46, and Prob. >chi2 = 0.000*
Variable is significant at * 1%, ** 5%, and * **10% level of significance (two-tailed).
Bilal et al.
Research Paper
Table 5: Hausman Specification Test
Variables
FDit
ACPit
TAGrwit
STTAit
Tangit
SecDistit
Fixed
Random
Difference
.0633788
.1026553
-.0392765
.0020224
.000582
.0014403
-.1520311
-.1031832
-.0488479
-.0016913
-.0002298
-.0014615
-.1322958
-.1067937
-.0255022
-.0108886
-.0061311
-.0047574
Notes: chi2 = 145.72, and Prob. >chi2 = 0.0000*
422

Research Paper The Effects of Government`s Financial Polices on

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