Untitled - European Journal of Economic and Political Studies

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European Journal of Economic and Political Studies
Vol: 8 No: 1
Summer 2015
Contents
Can Management Practices Make a Difference? Nonprofit Organization Financial
Performance during Times of Economic Stress
Qian Hu, Naim Kapucu ......................................................................................... 1
A Critical Review of Theoretical Perspectives on Emerging Economy Multinationals
Yüksel Ayden ........................................................................................................ 19
Empowerment and Trust as Mediators of the Relationship between
Transformational Leadership and Organizational Effectiveness
Agron Hoxha ......................................................................................................... 43
The ‘Common Sense’ of Austerity in Europe’s Historic Bloc: A Gramscian Analysis
Ben Luongo ........................................................................................................... 61
Islam and Foreign Policy: The Case of Qatar
Turan Kayaoğlu .................................................................................................... 93
European Journal of Economic and Political Studies 8 (2015) 1-18
Can Management Practices Make a Difference? Nonprofit
Organization Financial Performance during Times of Economic
Stress
Qian HU*, Naim KAPUCU
School of Public Administration, University of Central Florida, United States
Abstract
The economic crisis presented unprecedented challenges to nonprofit
organizations to sustain their services. In this study, we examined both financial
and management factors that influence the financial performance of nonprofit
organizations during times of economic stress. In particular, we investigated
whether strategic planning and plan implementation, revenue diversification, and
board involvement help nonprofit organizations deal with financial uncertainty
and strengthen financial performance. Despite the negative impacts that the
economic downturn had on nonprofit organizations, we found that the
implementation of strategic plans can help nonprofit organizations reduce
financial vulnerability. Our findings call attention to key management factors that
influence the financial performance of nonprofit organizations.
Key Words: Financial Performance, Strategic Planning, Plan Implementation
JEL Classification: L10, L25, L30, H12.
*
Corresponding author. Tel: +1 (407) 823 3340
E-mail addresses: [email protected] (Q. Hu), [email protected] (N. Kapucu).
Page | 1
Q. Hu & N. Kapucu / EJEPS 8 (2015) 1-18
1. Introduction
The nonprofit sector has become a crucial provider of human and social
services as well as a driving economic force in the United States. During the
economic turbulence following the global financial crisis of 2008, the nonprofit
sector faced unprecedented challenges of pursuing sustainable development. In
this study, we examined factors that influence nonprofit organizations’ financial
performance in times of economic crisis. Previous research has focused on factors
such as funding sources, revenue diversification, board size, board engagement,
organizational attributes, and environmental factors (Besel, Williams, & Klak,
2011; Bowman, 2011; Carroll & Stater, 2009; Graddy & Wang, 2009; Hodge &
Piccolo, 2005; Ritchie & Kolodinsky, 2003; Trussel, 2002; Tuckman & Chang, 1991).
To understand why nonprofit organizations performed better or worse during the
economic downturn, we not only included financial factors but also considered
the impacts of management factors, such as the use of strategic planning,
strategic plan implementation, and board commitment (Boyne & Walker, 2004;
Bryson, 2011; Moore, 2000; Mosley, Maronick, & Katz, 2012; Poister, Pitts, &
Edwards, 2010). We addressed two questions in particular: What factors influence
financial performance of nonprofit organizations during times of economic stress?
Can strategic planning and plan implementation help nonprofit organizations
tackle financial uncertainty and strengthen financial performance?
We examined the financial performance of nonprofit organizations in Central
Florida during the economic downturn starting in early 2008. Organizational
attributes, management data, and financial data were obtained from the Central
Florida Foundation (CFF). Findings from this study can inform both researchers
and nonprofit managers about how to apply strategies to enhance financial
performance in times of financial uncertainty. Unlike other studies focusing on
revenue factors, this study showed that strategic plan implementation may help
organizations perform better financially during economic crises. Our findings also
call increased attention to management practices that impact the financial
performance of nonprofit organizations.
2. Literature Review
Facing financial uncertainty, some nonprofit organizations may demonstrate
great financial sustainability, whereas others are relatively less stable financially.
This section first discusses the measures of financial performance of nonprofit
organizations and then reviews factors that influence financial performance of
nonprofit organizations, especially during times of financial stress. These key
factors include funding sources and revenue diversification, board size and board
Page | 2
involvement, strategic planning and implementation, organization size, and
environmental factors.
2.1. Nonprofit Organization Financial Performance
Many means are available for measuring the financial performance of
nonprofit organizations are numerous, but few are widely agreed on (Berman,
1998; Martin & Kettner, 2010; Ritchie & Kolodinsky, 2003). Tuckman and Chang
(1991) called for research studying “financial vulnerability” of nonprofits, defining
nonprofits as financially vulnerable if they were likely to reduce service provisions
in the face of financial stress. They further proposed four operational criteria to
evaluate financial vulnerability: inadequate equity balances, revenue
concentration, low administrative costs, and low or negative operating margins
(pp.451-453). Greenlee and Trussel (2000) added a time dimension to the
definition of financial vulnerability and considered nonprofits organizations to be
financially vulnerable if they reduced program expenditures for three consecutive
years. Trussel (2002) further redefined financial vulnerability and added that
organizations showing a 20% decrease in fund balances over three years are to be
considered financial vulnerable, according to such indicators as debt ratio,
revenue concentration, and surplus margin. In another study, Trussel, Greenlee,
and Brady (2002) proposed a financial vulnerability index based on a regression
analysis of five indicators: debt ratio, revenue concentration, surplus margin,
administrative cost ratio, and size (natural log of total assets). A financial
vulnerability index score higher than 0.2 demonstrates the financial vulnerability
of the nonprofit organization (Trussel et al., 2002). In empirical studies of the
financial performance of nonprofits, the financial vulnerability index proposed by
Trussel et al. has been frequently applied, tested, and revised (e.g., Hodge &
Piccolo, 2005).
Different from the index approach, other scholars broke down financial
performance measures into different subcategories. For instance, Ritchie and
Kolodinsky (2003) interviewed key informants of university foundations and
conducted factor analysis of the six financial measures from the IRS form 990.
They identified three performance categories: fund-raising efficiency, measured
by the ratio of direct public support to fund-raising expenses and the ratio of total
revenue to fund-raising expenses; public support, measured by total contributions
divided by total revenue and direct public support divided by total assets; and
fiscal performance, measured by the ratio of total revenue to total expenses and
the ratio of total contributions to total expenses. Their approach recommends
using multiple measures to evaluate various aspects of nonprofit financial
performance.
Page | 3
Bowman (2011) critiqued the static view of the financial status of nonprofit
organizations and maintained that a time dimension needs to be added to the
model measuring financial capacity and financial sustainability. He argued that
nonprofits have both the short-term goal of building resilience toward
environmental uncertainty and the long-term objective of sustaining or expanding
services. Hence, he proposed two sets of measures to evaluate financial capacity
and financial sustainability according to those two objectives. With the long-term
goal of sustaining or expanding services, financial capacity is measured by equity
ratio, and financial sustainability is measured by return on assets. With the shortterm goal of developing resilience toward financial stress, financial capacity can
be measured by “Months of Spending (MS) before running out of expendable
resources,” and financial sustainability can be measured by “the change in the
numerator of Months of Spending divided by spending on operations” (p.43).
2.2. Funding Source and Revenue Diversification
Funding sources and diversification of fund sources can influence nonprofit
organizations’ financial performance. Heavy reliance on government revenue can
have adverse effects on service delivery strategies (Besel et al., 2011). Nonprofit
organizations that rely mostly on such contributions may be at risk of resource
dependency during times of economic stress (Carroll & Stater, 2009; Herman,
Head, Jackson, & Fogarty, 2004). Hodge and Piccolo (2005) found that privately
funded nonprofit agencies were less susceptible to economic shock than
nonprofit organizations funded by government or other commercial agencies.
Many nonprofits may not be able to dramatically change the primary source
of their revenues; however, they may be able to diversify their portfolios.
Greenlee (2002) noted that revenue diversification can reduce net asset loss as
well as the likelihood of cutting off programs or services. On the contrary, revenue
concentration can increase the risk of revenue decline (Herman et al., 2004;
Keating et al., 2005). By diversifying revenue through “equalizing reliance on
earned income, investments, and contributions,” nonprofit organizations can
reduce their revenue volatility (Carroll & Stater, 2009, p. 962). By examining
longitudinal data on public charities between 1991 and 2003, Carroll and Stater
(2008) found that revenue diversification is an effective strategy to help
organizations obtain stable revenues and decrease revenue volatility. This
strategy is especially important when nonprofits face financial uncertainty. To
measure the level of revenue diversification of nonprofit organizations, we have
adopted the widely used Hirscheman-Herfindal index (Carroll & Stater, 2009). The
sources of revenue are grouped into four categories: (1) government grants; (2)
donations that include direct and indirect public support and private gifts, as well
Page | 4
as gross income from special events; (3) earned income, including program
revenue, dues, and other earned income; and (4) investment income, consisting
of interest, securities, and other investment income (Calabrese, 2013; Yan,
Denison & Butler, 2009). Ri represents the proportion of each category of revenue
to the total revenue. This revenue diversification index measures the extent to
which nonprofit revenues are evenly distributed among the four categories of
revenue sources. The higher the value, the greater level of revenue diversification
the nonprofit organization has. Assuming that diverse revenue sources can help
nonprofit organizations reduce financial volatility, we hypothesized that revenue
diversification can help improve the financial performance of nonprofits.
Revenue Diversification Index =
1−
4
𝑅2
𝑖=1 𝑖
0.75
Hypothesis 1: Revenue diversification can improve the financial performance
of nonprofits during times of economic stress.
2.3. Board Size and Involvement
Managing the financial health of nonprofits is a major part of the board’s
formal responsibilities (Besel et al., 2011; Bradshaw, Murray, & Wolpin, 1992;
Zimmerman & Stevens, 2008). Board members can play a prominent role in fund
development due to their strong connections with external environments (Brown
& Guo, 2010). Board commitment and involvement, board composition and
structure, and relationships between executives and boards may influence the
strategies that nonprofit organizations use to deal with financial uncertainty and
their financial performance. Strong, supportive relationships between the
executive and the board tend to produce more effective organizations (Balser &
McClusky, 2005). Committed board members were reported to be more involved
in the organization and were perceived to be engaged and were valued by the
executive director of nonprofit organizations (Preston & Brown, 2004). The
increased use of board involvement techniques has been shown to produce lower
levels of financial vulnerability (Hodge & Piccolo, 2005). Board commitment can
be measured by board meeting attendance at required meetings, participation
(e.g., length of service on the board, service on committees, hours donated to the
organization), and financial donations (Preston & Brown, 2004). Hence, we
hypothesize that there is a positive relationship between board involvement and
the financial performance of nonprofit organizations.
Hypothesis 2: Board involvement positively correlates with the financial
performance of nonprofits during times of economic stress.
Page | 5
2.4. Strategic Planning and Plan Implementation
Strategic planning can influence the financial performance and vulnerability
of nonprofits. According to Bryson (2011), strategic planning is “a deliberative,
disciplined approach to producing fundamental decisions and actions that shape
and guide what an organization (or other entity) is, what it does, and why” (pp.78). Strategic planning has potential for advancing both social and financial
performance (Siciliano, 2006), and they allow organizations to take proactive
measures, explore collaboration opportunities for joint programs, and carry out
new programs (Mosley et al., 2012).
Many nonprofits adopt strategic planning in their management practices to
increase potential funding opportunities and to satisfy the expectations of
potential funders (Crittenden & Crittenden, 2000). Strategic planning may help
nonprofits think strategically, diversify revenue sources, and improve decision
making and performance (Bryson & Roering, 1988; Jimenez, 2013; McHatton,
Bradshaw, Gallagher, & Reeves, 2011; Stone, Bigelow, & Crittenden, 1999). Facing
financial uncertainty, nonprofit organizations can use adaptive or reactive
strategies such as adding new programs, cutting off existing programs or staff,
building or expanding a joint program through collaboration, increasing earned
income, or starting or increasing involvement in advocacy (Mosley et al., 2012).
Yet, the relationship between strategic planning and financial performance of
nonprofit organizations is not always straightforward, and research examining the
impact of strategic planning on organizational performance remains limited and
inconclusive (Poister, Pitts, & Edwards, 2010). Nonprofit organizations often
utilize formal strategic planning because they are required by funders to do so
(Stone et al., 1999). Poister and Streib (2005) found that while nearly 44% of the
municipal governments that they surveyed had adopted strategic planning, only
33% of the sample cities had linked their budgets with strategic goals, and only
22% had utilized performance measurement. In a study on the impact of strategic
planning on city fiscal performance, Jimenez (2013) did not find significantly
positive impacts of strategic planning on city fiscal status. He further noted that
some cities may adopt strategic planning as a symbolic action to satisfy key
stakeholders. To make strategic planning more useful, he suggested that
performance management systems, clear goals and objectives, and guidance are
important for implementing strategic plans. Having a strategic plan does not
necessarily lead to improved financial performance of nonprofits; it is the actual
plan implementation that may contribute to healthier financial conditions.
Hypothesis 3: Plan implementation may help reduce the financial vulnerability
of nonprofits.
Page | 6
2.5. Dependence on External Sources and Organizational Size
The economic crisis of 2008 has exerted great pressure on the growth of
nonprofit organizations (Besel et al., 2011; Mosley et al., 2012). Heavy reliance on
government grants or external donations may make nonprofit organizations more
vulnerable to external financial uncertainty (Besel et al., 2011). In addition, the
size of a nonprofit may affect its financial performance and vulnerability, as
shown in Figure 1. A study by Mosley et al. (2012) examined structural,
managerial, and financial characteristics to see how they were related to adaptive
tactics used by nonprofit organizations faced with financial uncertainty. Small
nonprofit organizations are limited in how they can proactively respond to
financial hardship (Greenlee & Trussel, 2000; Mosley et al., 2012; Siciliano, 2006).
Hence, we developed the following two hypotheses.
Hypothesis 4: External financial conditions since 2008 have had a negative
impact on the financial performance of nonprofits.
Hypothesis 5: Large organizations are more likely to have better financial
performance during times of economic uncertainty.
Economic Crisis
Financial Status
Board:
Size
Involvement
Strategic
Planning
&
Plan
Implementation
Financial
Performance
Other Factors:
Organization Size
Figure 1. Factors Impacting Nonprofit Financial Performance during Times of
Economic Stress
Page | 7
3. Method
Data for this study were provided by the Central Florida Foundation (CFF).
The CFF, established in 1994, is a nonprofit foundation that manages and invests
“nearly 400 charitable funds established by generous individuals, families and
corporations” to serve the financial needs of nonprofit organizations in Central
Florida (CFF, 2014). To better understand community issues and to utilize and
allocate resources, the CFF built a knowledge database to collect information
about nonprofit organizations located in Central Florida. Compared with other
large national databases, the CFF knowledge database has its own strengths: The
knowledge database has collected rich data about local nonprofits and has
updated the data regularly. It includes not only organizational financial data and
organizational attributes data, such as age and service area, but also management
and governance data. Furthermore, the data, especially financial data, have been
carefully reviewed and validated by the professional staff at CFF. Hence, the
accuracy and validity of data have been improved than the self-reported survey
data. This is different from the National Center for Charitable Statistics data that
were collected from the self-reported Internal Revenue Service Form 990 and are
mainly financial data (Lampkin & Boris, 2002).
To understand the financial performance of nonprofits during the economic
downturn, we compiled the financial data of nonprofits in Central Florida between
fiscal year 2008 and fiscal year 2011. Due to the difficulty of collecting financial
data from nonprofit organizations—especially from small nonprofit
organizations—these data are the most recent financial data available for analysis
after the 2008 financial crisis. Management data, organizational attributes, board
size, and board involvement data for 2010 were merged with the financial data.
The merged dataset included 194 nonprofit organizations. However, because data
for certain variables were missing across all 194 organizations, we decided to
include 110 nonprofit organizations for the following statistical analysis. As shown
in Table 1, the sample includes a wide range of nonprofit organizations with
varying sizes, funding structures, and budgets.
Page | 8
Table 1. Descriptive Statistics of Organizations
Funding Structure (2010)
Government Grants
Private Contributions and Donations
Program Revenue
Investment Income
Total Expenses
$0 - $100,000
$100,001 – $500,000
$500,001 – $1,000,000
$1,000,001 - $5,000,000
Over $5,000,000
Board Size (number of members)
5-10
11-20
21-30
Over 30
Staff size (# of full-time employees)
1-5
6-15
16-25
26-50
Over 50
Valid N (Listwise) = 110
Average percentage of total revenue
17.1 %
55.1 %
28.9 %
1.6 %
Number (Percentage)
33 (17.6 %)
38 (20.2 %)
26 (13.8 %)
55 (29.3 %)
37 (19.1 %)
Number (Percentage)
48 (35 %)
56 (40.9 %)
15 (10.9 %)
18 (13.1 %)
Number (Percentage)
46 (41.4 %)
24 (21.6 %)
13 (11.7 %)
14 (12.6 %)
14 (12.6 %)
3.1. Key Variables
In this study, we measured the key dependent variable—the financial
performance of nonprofits—by calculating the change from 2010 to 2011 in the
deficit-to-expenditure ratio. Nonprofit organizations in Central Florida
experienced the greatest decreases in total revenues, total assets, and total
expenditures between the fiscal years 2010 and 2011. Examining the financial
performance of nonprofit organizations within these two years captured a
snapshot of how nonprofit organizations reacted to the external financial stress.
Moreover, using the ratio difference helped reduce the potential “serial
correlation” issue. A positive ratio change indicated that the nonprofit
organization under consideration had more deficits in relation to its expenditures.
In addition, we calculated other financial health indices for each organization,
including debt ratio, revenue diversification, administration cost to total revenue
Page | 9
ratio, and margin, as suggested by previous research (Trussel, 2002). In addition,
the change in the expenditure-to-revenue ratio from 2008 to 2010 was used as a
measure of the past fiscal conditions (Jimenez, 2013). The change in the
nonprofits’ dependence on government grants and donations from 2008 and
2010 were also included to measure their revenue source change. Total assets in
2008 and 2010 was used as a measure of organization size.
One of the key independent variables is the presence of a formal strategic
plan. Nonprofit organizations in Central Florida were expected to conduct
strategic planning by potential funders, including the Central Florida Foundation.
Another related variable was the plan implementation index, which measures
whether performance evaluation was part of the management practice and
whether supported plans were developed, such as succession plans, fund-raising
plans, and policy procedure plans. Board size was measured by the total number
of board members, board engagement was measured by the meeting attendance
rate, and board commitment was measured by the percentage of board members
who made monetary contributions to the organization.
3.2. Analysis and Two-Stage Least Squares Models
Plan implementation index variables may cause endogenous issues as the
plan implementation might also be influenced by fiscal conditions of nonprofits.
We applied the two-stage least squares model is to analyze the impact of
management and financial factors on the financial performance of nonprofit
organizations. In the first stage, the 2010 plan implementation index was the
dependent variable; the explanatory variables included the organizations’
previous financial conditions, the board variables, and the presence of formal
strategic plans.In the second stage, the predicted values of the plan
implementation index were used as an instrument to replace the original plan
implement index to calculate the exogenous effects of plan implementation on
the financial performance of nonprofits.
Stage 1 model. Plan implementation index2010 = a + b1 Total assets2008 (log) +
b2 (Change in expenditure revenue ratio2008-2010) + b3 Formal strategic plan2010 + b4
Board size + b5 Board meeting attendance rate + b6 Board contribution rate + b7
Dependence on government grants + b8 Dependence on donations + b9 (Change in
dependence on government grants2008-2010) + b10(Change in dependence on
donations2008-2010).
Stage 2 model. Change in deficit to expenditure ratio2010-2011 = a + b1 Formal
strategic plan2010 + b2 Plan implementation Index (Predicted from model 1) + b3
Board meeting attendance rate + b4 Total assets2010 (log) + b5 Administrative cost
Page | 10
to total revenue ratio2010 + b6 (Change in the expenditure to revenue ratio2008-2010)
+ b7 (Change in dependence on government grants2008-2010) + b8 (Change in
dependence on donations2008-2010) + b9 Revenue Diversification2010.
4. Findings and Discussion
In the following section, we first present descriptive attributes of the local
nonprofit organizations in Central Florida. As Table 2 depicts, approximately half
of the organizations in the sample had strategic plans, nearly 40% of the
nonprofits in the sample were developing strategic plans, and almost 10% of the
nonprofits did not have strategic plans. The average value for the plan
implementation index was 2.68. The majority of board members made monetary
contributions to the organization. The nonprofit has an average number of 17
board members. The meeting attendance rate is nearly 72 percent.
Table 2. Descriptive Statistics of Key Variables
Financial Measures
Deficit to total expenditure ratio in 2011
Deficit to total expenditure ration in 2010
Deficit to total expenditure ratio change from 2010
to 2011
Program expenditure to total revenue ratio
Expenditure to revenue ratio change from 2008 to
2010
Debt ratio
Revenue Diversification
Margin
Administrative Costs Ratio
Management Practice
Formal Strategic Plan
Yes (%)
No (%)
Plan Implementation Index
Board Involvement (% of meeting attendance)
Board Size (number of members)
Board Commitment (% of contributions)
Valid N (Listwise) = 110
Mean
-0.153
-0.070
0.069
S.D.
0.204
0.331
0.389
0.801
-0.031
0.282
0.311
0.066
0.339
0.012
0.153
0.155
0.341
0.288
0.204
56 (50.9%)
54 (49.1%)
2.68
71.6%
17.2
75.6%
1.34
12.86%
15.4
33.9%
Compared with measures from 2008, when the financial crisis occurred, total
revenues, total expenditures and total assets, program expenditures, and fundraising expenditures have decreased over the past four years (see Figure 2), with
the fiscal year 2010-2011 witnessing the greatest decreases across these
measures of financial health.
Page | 11
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
2008
2009
2010
2011
Total Revenue
Total Expenditure
Total Assets
Total Liabilities
Program Expenditure
Fundraising Expenditure
Figure 2. Key Variables between 2008-2011
* All numbers are in millions.
As Table 3 shows, we did not find statistically significant support for the
assumed negative relationships between nonprofits’ revenue diversification index
and deficit ratio change and neither for the negative correlation between
nonprofit organizations’ board involvement and deficit ratio change from 2010 to
2011. Therefore, hypotheses 1 and 2 were not supported by this study. The
coefficients were not statistically significant, and the signs were different from the
expected negative signs. The relationship between revenue diversification and the
financial performance of nonprofits deserves more research. Recent research on
this topic suggests that researchers need to delve into the “compositional change
in the portfolio” when examining the impact of revenue diversification on financial
performance (Mayer et al., 2014, p.374). Or, this positive relationship could have
resulted from the proactive measures taken by large risk-taking organizations with
active and dedicated board members. Our findings could also have been
influenced by the limitation of the dependent variable, which is the deficit ratio
change within two years. The deficit ratio change would be a more robust
measure if we could have collected data representing a longer period of time.
Page | 12
Table 3. Two staged Least Square Model
Variables
Management Variables
Strategic plan (Yes or no)
Plan implementation Index
Board meeting attendance rate
Financial Variables
Total assets (log) in 2010
Administrative cost to total revenue ratio
2008 – 2010 change in the expenditure to
revenue ratio
2008 – 2010 change in dependence on
government grants
2008 – 2010 change in dependence on
donations
Revenue Diversification
N
R2
Adjusted R2
Coef. (B)
St. Error
0.454
-0.347*
0.002
0.258
0.204
0.004
0.080
-0.067
0.552**
0.056
0.727
0.191
-0.357
0.362
-0.042
0.369
0.219
89
0.193
0.102
0.329
- We conducted Durbin-Wu-Hausman (DWH) test to examine whether the assumed endogenous
regressor in the model—plan implementation index—is in fact endogenous. The Durbin-WuHausman chi-square (1) is 8.17 and is statistically significant with a p value smaller than .05.
Therefore, we reject the null hypothesis that the variable of plan implementation index is exogenous
and hold the assumption of endogeneity.
- Significance at *: 5%, **: 1%.
Hypothesis 3, however, was supported. As shown in Table 3, the plan
implementation index was found to be negatively correlated with the deficit ratio
change. The higher the implementation index, the smaller the deficit ratio
increase, indicating that plan implementation may help nonprofit organizations
envision potential opportunities and overcome financial uncertainty by
developing and implementing various strategies to sustain or even expand
existing programs. Hence, plan implementation may contribute to the overall
financial health of nonprofits. Having a strategic plan does not necessarily lead to
better financial performance, as many nonprofits decide to formulate a strategic
plan simply because of external pressure from donors or other stakeholders.
Once they have developed their strategic plans, they may not implement them in
their management practice. It is important, therefore, to evaluate whether
nonprofit organizations integrate strategic thinking and strategic planning in their
management systems. As previous research (LeRoux & Wright, 2010) suggested,
Page | 13
the use of specific measures may improve the implementation of strategies in
nonprofit organizations.
Hypothesis 4 was also supported, suggesting that the economic crisis has
quickly worsened the financial performance of nonprofits. There is a strong
positive relationship between the expenditure-to-revenue ratio change from 2008
to 2010 and the deficit ratio change from 2010 to 2011. Previous years’ higher
expenditure ratios will further contribute to the deficit ratio accumulatively in the
following years. Hypothesis 5 was not supported, which suggests a negative
relationship between total assets and the deficit ratio change. In fact, large
organizations with higher total assets seemed to have higher deficit ratio changes
between 2010 and 2011. The sign between organizational size (measured by total
assets) and deficit ratio change is also positive. Organizations that have large
assets may decide to take more proactive measures to ensure regular operation
despite economic uncertainty.
5. Conclusion
In this study, we examined the financial status of nonprofit organizations in
Central Florida and the factors that can influence the financial performance of
nonprofit organizations in general. Besides the financial factors that have been
extensively examined in existing literature, this study focused on the impact of
management practices on financial performance, including strategic plans, plan
implementation, and board involvement. This study contributes to exiting
research by calling increased scholarly attention to management practices when
examining the financial performance of nonprofits.
The financial crisis of 2008 worsened nonprofit organizations’ financial
conditions. On average, nonprofit organizations in Central Florida have decreased
their program and fund-raising expenditures. Total revenue and total assets have
also decreased. However, many nonprofit organizations have stayed in a
financially sustainable state; so, more attention ought to be directed to finding
out why some organizations can still grow in spite of financial stress.
We found that plan implementation, not necessarily the plan itself, can have
a positive influence on the financial performance of nonprofit organizations.
Many nonprofit organizations may have strategic plans because they need to
meet the requirements of existing stakeholders or potential funders. Having a
strategic plan, however, does not automatically translate into better financial
performance. Both the nonprofit managers and the funding organizations need to
track carefully how the plan has been used in their management practices and
whether strategic planning has been closely linked with other management areas,
Page | 14
such as budgeting and performance management. We did not find revenue
diversification to be a significant predictor of the financial performance of
nonprofit organizations. Facing an economic downturn, organizations that are
more confident in their revenue sources may take active measures to continue
providing their services, and large organizations are more likely to spend more
money to sustain existing programs.
This study has some limitations.Here, we examined the financial performance
of nonprofit organizations in a local region in Florida, but a larger-scale study may
help improve the generalizability of the research findings. Moreover, collecting
data on the deficit ratio change for a longer period of time may help improve the
robustness of the measure. Future research may consider including qualitative
interviews of select nonprofit organizations in the region to further delve into
their management practices. In-depth interviews can allow researchers to
understand what factors differentiate high-performing nonprofits from lowperforming nonprofits not only in their financial management but also in many
other management areas.
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A Critical Review of Theoretical Perspectives on Emerging
Economy Multinationals
Yüksel AYDEN
*
Department of Management, Fatih University, Turkey
Abstract
This study provides a critical review of the mainstream (i.e. internationalization
process model and eclectic paradigm) and emergent perspectives (i.e. springboard
perspective and linkage, leverage, and learning model) on internationalization
process of emerging economy multinational enterprises (EE MNEs). It discusses the
theoretical knowledge on multinational enterprise (MNE) behavior by providing
the contributions of each perspective to the literature, their explanations about EE
MNEs’ international expansion, as well as the extensions, modifications, and
criticism made on them. The comparative discussion of the extant literature
demonstrates that each theoretical perspective explains a particular trajectory of
MNE internationalization; therefore, an integration of the current perspectives on
MNE internationalization is needed.
Key Words: Emerging Economy Multinationals, Internationalization, Outward
Foreign Direct Investment
JEL Classification: F23, M16, L10.
*
Tel: +90 (212) 866 3300/5052
E-mail address: [email protected]
Note: This paper is generated from the author's Ph.D. dissertation submitted to Graduate
School of Social Sciences at Fatih University.
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Y. Ayden / EJEPS 8 (2015) 19-42
1. Introduction
Internationalization of a firm has been explained in international business (IB)
literature from different perspectives for several decades. A number of theories
and models were developed by IB scholars that aim to explain multinational
enterprise (MNE) internationalization. Almost all of these theoretical
contributions were made by studying on developed economy multinational
enterprise (DE MNE) as a research phenomenon (Buckley et al., 2007; Ramamurti,
2012). A focus on DE MNEs was reasonable at the previous decades since the
global foreign direct investment (FDI) movements were mostly conducted by the
MNEs originated from triad economies (i.e. USA, EU and Japan). However, as the
percentage of emerging economies’ outward FDI (OFDI) within the overall global
investments enhanced (UNCTAD, 2014), multinationals originated from these
economies have attracted the attention of scholars and various research
questions have arisen such as “whether these firms represent a new type of MNE
or not?” or “whether existing IB theories are adequate to explain their behaviors
or not?” (Mathews, 2006; Narula, 2006; Ramamurti, 2012; Jormanainen and
Koveshnikov, 2012). In IB literature, there exists a debate around these questions
and a considerable amount of research has been conducted by the scholars
regarding the emerging economy multinational enterprise (EE MNE) behaviors
such as determinants of their OFDI (Yamakawa, Peng, and Deeds, 2008; Buckley et
al., 2007), their internationalization strategies (Tsai and Eisingerich 2010), location
choices (Filatotchev et al., 2007; Makino, Lau, and Yeh 2002), and entry modes
(Demirbag, Tatoglu, and Glaister, 2009). In general, there are three different
approaches in IB field to the current debate about the EE MNEs’ global expansion
(Ramamurti, 2012; Jormanainen and Koveshnikov, 2012).
First, some scholars argue that EE MNEs are a new type of MNE in terms of
their organizational forms and strategies (Mathews, 2006). According to this view,
existing theories are not adequate to explain EE MNE internationalization since
they were developed by studying DE MNEs. These scholars suggest developing
new theories by specifically focusing on EE MNEs and the environment from
which they have been emerging (Ramamurti, 2012; Mathews, 2006; Luo and
Tung, 2007; Luo and Rui, 2009). Contrary to the first view, some scholars address
that existing IB theories are quite adequate to explain international expansion of
EE MNEs (Dunning, 2006; Ramamurti, 2012; Narula, 2006). Another third group of
scholars proposes to extend and refine the previously developed theories (Meyer
and Thaijongrak, 2012; Jormanainen and Koveshnikov, 2012). These scholars
agree that existing IB theories were developed based on the research on DE
MNEs, and IB field is heavily influenced by western experience. However, they
assert that research on internationalization of these DE MNEs began by the 1970s
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Y. Ayden / EJEPS 8 (2015) 19-42
when many of the DE MNEs had already internationalized to some degree. In
other words, earlier international investments of DE MNEs had been made for
several decades when the scholars began to examine their internationalization
processes and FDIs. Thus, there is a lack of explanation about the earlier stages of
MNE internationalization. In this context, EE MNEs may provide a fruitful research
laboratory for the scholars to complete this gap by drawing a complete picture of
the internationalization of the firm (Ramamurti, 2012).
This paper attempts to review the mainstream and emergent theoretical
perspectives on EE MNE internationalization in order to discover theoretical
inconsistencies about firm internationalization and to shed some light on future
research for MNE behavior. In IB field, Dunning’s eclectic paradigm (Narula, 2010;
Cantwell and Narula, 2001; Narula, 2006; Erdener and Shapiro, 2005; Dunning,
1980, 1988, 2000, 2001) and internationalization process model (or Uppsala
model) (Johanson and Vahlne, 1977; Meyer and Thaijongrak, 2012; Johanson and
Vahlne, 2009; Forsgren, 2002; Clark, Pugh, and Mallory, 1997) are two
fundamental frameworks that are used to explain MNE internationalization. There
are also more recent contributions particularly focusing on EE MNEs, which are
mostly cited and discussed in IB field. This work includes two of these emergent
perspectives that are springboard perspective (Luo and Tung, 2007) and linkage,
leverage, and learning (LLL) model (Mathews, 2006) as additional research lenses
to examine EE MNE internationalization. The rationale behind this selection is that
among others springboard perspective and LLL model address the novelty of EE
MNEs and their arguments are mostly commented and cited in the recent studies
on EE MNEs (Dunning, 2006; Erdilek, 2008; Jormanainen & Koveshnikov, 2012; Lu
et al., 2011; Luo & Rui, 2009; Meyer & Thaijongrak, 2012; Narula, 2006;
Yamakawa et al., 2008; Yaprak & Karademir, 2010).
2. Mainstream Perspectives on EE MNEs
Internationalization has been studied from various dimensions in IB
literature. Since IB field is an eclectic area in nature, theoretical knowledge
generated in the field is largely depended on the inspirations and borrowings from
related fields such as economics, strategy, and organization theory. As a result of
this eclecticism, roots of perspectives explaining the research phenomena of the
field vary to a great extent. The internationalization process model (IPM) that
explains the internationalization process of the firm is mostly based on behavioral
theories (Melin, 1992), whereas Dunning’s eclectic paradigm or OLI Framework
integrates transaction cost economics and internalization theory to explain FDI.
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Y. Ayden / EJEPS 8 (2015) 19-42
2.1. Internationalization Process Model
The IPM proposes that firm increases its resource commitment abroad as it
acquires knowledge about the foreign markets and incrementally expands its
foreign operations based on a incremental learning process (Johanson and
Vahlne, 1977, 1990; Johanson and Wiedersheim-Paul, 1975). It describes
internationalization as a stage process in which a series of incremental decisions
made about the international activities of the firm based on the knowledge
acquisition through firm’s own experience (Johanson and Wiedersheim-Paul,
1975). The IPM explains firm internationalization as a different pattern of growth.
The firm international expansion is not seen as a set of deliberately planned steps
built on rational analysis by the IPM. Instead, the main characteristic of the
internationalization process is the incremental nature of successive learning
through stages of increasing commitment to international markets (Melin, 1992).
The model proposes that firms firstly begin internationalization in countries
that are culturally and geographically close to their country of origin (Johanson
and Vahlne, 1977; Casillas, Acedo, and Barbero, 2010). At the beginning of
internationalization the amount of the resources committed to the foreign market
is small since firms prefer less risky international operation types such as
exporting instead of making FDI. As external market knowledge is acquired, firm
increases the amount of resource commitment and expands its international
scope as well. Therefore, the IPM approaches internationalization as a pathdependent learning process in which the amount of resources committed to
foreign markets are dependent on the amount of knowledge acquired based on
experiential learning (Andersen, 1993; Eriksson, Majkgård, and Sharma, 2000).
The knowledge gained during this process is based on the experiences with
customers, markets, and competitors (i.e. market-based knowledge), the
experiences within the institutional framework (i.e. institutional knowledge), and
the experiences derived from working in foreign markets (i.e. internationalization
knowledge) (Casillas, Acedo, and Barbero, 2010; Clark, Pugh, and Mallory, 1997).
The IPM presents an incremental internationalization in small steps due to
the rationale that managers are risk-averse, and they expand their businesses as
they seize new opportunities in their local business environment. It depends on
the observations that companies internationalize in their nearby countries in
terms of culture, institutions, educational level, and language by first using sales
agents and then making FDI (Barkema and Drogendijk, 2007; Johanson and
Wiedersheim-Paul, 1975). In other words, dissimilarities between foreign markets
and home country create a psychic distance that discourages firms to begin their
international operations in countries where political, economic, cultural, and
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Y. Ayden / EJEPS 8 (2015) 19-42
linguistic differences are high (Johanson and Vahlne, 1990; Johanson and
Wiedersheim-Paul, 1975; Barkema and Drogendijk, 2007). Psychic distance is a
result of the various discrepancies that firm experiences between its home and
host countries in terms of language, education, business practices, culture, and
task environment. It is a key factor in determining the pattern of firm
internationalization across borders (Richardson, 2014). Other scholars suggest
that institutional distance that is the variations in the regulatory, cognitive, and
normative environments is also a significant determinant of firm
internationalization pattern (Kostova and Zaheer, 1999; Kostova, Roth, and Dacin,
2008; Kostova, 1999; Xu and Shenkar, 2002). Ghemawat (2001) describes four
different types of distance that are cultural distance (e.g. differences in religious
beliefs, race, social norms, and language between home and host countries);
administrative or political distance (e.g. colony-colonizer links, common currency,
and trade arrangements); geographic distance (the physical distance between the
two countries, the size of the target country, transportation and communications
infrastructures); and economic distance (e.g. differences in the two countries'
consumer income and variations in the cost and quality of resources). It is also
argued that firm internationalization is a regional effort, not a global one as a
result of distance (Jansson and Sandberg, 2008; Ghemawat, 2001; Richardson,
2014).
Research on the relation between incremental expansion and MNE
performance demonstrate conflicting results. Some scholars assert that
incremental learning from experiences reduces the failure rate of company
investments (Barkema, Bell, & Pennings, 1996; Li, 1995) while in recent studies
others argue that incremental expansion may not be the best option for the firm
overall performance (e.g. profitability) (Delios and Beamish, 2001; Barkema and
Drogendijk, 2007). Moreover regarding the EE MNEs, some scholars state that EE
MNEs internationalize differently in terms of speed and scope than the IPM
proposes (Mathews, 2006; Guillén and García-Canal, 2009; Madhok and Keyhani,
2012). In many cases, EE MNEs enter the markets that are not physically close to
their home countries; rather they enter the dissimilar and distant countries from
their home (Ramamurti, 2004). They use more risky, but faster options to
internationalize such as mergers and acquisitions instead of beginning with low
risks such as using sales agents or sales subsidiaries (Madhok and Keyhani, 2012;
Ramamurti, 2012).
This more accelerated internationalization of EE MNEs might be associated
with a set of factors changing the global business environment. As a result of the
high costs of innovation, short product life cycles, and the multiple technological
competences needed for today’s products –particularly in certain industries- firms
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Y. Ayden / EJEPS 8 (2015) 19-42
should internationalize rapidly rather than incrementally (Narula, 2006). Under
these circumstances, EE MNEs became more willing to act as global players to
compensate their late-comer disadvantages by acquiring assets and competences
that they lack (Child and Rodrigues, 2005). The path-dependent
internationalization can generate returns for the firm in the short-run, but such a
risk-averse expansion may not be applicable in the long-run (Barkema and
Drogendijk, 2007). Therefore, in a case of rapid internationalization the IPM
becomes insufficient to explain the internationalization of the firm, especially in
the case of EE MNEs. Moreover, firms, regardless of their country of origin, in
certain industries (e.g. information and communication technologies) cannot be
risk averse and cannot make incremental moves due to the fierce competition and
high market dynamism (Narula, 2006).
Furthermore, the existence of born global firms (Knight and Cavusgil, 2004)
that skip the incremental stages and early internationalize from or near their
founding shadows over the accuracy of traditional internationalization process
model of the firm. Thus, the argument proposed by the IPM that is firms
incrementally expand to the close markets in terms of cultural, geographical or
institutional proximity may not be generalizable (Richardson, 2014). As a
concluding remark Cantwell and Narula (2001) state that the internationalization
sequence argument that is firms first export and then make direct investments is
mostly abandoned.
2.2. Eclectic Paradigm
The eclectic paradigm is a comprehensive framework developed by John
Dunning in a series of publications (Dunning, 1980, 1983, 1988, 2000, 2001) to
explain firm foreign direct investment. It offers an overall framework for firms’
FDIs by integrating views from transaction cost economics, internalization theory,
and resource-based view (RBV) of the firm.
It was Coase (1937) who was the first recognizing that the operation of the
market costs something that are transaction, contracting, and coordinating costs
of using the price mechanism. To avoid these transaction costs, firms can use their
vertically integrated structures to set transfer prices by controlling the production
and marketing of an intermediate product inside the organization. These
fundamental insights from transaction cost economics are more applicable to the
MNEs. Since there are more imperfections and greater transaction costs for the
firms in international markets than in domestic markets, it could be assumed that
internalization might result in efficiency, thus, firms engaging in FDI take place in
global business landscape (Rugman, 1980).
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Y. Ayden / EJEPS 8 (2015) 19-42
Transaction cost economics view gave birth to internalization theory that
sees firm’s expansion through FDI as a mean to decrease transaction costs
resulting from coordination of activities across national boundaries (Buckley and
Casson, 1976; Rugman, 1980; Filatotchev et al., 2007). In other words,
internalization can happen in response to externalities in the goods or factor
markets. Distortions in the goods market, such as a tariff, will encourage FDI and
multinationality. The explicit recognition of these worldwide market
imperfections, which in practice causes inefficiencies in international operations,
lay at the heart of the internalization theory. Internalization theory argues that
the MNEs take place in the global landscape due to the market failures such as
exogenous government induced regulations and controls that spoil the theoretical
reasons for free trade and private foreign investment. The internalization process,
here, allows the firm to overcome such externalities and governmental
regulations in the product market (Rugman, 1980).
The internalization theory developed by Buckley and Casson (1976) and
Rugman (1980) is a firm-level theory that aims to explain the reasons that MNEs
attempt to control their firm-specific advantages (FSAs). In internalization theory,
FSAs such as knowledge advantage arising from a transaction cost economics
explanation; and other types of FSAs like brand advantage and organizational
capabilities are all efficiency-based and in line with the RBV of the firm. Therefore,
it could be argued that internalization theory employs transaction cost economics
and RBV to explain the firms’ FDI (Rugman, 2010).
In contrast to internalization theory, eclectic paradigm applies new variables
to explain FDI. According to eclectic paradigm, the international activities of
multinationals are determined by three different but related factors. These
factors are ownership (O) advantages, location (L) advantages and internalization
(I) advantages. Eclectic paradigm —also known as OLI paradigm argues that these
three distinct sets of advantages explain the rationale behind the firm’s
involvement in FDI activities. It uses transaction costs and factor costs as its main
explanatory variables and assumes that FDI decisions are made rationally within
international firms (Melin, 1992).
Eclectic paradigm asserts that MNEs have competitive advantages or Oadvantages against their rivals. They exploit these advantages by establishing
subsidiaries in attractive foreign countries due to the available L-advantages
(Dunning 1980, 1988, 2000, 2001; Cantwell and Narula, 2001). According to
Dunning, O-advantages can be distinguished in two types; the first is the
ownership advantages of unique tangible and intangible assets (such as firmspecific technology); and the second one is the ownership of complementary
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Y. Ayden / EJEPS 8 (2015) 19-42
assets (such as the ability to coordinate cross-border activities effectively)
(Cantwell and Narula, 2001). He clearly distinguished these two types of
ownership advantages as asset-based ownership (Oa) advantages and
transaction-type ownership (Ot) advantages later (Dunning, 1983; Eden and Dai,
2010). Oa-advantages arise from the ownership of specific assets such as
intellectual property rights in the forms of trademarks and patents or tacit
knowledge and tangible property and equipment. They are in line with the RBV
(Barney, 1991) which argues that the firm should possess valuable resources that
are difficult to imitate and rare to sustain its competitive position. Ot-advantages
are the economies achieved from the common governance of a network of assets
located in different countries (Lundan, 2010). They are firm-specific assets and
related to effective management of transactions that allows the firm to generate
economic rent. The use of markets and intra-firm hierarchies across national
borders may create an advantage to the firm even Oa-advantages are same or
even inferior to its rivals (Narula, 2006). Later, Dunning and Lundan (2008a)
defined a new type of ownership advantage that is institutional (Oi) advantages
which refers to the ability of the multinationals to manage their relationships
outside the firm boundaries both in home and host-country institutional
environments. Table 1 summarizes the three types of O-advantages.
Table 1. The Nature and Content of Different Ownership Advantages
Advantage
Contents
Property rights and/or intangible asset advantages
Product innovations, production management,
organizational and marketing systems, innovatory
capacity, noncodifable knowledge; accumulated
Oa
experience in marketing, finance etc.
Ability to reduce intra and/ or inter-firm
transactions (also influenced by Oi)
Advantages of common governance
Advantages of scale and scope of the multiplant
Ot
firm. Advantages specifically derived from
multinationality itself (also influenced by Oi)
Institutional advantages
The formal and informal institutions that govern the
value-added processes within the firm, and between
Oi
the firm and its stakeholders. Codes of conduct,
norms, and corporate culture; incentive systems and
appraisal; leadership and management of diversity
Source: Lundan (2010, p. 55)
Page | 26
Outcomes
Efficiency
Market power
Organizational
effectiveness
Legitimacy
and trust
resulting
nonmarket
effectiveness
Y. Ayden / EJEPS 8 (2015) 19-42
The second variable in eclectic paradigm is L-advantages. Eclectic paradigm
argues that firms engaging in IB activities choose FDI rather than other types of IB
operations to take advantages of location bounded advantages in any foreign
countries. Examples of L-advantages may include the spatial distribution of
natural resource endowments, input prices, quality and productivity benefits, and
transportation and communication costs. The government policies such as
investment incentives, strong legal and regulatory systems such as well protection
of propriety rights can be considered other types of L-advantages for the rationale
of FDI (Dunning and Lundan, 2008b). This sub-paradigm argues that the more the
immobile, natural or created resource endowments that firms needs to use
besides their O-advantages are available in a foreign country rather than a
domestic location, firms will choose to exploit or enhance their O-advantages by
engaging in FDI (Dunning, 2000). In other words, L-advantages can be the reason
for decisions to invest in a foreign country where superior procurement,
production, and market opportunities are available that allow the firm to use its
existing resources and capabilities (Child and Rodrigues, 2005). L-advantages rest
on the assumption that firms seek to locate their value adding activities at the
most suitable points with the most favorable conditions in space. Therefore, the
location choices of MNEs depend on their motives for FDIs (Dunning, 2001).
The third variable in eclectic paradigm is the internalization advantages
resulting from the internal usage of O-advantages rather than using them in the
open market. Many alternative ways exist to create or exploit firm core
competencies. For instance, firms may prefer to buy and sell their products in the
open market or through inter-firm non-equity agreements. Alternatively, firms
may prefer to integrate the intermediate product markets to avoid from
transaction costs. Likewise internalization theory, eclectic paradigm argues that
firms prefer to internalize cross-border intermediate markets through FDIs when
the net benefits are greater than other types of IB activities like licensing
(Dunning, 2000).
The eclectic paradigm aims to integrate the elements of transaction cost,
internalization theory, and RBV of the firm to explain the international production
of MNEs. However, it is not possible to synthesize a set of theories that address
different questions by relying on different views, and the eclectic paradigm is not
intended to do so. Thus, it is not itself another theory, instead it provides an
overall analytical framework that draws the investigators attention to the most
important theories for the problem that they seek to address (Cantwell and
Narula, 2001, 2006).
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Y. Ayden / EJEPS 8 (2015) 19-42
Scholars have been discussing the eclectic paradigm in order to explain EE
MNE behavior. The main principle of the eclectic paradigm is that to become an
MNE a firm must hold considerable ownership advantages (Dunning, 2001;
Ramamurti, 2012). According to Mathews (2006), EE MNEs do not possess
traditional ownership advantages. Instead, they have organizational skills as their
primary advantage. However, Narula (2006) posits that these organizational skills
are not incompatible with the propositions of the eclectic paradigm instead they
suit with the definition of Ot-advantages in OLI framework. Madhok and Keyhani
(2012) approach the O-advantages of EE MNEs from a different perspective. They
argue that EE MNEs possess only ordinary resources that are not traditionally
mentioned among the resources that generate extraordinary returns such as high
technology and brand. In a similar vein, Rugman (2009) asserts that EE MNE
internationalization is a result of exploitation of their home country comparative
advantages such as cheap labor and natural resources. However, Ramamurti
(2012) sees these explanations unsatisfactory and posits that home country
location advantages cannot provide long-run competitive advantage since they
are available to all firms in a given location too. He states that EE MNEs possess
ownership advantages, but they are not the same advantages that scholars are
used to seeing in DE MNEs. Thus, EE MNEs need to be investigated to explore
their unconventional O-advantages such as their ability to function in difficult
environments, their understanding of customer needs in emerging markets and
their abilities to develop low-cost products for emerging market customers
(Ramamurti, 2012; Cuervo-Cazurra and Genc, 2008; Guillén and García-Canal,
2009; Ramamurti and Singh, 2009).
Perhaps the most significant difference between DE MNE and EE MNE
internationalization in terms of O-advantages that many scholars argue that EE
MNEs lack valuable O-advantages, thus their OFDIs can be understood better by
asset-seeking motivations (Mathews, 2006; Madhok and Keyhani, 2012; Luo and
Tung, 2007). Considerable amount of evidence exist to support that EE MNEs are
seeking valuable assets such as technologies and brands (Gubbi et al., 2009; Lu et
al., 2011; Makino et al., 2002; Tsai & Eisingerich, 2010; Yaprak & Karademir,
2010). However, this explanation can be inadequate to assert that they
internationalize without O-advantages (Ramamurti, 2012). There are some
arguments that EE MNEs have developed their own O-advantages such as
flexibility, familiarity with emerging market contexts, and the ability to develop
beneficial relations with firms and other actors to access the resources that they
lack (Buckley et al., 2007; Erdener and Shapiro, 2005; Luo and Rui, 2009). The
discrepancy between EE MNE and DE MNE O-advantages might be a reflection of
the differences of their evolutionary stages. EE MNEs are at the beginning of their
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internationalization (Ramamurti and Singh, 2009) and with time they augment
their O-advantages and become more like DE MNEs. Since DE MNEs had more
time to develop their capabilities, they possess distinctive capabilities
(Ramamurti, 2012).
Some critiques of the broad definitions of OLI variables exist. Rugman (2010)
states that one of the problems of Dunning’s eclectic paradigm is that it has
overdetermined the three motives for FDI, especially O-advantages. In eclectic
paradigm, the definition of O-advantages is broad and includes not only the firm
intangible assets such as knowledge, brand, organizational structure, and
managerial skills but also Ricardian factor endowments such as capital,
manpower, and natural resources. Besides, legal and institutional environment
and industry market structure are included in O-advantages. However, the latter
set of O-advantages is country-specific advantages and it is easier to analyze these
advantages from country level instead of accepting them as O-advantages. Again
Dunning argued that these location-based advantages can be turned into Oadvantages but as discussed earlier these are available to all firms embedded in
the same location (Rugman, 2010). In addition, Rugman criticizes the very broad
definition of L-advantages including market size, natural resources, education
system and other types of political and government activity. This broad definition
makes it difficult to distinct O-advantages and L-advantages. For instance, when
an MNE is allowed to access to natural resources such as a mine, L-advantages of
that host country is transformed into an O-advantage (Rugman, 2010).
In addition to the ongoing debate on eclectic paradigm above, the rise of EE
MNEs in the global markets brings new questions to the discussion and offers new
opportunities. A potential contribution of the studies on EE MNEs might be a
clearer portray of O-, L-, and I-advantages as well as a more sharpened
categorization of these variables. For instance, Ramamurti (2012) states that what
is needed is an exploration of EE MNEs’ O-advantages without being limited to the
traditionally mentioned ones and to be more open-minded for novel forms of Oadvantages.
3. Emergent Perspectives on EE MNEs
As discussed earlier, perhaps the most significant discussion in IB field is
whether EE MNEs represent a new type of firm that requires novel theories or
their internationalization can be explained with the mainstream theories of the
field with some extensions (Ramamurti, 2012; Jormanainen and Koveshnikov,
2012). Many scholars agree that there is a need for theoretical extensions for the
existing theories (Buckley et al., 2007; Cuervo-Cazurra and Genc, 2008; Cuervo-
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Y. Ayden / EJEPS 8 (2015) 19-42
Cazurra, 2008) whereas others insist that existing theories be still suitable to
explain EE MNEs internationalization (Dunning, 2006). However, new perspectives
and models have been developed demonstrating the distinctiveness of EE MNEs
internationalization such as springboard perspective (Luo and Tung, 2007) and LLL
model (Mathews, 2006).
3.1. Springboard Perspective
The springboard perspective developed by Luo and Tung (2007) to point out
that EE MNEs use internationalization as a springboard to overcome their
latecomer disadvantages by acquiring the strategic assets that they lack and to
counter-attack their rivals in their home markets. EE MNEs also use OFDI in order
to reduce the institutional and market constraints in their home markets as well
as to bypass rigid trade barriers and international constraints by either assetseeking or opportunity-seeking FDIs. The argument that is EE MNEs
internationalize not only to exploit their ownership advantages but also to acquire
valuable strategic assets is also supported by other studies (Klein and Wöcke,
2007; Chittoor and Ray, 2007). In particular, the springboard perspective argues
that unlike DE MNEs, EE MNEs are not often path dependent nor evolutionary in
terms of location choices and entry modes. Instead, by a series of aggressive,
proactive and risk taking measures they expand their operations in both
developed and emerging markets via high-control, high-risk entry modes such as
acquisitions and greenfield investments. These strategies can be reasonable when
the low-cost advantages of these firms are considered. EE MNEs’ acquisitions
largely target brands and technology that may add differentiation advantages to
their existing cost advantages.
In addition, these quick and radical
internationalization also accelerates their further market entries and
internationalization process by increasing their reputations (Luo and Tung, 2007).
Luo and Tung (2007) identify a number of activities undertaken by EE MNEs
that expresses the “springboarding”. First, EE MNEs internationalize to
compensate their competitive disadvantages by seeking sophisticated technology
or advanced manufacturing know-how in developed markets. Second, EE MNEs
lessen their latecomer disadvantages in areas such as brand recognition and
consumer base by engaging in FDIs. To offset these competitive disadvantages
and latecomer deficiencies, EE MNEs use internationalization as a springboard and
engage in strategic asset-seeking FDIs in developed markets. Third, EE MNEs
engage in market-seeking FDIs to counterattack their global rivals that have been
penetrating their home country markets. Particularly large EE MNEs attempt to
gain customers in advanced markets like USA, Japan, and Europe. Fourth, EE
MNEs use FDI as a mean to bypass the trade barriers in host countries (e.g., quota
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Y. Ayden / EJEPS 8 (2015) 19-42
restrictions, anti-dumping penalties, and special tariff penalties). Particularly EE
MNEs manufacturing technologically standardized products are heavily
dependent on export markets. Here, FDI is used as a springboard to reach the
overseas customers and end users. Fifth, EE MNEs internationalize to alleviate
their home country institutional constraints such as weak legal systems, political
instability, government interference, and inefficient market intermediaries. These
institutional voids and political hazards erode the firm competitiveness, thus, push
them to internationalize. Sixth, EE MNEs makes reverse investments to get the
preferential treatment offered by emerging economy governments. They invest in
a foreign country and create a subunit at first. Then, they invest back to their
home by using this subunit to get the financial or non-financial privileges given by
their home country governments. Lastly, in springboard perspective, it is
expressed that EE MNEs uses internationalization as a springboard to exploit their
ownership advantages in emerging countries (Luo and Tung, 2007). At this point,
unlike the arguments asserted by Ramamurti (2012), springboard perspective
does not claim that EE MNEs internationalize without O-advantages instead it
argues that EE MNEs also internationalize to exploit their existing competitive
advantages in emerging markets.
The springboard perspective offers valuable insights for EE MNEs. It provides
a general picture of their behaviors and the characteristics of their institutional
environments. However, most of the behaviors associated to EE MNEs in
springboard view are realized by also DE MNEs. The activities defined as a
“springboard” could be observable in any MNE regardless of its origin.
3.2. Linkage, Leverage, and Learning Model
Another perspective specifically focuses on the uniqueness of EE MNEs
internationalization is the linkage, leverage and learning (LLL) model proposed by
Mathews (2006). LLL model argues that EE MNEs are resource-poor. Thus, they
engage in asset-seeking activities to internalize and transform acquired assets into
dynamic capabilities that are keys to competitiveness. In LLL model, in order to
internalize and transform the dynamic capabilities, a firm needs to linkages to
generate opportunities for resource acquisitions, leverages to exploit established
resource linkages, and learning as a repeated applications of linkages and
leverages (Yaprak and Karademir, 2010).
LLL model states that EE MNEs’ advantages arisen from external
environments not form their internal sides. In other words, they have the
opportunity to pay off their latecomer disadvantages by acquiring them
externally. Thus, according to LLL model, international expansion is a source of
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Y. Ayden / EJEPS 8 (2015) 19-42
advantage and a necessity for the EE MNEs. At this point, the risk and
uncertainties can be reduced by joint-ventures and other forms of partnerships.
After establishing a linkage, leveraging the resources is the following concern for
the EE MNE to receive the strategic end that is learning in the proposed model (Li,
2007; Mathews, 2006).
LLL model argues that firms that are originated from emerging economies are
a novel type of MNEs and make some of the concepts of the existing IB literature
less useful. Mathews (2006) discusses the characteristics of the new global
business system and the success of the newcomer and latecomer firms from
peripheral areas such as the Asia Pacific by associating these Dragon
multinationals’ success to their strategic innovations, organizational innovations,
and accelerated internationalization. He points out that Dragon multinationals
adopt a different perspective on the resources that they acquire through
internationalization and suggests a rethink of the RBV of strategy and dominant
eclectic paradigm of IB field.
LLL model is mostly criticized especially due to its challenges on O-advantages
of the eclectic paradigm. Ramamurti (2012) assert that LLL model uses the same
initials as the OLI framework. Narula (2006) states that asset-seeking activities are
not new for MNEs since MNEs have engaged in this type of FDI for quite a while.
Thus, what is LLL model describes is not a novel idea, and nor is it unique; it has
just been more common in EE MNEs. Moreover, the argument that is EE MNEs do
not possess O-advantages might not be valid, particularly in the more R&Dintensive sectors. For instance; Samsung has over 200,000 employees and has
invested $4.6 billion in R&D activities by the year 2003. Its establishment date
goes back to the 1930s, and it is more like an incumbent rather than a newcomer.
Furthermore, Mathews (2006) is criticized about the terminology that he used in
developing his LLL model such as dragon MNEs, third world multinationals,
latecomer, and newcomer MNEs. LLL model is based on the review of the
experiences of latecomer and newcomer MNEs such as Acer, Ispat International,
Li & Fung, and the Hong Leong Group. These firms, however, are hard to classify in
terms of industry, size, age or organization (Narula, 2006).
4. Theoretical Inconsistencies between Mainstream and Emergent Perspectives
The existence of EE MNEs discloses that there exist two seemingly
inconsistent themes about the existing literature on the internationalization of
MNEs. The first theme is the nature of the internationalization process. Although
the original IPM proposes an incremental internationalization process, many EE
MNEs expand their operations in a radical way by skipping the stages that the IPM
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Y. Ayden / EJEPS 8 (2015) 19-42
predicted. The second theme is about the firm motives for foreign expansion.
Both mainstream perspectives, whether implicitly or explicitly, argue that
internationalization occurs as a result of firm motive to exploit its ownership
advantages. However, explorative motives have been more observable as EE
MNEs has taken a significant position in global marketplaces. Therefore, the
second theme that requires further discussion is the exploitative and explorative
motives for FDI.
4.1. Theoretical Inconsistency #1: Incremental vs. Radical Internationalization
The central argument of the IPM is that firms follow an incremental process
through experiential learning during their internationalization. They commit more
resources as they increase their local market knowledge incrementally. The model
uses psychic distance concept to predict the location choices and entry strategies
of MNEs (Johanson and Vahlne, 1977). When the findings in the extant literature
are considered (Meyer and Thaijongrak, 2012; Chetty and Campbell-Hunt, 2004) it
is seen that arguments of IPM about the internationalization of the firm still keep
their explanatory power to some extent. Firms usually engage in other forms of
international activities in a particular market prior to their direct investments. This
development path is also discovered in the literature about the EE MNEs (CuervoCazurra, 2008). Many firms from emerging economies take a longtime to be
MNEs, and they choose the countries that are geographically and culturally close
to their home countries (Erdilek, 2008). However, there are some exceptions in
the literature. Some firms demonstrate deviations from the linear predictions of
the IPM. Particularly, EE MNEs suffer from the disadvantages of being latecomers
follow a more radical route that the IPM proposes. They pursue a rapid way to
internationalize to compensate their latecomers disadvantages by skipping the
stages predicted by IPM. In addition to this, EE MNEs use their networks and
managerial ties with other parties to accelerate their internationalization
(Mathews, 2006). This view is in line with the network view that has been added
to the refined version of the original IPM (Johanson and Vahlne, 2009). As
discussed earlier the stage model is also criticized by the researcher due to the
rise of the born global firms. Ramamurti (2012) states that, the world is now
flatter than previous decades when DE MNEs experiences were examined, and
mainstream IB perspectives were developed. As Johanson and Vahlne (2009)
pointed out that the emerging phenomena such as leapfrogging and born-global
firms are not included in the original IPM because they were not common among
the Swedish firms these scholars analyzed at that time.
Specifically, acquisitions made by EE MNEs facilitate the internalization of the
tangible and intangible resources that take time to develop internally and speed
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Y. Ayden / EJEPS 8 (2015) 19-42
up their internationalization (Gubbi et al., 2009). Their network ties with the hostcountry government and organizations operating in the industries to be
positioned may accelerate the process by rapid transformation of the market
knowledge. Therefore, networks and partnerships may result in a more quick way
of gathering institutional market knowledge (Eriksson et al., 1997) and might
decrease the liability of outsidership in a short time (Johanson and Vahlne, 2009).
This accelerated internationalization is addressed in springboard perspective and
LLL model as a distinctive feature for EE MNEs. These emergent perspectives
stress the latecomer disadvantages of EE MNEs, and the learning imperative to
catch up early movers (Mathews, 2006; Luo and Tung, 2007). To conclude,
although internationalization through rapid and risky steps appear in the cases of
DE MNEs, EE MNEs has made it more explicit that MNEs can internationalize in a
radical way by passing out the stages in so-called establishment chain.
4.2. Theoretical Inconsistency #2: Exploitative vs.Explorative Internationalization
The IPM and the eclectic paradigm argue that firms expand to foreign
countries to exploit their firm-specific advantages. Although their firm
competences are different from the DE MNEs’ competences, EE MNEs hold Oadvantages to be exploited in the foreign markets offering location advantages.
They possess valuable advantages that enable them to engage in FDIs. Besides
some conventional O-advantages such as know-how and technology, they hold Oadvantages considered as “ordinary” (Madhok and Keyhani, 2012) such as
entrepreneurial skills, cost advantages, and networking abilities. In fact, the
concept of advantage is a relative term. It is not logical to evaluate the value of EE
MNEs O-advantages by comparing them to DC MNEs’ ones. The value of any firm
resource or capability as an advantage depends on the ability of the firm in
combining and utilizing them. Even so-called ordinary firm resources and
capabilities can be superior when they are exploited in the appropriate locations.
Thus, the location choice for EE MNEs or market selection is again important for
their internationalization performance.
Even though the IPM and the eclectic paradigm have an explanatory power
on the EE MNEs exploitative internationalization, there are also some variances in
EE MNEs’ experiences when these firms asset-seeking FDIs are considered. EE
MNEs exploit not only their firm-specific advantages in foreign markets but also
explore new ones. Research on EE MNEs demonstrates that EE MNEs seek
international opportunities to upgrade their existing resource bases in an
explorative manner. Many EE MNEs use their partnerships with DE MNEs to learn
and upgrade their existing firm resources and capabilities (e.g. OEM/ODM
experiences as the LLL model argues) (Mathews, 2006). They also engage in
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Y. Ayden / EJEPS 8 (2015) 19-42
acquisitions to develop a strong position in global markets rapidly. EE MNEs
aggressive FDIs, particularly in developed economies, can be attributed to their
latecomer disadvantages. As springboard perspective argues that EE MNEs
undertake FDI as a mean, or springboard, to upgrade their competitive
advantages. These may include strategic assets such as brands, technology, and
design capabilities (Child and Rodrigues, 2005; Luo and Tung, 2007). These assetseeking FDIs also include market-seeking motives. In another saying, EE MNEs’
asset-seeking FDIs are in parallel with their quest for new markets, particularly in
developed markets. This argument supports the argument in springboard
perspective that EE MNEs internationalize to exploit their competitive advantages
as well.
At this point, the mainstream IB perspectives highlight the exploitative
nature of firm internationalization. However, MNEs also need to explore new firm
resources and capabilities while they exploit the existing ones. This situation
becomes more explicit for EE MNEs than DE MNEs considering their latecomer
disadvantages. As they involve in foreign markets, they feel more competitive
pressure, especially for differentiation advantages (Child and Rodrigues, 2005).
These findings support the arguments that MNEs need to be ambidextrous that is
simultaneous pursue of exploitation and exploration activities (Hsu, Lien, and
Chen, 2013; Keen and Wu, 2011; Luo and Rui, 2009). To conclude, although assetseeking motives may be observed in DE MNEs, EE MNEs has made it more explicit
that MNEs can internationalize to gain access strategic assets by engaging in FDIs.
5. Conclusion and Future Research Agenda
Models or theories provide parsimonious representations of the reality. They
shed light on a particular phenomenon, but they also cover some other aspects of
it. The cross-sectional research dominating the contemporary management
contributes much to our understanding of the specific factors and their effects on
specific decisions while neglecting the historical context and the dynamic
processes of strategic decisions (Meyer and Thaijongrak, 2012). As shown above,
each perspective discussed in this study illuminates certain aspects of EE MNEs
internationalization through FDI. IPM predominantly explains the process of
internationalization in a dynamic view, whereas eclectic paradigm offers a
theoretical framework to understand the FDI transactions. Springboard and LLL
model mostly, however, highlight the latecomer characteristics of EE MNEs and
their accelerated internationalization. Based on the above discussion, two
dimensions are identified that source the recent debates on MNE
internationalization. They are the nature of the internationalization process and
the firm motives for FDI. For each dimension, there are two categories. The
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Y. Ayden / EJEPS 8 (2015) 19-42
nature of the internationalization process varies on a continuum of incremental
vs. radical internationalization; whereas the firm motive for FDI can be either
asset-exploitation or asset-exploration.
Based on these themes, future research should be conducted on MNEs to
reveal the nature of the radical internationalization of the firm. Particularly, a
focus on born-global EE MNEs that have rapidly internationalized their operations
can provide valuable insights to fill the gap in the literature. In addition to this,
findings from asset-seeking FDIs of EE MNEs should be examined in order to make
a synthesis of mainstream and emergent perspectives. For both research avenues,
studies including both DE MNEs and EE MNEs should also be conducted to answer
the question that “whether DE MNEs and EE MNEs are truly different from each
other or they experience a different stage of evolution?.”
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Empowerment and Trust as Mediators of the Relationship
between Transformational Leadership and Organizational
Effectiveness
Agron HOXHA*
Department of Psychology, Fatih University, Turkey
Abstract
The purpose of this study was to examine the mediating role of trust and
empowerment on the relationships between transformational leadership and
organizational effectiveness.
A total of 457 employees participated, 193 of whom were males, with ages ranged
from 20 to 56 years. Participants were sampled from senior, middle and lower
positions in the organizational structure. Significant positive relationships were
observed between transformational leadership, trust, empowerment and
organizational effectiveness. Hierarchical regression analysis found that trust and
empowerment significantly enhanced the relationship between organizational
leadership styles and organizational effectiveness.
The results of this study support path-goal theory which suggests that different
style of leadership needs to be applied to different groups or individuals in an
organization.
Key Words: Transformational Leadership, Organizational Trust, Psychological
Empowerment, Organizational Effectiveness, Mediation, Malaysia
JEL Classification: M5, M53, L20, L21
*
Tel: +90 (546) 251 1034
E-mail Address: [email protected]
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A. Hoxha / EJEPS 8 (2015) 43-60
1. Introduction
Accumulating evidence suggests that transformational leadership plays an
important role in enhancing the level of organizational effectiveness (Podsakoff,
MacKenzie, and Bommer, 1996; Bass and Avolio, 1990; Yukl, 2002). However,
there is little empirical research focusing on the processes by which
transformational leadership influences and enhances the level of organizational
effectiveness. Therefore, in this study, the researcher will emphasize on
understanding the influencing process of transformational leadership on
organizational effectiveness through mediating factors namely trust and
empowerment. Past studies have reported positive relationships between
transformational leadership, trust, empowerment and organizational
effectiveness. However, there is insufficient literature investigating the role of
trust and empowerment as mediating factors between transformational
leadership and organizational effectiveness. Therefore, in the present study, the
researcher suggests that trust and empowerment will add value by moderating
the relationship between organizational leadership and organizational
effectiveness.
2. Literature Review
2.1. Leadership and Organizational Effectiveness
Previous research indicated that effective leadership is a major contributor to
organizational effectiveness; leadership creates the business strategy that would
lead the organization to success or failure (Bennis, 1987; Llewellyn, 2003; Ismail,
Mohamed, Sulaiman, Hamran Mohamed, and Yusuf, 2011). Effective leadership
will stimulate the right attitude and behavior among employees to enhance their
performance in an organization. Leadership refers to the process of influencing
others in order to achieve assigned goals in an organization (Yukl 1994; Fiedler
and Garcia, 1987; Bass, 1985; Marturano and Gosling, 2008). Further, leaders are
responsible to lead, direct, and coordinate with members to meet their expected
goals (Burns, 1978; Fiedler and Garcia, 1987).
A frequently used definition of leadership comes from the book “Leadership”
by James Mac-Gregor Burns (1978) who stated that:
“Leadership is the reciprocal process of mobilizing, by persons which
motivates certain motives and values, various economic, political and
other resources, in a context of competition and conflict, in order to
realize goals independently or mutually held by both leaders and
followers” (Burns, 1978, 425).
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A. Hoxha / EJEPS 8 (2015) 43-60
According to Burns (1978), leadership refers to the stimulation of employees
to achieve certain goals that leaders and employees expect. He associates
leadership with leaders and employees together, not with the leader or leader
activities alone. Effectively Burns shifted the main focus of organizational
leadership from the behaviors and actions of individuals to the interaction
between leaders and their followers as one group working towards mutual benefit
(Burns, 2003). Thus, he made significant contributions to the schools of
transformational and transactional leadership styles. Leadership style as
compared to the general definition of leadership explains specific manners and
approaches that a leader or manager uses to interact with others. While
leadership refers to persuading employees to accomplish their tasks, leadership
style explains the way in which a particular leader gets the task done. In addition,
leadership style refers to the skills that the particular leader used to accomplish
the task (Berkowitz, 2010). Depending on the type of work or different situations
in an organization, a leader might exercise one of a variety of leadership styles.
The two widely practiced styles of leadership are the transformational leadership
style and transactional leadership style.
In the modern era of a globalized economy, transformational leadership is
reported to have strong influence on organizational effectiveness (Avolio, 1999;
Ismail, Mohamad, Mohamed, Raifuddin and Zhen, 2010). The definition of
organizational effectiveness varies from one writer to another as they look at
different elements of organization, but they all associate organizational
effectiveness with the achievement of expected goals in an organization (Llewelly,
2002). Organizational effectiveness refers to outcomes that organizations desire
to attain (Bernard, 1938; Avolio and Bass, 1995; Quinn and Rohrbaugh, 1983;
Zammuto, 1984). These outcomes vary from one organization to another, but
their main desired outcomes emphasize product, financial performance and
organizational performance in general (Yuchtman and Seashore, 1967; Denison
and Mishra, 1995). Organizational effectiveness is reported to be the main focus
of most organizations (Yukl, 2008).
2.2. Transformational Leadership and Organizational Effectiveness
Transformational leadership occurs when employees are encouraged to meet
the highly challenging expectations of the organization. Transformational leaders
help employees find new ways to meet organizational challenges. The most
frequently used definition of transformational leadership refers to a leader’s
behavior, influential traits, power and situational variables that influence
employee performance in a positive direction such as motivating employees to
work more than expected and enjoy the work they do (Behery, 2008).
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A. Hoxha / EJEPS 8 (2015) 43-60
Bass and Avolio (1994) identified four main dimensions of transformational
leadership namely idealized influence, inspirational motivation, intellectual
stimulation and individual consideration. Each of four dimensions explains the
characteristics of a transformational leader in an organization.
Idealized influence refers to the leader who becomes a model for his
employees. In this dimension, leaders apply their highest moral and ethical
standards towards employees or followers rather than practicing power and
authority in leading followers. In modern organizations, employees are more
skillful and they expect their abilities to be acknowledged. When employees are
acknowledged for their contributions, it is more likely that they will reciprocate
the behavior of the leader with respect and improve their performance.
Inspirational motivation on the other hand, refers to a leader who gives
meaning to different challenges at the work place. Leaders with this behavior
inspire followers by providing meaning to followers’ work and effort. These
leaders emphasize explaining the importance of their roles and performance to
employees in the organization. This makes employees regard themselves as an
important asset of the organization rather than a regular employee.
Intellectual stimulation means leaders motivate followers by providing them
with a variety of problem solving skills. This leader behavior makes followers
aware of their intellect and skills that they have in solving problems or challenges
in the work place. Followers need to be encouraged to express their thoughts and
visions towards the organization and be taught to look at issues in different ways,
thinking before acting and being accurate with decisions.
Individualized consideration refers to a situation whereby a leader has a
personalized relationship with each employee, paying special attention to
individuals in an organization. In other words this behavior focuses on how to
treat employees as your colleagues with neither prejudice nor doubt, and seeing a
future in them.
These four dimensions of transformational leadership transform employees
from ordinary performers to extraordinary performers (Burns, 1978; Bass and
Avolio, 1994; Behery, 2008). In other words, transformational leadership helps
followers transform their behavior from traditional to new ways of thinking and
be innovative in the working environment. Transformational leadership is
interested in motivation, goal attainment, teamwork and behaviors that help
employees find meaning in their work, and at the same time enjoy their work
(Behery, 2008).
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A. Hoxha / EJEPS 8 (2015) 43-60
Bass (1999) reported that changes and advancements in the marketplace and
workforce over the last two decades had resulted in the need to promote
transformational leadership more and demote the traditional style of leadership
namely transactional leadership. Transactional leadership was more important in
the past when employees were mainly driven by financial resources (Olanrewaju,
2009). Therefore, in the current globalized economy, greater emphasis needs to
be placed on the transformational leadership style in order to break the old
routines and energize work environments through inspirational leadership
(Olanrewaju, 2009; Ismail, Mohamad, Mohamed, Raifuddin and Zhen, 2010). In
this regard, Montgomery (1996) reported that: “transformational leadership
works well when important organizational changes are needed because the
environment has shifted and the organization needs to respond and break old
routines” (p. 461).
Previous findings suggest that the transformational leadership style
contributes to organizational effectiveness more than transactional leadership
(Organ, 1988; Emeryand Barker, 2007; Behery, 2008). It was noted that most of
the positive characteristics of leadership such as encouragement, imparting
confidence, acknowledging competence, motivating, encouraging innovation and
many other positive behaviors are credited to transformational leaders (Yukl,
2006). However, the transformational leadership style is not necessarily suited to
all types of organizations (Tseng and Huang, 2009). Previous studies have
suggested that one style of leadership cannot be generalized as the effective style
for all organizations and situations (Rad and Yarmuhammadian, 2006). For
instance, in the study done by Obiwuru, Okwu, Apka and Nwankwere (2011) it
was reported that in smaller organizations, the transactional leadership style was
more related to increases in performance than transformational leadership style.
However, the same study also suggested that organizations need to transit to the
transformational leadership style as they grow.
The advantage of the transformational leadership mechanism over
transactional leadership is that it enhances organizational effectiveness by
increasing the levels of organizational trust and psychological empowerment.
Since organizational trust and psychological empowerment are well predicted by
transformational leadership (Northouse, 2004), and trust and empowerment
predict increase in organizational effectiveness (Zeffane and Al Zarooni, 2012;
Goodwin, 2011), it is suggested that transformational leadership influences the
levels of organizational effectiveness indirectly through the mediating effect of
trust and empowerment.
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A. Hoxha / EJEPS 8 (2015) 43-60
2.3. Trust and Empowerment
It is clearly and consistently reported that the transformational leadership
style empowers employees to express and practice their own creativity, which
leads employees to develop trust and respect in their leaders (Bass and Avolio,
1995). From the literature we find that trust and empowerment go hand in hand
with each other. Both, organizational trust and psychological empowerment
reinforce each other and together lead to enhancement of effectiveness in
organizations.
Previous research has shown that psychological empowerment and trust in
leader are directly related to an increase of organizational performance (Wat and
Shaffer, 2005; Chan, Taylor, and Markham, 2008). On the other hand, when a
leader trusts his or her employees, it makes employee feel empowered and
confident (Goodwin et al., 2011).
In addition, it has also been found that employee empowerment is
reciprocated with trust in leader (Tyler and Degoev, 1996; Douglas and Zivnuska,
2008). It has also been reported that employees work harder if the employee is
empowered and trusts the leader (Wat and Shaffer, 2005; Chan et al, 2008).
Psychological empowerment and organizational trust are found to be
essential factors to increase the commitment of employees and hence contribute
to the enhancement of organizational effectiveness (Zeffane and Al Zarooni, 2012;
Goodwin, 2011).
Psychological empowerment means enabling employees with authority to
make their own decisions about how to carry out tasks assigned to them. Also,
trusting employees to do their jobs without constant monitoring makes
employees trust their leaders (Kim, Tavitiyaman, and Kim, 2009). Empowerment
gives employees a chance to explore and develop their individual skills. Trust on
the other hand, refers to the faith and confidence between leader and employee.
Therefore, in this study organizational trust and psychological empowerment are
perceived as two mediating factors that enhance the relationship between
organizational leadership and organizational effectiveness. When these two
variables are present, the level of organizational effectiveness will also increase.
The definition of organizational effectiveness varies from one writer to
another as they look at different elements of organization, but they all associate
organizational effectiveness with the achievement of expected goals in an
organization (Llewelly, 2002). Organizational effectiveness refers to outcomes that
organizations desire to attain (Bernard, 1938; Avolio and Bass, 1995; Quinn and
Rohrbaugh, 1983; Zammuto, 1984). These outcomes vary from one organization
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A. Hoxha / EJEPS 8 (2015) 43-60
to another, but their main desired outcomes emphasize product, financial
performance and organizational performance in general (Yuchtman and Seashore,
1967; Denison and Mishra, 1995). Previous studies have reported that
organizational effectiveness is the main focus of most organizations (Yukl, 2008).
The role of trust and empowerment has not been previously studied in the
context of that relationship. Therefore, in the present study, the researcher
suggests that trust and empowerment will add value by moderating the
relationship between organizational leadership and organizational effectiveness.
According to House, Woycke, and Fodor (1988), it is the leader that must
understand the needs and expectations of employees for their performance. Also,
leaders must clarify to employees the expectations that leaders have from them.
Therefore, House developed the path-goal theory aiming to enhance
organizational effectiveness through effective cooperation between leaders and
employees. The purpose of path-goal theory is to make clear to employees what
to do, when to do it, how to do it and the consequences of their effort by
providing them all necessary resources needed in the workplace (House, 1996).
House, proposed four behavioral leadership styles as most appropriate to help
followers succeed in their performance. The behavioral leadership styles are
directive, supportive, participative and achievement oriented leadership behavior.
House (1996) advised matching the leadership behavior with employee behavior
and the work environment.
The directive style is used when the leader must be clear and strict in giving
instructions to employees. The purpose of a directive leadership style is mainly to
reduce role ambiguity among employees in the organization. Directive leadership
is useful when employees are given unstructured tasks or when employees are
new and inexperienced.
The supportive style of leadership describes leaders who provide individual
consideration to their employees. Supportive leaders are concerned about their
employees’ wellbeing and social status (Lussier and Achua, 2007). Leaders of this
style tend to approach employees and develop friendly relationships between
themselves and employees.
The participative style is used when the leader involves employees in
important decision-making situations. Employee’s opinions and suggestions are
taken into account for decisions made in the organization (Yukl, 2006). This style
of leadership gives opportunities for all team members to express their thoughts.
In addition, participative leadership is team-work oriented and emphasizes close
relationships between organizational members.
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A. Hoxha / EJEPS 8 (2015) 43-60
The achievement-oriented style is used when the leader has high confidence
that his or her employees will achieve their challenging tasks and look forward to
continuous performance improvement (Yukl, 2006). Leaders of this style
emphasize performance excellence and they are confident that employees can
attain the expected outcome with the expected quality.
Although, path-goal theory contributed in organizational leadership, leaders
still find it traditional and not motivational (Hartog, Muijen, and Koopman, 1997).
In addition, it is very complex to apply any of the four behavioral leadership types
as it is difficult to determine which leadership style is to be used in which
situations (Lussier and Achua, 2007). Therefore, House (1996) added
transformational style of leadership suggesting that employees need more
motivation and inspiration in order to achieve organizational outcomes. House
(1996) proposed that with the inclusion of behaviors from transformational
leadership, organizational performance can be improved.
In addition, transformational leadership is reported to empower employees
and develop trust between leaders and followers (Northouse, 2004). Therefore, in
this study it is suggested that transformational leadership styles, trust and
empowerment enhance the level of organizational effectiveness. The following
hypotheses are tested.
H1. Transformational leadership style predicts positive organizational
effectiveness.
H2. Psychological empowerment will mediate the relationship between
transformational leadership and organizational effectiveness.
H3. Organizational trust will mediate the relationship
between
3. Method
3.1. Participants
In this study 457 individuals participated, they were predominantly female
(57.8%). Participants were randomly selected from different departments of a
telecommunications organization in Kuala Lumpur, Malaysia. Participant ages
ranged from 20 to 56 years of age, with a mean of 33.7 years. The majority
(62.6%) were married. Educational levels varied across the sample, 29.1% of
participants had acquired a bachelor’s university degree, a majority (32.2%) of
respondents had completed a pre-university degree or diploma, and a slightly
smaller number (30%) had completed 11 years of schooling. In terms of
organizational level, the majority of respondents (70.7%) represented mid-level
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A. Hoxha / EJEPS 8 (2015) 43-60
management and 27.4% represented non-executive employees. A small
proportion of the sample (2.0%) comprised of senior executives.
3.2. Procedure
Participants were randomly selected from different departments of the
target organization. A purposive sample was selected using the selection criteria
of participants being able to understand and respond to the questionnaire in
English and in the ration of 1:2:3 from among senior, middle and lower
management. The researcher did not have access to individual participants,
therefore, a liaison person from the Human Resource department assisted the
researcher to distribute and collect the questionnaires from their employees. The
researcher followed up closely with the liaison person and was ready to help if
participants need any explanation regarding the content of measures.
3.3. Instruments
The questionnaire contained measures of organizational leadership, trust,
empowerment and organizational effectiveness as described below. A pilot study
was conducted prior to the main study to assess the reliability and validity of the
measures using a sample of 30 respondents from a market research company.
The final questionnaire contained the modified measures, details below, as well as
additional questions to collect socio-demographic information such as age,
gender, marital status, educational attainment, job position and work
experiences.
The Multifactor Leadership Questionnaire: MLQ Form 5-X Rater as developed
by Bernard Bass and Avolio (2004) was used to explore the differences between
transactional and transformational styles of leadership. The final MLQ scale that
was used for the main study consisted of 23 items. The item-whole correlations
for the final scale of MLQ ranged from 0.40 to 0.79, with Cronbach’s alpha of 0.95
which indicates high internal consistency between items.
Trust scale was adopted from that used by Jarvenpaa, Knoll and Leidner
(1998). The trust scale for the main study contained nine items. These items
showed very high reliability and validity with the item-whole correlations between
0.72 and 0.82 and Cronbach’s alpha of 0.94. The trust scale reported very high
internal consistency between items. All nine items were used for hypothesis
testing.
Psychological Empowerment was measured using the modified version of
psychological empowerment of Spreitzer (1992, 1995b). During the pilot study,
the PE scale showed low item-whole correlations and very low Cronbach’s alpha
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A. Hoxha / EJEPS 8 (2015) 43-60
but the researcher retained this scale for the final study. It was found that in the
final test the PE scale showed higher item-whole correlation ranging from 0.32 to
0.61 with Cronbach’s alpha of 0.80 which indicates high internal consistency
between items. All eight items were used for hypothesis testing.
Organizational effectiveness was measured using items from a scale originally
developed by Denison and Mishra (1995). This scale measures the level and
quality of new product development, sales growth, market share, cash flow,
profitability/return on assets, quality improvement, and overall company
performance. Item-whole correlations ranged from 0.49 to 0.78, Cronbach alpha
was 0.92 which indicated high internal consistency and therefore no items were
deleted. This scale utilized a 7-point scale, ranging from 1=Strongly Disagree to
7=Strongly Agree. Items were presented as questions such as “The quality of our
products has improved” for the item related to quality improvement.
4. Results
Table 1 below presents the means, standard deviations and correlations of
the three variables used in the main questionnaire. As expected, the correlation
between the dependent variables namely trust, empowerment and organizational
effectiveness were significant. Similarly, correlations between transformational
leadership and depended variables were high, as was to be expected with the
previously reported results of good reliability and validity. The independent and
dependent variables showed a positive correlation as well, which suggests that
the higher employees scored in transformational leadership style, the higher the
levels of organizational effectiveness. The correlation between empowerment and
organizational effectiveness, however, was the lowest compared to the
correlations between transformational and trust and empowerment.
Table 1. Means, Standard Deviations and Inter-Correlations
Variables
M
SD
Transformational
Trust
Empowerment
Effectiveness
81.96 14.18
47.65 7.87
40.30 6.02
43.57 8.26
TransTrust Empower- Effectivene
formational
ment
ss
1
0.80**
0.61**
0.61**
1
0.64**
0.60**
1
0.48**
1
- Correlations are significant at **: 0.01 and *: 0.05 levels.
Significant correlations were observed between the leadership styles, namely
transformational and transactional and trust, empowerment and OE ranging from
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A. Hoxha / EJEPS 8 (2015) 43-60
0.48 to 0.80. Pearson’s correlations indicated that the strongest correlation was
between effectiveness and transformational leadership (0.61) followed by trust
(0.60) and lowest with empowerment (0.48). The correlations between leadership
and trust and empowerment were slightly higher compared to that between trust
and empowerment and organizational effectiveness. Stronger correlations were
observed between the transformational leadership and trust.
4.1. Socio-Demographics Analysis
The results of one-way ANOVA were used to test the difference between
different levels of Socio-Economic Status (SES) and the level of trust,
empowerment and OE. No significant mean differences were found in gender, age
and marital status. However, results from ANOVA showed significant differences
between educational levels and job position with organizational effectiveness.
However, no significant mean differences were found between levels of education
and trust and empowerment.
4.1.1. Education
Results showed significant difference between levels of education and OE.
Significant mean differences in organizational effectiveness were observed
between employees with secondary school and those with masters level
education (MD=5.53). Comparatively, a higher significant mean difference was
observed between those with diplomas and those with masters (MD=6.50) on the
level of OE. There was no significant mean difference however, between those
with masters and bachelors.
The results showed that employees with less education reported higher
levels of OE. Compared to employees with masters (Mean=38.10), employees
with bachelors (Mean=43.37) reported better quality of OE. Moreover,
employees with diplomas reported even higher level of OE (Mean=44.59)
compared to those with bachelors and masters. In addition, employees with
secondary school (Mean=43.62) reported slightly lower OE compared to those
with diplomas but higher than those with masters and bachelors.
4.1.2. Job Position
Similarly one-way ANOVA analysis showed no significant mean differences
between job positions and trust and empowerment. However, a comparison of
job positions and the level of OE showed significant mean differences. Tukey’s
Post Hoc test revealed that there was a significant mean difference between
junior executives and managers (MD=4.52) in organizational effectiveness.
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A. Hoxha / EJEPS 8 (2015) 43-60
Compared to managers (Mean=40.05), junior executives perceived the
organization to have stronger effectiveness. There were no significant mean
differences in organizational effectiveness between the other job positions.
In view of the significant differences, education and job position will be
entered first as control variables in the hierarchical regression analysis.
4.2. Hierarchical Multiple Regression Analysis
Hierarchical multiple regression analysis was used to predict how well
transformational leadership style, organizational trust and empowerment are able
to predict the level of organizational effectiveness among employees in Malaysia.
Summary results are presented in Table 2 below.
Table 2. Summary table of R-Square for Organization Effectiveness
Independent Variables
Education
Job Position
Model 1
-0.069
(-1.46)
-0.039
(-0.83)
Model 2
-0.107**
(-2.60)
0.023
(0.55)
0.505**
(12.35)
Transformation
-
Trust
-
-
Empowerment
-
-
0.07
1.60
0.202
0.25
52.26
0.01
2
R
F-Statistics
Model Significance
Model 3
-0.055
(-1.46)
-0.007
(-0.19)
0.202**
(4.16)
0.225**
(4.95)
0.332**
(7.51)
0.39
57.58
0.01
- Numbers in the table are beta coefficients, and T-statistics are presented in the parenthesis.
- Coefficients are significant at **: 0.01 and *: 0.05 levels.
Overall, the results show that the regression model improved significantly in
strength with addition of the transformational leadership style. Moreover, the
addition of trust and empowerment showed a strong increase in overall
significance. The first step of the regression analysis showed that the level of
education and job position alone accounted for only seven percent of changes in
levels of organizational effectiveness among respondents and the model was
insignificant. The second step involved the addition of transformational leadership
to the regression analysis which resulted in an increase in R² from 0.07 to 0.25
(∆F(1,453) = 152.50, p ≤ 0.01). The third step involved the addition of trust and
empowerment to the regression analysis. From Table 2, it can be seen that with
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A. Hoxha / EJEPS 8 (2015) 43-60
this addition, the R² value increased from 0.25 to 0.39 for organizational
effectiveness (∆F(2,451) = 49.00, p ≤ 0.01).
The beta scores for each variable are shown in Table 2 to reflect the
contributions of each factor to the organization effectiveness. Transformational
leadership (0.40) showed significant positive beta values indicating strong
contribution to organizational effectiveness, thus, supporting the first hypothesis
(H1). Moreover, the inclusion of trust and empowerment in step three lowered
the beta values of transformational leadership, and trust and empowerment
emerged as positive and significant contributors to organizational effectiveness.
The results from Table 2 indicated that trust and empowerment did have a
strong mediating role. Therefore, findings of this study suggested that hypothesis
two (H2) and hypothesis three (H3) are both supported. In summary, results
indicated that the strongest predictor of organizational effectiveness is
empowerment followed by trust and transformational leadership.
5. Discussion
The main goal of this study was to expand upon previous research in regards
to the relationships between transformational leadership style and organizational
effectiveness in the Malaysian context. However, the uniqueness of this study was
to examine whether mediating variables such as organizational trust and
psychological
empowerment
enhanced
the
relationship
between
Although, previous studies reported that Malaysian leaders in the past were
more directive and autocratic in their relationship with their followers
(Jayasingam and Cheng, 2009; Gill, 1998), suggesting that employees had little
opportunity to participate or get involved in decision making. In other words, in
the past, employee creativity and innovativeness was restricted and yet, this
leadership style was reported to be effective (Ansari et al., 2004). In addition,
Ansari and his colleagues (2004) have reported that in the Malaysian context,
organizational hierarchy is well respected and employees are expected to obey
the orders of their superiors. This type of relationship is against the practices of
transformational leaders. However, in the current paper, transformational
leadership showed significant relationship with trust and empowerment. These
findings are consistent with those (Tyler and Degoev, 1996; Douglas and Zivnuska,
2008; Ismail at al., 2011) suggesting that transformational leadership increases
the level of trust and empowerment among employees. The positive relationship
between transformational leadership, and trust and empowerment indicates that
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A. Hoxha / EJEPS 8 (2015) 43-60
employees are more comfortable with leaders who consider them more as
colleagues rather than just receiving orders.
Further, trust and empowerment showed strongly positive relationships with
organizational effectiveness. In turn, the strongest predictor of trust and
empowerment in this Malaysian organization was reported to be the
transformational leadership style. Trust and empowerment also predicted higher
levels organizational effectiveness. These results suggest that through trust and
empowerment, transformational leadership increases the level organizational
effectiveness. Therefore, Malaysian organizations need to pay special attention to
establishing trust and empowerment among employees in Malaysia. Trust and
empowerment are significant variables that enhance the relationship between
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The ‘Common Sense’ of Austerity in Europe’s Historic Bloc:
A Gramscian Analysis
Ben LUONGO*
Department of Government and International Affairs, University of South Florida,
United States
Abstract
Euro-area efforts to address recession have moved Europe decisively into an era of
harsh austerity despite budget cuts and other fiscal measures facing massive
resistance from the public. Moreover, economists continue to express doubts
concerning austerity and warn Euro-area officials that fiscal tightening only
increases debt relative to GDP. Far from reflecting either popular or economic
opinion, I argue that Europe’s pro-austerity discourse both reflects and is
constructed by the hegemonic interests of transnational capital. Specifically,
advocacy groups representing the business-finance community manufacture the
‘common sense’ of fiscal tightening within narratives of European profligacy and
exploding debt. In reality, however, austerity only reinforces the neoliberal
structure underlying Europe’s integration into the Single Market. Forces of
transnational capital not only serve as the intellectual leaders behind this
neoliberal integration but, as my research shows, work to maintain this structure
by advancing pro-austerity discourses in a way that ensures their hegemonic
position within the historic bloc.
Key Words: Austerity, Europe Union, Finance, Gramsci, Neoliberalism
JEL Classification: F55, G00, H10
*
Tel: +1 (407) 733 3605
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B. Luongo / EJEPS 8 (2015) 61-91
1. Introduction
Euro-area efforts to address the current economic crisis have committed
member states to budget cuts and other fiscal measures which has thrust Europe
decisively into an era of harsh austerity. Bailout packages containing austerity
provisions have served as the remedy for recession despite these measures facing
violent resistance from the public. Even mainstream economists encourage more
pro-growth policies under the premise that cuts in public expenditures do nothing
to alleviate the debt while shortfalls of public consumption increases debt relative
to GDP (Wolf, 2012; Krugman, 2012; Gros and Maurer, 2012). Regardless of
growing skepticism and dissent from the public, however, austerity-politics
constitutes Europe’s current finance orthodoxy.
My research explains the triumph of the Euro-area’s pro-austerity discourse
through a Gramscian perspective which frames fiscal tightening as an economic
common sense imposed on Europe’s historic bloc. I build on previous research
that frames European integration in neo-Gramscian perspectives (Cox, 1993; Gill,
1993; Gill, 1998; Bieler, 2000; Bieler & Morton, 2001; Apeldoorn, Overbeek, and
Ryner, 2003) as well as other findings which identify the intellectual forces driving
integration (Bieler, 2000; van Apeldoorn, 2002; Cafruney & Ryner, 2003; Holman
& van der Pijl, 2003) in order to advance the argument of this paper: that forces of
transnational capital have exploited their hegemonic position in order to
manufacture the common sense of European austerity. Such a common sense
reproduces the neoliberal order of Europe’s historic bloc as well as the hegemonic
position of transnational capital within it.
To accomplish this, I outline the role that the business and finance
community has played in advancing Europe’s integration into a neoliberal
superstructure. The EU’s neoliberal architecture reflects these financial interests
which are pursued through the political efforts of powerful business advocacy
groups who serve as the intellectual leadership behind Europe’s neoliberal
integration. I demonstrate how that same political arm of transnational capital
manufactures the common sense of austerity by exploiting the EU’s
superstructure it helped establish. These advocacy groups accomplish this by
framing Europe’s recession in apocryphal narratives of sovereign profligacy in
order to build the case for restoring investor confidence through fiscal-tightening.
Such an agenda which manufactures the common sense of austerity serves to
reproduce the hegemony of Europe’s neoliberal project. Processes of European
integration not only retool the state to serve the interests of global capital but,
furthermore, hollows out its welfare capacity. This consigning of wealth and
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privilege from the citizen to the investor aids in reproducing the hegemonic status
of transnational capital by choking counter-hegemonic efforts of labor.
I begin with a brief review of the theoretical frames that have dominated the
literature on European integration and underline the inability of these frames to
conceptualize the role of social conflict in European integration. From there, I
introduce the work of Gramsci who provides us with a frame to explore the
discursive union between ideas on one hand and social relations on another and
how this nexus shapes Europe’s historic bloc. The second and third section builds
on previous neo-Gramscian literature to accomplish two tasks: The second section
outlines how the EU not only operates according to a neoliberal logic but protects
the finance orthodoxy from popular consent. States must follow a deflationary
agenda, adhere to standards of Europe’s competitiveness, and cope with
convergence criteria which place controls on public spending, all of which are
imposed on states from supranational level thus removing it from democratic
accountability. The third section discusses the intellectual leadership behind
Europe’s neoliberal design and traces its origins to the efforts of transnational
capital. In particular, advocacy groups, like the European Round Table of
Industrialists (ERT), have exploited their political capital to embed discourses of
competitiveness and investor-confidence in order to advance Europe’s integration
into a single market. This all positions the fourth section to argue how
manufacturing the common sense of austerity serves as a political tool for forces
of transnational capital to secure their hegemonic status within the historic bloc.
By advancing narratives of sovereign profligacy, transnational capital builds the
case for austerity upon the logic of the ‘expansionary fiscal contraction’
hypothesis, which reflects and reproduces the hegemony of the same neoliberal
principles underpinning Europe’s integration – those principles which call for
promoting investor-confidence. Simultaneously, business advocacy groups
advance discourses of labor flexibility to justify the shortfall in public welfare
spending. Together, these serve as the intellectual justification for the business
and finance community to lobby for further fiscal tightening.
2. Theories of European Integration
European integration has traditionally been studied under two dominant
theoretical frames: neo-functionalism and inter-governmentalism. Built on the
work of Earnst B. Haas, neo-functionalism emerged in the 1950s to explain the
integration of Western Europe through the expanding role of regional institutions.
It frames regional integration as a continuous and self-sustaining process driven
by the ‘logic of spill-over’ where the decision to place one sector under the
authority of a centralized institution leads neighboring policy areas to be
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integrated as well (Tranholm-Mikkelsen, 1991, p.4). Because this integration is
driven by a technocratic rationality, neofunctionalism doesn’t only assume the
growth and importance of supranational structures but the incremental erosion of
traditional state power.
Inter-governmentalism brought sovereignty back into the discussion and
asserted that integration cannot be fully understood without incorporating
national interests (Moga, 2009). Andrew Moravcsik (1993) later proposed ‘liberal
inter-governmentalism’ built on liberal theories of bargaining and compromise in
order to explain how states, careful not to give up their sovereignty, may
cooperate with each other over matters of common interest. Such prospects of
compromise occur when processes of international interdependence encourage a
convergence of national interests. In relation to the EU, this theory examined
European integration in terms of a) how states’ interests are determined by the
costs and benefits of economic interdependence and b) how negotiations are
determined by the bargaining power of governments on one hand and the
benefits of institutionalization on the other.
While both of these approaches constitute an important body of research
regarding European integration, they suffer from a major theoretical limitation.
The focus on automatic processes of spill-overs or the economically constrained
pursuits of national interests reduces integration to rational processes and ignores
the role of conflict inherent in the formation of the EU. As a result, these
reductionist frames analyze only the manner of integration rather than the
political interests driving it.
Marxists scholars have long recognized these limitations and understood that
explaining integration in terms of political and economic conflict required
incorporating the historical process of class structure. Peter Cocks emphasizes this
point in “Toward a Marxist Theory of European Integration,” arguing that previous
theories have avoided the historical and socio-economic dimensions to
integration (1980, p.2). Because of this, integrationist theories were unable to
analyze the social relations of production. Cocks therefore enjoined scholars to
examine how open-ended class struggle shapes and advances forms of
integration. From that point, Marxist research conceptualized both state and
business as expressions of social relations in order to demonstrate how capitalist
forces drove and purposed European integration as a market rather than as a
political unit.
However, Marx fails to offer a theoretical frame that recognizes the
legitimizing role of ideology due to his belief that political and economic
transformation is rooted in the crisis of capitalism. Understanding how market
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forces maintain hegemony, then, requires a closer examination of the intersection
between social relations and discourse. Gramsci accomplished this through the
concept of ‘common sense’ which entails “diffuse, unco-ordinated features of a
general form of thought common to a particular period and a particular popular
environment” (Gramsci, 1971, p.330). Generally speaking, common sense refers to
popular but primitive accounts of how the world works. While these accounts may
seem natural, they are actually historical acquisitions that have become taken for
granted (ibid, p.198). Capitalism, therefore, presents itself as ‘common sense’
which produces the consent necessary to legitimize and maintain its power.
Far from representing a peaceful unanimity, common sense serves more as
an arena of contested ideas and represents the violent and turbulent front over
the struggle for hegemony (ibid, p.422). Because hegemony is “grasped when the
citizenry comes to believe that authority over their lives emanates from the self”
(ibid, p.268), common sense functions not only as a material conflict but an
ideational one as well. Hegemony, then, doesn’t signal only consent, but implies a
precarious union between social forces as the interests of subordinate classes are
partially addressed only to incorporate them into an historic bloc.
Moreover, Gramsci speaks of the necessary role of organizing intellectual
interests. For him, common sense does not simply emerge from disorganized
interests but, rather, is produced with the aid of organic intellectual leaders who
play an integral role in the development of the historic bloc. The goal of this
leadership is to articulate the ideological justification for the legitimacy of the
current system. However, their successful leadership requires not only articulating
an ideology but, according to Gramsci, overthrowing the traditional intellectuals
(ibid, p.10). In other words, hegemony requires the development of a dominant
ideology and organic intellectuals assume the leadership position to articulate it.
Unlike previous integration theories, a Gramscian approach provides us with
a conceptual framework to examine the social forces that shape economic
integration as well as the ideational forces which legitimize it. For the purposes of
this paper, a Gramscian approach allows me to (a) describe how pro-austerity
discourses reproduce Europe’s neoliberal political order (b) identify the
intellectual forces advancing austerity as a common sense, and (c) explain how
advancing austerity as common sense serves to maintain the hegemonic status of
those intellectual forces within Europe’s historic bloc.
3. Europe’s Neoliberal Historic Bloc
This section discusses the ideational dimension to Europe’s economic
integration and, building on previous research (Cox, 1993; Gill, 1993; Gill, 1998;
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Bieler, 2000; Bieler & Morton, 2001; Apeldoorn, Overbeek, and Ryner, 2003), how
that process executes a neoliberal agenda. Europe embraced neoliberal
economics in response to the economic troubles of the 1970s and 80s which
many blamed on government inefficiencies – stimulative tax breaks floated
overseas in globalizing economy, Keynesian policies failed to address persistent
stagflation, and regulations were blamed for stifling business and trade (Bieling,
2003).
However, the most urgent problem in the eyes of public officials was what
O’Conner (2001) calls the ‘fiscal crisis of the state’ where government
expenditures for social programs and public services exceeded revenues from the
tax base. As O’Conner shows, public officials shifted their strategy from raising
revenues to a more market oriented approach of lowering taxes to attract
business and investment. This is best seen in the European Commission’s 1985
report titled Completing the Internal Market which called for the dismantling of
business regulations and trade barriers, easing the corporate tax burden,
strengthening monetary cooperation, and other neoliberal policies. According to
the document, such policies are evidently common sense given that “we draw the
lessons from the setbacks and delays of the past.” (1985, p.4). The mention of
“setbacks and delays of the past” serves to remind public officials of the ‘fiscal
crisis of the state’ in order to frame government intervention as the cause of
crisis. Proponents of the internal market believed that a more market-oriented
approach would grow business where supply-side dynamics would obviate the
need for a welfare state. Public officials, thus, called for bigger markets under the
logic that more competition would create more jobs and more services.
3.1. Establishing a Neoliberal State
This vision of the internal market was realized through the Single European
Act of 1987 (SEA) which eliminated non-tariff barriers still remaining after the
creation of the European Union Customs Union (EUCU). The SEA’s focus on
market solutions are articulated in its ‘four freedoms’ of goods, services, capital,
and people which “are enshrined in the EC Treaty and form the basis of the single
market framework” (European Commission, 2008, p.20). This single legislative act
dramatically transformed the EU into the market-driven project that it is today
(Underhill, 1997, p.118).
The EU’s neoliberal direction changed the economic role and power of both
finance and the state. Finance exploded as neoliberal policies deregulated
markets and reduced barriers to the movement of capital. This led to a shift away
from commercial lending to riskier capital market activities. Simultaneously,
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competition policies denied states their traditional sovereign right to intervene in
market affairs. This reshaping of the state, however, should not be characterized
in terms of its shrinking – both businesses and consumers require a capable state
to secure basic property rights, trust in currency, and laws governing financial
transactions. Rather, the reshaping of the state serves to realign it with the
disciplines of the market. This reflects what Robert Cox (1987) refers to as the
internationalization of the state, a concept meant to explain how European states
are re-oriented to serve the interests of transnational capital. According to Cox,
the common feature of the internationalization of the state is to:
"…convert the state into an agency for adjusting national economic
practices and policies to the perceived exigencies of the global economy.
The state becomes a transmission belt from the global to the national
economy, where heretofore it had acted as the bulwark defending
domestic welfare from external disturbances." (1992, pp.30-31)
This is clearly evidenced in the Treaty of Maastricht which redistributes
economic power from the state to a supranational arrangement of institutions
that enforce and execute neoliberal policy. In particular, Euro-area members
forfeit their monetary sovereignty to the authority of the European Union and are
then subject to a deflationary monetary policy set by the European Central Bank
(ECB) as well as competitiveness laws enforced by the European Commission (EC)
and interpreted by the European Court of Justice (ECJ).
For Cox, three developments are necessary for the internationalization of the
state, (1987, p.254) all three of which are present in the EU. The first refers to the
formation of an international consensus around an ideological understanding and
prioritization of the world economy, which describes aptly the paradigmatic shift
of Europe’s collective neoliberal turn. His second criterion, where consensus is
hierarchically structured, presents itself through the consigning of traditionally
state-based monetary power to EU authority. The third, and most important,
criterion holds that structures inside the state are repurposed to translate the
international economic consensus into national policy. This is evidenced in
Europe’s competitiveness policies which thrusts member states into a race to
attract business and investment by lowering taxes and relaxing regulation (ibid,
pp.254-255).
Probably the most effective dimension in establishing the neoliberal state
was their voluntary sacrifice of monetary sovereignty which subjects Euro-area
members to the real threat of insolvency and, thus, functions as a control over
public spending. The fear of bankruptcy serves to justify the Maastricht Treaty’s
convergence criteria [as outlined in article 10c(2)] which mandates that member
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states maintain budget deficits under three percent of their GDP and keep
national debt under 60% of GDP (Treaty on European Union 1992, p.183).
Additionally, the Stability and Growth Pact of 1997 imposes strict monitoring and
penalty mechanisms in order to enforce the Maastricht Treaty which, by
extension, attenuates the state’s ability to address joblessness or recession.
The pressure for states to maintain a proper fiscal standing highlights
Europe’s confidence in the expansionary-fiscal-contraction hypothesis, also
known as expansionary austerity, a theory introduced by economists Francesco
Giavazzi and Marco Pagano in 1990. According to the theory, a major reduction in
public expenditures creates an expectation of lower tax rates thereby
incentivizing higher levels of consumer spending. This in turn attracts finance
capital and creates business which not only generate jobs but provides necessary
services to consumers thus obviating the need for social programs.
Additionally, the expansionary austerity coheres nicely with discourses calling
for higher levels of labor market flexibility. A study published by the Organization
of Economic Cooperation and Development (OECD, 1994) blamed Europe’s
unemployment and slow growth in the early 1990s on inflexible labor markets.
The report encouraged a reduction in welfare as well as curbing the efficacy of
labor institutions. Despite little research corroborating the benefits of labor
flexibility, the ECB published a report titled Euro Area Labour Markets and the
Crisis (2012) echoing these same policy prescriptions. Specifically, the report
called for major market reforms where increased labor flexibility serves as a “key
ingredient” (ibid, p.10).
The expansionary-fiscal-contraction hypothesis and labor flexibility both
serve as the intellectual basis for Europe’s neoliberal order. Taken together, they
highlight two important features of the Cox’s internationalized state:
Expansionary austerity highlights the first where “Power within the state becomes
concentrated in those agencies in closest touch with the global economy,” and
labor flexibility highlights the second where “The agencies that are more closely
identified with domestic clients – ministers of industries, labor ministries, etc. –
become subordinated” (1992, pp.30-31). This not only transfers privilege away
from the citizen to the interests of capital, but creates a hostile environment for
labor; controls imposed on public spending trim Europe’s welfare architecture and
shifts the cost of the Euro-area to labor while businesses extract record-levels of
surplus value through increased exploitation.
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3.2. Preserving Neoliberal Hegemony
Given how unfriendly the economic base is to labor, the historic bloc must
work to legitimize its authority which requires embedding neoliberalism into all
aspects of life where it assumes a ‘common sense’ status. Europe’s historic bloc
accomplishes this through two processes. First, the surrender of a state’s
monetary sovereignty to Euro-area authority removes neoliberal policy from
democratic accountability and, thus, shields it from critical debate. Second, the
historic bloc incorporates a social dimension in order to appeal to the interests of
labor in a way that subordinates them to the interests of capital. The former
refers to Stephen Gill’s new constitutionalism which refer to the shielding of
economics from democratic debate. According to Gill, the aim is to:
"…allow dominant economic forces to be increasingly insulated from
democratic rule and popular accountability. Indeed, in neo-liberal
discourse […] private forms of power and authority in capitalist society
are only fully stabilized when questions of economic rule are removed
from politics.” (1998, p.23)
The historic bloc accomplishes this by consigning monetary responsibility
from the state to the authority of the EU insulating monetarist and supply-side
policy from democratic debate – which exposes the very real legitimation crisis
within Europe’s historic bloc!
The latter occurs through the incorporation of a social dimension in order to
capture the consent of labor. According to Gramsci, those in the struggle for
hegemony must cede some recognition to opposing interests in order to secure
their consent. In his words, “the leading group should make sacrifices of an
economic-corporate kind” (1971, p.161). The incorporation of a social dimension
serves as such a compromise.
The social dimension refers specifically to the European Social Model, which
is an attempt to address the interests of labor and unions as well as marry social
and economic interests. This is reflected in the European Commission’s 1994
White Paper on Social Policy where it decisively links social progress to discourses
of competitiveness by asserting “the conviction that economic and social progress
must go hand in hand. Competitiveness and solidarity have both to be taken into
account in building a successful Europe for the future.” (1994, p.2).
However, the values expressed in Europe’s social dimension are designed to
advance European competitiveness and overall economic integration. Specifically,
the European Commission places the quality of one’s social life in their
contributions to economic life. In fact, the document makes a point of saying that
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it conceives of rights as they are articulated in the Community Charter of the
Fundamental Social Rights of Workers (1994, p.2). This is best illustrated in the
same 1994 White Paper which claims that values such as free markets, equal
employment opportunity, bargaining rights, and individual freedoms constitute
the primary ingredients for Europe’s social model (ibid, p.2). Subordinating the
social to the economic has been a strategy pursued in other European institutions
as well. A European Council document titled the Social Policy Agenda stated that
“growth is not an end in itself but essentially a means to achieve a better standard
of living for all. Social policy underpins economic policy and employment has not
only economic but also social value” (2000, p.13). This was further echoed five
years later in European Commission document titled European Values in a
Globalized World where the EC stated that “it is essential to recognise that the
pursuit of economic or labour market reforms is the pursuit of social justice; they
are two sides of the same coin” (2005, p.13).
The strongest push to incorporate a social dimension has been the Lisbon
Agenda, generally characterized by two goals: to advance competitiveness and
growth while achieving social cohesion and protection through European Social
Model (European Council, 2000). The European Parliament’s Resolution on its
Midterm Review of the Lisbon Strategy reasserted the subordinate role of the
social to the economic when it spoke of social cohesion in terms of
competitiveness and sustainable growth (2005, p.2). This point is reiterated by a
European Commission communication titled European Values in the Globalised
World which framed the possibilities for social cohesion in terms of states
achieving low inflation and low debt levels (2005, p.11).
The inherent tension between the economic and social dimension refers to
what van Apeldoorn (2008) calls the “contradictions of embedded neoliberalism”.
On one hand, the EU’s structure institutionalizes neoliberal economics which
allows for a form of governance dictated by market forces. On the other hand, the
social dimension attempts to bring Europe together and foster social cohesion.
However, contradictions emerge while fostering both economic freedom and
social protection at different levels. According to Apeldoorn, discourses of
competitiveness remain hegemonic as they are protected at the union level while
social cohesion is delegated to the states. While claiming to marry both economic
and social interests, the historic bloc subjects the latter to the former as market
interests are protected at the supranational level which undermines the social
protections offered at the national level. Ultimately, the social dimension serves
primarily as a process to embed neoliberalism by roping labor under a pretense of
social cohesion.
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To briefly summarize, the institutional configuration of the Economic
Monetary Union produces the hegemony of neoliberal economics in Europe’s
historic bloc. The European Central Bank pursues a deflationary agenda while the
European Commission and Court of Justice implement and enforce the historic
bloc’s competitiveness doctrine. Coupled with convergence criteria which place
budgeting controls on public spending, member states rely increasingly more on
market mechanisms to provide services to the public and are therefore more
disciplined to serve market interests. However, member states locked in
competition to attract footloose investment sacrifice the revenues necessary for
funding social programs and labor protections. Labor, then, must bear the cost of
Europe’s monetary union as businesses extract surplus value through increased
levels of exploitation. The European Commission implemented the Lisbon Agenda
to address the concerns of a neglected social dimension, but Lisbon architects
subordinated the strategy to the disciplines of competitiveness.
All of this occurs outside the realm of accountability. Member states’ forfeit
of monetary sovereignty consigns economic responsibility to technocratic
authority which removes it from democratic procedure and thus critical debate.
Consequentially, policies emphasizing deflation, competitiveness, and balanced
budgets are simply accepted and enforced by political leaders who hold neoliberal
policies as natural. Such a design of Europe’s historic bloc exposes the social
purpose of European integration as a neoliberal hegemonic project.
4. Transnational Capital as the Organic Intellectuals
According to Gramsci, “A human mass does not ‘distinguish’ itself, does not
become independent in its own right without, in its widest sense, organizing itself;
and there is no organization without intellectuals, that is, without organizers and
leaders” (1971, p.334). Here I discuss the intellectual leadership behind European
integration. If Europe’s neoliberal structure hollows out the state and exploits
labor, then whose interests does European integration serve? Previous research
(Bieler, 2000; van Apeldoorn, 2002; Cafruney & Ryner, 2003; Holman & van der
Pijl, 2003) has demonstrated how such an agenda benefits of the interests of
transnational capital. I build on this research to demonstrate how integration
represents the success of the business-finance community in establishing Europe’s
neoliberal common sense. Again, according to Gramsci, every interested group is
organized by some intellectual elite (1971, p.5). This section, then, will discuss
those intellectuals within the business-finance community responsible for
embedding neoliberal ideology into economic, political, and social life.
Specifically, I demonstrate how a networked and organized transnational class of
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executives and investors serve as the intellectual leadership who articulate the
economic virtues of neoliberalism.
The most powerful and vocal group in the business community is the
European Round Table of Industrialists (ERT) which, according to its website, acts
as a forum for major multinational corporations to lobby for the interests of the
Single Market program (2015a). Their homepage proudly boasts the power of its
business network by stating that it houses 50 chief executives of multinational
corporations and that member companies of the ERT have a combined turnover
that exceeds € 1,300 billion (ibid).
More importantly, the organization flaunts its political capital stating that it is
in close coordination with members of the European Commission, the Council of
Ministers, the European Parliament, national governments and parliaments,
business colleges, and the media (ERT, 2015b). It also states that it works closely
with BusinessEurope in pursuing and implementing their political agenda.
Not only does the ERT take pride in its ability to influence Europe’s political
economy, but it sees no problem mixing moneyed interests and politics. In fact,
the group argues that networking big business with government creates a synergy
to inform business friendly policy. They state in a report titled ERT’s Vision for a
competitive Europe in 2025 that:
"A strong culture of cooperation between business, education and
government should be expected.‘Revolving doors’ between the three
sectors could create a shared understanding of the importance of
entrepreneurship. This should permit the development of a common
agenda, where workforce training, design of regulatory and tax systems
and business development all reinforce each other." (2010a, p.3).
What best demonstrates the ERT’s political power is the pivotal role it played
in creating the Single Market. Then-President Jacques Delors of the European
Commission (1985-1995) has publicly stated the influential role that the ERT
played in its creation (ERT, 2015d). The group published a 1985 report called An
Agenda for Action which functioned as an outline for the Single Market’s
framework. Specifically, the European Commission’s White Paper that led to the
1986 SEA followed the ERT’s plan for a Single Market (ibid).
Their push for the Single Market reflects the ambitions of a ‘double
revolution’ which former ERT chairman, Daniel Jenson, called for in 2000.
According to Jenson, the double revolution entails subjecting the state’s powers
to the interests of the global economy while simultaneously consigning
government responsibilities to the union level (Murphy, 2011). Their ambitions for
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a ‘double revolution,’ manifest in their efforts for the SEA, demonstrates the
economic forces behind the internationalization of the state.
The ERT is also largely responsible for framing Europe’s discourse on
competitiveness. A major goal of the group is to identify issues of competitiveness
within the EU and communicate specific policy prescriptions to public leader (ERT,
2015b). In a report titled Benchmarking for Policy-Makers, the ERT argued that
the most competitive European states are those who can attract mobile capital
which requires low tax rates, privatization, and wholesale deregulation (1996,
p.15). This philosophy led to the creation of the Competitiveness Advisory Group
(CAG) who serve as a watchdog group which reviews government policies and
regulations against the standards of competitiveness (ERT, 1994, p.3). Essentially,
the group is meant to secure competitiveness as a high priority on the EU’s
agenda. Far from acting as an objective outlet, however, the CAG has actually
housed many networked members from the business community including
several executives of business members of the ERT.
The ERT also shapes the interests of individual member states regarding
competitiveness. For example, German Chancellor Angela Merkel sent an email to
French President Francois Hollande and several ERT chairmen asking to convene
and discuss the topic of competitiveness in 2013 (Merkel and the Dreams of
Corporate Leaders, 2013). In fact, both Germany and France appointed ERT
veterans, Gerhard Cromme and Jean-Louis Beffa, to serve as chairs for the
Working Group on Competitiveness, a group tasked with recommending
competitiveness policies (Press and Information Office of German Federal
Government, 2013, p.4).
Furthermore, the ERT has developed a system of benchmarking with the
purpose of monitor competitiveness of EU member states and to make policy
recommendations for government leaders (ERT, 2015c). This highlights the
panoptic component of Gill’s new constitutionalism which refers to the
implementation of pervasive forms of market-oriented surveillance. Specifically,
these panoptic measures allow for greater monitoring and social control over the
labor’s activity (Gill, 1995). The ERT’s push for benchmarking serves to bulwark
such a panoptic architecture by way of monitoring and intensifying productivity
levels of labor. This is essentially what the ERT advanced in their 1996 paper titled
Benchmarking for Policy-makers: The Way to Competitiveness, Growth and Job
Creation as well as their 1997 paper titled Benchmarking for Competitiveness.
They also wrote several letters to the European Commission espousing the
advantages of benchmarking. The group’s success in advancing Europe’s
benchmarking panopticon is marked in the European Commission’s creation of
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the High Level Group of Benchmarking who, in their first report, suggested
implementing the ERT’s agenda of linking the Commission’s Competitiveness
Report to benchmarking activities (European Commission, 1999, p. 4). This report
concludes by arguing how labor protections and government programs impede
benchmarking efforts (ibid, p.16).
Benchmarking serves the additional purpose to remove the politics from
economics by making it a purely technical enterprise. This technical
transformation was welcomed by political leaders, especially Portuguese Prime
Minister Guterres who said that “The idea of a benchmarking system is to simplify
the coordination of policies,” and “If we have clear strategies, quantified and
verifiable objectives, I think the markets will respond in a much more coherent
way” (“Europe’s Route to Growth,” 2000, p.10)
Additionally, the ERT aids in the construction of Europe’s subordinate social
dimension. For example, the European Council has made it a public campaign to
fight youth unemployment, also known as the ‘youth guarantee’ which builds on
an ERT initiative. The program works to make young people more attractive for
employers by requiring governments impose structural reforms to education and
job-training as well as increase vocational schooling (European Commission 2015).
The European Commission claims to receive a lot of support for this program from
the ERT (2014, p.59).
In general, the ERT has been a driving force in advancing neoliberal ideology
in Europe’s historic bloc. Their Agenda for Action served as an outline for the
Commission’s White Papers which led to the 1986 SEA. Additionally, their efforts
to frame the competitiveness discourse and to advance benchmarking have
established the dominance of supply-side policies.
5. Austerity as Common Sense
While the previous section discusses the leadership role of transnational
capital in advancing Europe’s neoliberal ideology, this section demonstrates how
those same political-economic forces frame European austerity as a fiscal
‘common sense’ in order to reproduces their hegemonic role in Europe’s historic
bloc.
The business-finance community’s recent push for fiscal-tightening follows
the same logic reflected in the Stability and Growth Pact of 1997, which commits
member states to adhere to convergence criteria as well as the Broad Economic
Policy Guideline of balanced budgets. However, the austerity measures imposed
on EU members following the 2008 financial crisis are historically harsh and mark
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a dramatic shift in fiscal tightening. Figure 1 illustrates the reduction of structural
deficits as percentage of GDP.
Figure 1: Reduction in Structural Deficit as Percentage of GDP
Source: International Monetary Fund (2013), World Economic Outlook: Hopes, Realities,
Risks.
The severity of these measures is rationalized in apocryphal narratives of
European profligate spending. Specifically, the GIPSI states (Greece, Italy,
Portugal, Spain, and Ireland) were castigated by public officials and the media as
excessive and indolent. For example, German Finance Minister Wolfgang Schäuble
wrote that:
"…it is an undisputable fact that excessive state spending has led to
unsustainable levels of debt and deficits that now threaten our economic
welfare. Piling on more debt now will stunt rather than stimulate growth
in the long run. Governments in and beyond the Eurozone need not just
to commit to fiscal consolidation and improved competitiveness – they
need to start delivering on these now." (2011, paragraph 3).
The language of “excessive state spending” serves as a retelling of the ‘fiscal
crisis of the state,’ a narrative that blamed the state as the cause of the crisis in
order to rationalize the EU’s neoliberal turn.
Just as the interests of transnational capital served as one of the major
political forces driving Europe’s neoliberal turn, they now exploit their position to
advance austerity as a common sense prescription to Europe’s fiscal crisis.
Framing the 2008 crisis in terms of debt, the ERT delivered a message (2009) to
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the informal European Council meeting arguing that earning the public confidence
requires states reduce their debts by adhering to the Growth and Stability Pact as
well as increasing competitiveness. BusinessEurope, another leading European
corporate lobbying group, published a report called Combining Fiscal
Responsibility and Growth (2010) which frames the issue in terms of “fiscal
sustainability” and urges the policy officials to direct their attention to the issue of
debt.
This is, however, a false narrative as Europe’s crisis cannot be traced to a
bloated welfare state. Figure 2 illustrates how GIPSI spending relative to GDP has
remained well within the average ratio of other EU member states. Additionally,
the fiscal conditions of the GIPSIs were actually improving in the decade leading
up to the crisis. Figure 3 demonstrates how the collective debt of the GIPSIs was
decreasing relative to the size of their GDP leading up 2008. Nonetheless, framing
the root of the crisis in state spending serves to justify the historic bloc’s
draconian embrace of austerity politics.
Figure 2: Public Social Expenditures in EU in 2007
Source: OECD Factbook Statistics. Data missing for Bulgaria, Cyprus, Latvia, Lithuania, and
Malta
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Figure 3a: GIPSI Spending as Percentage of GDP
Source: International Monetary Fund (2013). World Economic Outlook Database.
Figure 3b: Average (GIPSI) Spending as Percentage of GDP
Source: International Monetary Fund (2013). World Economic Outlook Database.
In reality, the sovereign debt crisis is a product of the banking crisis as states
dissipated large percentages of their GDP to rescue the financial sector. EU
officials determined that reviving confidence in the financial sector was necessary
even if sovereigns had to shoulder the cost. The popular adage, “privatizing profits
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and socializing risk” appropriately describes how taxpayers are forced to shoulder
the cost of banks – which failed to properly assess creditworthiness – all to
appease foreign investors. Such moral hazard demonstrates the privileged status
that finance capital holds in Europe’s historic bloc.
Additionally, the expense of bailouts incurred by the state creates the
opportunity for transnational capital to call for further fiscal tightening. Leif
Johansson, then-chairman of ERT, held a press-conference to send this message to
state leaders before they met at the 2011 EU Summit in Brussel. He asserted that
the Euro-crisis could best be addressed through “a quick and orderly return to
sustainable public finances” (Schäfer, 2011, paragraph 14) and that this could
achieved by a strict adherence to the revised Stability and Growth Pact.
Of course, the Stability and Growth pact advances the logic of the
expansionary-fiscal-contraction hypothesis in its call starve the state of revenues
which, in theory, would boost consumer confidence and create an environment
ripe for privatization. An ERT document titled ERT’s Vision for a competitive
Europe in 2025 serves to communicate these interests to public officials in the
form of policy recommendations. According to the document, these
recommendations include respecting the Stability and Growth Pact with the aim
of encouraging long term budget surpluses (2010a, p.5). Such surpluses are
achieved primarily through strategies of labor flexibility. According to the report,
budget surpluses “should be financed by cutting public expenditures on policies
that are not sustainable” (ibid, p.5). They suggest that this be accomplished by
reforming public pension plans, social security systems, and overall privatization.
Specifically, the ERT suggests that member states “strike a better balance between
social cohesion and financial sustainability, for example, by placing greater
emphasis on patients’ responsibility for health care costs” (ibid, p.5). These
strategies have also been advanced by other business advocacy groups like
BusinessEurope who, in a report titled Putting Europe back on Track, called for
reducing government costs through structural reforms to healthcare and public
pensions while “promoting higher labour participation” (2009, p.3)
Again, there are two sides to labor flexibility; the added risks imposed on
labor relieves business of their responsibility to address basic worker demands.
The ERT advocates for this in a report titled Flexibility and Employment (2011)
where they argue that increased flexibility would create more jobs, smooth out
employment transitions, and maintain corporate competitiveness. The report calls
for specific strategies of “internal flexibility” such as reducing work hours of hourly
wage earners as well as seeking “support from the workforce, social partners and
public employment agencies, which can partially fund wage decreases” (ibid, p.1).
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Following such steps, according to the report, would allow “companies [to]
maintain their competitiveness as the increased flexibility allows them to adapt
their workforce according to market circumstances” (ibid, p.1).
Additionally, the ERT emphasizes the need for a closer relationship between
transnational capital and the state by marrying fiscal tightening with privileges for
the business and finance community, a design that again reflects the
internationalization of the state. For instance, after stating the importance of
reforming the EU budget, the ERT’s vision for a Competitive Europe in 2025
argues that the EU’s Multiannual Financial Framework must avoid budget cuts in
investment areas that promise future growth. This includes research and
development which the ERT claims to invest more than € 51 billion annually in
(ERT, 2015a). The ERT and BusinessEurope wrote a joint open letter to EU leaders
again warning them that budget cuts to R&D would hinder growth (ERT, 2012).
Additionally, the ERT has called for making it easier for the business community to
have access to venture capital. They make these points in their report ERT
Highlights, urging EU leaders to address “Europe’s structural weaknesses which
included inflexible labour markets, low return on invested capital and insufficient
R&D investments. (2010b, p.90).
These strategies and policy recommendations constitute a pro-austerity
discourse advanced by, and tailored to, the interests of transnational capital,
primarily the ERT. More importantly, this pro-austerity discourse asserts the
hegemony of transnational capital by embedding expansionary-fiscal-contraction
and labor flexibility into the European Commission’s policy agenda. An example
of this is a report1 published by the European Commission (2011) which argued
for a single European core tax aimed to simplify corporate income tax systems in
the EU. According to the report, this would “reduce tax distortions to investment
decisions and increase opportunities for cross-border investments” (ibid p.16)
which would make the EU more competitive in attracting capital.
In 2012, the European Commission held a Competition Forum which
discussed Commission Policies on state aid which opened with Vice President
Almunia asserting that the most important agenda for the commission is “first and
foremost, supporting the efforts that are being made across Europe to boost
growth” (European Commission, 2012a, paragraph 7). This echoed the same
1
During the drawing up of the report, the Commission met three times in “extended
formats” with not only the ERT and BusinessEurope, but other business interests including
the European Business Initiative on Taxation, the Fédération des Experts Comptables
Européens, the European Banking Federation, and the European Association of Cooperative Banks.
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sentiments of ERT representative Worlgang Kopf who also spoke at the function.
The European Commission described the event as forming a consensus among the
attendees regarding policies of competitiveness and state-aid. (European
Commission, 2012b).
Furthermore, the ERT and BusinessEurope, called for the Stability Treaty, or
what activist groups call the ‘Austerity Treaty’ in 2012. Article 5 of the treaty
would require states suffering from debt to agree to detailed structural reforms
aimed to “ensure an effective and durable correction of its excessive deficit”
(European Council, 2013, p.14). The two lobbying groups demand that “Voting
rules should be strengthened to make it tougher for the Council to overrule the
Commission’s recommendations regarding deficits” (BusinessEurope, 2011, p.3).
The language of this treaty accomplishes the ERT’s double revolution first
articulated by Daniel Jenson where national budgets are reviewed and approved
at the union-level. What these examples show is that the ERT does not just call for
more austerity on the whole of public spending, but designs an austerity agenda
designed to hijack the functions of the state in pursuit of wealth accumulation.
Another example of this is the ERT’s call to shrink government spending in all
areas except research and development, an area that the group benefits from.
The ERT published a joint statement with the European Research Council (ERC), an
agency established by the European Commission, urging Europe not to cut its R&D
if it wants to maintain its industrial leadership. According to them, “if we want
Europe to be an attractive place for research, investment, and entrepreneurship,
Europe’s R&D budget must serve this purpose” (ERC, 2014, paragraph 2)
In 2014, The European Commission held an Enterprise and Industry meeting
which they describe as an ”internal seminar conceived to keep our staff in contact
with the frontier of research in economics, notably in the areas of industrial policy
and economic reforms” (2014a, p.1). A presentation by ERT representative
Roeland Van der Stappen showcased their benchmarking report which argued
that the most important actions to take are to increase support for financing
instruments aimed to aid SMEs with venture capital (2014, p.12). The report also
called for increased labor flexibility by relaxing job protections and “Linking wage
evolution to productivity improvements, international competitiveness and
individual performance.” (ibid, p.25).
Forces of transnational capital do not only influence politics at the regional
level, but at the national level as well. For example, the ERT has worked in close
coordination with the German and French initiatives pushing for austerity. The
group delivered a letter titled “Restoring Europe’s competitiveness, growth and
employment” to German Chancellor Angela Merkel, French President Francois
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Hollande, and European Commission President Jose Manuel Barroso (ERT, 2013).
The letter warned the leaders against aid to national governments and urged that
public money be used for ERT research and development programs instead. This
again evidences how the group constructs an austerity agenda that marries
government fiscal tightening with privileges for the business and finance
community. Additionally, the letter suggested that businesses “link wage
evolution to productivity improvements, international competitiveness and
individual performance” (ibid, p.3) which advances labor flexibility by undermining
worker’s rights and linking pay to business needs rather than collective
bargaining.
Later in March of 2013, Merkel, Hollande, and Barroso met with delegates
from the ERT (including the ERT Chairman Leif Johansson). The meeting did not
receive much attention from the media but President Barroso spoke at a press
conference that framed the subject matter of the meeting in terms of austerity.
He defended Europe’s focus on fiscal consolidation and insisted that structural
reforms aimed at shrinking public expenditure are working. His most telling
statement was his assertion that “growth indeed needs to come from increased
competitiveness and productivity, not from debt creation” (European Commission,
2013, paragraph 6). He concluded by saying that “we have seen in the past that
artificial growth fueled by artificial debt, either public or private, is not a solution”
(ibid, paragraph 6), which is a statement that clearly evokes the ‘fiscal crisis of the
state.’
The four leaders met again in 2014 as a continuation in their discussions on
competitiveness (European Council, 2014). President Barroso introduced the
meeting with a brief statement that emphasized the importance of implementing
competitiveness policies as a way to encourage investor confidence. He reiterated
that investor confidence is the “key variable for growth” and that a European
recovery is possible with efforts of the business community (European
Commission, 2014b, p.2).
6. Concluding Remarks
A period of austerity may seem reasonable after governments dissipated
large percentages of their GDP rescuing the financial sector. Even European
leaders grow tired of austerity’s critics. In April of 2013, an exasperated Merkel
said at a podium discussion in Berlin “I call it balancing the budget. Everyone else
is using this term austerity. That makes it sound like something truly evil” (Barkin
& Rinke, 2013, paragraph 3). However, spending cuts hurt some more than
others, specifically those who rely on government programs offering education,
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health, and unemployment services. The fact that austerity politics is insulated
from democratic accountability emphasizes this danger even more as those who
rely on such public goods have no say in Europe’s austerity agenda, despite the
fact that they continue to bear the costs of budget cuts in order to rescue the
banks. Merkel’s statement reflects Germany’s will to pressure profligate spenders
to adopt more austere measures. The reason for this lies in the fact that German
banks would collapse without the current union. The irony is that France and
Germany demonstrated more profligacy than the GIPSI states as their banks
invested in Greek and Italian bonds while also investing heavily in Spanish realestate. This reemphasizes the point that the problem didn’t begin with public
spending but, rather, with private lending and capital market activities. This
reveals a nefarious development in Europe’s historic bloc where transnational
capital hijacks those functions of the state meant to protect and privilege its
citizens. In fact, Europe’s austerity agenda marks a new chapter in class politics
where such measures function as trickle-up payment plans that redistribute
wealth from the bottom to the top. This is best evidenced by rising
unemployment rates in the GIPSI states (illustrated in Figure 4) while the richest
investors in the world continue to rake in record profits while hoarding up to $31
trillion in international tax havens (Tax Justice Network, 2012). The crisis, then,
starts and ends with the banks – though a bloated financial regime created the
crisis, finance capital continues to exercise political power so that states both prop
up and adhere to Europe’s neoliberal order. Austerity politics serve this function.
Figure 4a: GIPSI Labor Force Unemployment
Source: The World Bank (2013). Unemployment, total (% of total labor force)
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B. Luongo / EJEPS 8 (2015) 61-91
Figure 4b: Average of GIPSI Unemployment
Source: The World Bank (2013). Unemployment, total (% of total labor force)
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Islam and Foreign Policy: The Case of Qatar
Turan KAYAOĞLU*
School of Interdisciplinary Arts and Sciences,
University of Washington, Tacoma, United States
Abstract
Qatar’s foreign policy dynamism has been impressive. The literature has
overwhelmingly attributed this activism to Qatar’s desire for security through
military alliances and soft-power. I argue that these claims remain incomplete and
shortsighted because they exclude the role of Islam. I argue that the exclusion of
religious factors is produced by these scholars’ unreflective view about the
conceptualization of religion. This paper looks to develop a different theoretical
perspective from which to look at the impact of religion on foreign policy. To this
end, I use Jeremy Gunn’s conceptualization of three facets of religion—religion as
belief, identity, and a way of life—to conceptualize the role of religion on foreign
policy. I use Qatar’s foreign policy as an example to illustrate the problem of
exclusion of religion in foreign policy analysis and how Gunn’s typology offers a
richer understanding of religious factors on Qatar’s foreign policy.
Key Words: Qatar, Foreign Policy, religion and foreign policy, Islam and politics,
Middle East
JEL Classification: Z12, Z18
*
Tel: +1 (253) 692 5856
Page | 93
T. Kayaoğlu / EJEPS 8 (2015) 93-111
1. Introduction
Since 1995 when the current Emir replaced his father in a bloodless coup,
Qatar’s international activism has impressed many. The Economist praised this
record, noting in 2006 that Qatar has a “[h]abit of punching above its weight, and
in several directions at once” (A bouncy bantam, 2011) and characterizing Qatar in
2011 as a “Pygmy with the punch of a giant” (2011). These metaphors seem apt.
Qatar has held a UN Security Council Seat (2006-2007), was Chairman of the
Group of 77 (2004), hosted the Middle East and North Africa Economic Summit
(1997), the OIC Conference (2000), and the WTO Doha Rounds (2001). The small
Gulf country has diplomatically interposed itself, with varying success, in longstanding conflicts in Lebanon, Palestine, Somalia, Sudan, Syria, and Yemen. Qatarbased Al Jazeera’s extensive, if uneven (the network was largely silent on
Bahrain), coverage sped the Arab Spring (Eakin, 2011). During NATO’s Libya
intervention, Qatar provided money, weapons, and field advisers in addition to
securing the Arab League’s support for the intervention. More recently, Qatar has
successfully persuaded the Arab League to isolate Syria and then, subsequently, to
impose sanctions.
This international activism defies easy explanations. Still, three explanations
abound in the media and academic discourse: Qatar and its regime are building
alliances, are attempting to harness soft power for their own purposes, and,
lastly, are motivated by domestic political concerns (Rabi, 2009; Kamrava, 2009).
While providing rich empirical accounts of Qatar’s foreign policy, these
explanations suffer from the over-rationalization of state action and the exclusion
of religious factors. I argue that this exclusion of religious factors is produced by
these scholars’ unreflective view about the conceptualization of religion. Rather
than explaining Qatari foreign policies based on the role of Islam, this paper looks
to develop a different theoretical perspective from which to look at the impact of
religion on foreign policy. To this end, I use Jeremy Gunn’s conceptualization of
three facets of religion—religion as belief, identity, and a way of life—to
conceptualize the role of religion on foreign policy (Gunn, 2003). I use Qatar’s
foreign policy as an example to illustrate the problem of exclusion of religion in
foreign policy analysis and how Gunn’s typology offers a richer understanding of
religious factors on Qatar’s foreign policy.
This paper has four sections. In the first section, I look at the literature on
Qatar’s foreign policy to identify instrumental rationality as its common
assumption. In the second, I review the literature on religion and politics in Qatar
to distinguish this literature’s emphasis on the structure of the political system
from my argument that emphasizes the role on worldview, legitimacy, and public
Page | 94
Islam. In the third and fourth sections, I propose an approach for studying religion
in foreign policy, broadly conceived, by discussing three facets of religion—belief,
identity, and way-of-life—on foreign policy of Qatar.
2. Existing Explanations of Qatar’s Foreign Policy: Alliance, Soft-power, and
Domestic Politics
According to the alliance logic, “Qatar’s geopolitical position underlines a
systematic security problem” (Wright, 2011, p.128). Sandwiched between regional
powers of Iran and Saudi Arabia, Qatar has relied on external actors for its
security. With the British decision to withdraw from the Persian Gulf in the 1960s,
Qatar allied with Saudi Arabia and founded the Gulf Cooperation Council in 1981,
a collective security organization that arguably institutionalized the Saudi
leadership in the region (Kostiner, 2011). However, Qatar has been seeking new
friends in the post-1995 era because of deteriorating relations with neighboring
Saudi Arabia, who had supported the old Emir, Sheikh Khalifa bin Hamad Al-Thani,
Thus, the new Emir, Sheikh Hamad bin Khalifa Al-Thani has cultivated strong
military relations with the US. Conforming to the Waltian “balance-of-threat”
logic, Qatar has allied with a faraway great power to bolster its security against
regional powers, namely Saudi Arabia and Iran (Priess, 1996; Lawson, 2011).
American military bases cemented this alliance. Housing about 13,000 American
military personal, Al Udeid and As Saliyah serve as logistics, command, and basic
hubs for the US Central Command’s regional operations, including the actions in
Iraq and Afghanistan (Ayoob, 2011; Blanchard, 2010).
However, as observed by Cooper and Momani, “Qatari actions never
followed simple alliance structures. Instead, as a maverick, it mediated and
intervened in regional affairs where state interests were not clear and success was
uncertain” (Cooper and Momani, p.103). Some of Qatar’s actions have diverged
considerably from American goals in the Middle East. Qatar has developed close
relations with Iran, financially helped Hamas and Hezbollah, and permitted AlJazeera to continue broadcasting what many American policy makers claim has
been anti-American coverage. All these actions brought strong censure from the
American policy makers. For example, Senator John Kerry complained in 2009,
“Qatar . . . can’t continue to be an American ally on Monday that sends money to
Hamas on Tuesday” (Cited in Blanchard, 2010, p.18). Defying the alliance logic and
Qatar’s asymmetric dependence on American security guarantees, Qatar has
continued to deviate significantly from American policies in the Middle East on
issues like Iran and the Arab-Israeli conflict.
Page | 95
Another explanation of Qatar’s international activism focuses on Qatar’s
reliance on soft-power. According to this perspective, lacking the necessary
material capability to defend itself against regional powers, Qatar—besides
relying on the American military guarantees—has promoted the image of being a
good member of the international community: moderate, responsible, and
cooperative (Cooper & Momani, 2009, p.5). In advancing this image, Qatar has
worked both sides of the street, so to speak, delicately cultivating a positive image
in Western capitals and on the Arab street. Internationally, Qatar’s diplomatic
peace initiatives, sponsorship of arts, culture, sports, and humanitarian aid have
all served to polish the Qatar’s image as sophisticated, peace-loving, and
humanitarian (Roberts, 2009).
A variant of the soft power argument, “branding” emphasizes states’
conscious marketing-style attempts at crafting a positive reputation. J. E. Peterson
(2006) and Cooper and Momani (2009) apply this logic to Qatar’s foreign policy.
According to these scholars, Qatar has successfully re-branded itself by replacing
the “backward,” “Wahhabi” image with capitalist, stable, and liberal (Cooper &
Momani, 2009, p.103). In so doing, it has distinguished itself from its neighbors
and achieved global recognition. In a similar vein, Debra Shushan argues that the
desire for prestige explains Qatar’s international activism. “Qatari foreign policy is
geared toward generating prestige, which the regime values as protection against
both internal and external threats to its rule. Internally, the accumulation of
prestige is designed to win public approval by enabling citizens to take pride in
their country. Externally, the regime seeks to use its newfound prestige to insulate
itself from expansionist threats by making Qatar an indispensible player in
regional affairs” (Shushan, 2011).
While plausible in explaining Qatar’s high-profile, prime-time news capturing
activities, these arguments ignore the limits that Qatar—an authoritarian county
with serious human rights issues in the areas of gender and foreign labor—faces
in effectively influencing Western audiences. Namely, rebranding what essentially
amounts to cosmetic changes may not create sufficient goodwill to overcome
substantial obstacles (Rosman-Stollman, 2009). Qatar’s human rights record
continues to be criticized by Western media, NGOs, and states (State Department,
2011; Human Rights Watch, 2012).
A final argument explaining Qatar’s international activism draws on its
domestic politics. From this perspective, Qatar uses its international activism as a
means to ensure the regime’s survival. Particularly in the early years of his rule,
Hamad Al-Thani used foreign policy activism and domestic liberalization to
impress international audiences (Rosman-Stollman, 2009). Receiving approbation
Page | 96
from the international community buoyed him against the new regime’s
conservative opponents, mainly Saudi Arabia and its allies inside Qatar. As the
regime has succeeded in consolidating its power, thanks to help from Al-Thani’s
family, and in securing Hamad’s Al-Thani’s son as heir apparent, domestic reforms
have significantly slowed down (Kamrava, 2009). While this argument has some
currency for explain the faltering domestic liberalization efforts, it does not
explain the growth of Qatar’s activism and risk-taking in foreign relations.
The above-discussed explanations share a premise: the rationalist (utilitarian)
approach to Qatar’s foreign policy. In this view, driven by a Napoleon complex
(Shadid, 2011) or obsessed with a siege mentality (Petersen, 2006), Qatar has
skillfully honed foreign policies (Lambert, 2011) and adopted a policy of “hedging”
and “security diversification” (Wright, 2012) to ensure its or its rulers’ survival.
This instrumentalist logic was taken as given because of Qatar’s endemic
insecurity as small state in an unstable region and regime’s autonomy from any
significant domestic constraints. For example, Mehran Kamrava argues that “As a
small state in a rough neighborhood, much of Qatari diplomacy, including the
country’s mediation efforts, is informed by a broader survival strategy that is
aimed at ensuring the security of the ruling Al Thanis” (Kamrava, 2011b, p.556).
Qatar has become the poster child for small states who manage to survive via
strategic use of balancing and branding (Petersen, 2006, p.740). This logic is
plausible; security concerns are paramount for small states in general and even
more so for rich, small Middle Eastern states. International politics of the Persian
Gulf is essentially security politics (Kamrava, 2011). According to this claim, Qatar
is at the mercy of external help to secure the survival of state, regime, or both,
and thus is constantly strategizing. When such material explanations fail, many
scholars invoke branding: For example, just after reducing Qatar’s foreign policy
to survival instinct, Mehran Kamrava argues that, “Mediation has emerged as one
of the central tools for enhancing Qatari soft power and global image” (Kamrava,
2011, p.556).
This premise reduces Qatar’s foreign policy to logical of expected
consequences. Uzi Rabi’s description of Qatar’s foreign policy regarding Israel
illustrates this tendency: Qatar “skillfully generate[s] a sophisticated, independent
foreign policy agenda that differentiates itself from larger and influential
neighbors, while simultaneously upgrading its international profile and gaining
regional prominence” (Rabi, 2009, p.443). In this highly sophisticated hedging
strategy, Qatar carefully calculates a payoff curve for any action. “Qatar has used
both normalization with and estrangement from Israel as policy tools, calibrated
to maintain its visibility in a constantly changing geopolitical environment. Qatar
has deemed normalization with Israel as a calculated risk through which to
Page | 97
promote its broader foreign policy objectives” (Rabi, 2009, p.459). According to
this rationalist view, which reduces Qatar’s diplomacy to a series of actions based
purely on cost-benefit calculations the logic and processes of Qatar’s foreign
policy differs little from the Qatar Investment Authority’s decisions.
This logic of expected consequences leaves no room for the culture and
religion play any role on Qatar’s foreign policy. According to this logic, since Qatari
rulers almost always treat non-security related concerns secondarily to—and
usually in service of—ensuring Qatar’s perpetually threatened security, any Qatari
international activism can be reduced to its security needs. The absence of culture
and religion is even more surprising because Islam is fully ingrained into Qatar’s
history and society. This is a striking loss of perspective and explanatory power.
Apart from Saudi Arabia, Qatar is the only place where the conservative HanballiWahhabi understanding of Islam holds sway; Qatar’s legal system is partially
based on Shari’a; and Qatar is officially identified as an Islamic state. Arguing that
Islam does not have any significant influence on Qatar’s foreign policy is similar to
the argument that political liberalism does not have any significant influence on
American foreign policy.
This exclusively rationalist approach, which discounts the impact of Islam on
Qatar’s foreign policy, resonates well with other empirical studies on the foreign
policies of Muslim-majority states. While scholars of religion and politics have
demonstrated religion’s growing importance in domestic and international
politics, the literature on Islam and foreign policy has suggested only an
ambiguous—often epiphenomenal—role for Islam in the foreign relations of
Muslim-majority states. Even these scholars who concede that Islam has a moral
system shape the values, norms, and principles of a society, constitute an
important part of state identity, and in many cases establish the backbone of
regime’s legitimacy, if it has a place in foreign policy of Muslim states, it is an
instrumental one (Shaffer, 2006).
Brenda Shaffer for example argues that “assuming all things are equal,
culture can be assumed to play a role in foreign policy decision making. All things
are not equal. . .” (2006, p.1). Although states and ruling regimes invoke Islam
rhetorically to justify their foreign policies, but when necessary they decouple
rhetoric and policies. Paradoxically, only other states “take their rhetoric
seriously” (2006, p.6). Even in ‘Islamic’ states, “Islam does not necessarily limit
foreign policy options” (2006, p.4). Because Muslim rulers often define what
Islamic requires a particular conjecture and justify their “pro-Western policies by
creating a distinction between the dictates of ‘good Islam’ or ‘real Islam,’ and ‘bad
Islam’ or ‘false Islam’” (2006, p.5).
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Ironically, a casual review of this literature even suggests that religion may
have more influence on American foreign policy than on Qatar’s foreign policy.
This counterintuitive suggestion is in part an artifact of the literature’s emphasis
on rulers’ sensitivity to constituencies’ demands. This factor is arguably lacking in
Qatar, thus leaving its rulers isolated from interest group pressure (Henne, 2011).
Reading the scholarship in this manner, the reader notes that Qatar’s rulers are
largely unconstrained by the public and mindful of pressing security concerns;
they thus override any concern—including that of religion—in service of state
survival when crafting Qatar’s foreign policy. Yet this approach, endemic in
foreign policy of Muslim states’ literature, contradicts much of the current
international relations literature that has increasingly downplayed the effect of
the logic of expected consequences in international relations while underscoring
the non-deliberative, reflective factors, including norms, ideas, and identities,
habits on state actions (Wendt, 1999; Pouliot, 2008; Hopf, 2012).
3. Bringing Islam into Debates about Qatar’s Foreign Polices
Following Gunn (2003), I propose three ways of thinking about Islam’s
influence on foreign policy: Islam as belief, identity, and a way-of-life, which I call
the three cuts. Each cut moves further away from rationalist thinking endemic in
scholarship on Qatar’s foreign policy and from the instrumentalist and essentialist
approach to religion. Each cut also requires the use of political, sociological, and
ethnographic methods and requiring a shift from thinking of religion as a causal to
constitutive factor on foreign policy.
3.1. First Cut: Religion as Belief and the effect of Political Islam on Qatar’s
Foreign Policy
This first cut treats religion as a belief in a set of doctrines about salvation,
Godhead, and angels. Religion binds believers to these doctrines. The extension of
this logic to foreign policy often invokes “doctrines” that may have political
implications, such as dar-ul Islam versus dar-ul harb, the primacy of umma
(Muslim solidarity) over nation-states, and the Sunni doctrine of Caliphate. In
domestic politics, these religion-based political beliefs are represented by either
political Islamists or safeguarded by state bureaucracy and institutions in
“Islamist” states. Parallel to their powers in domestic politics, these groups and
institutions exert influence on decision-makers to shape the state’s foreign policy.
Qatar’s case illustrates the limited value in conceptualizing the role of religion
on foreign policy in the form of political Islam. Unlike many other nations in the
Middle East, Islam as a political force has played only a marginal role in the Qatari
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political system. Historical, institutional, and political reasons account for this
minor role in Qatar’s domestic and foreign policy. Historically, unlike Saudi Arabia,
where religious (Wahhabis, in particular) and political forces (the Saudi tribe)
were intertwined in the state-building process, the Al-Thani family, who moved
into the Qatar peninsula in the 1800s, has single-handedly built Qatar’s
contemporary structure (Fromherz, 2012). Until recently, Qatar, dotted by small
fishing and pearling villages and lacking in urban centers, did not attract religious
scholars or leaders. Consequently, Qatari state rulers have “imported” imams and
preachers, initially from Saudi Arabia. As relations with the Saudis soured in the
1990s, the Qatari government has increasingly recruited Egyptians, Yemenis,
Syrians, and Iraqis. These temporary religious workers lack a strong social and
political base to mobilize the society for political demands. Moreover, the
possibility of summary deportation and the consequent loss of salary serve as a
significant deterrent for any unsanctioned political activism on the part of the
foreign imams (Kamrava, 2009, p.410).
Institutionally, the religious “sector” does not have strong representation in
the government. Although the government established a Ministry for Islamic
Affairs and Endowments (Awqaf) in 1993, in terms of power and prestige, Awqaf
is more similar to Turkey’s Directorate of Religious Affairs than the powerful office
of Saudi Arabia’s Grand Mufti (Baskan & Wright, 2010, p.99). In fact, Awqaf was
not established until nearly a quarter century after Qatari independence. While
Awqaf has brought some religious perspective, promoting the government to
adopt Islamic-inspired policies, the overall role of Awqaf has been limited to
concerns surrounding religious services. For example, it has no role in shaping the
education curriculum (Baskan & Wright, 2010, p.109). Unlike the Saudi King, the
Qatar’s Emir does not seek fatwas to justify his policies.
Politically, the Al-Thanis, who have controlled the government with few, if
any, domestic constrains from the outset, do not want to share their power. The
revenue from oil and natural gas has allowed the Al-Thanis to create a “classic
rentier state” (Fromherz, 2012, p.111). The government provides major services
without taxation and in return rejects any meaningful public participation. In
other words, the Qatari government does not depend on the support of any
domestic religious actor in order to maintain its rule. Facing little domestic
resistance, the rulers have the latitude to develop a foreign policy that advances
their interests.
All these factors marginalize the religious influence on politics in Qatar.
Baskan and Wright even argue that “at a political level, Qatar has a secular
character more comparable to Turkey than Saudi Arabia” (Baskan & Wright, 2010,
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p.108). Yet, as discussed by these authors, there are signs that things may be
changing: increasing democratic reforms may bring stronger religious voices to
the government; the population growth may necessitate Al-Thani family to use
religion to strengthen social cohesion; and growing indigenous ulama (religious
scholars) within Qatari society may be more influential in advancing a “greater
role of religion at a political and societal level” (Baskan & Wright, 2010, p.96).
There are also two additional ways in which political Islam may influence
Qatari politics. Several scholars, however, have discussed the role of informal,
personal links in Qatari politics within the context of religion (Foley, 2010). These
connections are significant because “the politics of foreign policy tends to be far
more personalized in Arab states of the Persian Gulf than in most other states,
and, typically involves only a small number of elites” (Wright, 2011b, p.78). Foley,
for example, points to several “well-known Islamist supporters” within the ruling
elite, such as the fomer Interior Minister, Shaykh Abdallah bin Khalifa Al-Thani,
and the Emir’s second-oldest son, Shaykh Fahd bin Hamad Al-Thani (Foley, 2010;
Blanchard, 2010, pp.15-16).
Moreover, Qatar has accepted several high profile religious exiles. Notably,
Shaykh Abdullah bin Zayd al-Mahmud, a Hanballi-Wahhabi scholar from Saudi
Arabia who was exiled following the seizure of the Grand Mosque in Mecca in
1979, lives in Qatar. There is also Yusuf al-Qaradawi. Exiled from Egypt in the early
1960s, he has settled in Qatar. His writings, including The Lawful and the
Prohibited in Islam, and his appearances on talk shows like Sharia and Life have
been widely watched throughout the Muslim world. His deep connections to the
Muslim Brotherhood and his respected position among the Qatari elite have
allowed him to establish an informal network between the Islamists and Qatari
rulers (Kamrava, 2009). It was suggested that Qaradawi has privileged access and
considerable influence on Emir (Barakata, 2012) and brokered connections
between Qatari government and high-profile Muslim Brootherhood figures like
Tunisian Rachid al-Ghannouchi. These informal—yet strong—ties to the Muslim
Brotherhood and to its various incarnations in Libya, Syria, Tunisia, and Palestine
have propelled Qatar in a unique position among the rulers in the Muslim world.
As a result of such connections, the Qatari rulers were positively disposed toward
the Arab Spring and the role of Islamists in the various protests.
Whether the subject is formal or informal relations, the discussion in the
literature has focused on the effects of “political Islam”—discernible political
ideas informed by “Islam” and advanced in formal institutions or through informal
channels by a clearly identifiable religiously oriented individual or group. In this
view, the impact of religion on foreign policy practices corresponds to the
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institutional or political clout of religious leaders, movements, and bureaucracies.
In a way, focusing on the institutional role of religion is still an effect of the
salience of over-rationalization in political science literature on religion. It
assumes that power can only come through political institutions, as opposed to a
more cultural impact. Looking solely at “who has power”, like the security scholars
will, misses the importance of religion on Qatari foreign policy if this influence is
grounded in identity, legitimacy and everyday practices. Overall, this approach,
which is a conventional one in political science discussions concerning religion and
politics, allows a minor role for religious influences in Qatari politics as well as in
foreign policy. When skeptics dismiss the role of religion on foreign policy, they
largely focus on this type of religious influence.
3.2. Second Cut: Islamic Identity and Legitimacy on Qatar’s Foreign Policy
The second facet of religion is identity. Religion binds the believer to a
community more than to a set of doctrines. According to this view, similar to
ethnic and racial identity, people are born into religion rather than believe it
through inner convictions and even an agnostic Muslim may still be part of the
Muslim umma. Foreign policy is then a reflection of this collective identity that
highlights shared culture, history, and traditions more than shared creeds,
doctrines, or theology. Religion as identity focuses on constitutive rather than
strictly causal role of religion on foreign policy. In this view, religion can influence
foreign policy through shaping identity of policy makers, their constituencies, or
their audience. Religion is one of the many factors informing the identity of a
policymaker and difficult to measure its effect on other factors, but its power
often shape actors’ interpretation of the international relations and dispose the
policymakers to pursue some policies rather than others.
Identities are always social and relational and were shaped with interactions
of other actors (Wendt, 1999). Identity can also be part of cultural and ideological
underpinning of the society and informs and conditions the foreign policies.
Constructivist international relations scholars’ conceptualizations of state identity
provide some insights for this understanding of state identity that has been
overlook on studies about Qatar’s foreign policy. Telhami and Barnett define
identity is “the understanding of oneself in relations to others. Identities, in short,
are not only personal or psychological, but are also social, profoundly influenced
by the actor’s interaction and the relationship to others” (Telhami & Barnett,
2002, p.8). They argue that state identity—corporate and officially demarcated
identity linked to the state apparatus—and national identity have significant
effect on state’s foreign policy. These identities are in turn shaped by political
elites, social forces, and international forces.
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The state and national identity’s role on foreign policy is constitutive rather
than causal. While in some instances one can establish a direct link between
identity and behavior, identity mostly works by predisposing the state to follow
particular behavior or make certain other behavior less likely. “To say that the
shift in Egypt’s identity from Arabist to statist made possible the Camp David
accords is not to say that all Arab states with a statist identity will make peace
with Israel. Rather, the Arab identity as previous inscribed had treated peace with
Israel as nearly taboo, and the shift toward a state-national identity made peaces
with Israel thinkable” (Telhami & Barnett, 2002, p.18). Jordan’s embrace of
Jordanian identity made it easier to give up its claim on the West Bank. “To say
that an Islamic identity makes an alliance with the West difficult is not to say that
it is inconceivable.” (2002, p.18).
For example it is often the case that states often act to intervene on the
behalf of their co-religions or they tend to provide them more humanitarian aid.
For example while Qatar also provided disaster relief to America after Katrina and
Japan after Tsunami, the overwhelming majority of its foreign aid goes to Muslim
nations. Qatar’s mediation exclusively focused on problems of the Muslim
societies.
Religion also shapes the identity and worldview of the rulers’ constituencies
who expect that rulers would not act counter to widespread preferences of the
society. Islam underpins the legitimacy of the Qatari rulers’ claim to authority
(Wright, 2011, p.83). In Qatar and other more religiously based states, legitimacy
is not merely legal-rational authority, but also – and perhaps more primarily –
traditional authority. “In many respects, Islamic identity and the upholding of its
virtues is uniformly linked to legitimacy of the governments and ruling elites”
(Wright, 2009, p.76). The Qatar state also adopted Islam as official state identity.
This is codified in the first article of Qatar’s Constitution: “Qatar is an independent
Arab state. Islam is the State’s religion and the Islamic Shariah is the main source
of its legislations. It has a democratic political system. Its official language is
Arabic. People of Qatar are part of the Arab nation (ummah).” (Constitution of
Qatar, 2004)
While rulers have extensive autonomy to craft the country’s foreign policy in
Qatar, the rulers would hesitate to take any major foreign policy decisions that
may undermine the regime’s legitimacy, “the normative belief by an actor that a
rule or institution ought to be obeyed” (Hurd, 1999, p.381). “Religion can lend
legitimacy to governments as well as specific policies followed by governments”
(Fox, 2009, p.277). In a society like Qatar where important segments of the
population take religious legitimacy seriously, religious actors can extend or
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withhold their legitimacy from certain actions. Thus Qatari leaders, like other
Islamic rulers leaders, refer religious text and invoke Qatar’s Arab heritage—
rather than citing state constitutions—as a basis for its policies. Although
governments may have significant influence on religious authorities and
legitimacy is not the only concern for the state rulers, rulers may refrain from
pursuing religiously unpopular foreign policies if such policies are not intimately
related to regime survival. For example, while Qatar allow Israel to establish a
trade office in Qatar, it closed it down in parallel with the rise of anti-Israeli
sentiments during the Israel’s assault to Gaza in 2008.
Furthermore, religion shapes the perception of external actors. In the case of
Qatar four layers of international audience—Arab, Muslim, and Western states,
international community—play prominent role in Qatari foreign policy. For the
first two of these layers, Islam an important factor in considering in judging
Qatar’s foreign policy. Qatari state rulers often take Arab and Muslim criticism
seriously and attempt to persuade these audiences for the legitimacy of their
foreign policies.
One case for this is Qatar’s relations with Israel. In part to build closer
relations with the US, just after ousting his father, the new Emir attempted to
normalize relations with Israel. Despite the public opinion against the
normalization, Israeli Prime Minister Shimon Peres visited Qatar and Israel opened
a trade office in Doha in 1996. When criticized that this normalization undermines
Arab and Muslim interest, Qatar argued its sovereign right to conduct foreign
policy autonomously (Rabi, 2009, p.449). Yet Qatari Government also took actions
such as establishing committee to support Arab and Islamic heritage of Jerusalem
to show its commitment to pan-Arab and “Islamic” cause (Rabi, 2009, p.450).
Each wave of Arab-Israeli, Arab and Islamic circles ratcheted up their criticism
about the existence of Israel’s trade office in Doha. Second (Al-Aqsa) Intifada
resulted in more internal and regional calls for Qatari government end ties with
Israel. Qatari desire in hosting the
Organization of Islamic
Conference/Cooperation (OIC) summit in Doha in November 2000 made it more
vulnerable to the criticism about its relations with Israel (Rabi, 2009, p.451).
Established a reaction to Israel’s expansion in 1967 and control of Jerusalem, one
of the primary objections of the OIC is to deny international legitimacy in to the
Israeli occupation beyond its 1967 boundaries. Arab and Muslim actors argued
that Doha’s relations with Israel made it unsuitable to host the OIC meeting and
thus a serious actor in the region and broader Muslim world (Kayaoglu, 2015).
“Eventually, Qatar succumbed to regional pressure, and announced the closure of
the Israeli office in November 2000. A government spokesman stated that the
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closure ‘reinforces Arab solidarity and creates appropriate conditions for holding
the summit.’” (Rabi, 2009, p.452).
3.3. Third Cut: Religion as a Way of Life and Public Islam on Qatar’s Foreign
Policy
Unlike political scientist, many anthropologists and sociologists have
abandoned the “social-scientific” view of religion in general and Islam in
particular. For example, the anthropologist Talal Asad cautions against thinking of
Islam as merely a belief calling it privatized, which is the Protestant view of
religion that reduces religion to inner convictions (forum internum). He likewise
questions thinking about religion as culture or identity. He suggests thinking of
religion not as a state of mind or blue print of society, but as a form of activity and
practice in the world (Asad, 1993).Rejecting the construction of religion as a
category that can be studied, he asks us to view religion as a “discursive tradition”
in which doctrine and practices mutually inform each other, making contextdependent shared understanding of Islam that in turn shape Muslims’ everyday
life.
Shared habits and practices grounded in Islam have contributed to the
formation of conceptions of Islamically legitimated social action in public life what
Eickelman and Salvatore call “public Islam” (Eickelman & Salvatore, 2002, p.101).
This approach moves beyond formal authority a structure that is discussed in the
previous section. In other words, the influence and power of Islam lies not only
with its place in formal authority structures, but more so with its ability to shape
“accepted and socially legitimated means of accomplishing a task.” Islam thus
provides “background clusters of concepts, shared understandings, and practices”
that underpin the public sphere (Eickelman & Salvatore, 2002, p.99).
Eickelman and Saltvatore argue that mass education and media throughout
the Muslim-majority world have contributed to the re-emergence of a robust
public sphere. In this public sphere, there is a wide spectrum of people engaging
political and religious debates in which they invoke Islam to discuss Islamically
legitimated practices. These public debates about Islam reconfigure the politics
and social life in Muslim societies by changing political ideas and also religious
habits, practices, and discourses. Thus, these debates mold in the participants a
new identity and new forms of social relations. As growing numbers of people
participate in the public sphere, these activities challenge authoritarian
structures, lead to the fragmentation of political and religious authority, and
expand debates on issues of common good (al-maslaha al-‘amma) (Eickelman &
Salvatore, 2002, p.98).
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Unlike political Islam, public Islam focuses on how religion shapes and can be
shaped in everyday practices and questions. Islam requires its followers to carry
out a myriad of activities regularly such as to pray five times a day, follow dietary
rules (halal), fast during the month of Ramadan, wear modest clothes (hijab), go
to pilgrimage (hajj), and avoid usury (riba), spread Islam (dawa), and giving tithe
(zakat). Seeing this way, Islam is a deen, righteous path that Muslims should
follow to comply with the Sharia, Islamic law that shapes significant aspects of
everyday practice of Muslims.
Islam’s influence in Qatar’s public sphere is all-pervasive. Islam as set of
values, norms, and principles that informs and guides the life of the society of
believers—has long become as reference with which the society identifies itself.
These norms, values, and principles are continuously practiced in Qatar’s public
sphere (except for some extraterritorial enclaves), such as the ban of alcohol,
gender segregation, and dress code. For these everyday practices, values, norms,
and principles, Muslims offer public reasoning based on religious teachings by
citing not only Quran or hadith but also religious scholars’ interpretations they
learn through popular media, books, Friday sermons (usually well-attended), or
other religious gatherings. These platforms allow religious scholars to construct a
public theology that deals not only issues about religious faith and practices but
also social, economic, and political implications religious faith and practice. In
other words, even when religious scholars are excluded from the formal political
decision-making processes, they continue to have enormous influence on shaping
social values and frame of references of society and thus influence politics
indirectly (through popular legitimacy and mobilization) or directly by shaping
decision-makers’ values and frame references.
The growth of public Islam is visible in Qatar. Qatar has a comparatively open
public sphere among Arab states for the discussion of politics and religion. The
Qatari population is increasingly well-educated, and internet penetration in Qatari
society is very high. “The Global Mufti” Yusuf al-Qaradawi and the media giant Al
Jazeera bolsters a public sphere in which public Islam took increasingly stronger
roots (Gräf & Skovgaard-Petersen, 2009). In contrast to the perspectives of
political Islam that downplay the role of Islam in Qatari politics, public Islam
predicts this strong public sphere will have significant influence on Qatari politics.
Few would dispute that the coverage of Al-Jazeera or Al-Qaradawi’s frequent
sermons in Qatari Mosques has influence over Arab and Muslim politics. While
Qatari elite has some control over these mediums that have increasingly shaped
the Arab public sphere, the elite’s views are also shaped these coverage and
sermons. For example, while some survival instinct or prestige can be related to
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Qatari mediation into conflicts, it is inconceivable that Qatari leadership would
consider to intervene or mediate an issue that is not extensively covered by Al
Jazeera. This does not mean that Qatar will involve on issues extensively covered
by Al Jazeera, but it means that Al Jazeera coverage might also informs Qatari
leadership about these issues and shapes their understanding of Qatari interest
about these. Similarly, powerful voices such as Qaradawi is not in position to get
Qatar act on a specific issue, but he can inform and shape Qatari view of Islamic
values and politics as well as Muslim practices. For example he publicly and
strongly holds a strong pro-Palestinian position and argues that Muslims should
support Hamas and Hezballah as legitimate resistance movement against Israel,
“based on Quranic injunctions to defend Muslim territory invaded by outsiders”
(Blanchard, 2010).
Qatar is a great case for the identification of the mechanisms through which
public Islam can influence foreign policy because strategic factors limit the
influence of religion, domestic structures marginalize factors related to political
Islam, and yet there is a healthy public sphere in which public Islam exists. From
the perspective of thinking Islam as a way of life and examining its influence on
Qatar’s foreign policy, with its public sphere and the centrality of Islam in Qatar’s
society should be integral to any explanation of Qatar’s foreign policy. Yet the
research on religion and foreign policy so far has not identified how exactly the
debates on religious practices public sphere influences foreign policies. Under
what conditions and what kind of public spheres may be more conducive to
religious influences on foreign policies? Similarly, scholarship on Qatar has not
explored the role of public Islam and everyday practices of Islam on Qatar’s
foreign policy. How do debates about and practices of zakat influence Qatar’s
foreign aid? How do debates about Jerusalem in Qatar’s public sphere influence
foreign policies towards Israel? These are the type of questions the third cut—
Islam as a way of life—would ask scholar to pay attention.
4. Conclusion
This paper has three conclusions. First, the instrumentalist approaches that
emphasize Qatari foreign policy through strategic decisions that reduces Qatar’s
foreign policy obsessively focusing on its survivability or its brand are incomplete
and fails to offer a comprehensive account Qatar’s foreign policy activism.
Moreover these approaches neglect the role of Islam plays in Qatari foreign
policy. This neglect may be understandable because Qatari domestic political
system does not allow political Islamist actors to influence Qatari politics.
Page | 107
Second, the tendency among scholars to reduce the role of Islam to political
Islam and to what “Islamic” actors do not make justice to complex ways that Islam
influences foreign policy. This influence is mostly constitutive—rather than
causal—in informing and shaping foreign policy elites about the nature of
problem and their own interest. By doing so, this religious influence dispose—
rather than cause, in a narrow sense of the word—to deal with particular issues,
to understand their preferences in certain ways, and develop some policies not
others.
Third, there are three ways in which religious factors can influence foreign
policies of states that cannot be captured by a narrow understanding of politics
and causality. First way sees religion as belief: political actors have particular
religious beliefs that lead them to certain political and foreign policy choices.
Second way sees religion as identity and a source of legitimacy: political actors
often need to consider what domestic and international audience would consider
legitimate. Third way sees religion as a way of life which shapes and is shaped in
debates in public sphere and religious practices: debates in public sphere about
Islam—such as to whom zakat can be given—may influence a Qatar’s foreign aid
policies as at least some portion of Qatar’s foreign aid budget is considered zakat.
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EUROPEAN JOURNAL OF ECONOMIC AND POLITICAL STUDIES
GUIDE FOR AUTHORS
Procedures for reviewing manuscripts are based on the anonymity of the author
and the confidentiality of readers’ and editors’ reports. As author anonymity is
preserved during the editorial decision-making process, self-references should be
removed. Referees are drawn from Fatih and other institutions; published articles
have usually been reviewed by the editors and at least two peer-reviewers.
EJEPS does not accept manuscripts that have already been published, are
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on the responsibility of the authors alone and do not imply the endorsement of
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ARTICLE SUBMISSION GUIDELINES
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 An abstract of 250 words
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 Page Setup: The structure of paper (W:17cm x H:24cm) should follow
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Use dot for a decimal separator, and comma for a thousands-separator.
Consider only 4 digits after decimal point (Ex: 62.88%). Tables & Figures
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 Manuscripts should be approximately 5,000 to 8,000 words. Longer
manuscripts will be considered only in exceptional circumstances.
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review upon their assessment.
 The citations should follow APA 6th referencing system, and references
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APA 6th EDITION CITATION (REFERENCING)
The following examples illustrate citations using the APA 6th edition citation
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corresponding parenthetical citation in the text. Followings are few examples.
Book
Pollan, M. (2006). The Omnivore’s
Dilemma: A Natural History of Four
Meals. New York: Penguin.
Journal Article
Weinstein, J.I. (2009). The Market in
Plato’s Republic. Classical Philology, 104
(2), 439–58.
(Pollan, 2006, pp.99–100)
(Weinstein, 2009, p.440)
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