12 Spring Edition - Journal of Global Commerce Research

Transcription

Volume 3 Number 5
Spring 2012
The Journal of
Research
www.journalofglobalcommerceresearch.com
The Journal of the Global Commerce Forum
www.Globalcommerceforum.org
THE JOURNAL OF GLOBAL COMMERCE RESEARCH
The Journal of Global Commerce Research(ISSN 1946-7958 issued by
the Library of Congress, Washington, D.C) is a blind peer reviewed
journal
published
by
the
Global
Commerce
Forum
(www.GlobalCommerceforum.org) and is indexed by Cabell’s Directory
and ABI/INFORM. The Journal accepts manuscripts in theoretical,
experimental, and applied research from global scholars and practitioners
to bring together practice, research, policy formulation and decision
making.
Through its sponsors, the Global Commerce Forum provides a vehicle for business executives,
global scholars, researchers, practitioners, vendors, service providers, legislators and
manufacturers to share their expertise, experiences, best practices, and future challenges to
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Academicians and researchers learn about the problems facing businesses and use this
knowledge as a platform for research leading to business solutions in addition to developing a
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Practitioners network with potential business partners and gain valuable information as they get
exposed to tools and practices that can be employed to refine their business practices and or
enhance how they function in their area of responsibility.
LIBRARY SUBSCRIPTION
The Journal of Global Commerce Research recognizes that most developing countries are
strapped for resources and to allow academicians to have more access to the works of their peers,
the Journal is available online and in print free of charge to scholars from developing countries.
The print version is available if postage is paid for.
The Journal of Global Commerce Research
Spring 2012 Volume 3 Number 5
Journal of Global Commerce Research
Volume 3 Number 5 Spring 2012
CONTENTS
An Institutional Approach to Entrepreneurship:
The Case of China...........................................................................…1
Jean-Michel Quentier
Building a Country’s Image through Industrial Upgrading:
Evidence from China’s Apparel Industry …………………………..15
Hongmei Xi , Nicholas Grigoriou and Xia Ying
An Expanded Model of National Competitive Advantage:
Embracing Corporate Social Responsibility..............................………26
Austin B. McKinney, Steve G. Green and Kurt A. Heppard
Are Salary and Promotion, Predictors of Job Satisfaction?
A Comparative Study of Public and Private Banks in India……....37
Nawab Ali Khan and Suhalia Parveen
The Emergence of Sovereign Wealth Funds:
Implications for Global Financial Systems ....…………….….….…48
Surendar Singh and R.C Mishra
The Viability of Federal Preemption Doctrine as a Defense to
Lawsuits against the Business World……………………………......57
Larry Bumgardner
MANAGING EDITOR
Luka Powanga
Regis University
ASSOCIATE EDITORS
Xiaolin Li
Towson University, USA
Revti Raman
Victoria University of Wellington, New Zealand
ESC Bretagne Brest, France
Shivkumar Deene
Karnataka State Open University-India
John Dilyard
St. Francis College, USA
Shaukat Ali
Wolverhampton University, UK
EDITORIAL ASSISTANTS
Wlamir Xavier
University of Pennsylvania, USA
Richard Brunet-Thornton
Videotron, Canada
CONTRIBUTING EDITORS
Keerri Sharma
Institute of Management Technology (IMT)-India
Willetts, Judith
Regent’s College, UK
Nazly K. Nardi
Nova South Eastern University, USA
John P. Lilly
Fairleigh Dickinson University, USA
Sulaman Hafeez Siddiqui
The Islamia University of Bahwalpur, Pakistan
Wade McKenzie
University of the West Indies, Barbados
Virginie Khare
The University of Tampa, USA
Ernst Verwaal
University of Erasmus, Netherlands
Matt Mardanov
Southeast Missouri State, USA
Nicholas Grigoriou
Monash College Programs in Guangzhou, China
Chittipa Ngamkroeckjoti
Assumption University-Thailand
Yu-Mei Huang
YuDa University, Taiwan
Mohammad Faisal Ahammad
Nottingham Trent University, UK
Sunny Li Sun
Institute for Entrepreneurship and Innovation, USA
Rodney Andrew Carveth
Fitchburg State College, USA
Braimoh Oseghale
Fairleigh Dickinson University, USA
Florinel-Frank Cotae
Las Roche University, USA
Osama Jawaid Butt
FAST-National University of Computer & Emerging
Sciences, Pakistan
Basit Basharat Tayyab
Quaid-i-Azam University, Pakistan
MANAGING EDITOR
Luka Powanga
Regis University
Review Board
Flory Anette Dieck Assad
Technológico de Monterrey (ITESM),
Mexico
Steven Berkshire
Central Michigan University
Mefturn Edorgan
Halliburton
Aileen Kennedy
Dublin Institute of Technology, Ireland
Appolo Tankeh
MIT
Zeenobiyah Hannif
The University of Wollongong, Australia
Heru Satyanugraha
Trisakti University, Indonesia
Peter Zettinig
Turku School of Economics, Finland
Lynn A. Fish
Canisius College
Yueyun (Bill) Chen
University of the West
Maria Alejandra Gonzalez-Perez
Universidad EAFIT, Colombia
Renu Desai
Florida International University
ESC Bretagne Brest, France
Shivakumar Deene
Karnataka State Open University, India
Ismatilla Mardanov
Southeast Missouri State University
Shaukat Ali
University of Wolverhampton, United
Kingdom
Richard Brunet-Thornton
IMCA/GARC, United Kingdom
Emilyn Cabanda
Regent University
Nicholas Grigoriou
Monash College Guangzhou, China
Ahmed Y. Zohny
American University
Xiaolin Li
Towson University
Dana L. Brown
Oxford University, United Kingdom
Matt Mardanov
Southeast Missouri State University
Ronel Rensburg
University of Pretoria, South Africa
Mohammad Ayub Khan
Tecnologico de Monterrey, Mexico
Lamia Ben Hamida
Politecnico di Milano Italy
AN INSTITUTIONAL APPROACH TO ENTREPRENEURSHIP: THE
CASE OF CHINA
Jean-Michel Quentier, ESC Bretagne Brest, France
This paper views entrepreneurship in China as a legitimacy seeking process. It uses institutional theory as
a lens to understand the pattern of entrepreneurship in China. The paper also examines how rapidly changing
formal and informal institutions are likely to bring change in entrepreneurship in the country.
Introduction
While the Chinese Communist Party (CCP) maintained political dominance thanks mainly to entrepreneurs
that were highly innovative in carrying out state plans to build industries and launch new enterprises (Yang 2002),
“reemergence” of private entrepreneurship (Guiheux 2006) in the country is a recent phenomenon. In recent years,
indeed, there has been a rapid growth of entrepreneurship in China. As of 2005, China had about 24 million small
independent companies and the number is growing at 15-20% annually (Loyalka 2006). Small to medium sized
enterprises (SMEs) account for 75% of new jobs (Loyalka 2006). For most of these enterprises, entrepreneurship is
considered to play a very important role (Daokui Li et al. 2006).
International differences in entrepreneurship are typically framed as a result of cultural differences across
countries. The existing studies on entrepreneurship thus narrowly focus on culture (Busenitz, Gomez and Spencer
2000) and a number of them have linked Hofstede's (1980) cultural dimensions -especially individualism- to
examine a country‘s propensity to engage in entrepreneurial activities.
The findings of studies focusing on individualism are, however, inconsistent and confusing. While some
commentators argued that collectivism is negatively related with entrepreneurial activities (Takyi-Asiedu 1993),
others have found a limited correlation between countries' levels of individualism and entrepreneurship (Acs 1992;
European Network for SME Research 1996; Mueller and Thomas 1997). Similarly, Harper (2003) rejected the idea
that people in individualist cultures are more entrepreneurial than those in collectivist cultures. He, however,
proposed that developing countries characterized by collective culture may have different social organizations that
may impact on entrepreneurship patterns (Harper 2003). Likewise, Holt (1997) found that Chinese and U.S.
entrepreneurs did not differ significantly in terms of their emphasis on individualism and acceptance of uncertainty.
It can thus be concluded that private entrepreneurship either encourages individualism and acceptance of uncertainty
or attracts people with values comparable to entrepreneurs (Morris and Schindehutte. 2005).
Other researchers point to declining differences in development across cultures (Baumol 1986) and global
diffusion of entrepreneurial institutions (Gereffi and Hempel 1996) such as IPO markets in countries considered to
be characterized by nonentrepreneurial cultures (Edmundson et al 1996). These studies provide support for the
notion that Hofstede's measures of culture are far from sufficient to describe cross-country differences in
entrepreneurial activity. In China‟s case, close state control can be arguably attributed to the failure of apparentlyabundant Chinese entrepreneurship (Moore 1997). These examples imply that in addition to cultural differences,
entrepreneurship is determined by a number of other forces.
Perspectives on entrepreneurship in the social sciences include focus on the role of economic, political and
legal institutions in facilitating or hindering entrepreneurship (Djankov and Roland 2006). Referring to China,
Guiheux (2006) argues that entrepreneurship in the country can be attributed to initiatives coming from society
(informal institutions) and the setting up of a new legal framework (formal institutions). To broaden our
understanding of international similarities and differences in entrepreneurship, researchers have emphasized the
necessity to study a broader set of institutions (Busenitz, Gomez and Spencer 2000) and the complex interaction
between different kinds of entrepreneurs and the institutional environment in which they are embedded (Yang
2002).
Clearly, thus there are under explored issues on how institutions with opposing and different perspectives
are shaping entrepreneurship in China. The purpose of our study is to fill this research void. To more fully
understand factors driving Chinese entrepreneurship landscape, in this article we integrate and apply findings in
literatures on institutional theory. We propose a framework, which identifies very clear contexts and attendant
mechanisms associated with institutional influence on entrepreneurship in China.
In the remainder of the paper, we first briefly review the theoretical foundation. Then, we translate the
theories within the context and limits of China and attempt to explain the nature of Chinese institutions that
Spring 2012 Volume 3 Number 5 Page 1
influence the country‘s response to private entrepreneurship with some propositions. The final section provides
conclusion and implications.
Theoretical Framework
Entrepreneurship as a Legitimacy Seeking Process
It is important to note that institutional theory is described as ―a theory of legitimacy seeking‖ (Dickson et
al. 2004, p. 81). Isomorphism is arguably positively related to legitimacy (Deephouse 1996). In an attempt to gain
legitimacy, organizations thus adopt certain behaviors irrespective of whether such behaviors increase organizational
efficiency (Campbell 2004, p. 18; George et al. 2006).
Organizations that are able to acquire legitimacy from external institutional actors, on the other hand, are
likely to gain resources as well as maintain control over the environment (George et al. 2006). Put differently, an
organization can increase its chance of survival and/or growth by engaging in actions that are approved by powerful
institutional actors, used by organizations that are perceived to be ‗successful‘ (Newman, 2000), or have the backing
and approval of professions in their industry or field (Aldrich 1999; Baum and Oliver 1991; Meyer and Scott 1983;
Ruef and Scott 1998; Sitkin and Sutcliffe, 1991). Non-isomorphic responses that deviate away from ―established
structures, practices, and utterances of other actors in the environment‖ (George et al. 2006), on the other hand, are
likely to face resistance.
Institutional influence on entrepreneurship becomes an admittedly complex process (Dickson et al. 2004),
when organizations have to derive legitimacy from multiple sources. In China‘s context, entrepreneurs have to
acquire legitimacy from the state regulations, local authorities and bureaucrats, business partners, employee (Yang
2002) and the society.
Scott’s Institutional Pillars and Entrepreneurship in China
Table 1 presents institutional influence on entrepreneurship in China in terms of three institutional pillars
proposed by Scott (1995, 2001)—regulative, normative and cognitive. Regulative institutions consist of "explicit
regulative processes: rule setting, monitoring, and sanctioning activities" (Scott 1995, 35). They are related to
regulatory bodies and the existing laws and rules that influence offshore outsourcing. Normative components
introduce "a prescriptive, evaluative, and obligatory dimension into social life" (Scott 1995, 37). Practices that are
consistent with and take into account different assumptions and value systems of national cultures are likely to be
successful (Schneider 1999). Cognitive institutions represent culturally supported habits that influence the pattern of
entrepreneurship. The nature of entrepreneurship is a function of a cognitive institutions related to history, culture,
ideology, and social attitudes (Doucouliagos 1995). In most cases, they are associated with cognitive legitimacy
concerns that are based on subconsciously accepted rules and customs as well as some taken-for-granted cultural
account related to entrepreneurship (Berger and Luckmann 1967). Cognitive programs affect the way people notice,
categorize, and interpret stimuli from the environment.
Diffusion of Entrepreneurship among the CCP
Institutionalists use the concept of diffusion to refer to the spread of institutional principles or practices
among a population of actors (David and Foray 1994; Strang and Meyer 1993). Prior researchers have also noted
typical patterns of events and relationships in institutionalization and institutional changes (Lawrence et al. 2001).
New values, norms, practices and ideas are first recognized, and then accepted by relatively few actors and then
widely diffused (Leblebici et al. 1994; Meyer and Rowan 1977). Finally, they reach to a stage of saturation and
complete legitimation (Zucker 1987). In this regard, it is important to note that, although the Chinese Communist
Party's (CCP) policies and formal legal institutions regarding private entrepreneurship have gone through stages:
strict prohibition, tolerance, accommodation, and encouragement (Peng 2004), there has been a lack of complete
legitimation to entrepreneurship. For instance, property rights in China aren't yet well-defined and fully binding
(Mourdoukoutas 2004). Private enterprises are thus never sure which resources are their property and under their
command and for what length of time (Mourdoukoutas 2004).
Table 1: Understanding Institutional Influence on the Chinese Pattern of Entrepreneurship
Institutional
component
Regulative
Institutional forces
Effect on entrepreneurship in China
Entrepreneurial ventures perceived as potential
threats to the CCP regime (Yang 2002).
Ineffective enforcement of laws related o private
property (Yang 2002).
Normative
Cognitive
Marriage between entrepreneurship and party
membership.
Entrepreneurs were considered as "getihu" or
―cadres" (Hsu 2006; Mourdoukoutas 2004).
Society's attitude toward business increasingly
favoring entrepreneurship, especially related to
high technologies (Hsu 2006; Han and Baumgarte
2000).
Culture of complacency, conformity and risk
aversion (Mourdoukoutas 2004).
Entrepreneurs are sensitive to the communist
regime and the society, which resist ownership of
private property (Economist 2006).
Resistance to substantive actions to
promote entrepreneurship and even
some regressive changes.
Private entrepreneurs depend to a
large extent on informal norms and
networks for security.
Substantive measures to encourage
private entrepreneurship.
Private entrepreneurship lacked
social legitimacy.
Increased social legitimacy to
private entrepreneurship.
Hinders discovery and exploitation
of new market opportunities. The
Western level of risk is unacceptable
in China (Harwit 2002).
Discourages entrepreneurship.
Perceived ―glass ceiling‖ for ethnic Chinese
employees at multinationals (Browne 2004).
They prefer starting their own
businesses.
Rapid increase in the returns of overseas Chinese.
Emergence of a club culture
promoting innovation, and risk
taking (Wang 2001).
Progressive and Regressive Changes
The work of Paul D. Bush (1983, 1987, 1989, 1994), among others, provides us with additional insights
into the temporal dimension of institutional changes. According to this approach, the process of institutional
adjustment is broken down into two phases: Phase I involves ceremonial encapsulation, and Phase II involves
regressive or progressive changes. These phases are conceptually similar to what North (1990) refers as the “causeeffect-cause" model.
In the first phase, the ideas of entrepreneurship and private ownership are ‗encapsulated‘ within the existing
value structure (Bush 1994). In this phase, such decisions are mainly based on technical grounds (Tolbert and
Zucker 1983). This stage involves no change in the value structure of the community. The idea of entrepreneurship
is introduced without disrupting the patterns of power, status, and other forms of existing differential advantages
(Bush 1994).
According to North‘s (1993) "shared mental models", institutional evolution is influenced by the feedback
process by which human beings perceive and react to changes in their environment. Phase II is a result of reaction to
entrepreneurship and starts when entrepreneurship demonstrate new instrumentally warranted possibilities for
correlating behaviors, which are not sanctioned by the community's traditional pattern of values (Bush 1994). While
decisions in the early phase are based on technical grounds, legitimacy pressures play a critical role in the latter
phase (Tolbert and Zucker 1983). That is, organizations must strive to achieve social legitimacy in addition to
technological and operational efficiency to prosper in their environment (Abernathy and Chua 1996).
In a progressive change, the new instrumentally warranted patterns of behavior displace ceremonially
warranted patterns of behavior (Bush 1994). The sustainability of progressive institutional changes requires
"minimal dislocation". Put differently, the incorporation of the new instrumental behavior has a minimally
disruptive effect on other instrumental patterns of behavior in the community (Bush 1994).
An unintended consequence of entrepreneurship is disruption in existing power structure. In a regressive
change, new instrumentally warranted behavior is suppressed and additional patterns of ceremonially warranted
behavior are instituted to secure the suppression (Bush 1994).
Institutional Changes Crested by Entrepreneurship
Entrepreneurs may also bring institutional changes as they stimulate new isomorphic pressures, modify the nature of
existing pressures or replace one type of pressure by another. Structural changes institutions can be explained in
terms of coercive, normative and mimetic isomorphism (DiMaggio and Powell 1983). Scott (1995, 2001) describes
these forces in terms of regulative, normative and cognitive processes respectively (Table 1).
Institutions and Entrepreneurship in China
Progressive and Regressive Changes
The conservative faction in the Chinese Communist Party considers entrepreneurial ventures as potential
threats to the party‟s dominance, ideology, administrative authority and moral standards (Yang 2002). The leftist
opposition leaders have thus employed China's rising income gap and increasing social unrest to criticize and justify
measures against private entrepreneurship (Kahn 2006). Some analysts argue that the delay in granting full rights to
private entrepreneurs reflects “ideological rigidity and institutional inertia against changes” (Peng 2004).
Chinese leftist leaders thus perceive improved legal institutions as potential challenges for legitimacy to the
CCP regime (Potter 2004, p. 478). Consequently, Chinese legal institutions related to entrepreneurship have been
victims of political ideology (Yang 2002). Following the Tiananmen events in 1989, the conservative faction‟s
actions severely impacted private entrepreneurs. Estimates suggest that the number of private enterprises reduced by
50% that year (Ling 1998).
We can, however, argue that institutional actors bringing regressive changes in Chinese institutions will
weaken over time. Why might this be the case? First, as noted above, although many Chinese government officials
and policymakers consider China‘s integration with the global market associated with significant socioeconomic
costs, they cannot openly reject global integration (Heer 2000). To gain legitimacy from international institutions
such as the World Trade Organization (WTO), China is required to respect private entrepreneurship and ownership
of private property.
Second, entrepreneurs are being openly accepted into the CCP's inner circle. The CCP‟s policies and formal
legal institutions encourage entrepreneurship (Peng 2004). The CCP in 2002 changed its bylaws to allow
entrepreneurs to become members (Loyalka 2006). In a speech on July 1, 2001, during celebrations of the party's
80th anniversary, President Jiang Zemin acknowledged the benefit that capitalists bring to the economy
(Hoogewerf 2002). He also handed party membership to a capitalist and one of China's most respected private
companies and the first private company to list on a foreign stock exchange (Pomfret 2001). In another instance, in
January 2003, the CCP appointed Yin Mingshan, one of China's wealthiest private entrepreneurs, as deputy
chairman of an advisory body to the government of Chongqing municipality, the first private businessman in China
to be awarded such a high position (The Economist March 29, 2003). Although some analysts argue that the
seemingly impressive position carried “no real power”, optimists argue that these entrepreneurs will give the private
sector a more powerful voice in policymaking (The Economist March 29, 2003) and further weaken forces
contributing to regressive changes in institutions influencing private entrepreneurship. In line with these arguments,
the following propositions are presented:
Proposition 1a: In China, forces contributing to progressive changes in institutions related to entrepreneurship and
private property will strengthen over time.
Proposition 1b: In China, forces contributing to regressive changes in institutions related to entrepreneurship and
private property will weaken over time.
Development of Entrepreneurship and Substantiveness in Laws Protecting Private Property—a
Progressive Change
Chinese communities arguably have a greater cultural disposition toward entrepreneurship (Waldinger,
Aldrich and Ward 1990). Traditionally, regulative institutional such as insecurity of property rights and close state
control hindered entrepreneurship in China (Djankov and Roland 2006; Moore 1997). Some commentators argue
that the traditional culture of entrepreneurship will strengthen efforts to create the rule of law in China (Shuli 2004).
A good example to illustrate how Chinese entrepreneurs are influencing regulative institutions related to
entrepreneurship is the changes in laws related to intellectual property rights (IPR) in recent years. With rapid
increase in the creation of IP by local firms, these firms are actively participating in substantive measures that could
help strengthen the country‘s IP regime. According to the Chinese Supreme Court, in 2005, over 16,000 civil cases
and 3,500 criminal cases related to IP rights violations were handled by Chinese courts and more than 2,900 people
were jailed (Culpan 2006). The number of cases involving IPR protection including patents, trade secrets and
counterfeit goods increased by 21percent in 2005 (AFX News Limited, 2006). It is also important to note that 95
percent of China's IPR related cases in 2005 were brought by Chinese companies (Culpan 2006).
The Chinese nano technology industry provides a visible example to illustrate how local IP creation leads
to substantive actions to protect IPR. Chinese scientists are capable of producing carbon nanotubes 60 times faster
than their U.S. counterparts (Stokes 2005). The Nanometer Technology Center established in Beijing is actively
involved in protecting IPR (Singer et al. 2005).
A rapid increase in domestic IP creation has led to more substantive measures to protect IPR. Under
China‘s recently enacted new piracy laws, buyers of pirated goods can be fined 5-10 times the value of the goods
and manufacturers face jail time and equipment confiscation (Kanellos 2002). The government has provided a
significant empowerment to regulatory agencies involved in IPR issues such as the State Administration of Industry
and Commerce, the State Administration of Press and Publications, the intellectual property right office and the
State Pharmaceutical Administration (Yang 2002). Similarly, China announced its plans to open special centers in
50 cities by 2006 to handle IPR infringement complaints as well as to provide consulting services (MacLeod 2006).
In sum, we argue that:
Proposition 2: The development of entrepreneurship will provide pressure to enhance regulative institutions related
to private property and entrepreneurship.
Formal and Informal Institutions and Implementation Capacities
Prior research has indicated that the degree to which ideas such as private ownership are translated into
local practices is a function of implementation capacities (Scott et al. 2000). The relative strength of state institutions
in implementing and enforcing laws related to entrepreneurship, thus, can make or break governments' policies and
firms' innovation strategies (Spencer, Murtha and Lenway 2005).
Implementation capacities are largely influenced by informal institutions which do not necessarily change
at the same rate as formal institutions. North (1990: 6) noted that "although formal rules may change overnight as
the result of political and judicial decisions, informal constraints embodied in customs, traditions, and codes of
conduct are much more impervious to deliberate policies". In the Chinese entrepreneurship landscape, there has
been a rapid shift in formal institutions related to entrepreneurship. Following the 1978 economic and political
reforms, China enacted thousands of new laws to protect private property and IP (Pei 1998; Meredith 2003); and
abolished or amended many laws in these areas to comply with World Trade Organization (WTO) obligations
(Hughes 2005).
Nonetheless, informal institutions are not changing at the same rate as formal institutions. Mao arguably
developed a critique of capitalism, private property, and inequality as well as material interest (Guiheux 2006).
During the Mao era, private entrepreneurship was virtually eradicated and was a political taboo in China (Loyalka
2006; Peng 2004). Entrepreneurship was “shunned” in China as late as the 1980s (Wehrfritz and Seno 2003). After
decades of socialism, the idea of respecting the constitutional rights of private entrepreneurs has been slow to diffuse
among various institutional actors in China (Nee 1989).
Chinese incubators thus lack proper mindsets in assisting and guiding private entrepreneurs (Harwit 2002).
Private enterprises also complain about difficulties in dealing with state-owned banks for loans and other state
agencies as well as harassment and extortion by local cadres, tax officers and other government officials (The
Economist 2002; Yang 2002).
As discussed above, until a few years ago, when private entrepreneurs‟ rights were violated, they lacked
legal protection (Yang 2002). The situation is, however, changing rapidly. Like in a number of other Asian
economies, China is “shifting from top-down, state-directed technology policies to more flexible, market-oriented
approaches that foster innovation and entrepreneurship” (Segal 2004) and is adopting policies that actively
encourage entrepreneurship (Schramm 2004).
Among many examples that illustrate such a trend, let us consider some. Sender (2000) documents a story
related to state-run China Telecom‘s complaint against two entrepreneur brothers who started offering callback
services in Fujian as an alternative to China Telecom‘s monopoly and high charges. The courts weren't convinced
the brothers had violated any laws and ruled against China Telecom. Recently, Pfizer successfully went against a
major Chinese ministry-level government agency to defend its Viagra patent (Boswell and Baker 2006). Across
these two examples we see how state-owned monopolies‘ and government agencies‘ control and power are
declining. It is proposed:
Proposition 3: Over time, informal institutions and enforcement capabilities will change to catch up with the formal
institutions.
Shift from Double Entrepreneurship towards Legal Entrepreneurship
Institutional boundaries for economic activities are not well defined in emerging economies such as China.
Exploitation the regulative uncertainty and the weak rules of laws has arguably become an important form of
entrepreneurship in China (Kolko 1997). Yang (2002) refers this phenomenon prevalent in many developing
economies as ―double entrepreneurship‖ which entails maximizing economic rewards and minimizing sociopolitical
risks. In a rapidly changing environment like that of China, entrepreneurs find attractive economic niches from
outside the current institutional boundaries (Yang 2002). For instance, entrepreneurs depend on relations with
government bureaucrats to obtain a license to enter and remain in a business (Mourdoukoutas 2004). At the same
time, because of ineffective legal enforcement of private property rights, they have to acquire political and
administrative protection or depend upon informal norms for security (Yang 2002).
In many developing countries, starting a business entails overcoming a significant amount of red tape
(Schramm 2004). In China, one way to overcome bureaucratic red tape for businesspeople has been to be close to
the CCP in order to gain advantages and preferential treatments (Guiheux 2006). A membership in CCP would give
an entrepreneur easier access to loans and official protection and discourages the entry of new players in the market
(Guiheux 2006). In addition, entrepreneurs also spend time and energy in forming and maintaining guanxi and
cultivating ties with officials through gifts or bribery (Yang 2002). In China, the factors discussed above limit an
entrepreneur‘s ability to pursue genuine ideas and business opportunities (Mourdoukoutas 2004). In sum, whereas
entrepreneurship the West is about identifying profitable opportunities, in China, "the ability to form an alliance"
with those who control the financial, physical or human resources is critical to succeed (Krug 2004:60).
Institutional environment shapes private entrepreneurs‘ motivation to enter into politics. For instance, one
study found that the probability of an entrepreneur's political participation decreases by 8–20% from the mean when
institutional indices related to markets and market-supporting institutions improve by one standard deviation (Li et
al. 2006). Improvement in market-supporting institutions or transformation of a socialist economy into a market
economy can thus be an important force in converting double entrepreneurship into legal entrepreneurship (Yang
2002). In recent years, Chinese regulative landscape has undergone significant improvement in rule setting and
monitoring activities. Such an environment is expected to promote legal entrepreneurship. Based on above
discussion, the following proposition is presented:
Proposition 4: Over time, with the development in regulative institutions, the Chinese entrepreneurship landscape
will shift from double entrepreneurship to legal entrepreneurship.
Societal Perception of Entrepreneurs
The perception of entrepreneurship in China is drastically different from market economies
(Mourdoukoutas 2004). Mao arguably developed a strong critique of capitalism, private property, income and
wealth inequality and material interest (Guiheux 2006). During the Mao era, private entrepreneurship was thus
virtually non-existent and was a political taboo (Loyalka 2006; Peng 2004). Traditionally entrepreneurship was not
the most desired one for China's best and brightest and was limited to people with criminal records that found it
difficult to find other jobs (Nair 1996). Policies that were reminiscent of the Chinese Communist Public Goods
Regime (Solinger 1995, 127) thus discouraged private entrepreneurship. Most entrepreneurs are still considered as
―selfish, avaricious peddlers‖, or "getihu" (Hsu 2006).
Private entrepreneurship in China is the result of the ―market track‖ of the Chinese ―dual-track approach‖,
in which economic agents were allowed to participate in the market at free-market prices provided they fulfill their
social obligations (Lau et al. 2001). However, as late as the 1990s, Chinese societies had highly negative perception
of those trying to build their own company (Harwit 2002). Entrepreneurs are still considered members of the
working class striving for China's development rather than risk takers (Mourdoukoutas 2004). In an ethnographic
study conducted in the Chinese city of Harbin, Hsu (2006) found some entrepreneurs were understood as "cadres"
and were judged by their ability to provide socialist benefits for their employees, rather than by their success at
generating profits.
Faced with such societal perceptions, China's entrepreneurs are also sensitive to the society and the
communist regime that still resist ideas related to the ownership of private property (Economist 2006).
Accumulating a huge amount of wealth is thus still a ―delicate subject‖ in China (Hoogewerf 2002).
As noted above, although China is still characterized by a significant integration of state and social
organization (Moore 1997), attitude toward businesses and private entrepreneurship and a business career is rapidly
shifting in the positive direction (Han and Baumgarte 2000, Nair 1996). Entrepreneurs have started to get more
respect in the society (Loyalka 2006). Some Chinese leaders have also provided validity to entrepreneurship. Even
Deng said: "To be rich is to be glorious" (Nair 1996). Hsu‘s (2006) finding also provided support for such a trend.
Educated entrepreneurs running high-tech businesses are seen as highly respected good businesspeople (Hsu 2006).
The above leads to the following:
Proposition 5a: The societal perception of private entrepreneurship will be more positive over time in China.
Proposition 5b: Private entrepreneurs in China will have a better cognitive assessment of their occupation over
time.
Inflow of Overseas Chinese and the Influence on Entrepreneurship
“Social remittances” associated with immigrants in the form of various resources such as ideas, behaviors,
identities and social capital play critical roles in promoting immigrant entrepreneurship in the home country (Levitt
1998). In this regard, it is important to note that much of the new entrepreneurship in China can be attributed to an
increasing number of overseas Chinese educated abroad that are returning home, some with significant
entrepreneurship experience in industrialized world. Estimates suggest that there are about 200,000 Chinese who
have returned to the country after working or studying abroad (Loyalka 2006). Moreover, because of perceived
“glass ceiling” for ethnic Chinese employees at multinationals (Browne 2004), more and more Chinese prefer to
start their own businesses.
Before proceeding further it is important note that theorists argue that it would be erroneous to assume the
existence of a generic Chinese culture. There is arguably a major difference between the social organization and risk
taking behavior of Chinese that have stayed in China for their whole life and Overseas Chinese (Moore 1997).
First, consider proper Chinese. Some commentators argue that Chinese culture does not encourage
independent thinking (Friedman 2005). Compared to managers in the West, Chinese managers are more likely to
avoid uncertainty, less likely to exhibit innovations and possess low degree of self-determination and risk taking
(Holt 1997, p. 490; Anderson et al. 2003). Chinese managers also tend to be conformists, adhering to standard rules
and procedures, rather than to personal insights based on their professional experiences (Mourdoukoutas 2004).
Entrepreneurship as discovery and exploitation of market opportunities and the introduction of new products and
processes arguably are incompatible with China's culture of complacency and conformity (Mourdoukoutas 2004).
Some observe that entrepreneurship in China is arguably about copying products invented and innovated in other
countries (Loyalka 2006; Mourdoukoutas 2004).
Overseas Chinese with educations and entrepreneurship experience in the industrialized world, on the other
hand, tend to be more similar to managers from the Western world. A rapid rate of returns of Chinese with education
and entrepreneurial experience in the industrialized world is thus likely to promote risk taking and innovativeness in
China.
Overseas Chinese returnees are likely to influence the Chinese entrepreneurship landscape through a
number of mechanisms. The Overseas Chinese in Asia have earned reputation for developing complex and dense
social organizations and institutions (Wu and Wu 1980: 137-41; Moore 1997). In recent years, Chinese returnees
have started developing such institutions in the mainland. Wang (2001) observed the evolution of a ―club culture‖ in
China, which has stimulated interaction among various ingredients of entrepreneurship promoting innovation and
risk taking. Existence of such a culture is especially evident in industrial and high-tech parks of the country (Loyalka
2006). Overseas Chinese have contributed in producing synergies and to thicken existing Institutional (Amin and
Thrift 1995, p. 102; Keeble, Lawson, Moore and Wilkinson 1999).
While lifelong working for big enterprises is considered to be the most sought after career in Japan (Muller,
Fujiwara and Herstatt 2004), employment in big state owned factories is ideal for many Chinese. People who have
spent most of their life in such careers may not like the idea of entrepreneurship (Loyalka 2006). Likewise, thanks to
elite cultivation” in China‟s IT education, over half of IT graduates pursue senior technological or managerial
positions after a couple of years of work rather than pursuing entrepreneurial ventures (Kharbanda and Suman
2002). There is thus no culture to promote entrepreneurship in China. Successful entrepreneurial spin-offs from
Chinese returnees may promote risk taking behavior among Chinese.
On a more speculative basis, we can argue that Chinese returnees may also change other components of
Chinese institutions such as the Chinese venture capital (VC) landscape, which currently discourages risk taking. In
China, most VC funds are linked to the government and can be considered as a loan (Harwit 2002). Enterprises that
are able to obtain VC funds feel an obligation not to lose the resources. Moreover, an incubator losing the
government owned money also becomes a target of official criticism (Harwit 2002). Chinese government VC funds
thus cannot accept the Western level of risk taking (Harwit 2002). There is already evidence of a significant inflow
of VC in China thanks to dense networks of overseas Chinese (UNDP 2001). Estimates suggest that overseas
Chinese control assets worth trillions of dollars. The discussion in this section is summarized as:
Proposition 6: The inflow of overseas Chinese into the mainland is positively related to similarity of Chinese
entrepreneurship pattern with that of the Western world in terms of (a) risk taking; (b) product innovations.
Discussion and Implications
In this paper, we employed institutional theory to examine the pattern of Chinese entrepreneurship.
Notwithstanding the existence of a Chinese entrepreneurial culture, regulative institutions traditionally severely
obstructed the growth of private entrepreneurship in China. Nonetheless, Chinese regulative institutions are
undergoing fundamental and extraordinary shifts. Such shifts directly as well as indirectly through informal
institutions are likely to facilitate entrepreneurship in China. From the above discussion, we can draw a number of
implications.
With the change in formal institutions, profiles of entrepreneurs are likely to change. Strengthening rule of
law and increased regulative certainty, for instance, are likely to encourage legal entrepreneurship and discourage
double entrepreneurship. We can expect that profiles of individuals who are likely to be successful in legal
entrepreneurship are likely to different from those that are likely to be successful in double entrepreneurship. Given
that China is rapidly moving toward a market economy, “institutional entrepreneurs”, that are skillful at dealing with
government officials and public opinion are likely to face risks in a changed economy (Daokui Li et al. 2006).
As Veblen (1915) argued, transition from state ownership toward private ownership and a market economy
can lead to changes in cultural and behavioral characteristics. Economic motives and behaviors of individuals are
also likely to change (Karayiannis and Young. 2003). Entrepreneurial activities themselves can lead to "new habits
of thought”, which are likely to change the ingredients of entrepreneurship in China. As noted above, some
entrepreneurs are still considered as selfish and in some cases the success is measured in terms of their contribution
to the society. The lens through which the society views entrepreneurship and measures of success of entrepreneurs
may change over time.
As noted above, rapid rise in the inflow of Chinese with education and experience in entrepreneurial
ventures in Western countries is also like to bring significant changes in "habits of thought‖ related to
entrepreneurship. An increasing number of Chinese educated abroad are returning home. In 2002 alone, over 18,000
Chinese graduated from foreign universities returned to China. This figure was 47% more than in 2001, double that
in 2000, and over three times the figure for 1995 (Lynch 2003). Chinese with experience in entrepreneurial ventures
in the U.S. are thus expected to have a more positive attitude towards risk taking. As mentioned above, there has
been an emergence of ―club culture‖, which has stimulated interactions among entrepreneurs and other professionals
(Wang 2001). Such interactions with Chinese returned from overseas, proper Chinese entrepreneurs are likely to
develop more positive attitude towards risk taking.
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BUILDING A COUNTRY’S IMAGE THROUGH INDUSTRIAL
UPGRADING: EVIDENCE FROM CHINA’S APPAREL INDUSTRY
Hongmei Xi, Shanghai Institute of Foreign Trade, China
Nicholas Grigoriou, Monash College Guangzhou, China
Xia Ying, Shanghai Institute of Foreign Trade, China
Country image, dimensioned by innovation, workmanship, design and prestige have become some of the
competitive sources when products are sold in global markets. This conceptual paper examines the relationship
between country image building and industrial upgrading, and explores ways to establish country image through
apparel industrial upgrading efforts. Firms in China should leverage their linkages of global production networks to
improve design, marketing, and innovation capabilities. At the same time big firms in China should integrate
domestic apparel clusters into entire value chain and produce for internal markets. Successful apparel industrial
upgrading in China will lead to country image building which helps Chinese brands go global.
Introduction
The effect of a product's country of origin on buyer perceptions and evaluations has received wide attention
in international business, marketing, and consumer behavior literature. Some researchers have treated country image
as consumers‘ overall perceptions, e.g. quality of products made in a given country (Crawford and Garland 1988). A
more common interpretation of country image is its definition as a set of generalized belief about specific products
from a country on a set of attributes (Bilkey and Nes 1982). The country of origin of a product affects purchase
decisions because consumers tend to infer the quality of a country‘s products from its country image (Jaffe and
Nebenzahl 2001).
Han (1989) posited that when consumers are not familiar with a country's products, country image may
serve as a halo from which consumers infer product attributes and it may indirectly affect their brand attitude
through their inferential beliefs. As consumers become familiar with a country's products, country image may
become a construct that summarizes consumers' beliefs about product attributes and directly affects their brand
attitude. These implications suggest structural interrelationships between country image beliefs about product
attributes, and brand attitude. An established principle in the literature is that country image exerts a strong impact
on the global brand building efforts by Chinese companies (Wang and Chen 2004). Originally the concept of the
country of origin was equivalent to that of country of manufacturing (Watson and Wright 2000). However, with the
development of global production networks, product manufacturing, design, assembly taking place in different
countries and regions (Acharya and Elliott 2001), the phrase has morphed into the country of brand origin.
Country Image Explained
Scholarly interest in country image has received considerable attention in international business research.
Scholars believe that the country image refers to consumers‘ products and marketing perception of a particular
country, on which overall perception is developed (Ahmed and d' Astous 2003; d‘ Astous and Ahmed 1999; Han
1989; Jaffe and Nebenzahl 1984; Kaynak and Kara 2002; Kim 1995). From the perspective of international
marketing, the country image is relevant to consumers‘ perception of products from a country and reflects
consumers overall perception of products from other countries. Country image is the overall perception consumers
form of products from a particular country, based on their prior perceptions of the country's production and
marketing strengths and weaknesses (Roth and Romeo 1992). Roth and Romeo (1992) define country images as
innovativeness (representing use of new technology and engineering advances), workmanship (representing
reliability, durability, craftsmanship and manufacturing quality), design (representing appearance, style, color and
variety), and prestige (representing exclusivity, status and brand names and reputation). Country image reflects
consumers‘ perception of value creation ability in a given country.
Product knowledge is represented in the memory as a set of associations（Lynch and Scrull 1982). Country
images are important extrinsic clues in product evaluations. They elicit associations and they can influence product
evaluations and purchase decisions (Kotler 2002). Extensive research has reported that the country image can have
considerable impact on consumers‘ product evaluations (Bilkey and Nes 1982; Han 1989; Roth and Romeo 1992).
In addition to influencing evaluations of existing products, the country image may also be transferable to new or
unfamiliar products. Thus, the country image of an existing product could influence evaluations of new products
from that country (Han 1989). Agarwal and Sikri (1996) find that there is considerable association between beliefs
held for the most well-known product category from a country and expectations for new products. The transference
of beliefs to the new products is greater when the perceived similarity between the well-known product and the new
product is higher. These findings have several important implications for marketers. First, positive country images
of established and well-known product categories can be capitalized on by marketers through the choice of new
products that are ―similar‖. Second, to capitalize on the ―equity‖ of the well-known product, the marketer of the new
product must seek to provide evidence of, and reinforce perceptions of, similarity between the new product and the
well-known product.
Consumers are willing to pay more for goods and services from countries that they perceive favorably or as
having the expertise to produce those products and services (Nebenzahl and Jaffe 1996), such as Japanese
electronics, Swiss timepieces and German cars. The country of origin effect influences whether a nation‘s products
and services can demand a premium, both inside the country of origin and outside. Products originating from a
country with a weak country image lead buyers to expect a greater price discount compared with products produced
by a nation with a stronger image (Nebenzahl and Jaffe 1996). In the early 1990s, when Brand Korea had a poor
national image in the international arena, research indicated that Korean-made VCRs had to discount by
approximately 40 per cent in order to compete with VCRs with a ―Made in Japan‖ label (Nebenzahl and Jaffe 1993).
These research findings demonstrate that there is a substantial monetary value to the nation brand (Loo and Davies
2006). Country image has become one of competitive sources for companies to compete in global markets.
How Does Country Image Building Relate to Industrial Upgrading?
Humphrey and Schmitz (2002) classify industrial upgrading into four types: process upgrading, product
upgrading, functional upgrading and inter-sectoral upgrading. Process upgrading improves the efficiency of
transforming inputs into outputs. Internal processes become significantly better than those of rivals, both within
links in the chain (more inventory turnovers, less scrap) and between links (more frequent, smaller and on-time
deliveries). Product upgrading leads to better quality lower priced and more differentiated products, as well as
shorter times to market for new products. Functional upgrading assumes responsibility for new activities in the
global value chain. That can include involvement from contract manufacturing to design and marketing or
incorporating logistics within the contracted work. Inter-sectoral upgrading moves to new and more profitable
chains. Enterprises in Taiwan Province of China moved from manufacturing transistor radios to calculators, to
televisions, to computer monitors, to laptops and to Wireless Application Protocol telephones.
Industrial upgrading is interrelated with country image building. Country image is dimensioned by
innovation, workmanship, design and prestige while industrial upgrading involves process upgrading, product
upgrading, functional upgrading and inter-sectoral upgrading (Gereffi, 1999). The tasks facing country image
building are the same ones facing industrial upgrading. Therefore, country image can be built through industrial
upgrading. For this paper we take apparel industry as an example to illustrate upgrading approaches.
Trends in Global Apparel Value Chain
The apparel global value chain ranges from raw materials processing and production of textiles and
manufacturing garments to marketing and retail (Figure 1). Because of differences in these parts, such as geographic
location, production capability, technology, labor skills and the scale of enterprises, the market power and
distribution of profits among the main firms in the value chain is unequal. Retailers and marketers have displaced
traditional manufacturers as the leaders in many consumers-goods industries due to the lavish advertising budgets
and promotional campaigns needed to create and sustain global brands. Large retailers have employed sophisticated
and costly information technology to develop ―quick response‖ programs that increase revenues and lower risks by
getting suppliers to manage inventories.
Apparel in industrialized markets is roughly divided into three categories. The first category is called
fashion products, with a 10-week product life, accounting for approximately 35 percent of the market. The second
category is called seasonal products, with a 20-week product life, approximately 45 percent of the market. The third
category is called basic products, sold throughout the year, approximately 20 percent of the market. Generally,
markets for men‘s and children‘s clothing are less subject to changes in demand from year to year, and are therefore
more suited to large-scale production. Women‘s garments tend to dominate seasonal sales, which are much more
difficult to predict. In fashion and seasonal markets, quick response to consumer taste is key to gaining the market
share. In marketing, a source of competitive advantage is low price.
Figure 1: Apparel Value Chain
Raw
materials
Natural and
synthetic
fibres
Machinery
Textile
manufacture
r
Dye
stuff/
bleacher
Logistics
quality
advice
service
Design
Apparel
buyers
Marketing/
branding
Domestic
wholesale
Foreign
wholesale
Domestic
retail
Foreign
retail
Consumers
Source: Appelbaum, R., and Gereffi G. 1994，Power and Profits in the Apparel Commodity Chain [A]. in E.
Bonacich and Others (Eds.). Global Production: The Apparel Industry in the Pacific Rim [C]. Philadelphia, Pa.:
Temple University Press, pp. 42-64.
Low cost and quick response are the important factors for lead firms to consider when they arrange
activities on global basis. On one hand, lead firms arrange apparel manufacturing in low labor cost countries. On the
other hand, they look for suppliers in countries which are geographically close to markets. As a result, the apparel
industry is characterized by both global production and regional clustering.
Global Production
Over the last three decades, the apparel industry has become increasingly globalized, with manufacturing
for some retailers dispersed across dozens of countries (Rosen, 2002). Lead firms in global apparel value chain
outsource manufacturing in developing countries where the cost is low. Since the 1980s, apparel exports from Asian
countries have experienced a steady growth. Apparel exports from European countries declined rapidly in the 1980s
and then began to be stable in the 1990s. During the same period, apparel exports from North America increased
slowly. Table 1 shows the top ten exporters of clothing in 2009. Most of them were from Asian countries.
Table 1: Top 10 Exporters of Clothing, 2009
Share in world exports (Percentage)
Value US$
Billions
2009
1980
1990
2000
2009
107
4
8.9
18.3
34
European
Union (27)
97
-
-
28.5
30.7
Hong Kong,
China
23
-
-
-
-
Turkey
12
0.3
3.1
3.3
3.7
India
11
1.7
2.3
3
3.6
Bangladesh
11
0
0.6
2.6
3.4
Viet Nam
9
-
-
0.9
2.7
Indonesia
6
0.2
1.5
2.4
1.9
United States
4
3.1
2.4
4.4
1.3
Exporters
China
Source: WTO. International Trade Statistics 2010 [EB/OL].
http://www.wto.org/english/res_e/statis_e/its2010_e/its2010_e.pdf，2010-12-1
Since 1980s share from China, Turkey, Bangladesh, India and Viet Nam in world clothing exports has
increased steadily as a result of production outsourcing from developed countries. Global production of apparel
intensifies competition among developing countries. Low labor cost advantage in China is being replaced by India,
Vietnam and other developing countries. China has to upgrade its apparel industry so as to be able to compete in
global markets.
Regional Clustering
Fashion items account for between 20 per cent and 40 per cent of stock keeping units (SKUs) in Western
Europe, the US and Japan. These items are highly time sensitive. The remaining 60 per cent to 80 per cent of apparel
items are commodity-like and, hence, are more price-sensitive. Sourcing decisions in these different categories
involve considerations of both geographic proximity and labor cost. In a consumer-driven environment, availability
at the right moment is more critical than price for some items. Non-financial costs may also compel retailers to seek
local or geographically proximate suppliers (Cammett 2006). When global apparel production becomes popular,
regional apparel clustering takes place. Table 2 illustrates the top three leading importers of clothing were European
Union, United States and Japan in 2009. Nearby these markets there are apparel production clusters (refer to table
3).
Quick response to market changes boosts the importance of geographic proximity to major buyers and
provides niche markets in which nearby middle-income producers can excel, notably in restocking of medium to
high value-added products. For example, North African suppliers have significantly higher costs than many Asian
manufacturers, but their geographic proximity gives them an edge in the European market. Global apparel value
chain is buyer driven and large retailers play an important role in shaping regional clusters (Humphrey and Schmitz,
2002. To reduce cost, large retailers increasingly buy directly from suppliers who can meet the need for variety of
goods, rapid replenishment of orders and frequent but smaller shipments. In this way, retailers shift risks to
manufactures and subcontractors and press them to speed up production and delivery. Large retailers constantly seek
new ways to accelerate the time elapsed from product development to delivery – that is, to shorten the supply chain.
Longer import lead times make it more difficult for retailers to replenish merchandise, causing a potential loss of
sales. The intense competition calls for cooperation between retailers and manufacturers on product development,
inventory management and related logistics. Retailers even shift display preparation to suppliers, who now affix
price tags, bar code tickets, hangers and security tags, and presses and packages items for direct delivery to stores.
As a result, retailers are able to focus on responding to market changes. Clusters of upstream and downstream firms
in the countries which are geographically proximate to markets can better meet retailers‘ requirements.
Regional clusters are further reinforced by government investment policies in developing countries where
governments intend to concentrate firms of upstream and downstream in certain locations to achieve efficiency.
Competitive relations among geographically proximate firms can drive knowledge generation, making local
groupings of firms in distinct parts of the supply chain a key source of competitive advantage. It is believed that
clusters produce knowledge spillovers. Knowledge spillovers within clusters are the driving forces of learning and
innovation (Maskell and Malmberg 1999).
Table 2: Top 10 Importers of Clothing, 2009
Share in world imports (Percentage)
Value
(US$Billion)
2009
1980
1990
2000
2009
Importers
European
Union(27)
160
-
-
41
48.5
United States
72
16.4
24
33.1
21.8
Japan
26
3.6
7.8
9.7
7.7
Hong Kong,
China
16
-
-
-
-
Canada
8
1.7
2.1
1.8
2.3
Russian
Federation
7
-
-
1.3
2.2
Switzerland
5
3.4
3.1
1.6
1.6
Australia
4
0.8
0.6
0.9
1.2
Korea,
Republic of
3
0
0.1
0.6
1
Saudi Arabia
3
1.6
0.7
0.4
0.9
Source:WTO International Trade Statistics 2010[EB/OL].
http://www.wto.org/english/res_e/statis_e/its2010_e/its2010_e.pdf，2010-12-1
Table 3: Local Apparel Production Clusters
Lead firms
Production locations
Brand owners from
Hong Kong, China
China and many other
Asian countries
Retailers and brand
owners from
America
Mexico and North
America
Brand owners from
Western Europe
Central Europe, Eastern
Europe and some
countries in Northern
Africa
Source: Shen Yuliang, Study On Processing Trade Model
of China, People‘s Publishing, Beijing, 2007,9, P.197
Governance of Global Apparel Value Chain
Four types of relationships can be distinguished in value chains: arm’s length market relations, networks,
quasi hierarchy, and hierarchy (Humphrey and Schmitz 2002). According to Humphrey and Schmitz (2002), arm’s
length market relations describe the situation where buyer and supplier do not develop close relationships. This
implies that the supplier has the capacity to produce the products the buyer wants, and also that the buyer‘s
requirements could be met by a range of firms. The product should be standard or easily customized and any process
requirements can be met by non-transaction specific standards of the sort verified by independent certification.
Networks describe the situation where firms co-operate in a more information intensive relationship, frequently
dividing essential value chain competences between them. The relationship is characterized by reciprocal
dependence. In this case, the buyer may specify certain product performance standards or process standards to be
attained, but should be confident that the supplier can meet them. Quasi hierarchy describes the situation where one
firm exercises a high degree of control over other firms in the chain, frequently specifying the characteristics of the
product to be produced, and sometimes specifying the process to be followed and the control mechanisms to be
enforced. This level of control can arise not only from the lead firm‘s role in defining the product, but also from the
buyer‘s perceived risk of losses from the supplier‘s performance failures. The buyer keeps some doubts about the
competence of the supply chain. The lead firms in the chain may exercise control not only over its direct suppliers
but also further along the chain. Hierarchy describes the situation where the lead firm takes direct ownership of
some operations in the chain.
Humphrey and Schmitz (2002) also assert that different forms of chain governance have different
upgrading implications. Insertion in a quasi-hierarchical chain offers very favorable conditions for fast process and
product upgrading but hinders functional upgrading. Process and product upgrading tend to be slower, but the road
to functional upgrading is more open in chains characterized by market-based relationships. Networks offer ideal
upgrading conditions but are the least likely for developing country producers because of the high level of
competences required. Suppliers in exported oriented countries insert themselves in the value chains characterized
by quasi hierarchy. This implies that they are locked in production. It is easier for them to move towards process
upgrading and product upgrading than towards functional upgrading. Suppliers and even government in developing
countries carry the hope that lead firms will transfer knowledge and technology to producers automatically.
However, it is not a reality. Brand and marketing are the core competences owned by lead firms who won‘t allow
suppliers in developing countries to encroach on. To developing countries, the driving force for industrial upgrading
mainly comes from internal capabilities, home consumer sophistication and local government policies.
Approach to China’s Apparel Industry Upgrading
In global production context, China‘s apparel industry upgrading needs to leverage both external and
internal forces. In terms of external forces, firms in China should actively immerse in global production networks to
improve workmanship and innovation capabilities. At the same time firms in China should also work with overseas
small importers who like to provide some inputs in design. In terms of internal forces, large firms in China should
integrate domestic apparel value chain and develop marketing and branding skills by producing for internal markets.
Insertion in Global Production Network to Improve Workmanship and Innovation
Global production network (GPN) is defined as one that is coordinated and controlled by a globally
significant transnational companies and involves a vast network of their overseas affiliates, strategic partners, key
customers and non-firm institutions (Coe, Hess, Yeung, Dicken and Henderson 2004). Taking the apparel industry
as an example, brand owners and big retailers are likely to be a global lead firms. With fast advancement of
technology and shrinking product life cycle, time-to-market has emerged as a critical success factor in global
competition (Stalk and Hout 1990). When global lead firms find it impossible for themselves to excel in each stage
of value chain, they prefer to focus their energy on activities in which they have core competencies, such as R&D,
design, key product production and marketing distribution, and outsource low value added activities to developing
countries. The increasing upstream and downstream specialization by global lead firms has opened up certain market
segments for Asian firms, particularly in low-end medium-value mass products that are not seen as core
competencies or products to these global lead firms (Yeung 2007). By entering global production network, firms in
developing countries gain the opportunities to improve their capabilities in production, management and cost
control.
Large retailers have established quick response system to accelerate the time elapsed from product
development to delivery – that is, to shorten the supply chain. Quick response system is a kind of logistic
management method which was originally developed by American apparel industry. It calls for cooperation between
retailers and suppliers on product development, inventory management, related logistics so as to generate more
accurate forecasts of stocking needs. By working with big retailers, suppliers can improve themselves in supply
chain management. In the relatively low-tech apparel industry, innovation occurs mainly through improved
management practices and technological changes that speed up particular aspects of the production process rather
than replacement of manual labor with mechanized or automated procedures (Dicken 2003). Thus, for most
developing countries that focus on the labor-intensive components of apparel manufacturing, innovation refers to the
ability to master time-saving procedures and boost the quality and efficiency of production (Cammett 2006).
Cooperation with Small and Medium-sized Importers to Improve Design Capability
Insertion in global value chain doesn‘t guarantee that firms in China will gain design and marketing
capabilities. In the governance of global value chain, export orientated developing countries are placed in quasi
hierarchy relationship. That is, they are locked in production and are difficult to achieve functional upgrading. The
power of large global retailers is formidable and remains important to determining market access for thousands of
suppliers. However, the development of the international apparel industry is not driven solely by the needs of large
western retailers (Tewari 2008). There are some smaller retailers and importers who seek greater variety and flexible
orders, and encourage their suppliers to be involved in sample-making, prototype development and provision of
design inputs because, in part, this lowered the importers‘ own business costs (Tewari 2008). They are inclined to
build long term ties with suppliers who can satisfy their order fulfillment and respond quickly to shifting consumer
tastes. Firms in China can improve design and marketing capabilities by working with these small and medium-sized
importers in developed countries.
Integration of Domestic Industrial Clusters into Global Value Chain
China is the world‘s largest producer and apparel exporter. With its abundant supply of low cost and skilled
labor, the country has attracted apparel manufacturers from around the world to set up production bases. One
noteworthy feature in China‘s apparel production is the presence of industrial clusters (see Table 4). The apparel
clusters are primarily located in the coastal regions. Since raw materials and other processed apparel products are
much cheaper in China and their qualities are increasingly matching global standards, apparel clusters in China have
become principal sourcing bases for apparel products. However these clusters mainly engage in OEM (original
equipment manufacturing) activities and are weak in technological capabilities. They can be easily replaced by
competitors in other developing countries. The issue facing competitors in China‘s apparel industry now is to
integrate the domestic apparel clusters into entire value chain. As capabilities in the supplying cluster increase,
competitors in China may find that the lead firms vacate certain spaces.
Accumulation of Marketing Capabilities by Producing for the Internal Market
Marketing capabilities can only be achieved when companies directly deal with customers. In global value
chain apparel firms in China mainly focus on activities of production and have few opportunities to deal with end
users overseas. Domestic markets offer opportunities for firms to gain marketing capabilities. With increasing
disposable income, Chinese consumers are now becoming more demanding. They favor quality products with better
design and good brand image.
Brand represents company‘s ability to keep lasting relationship with its target consumers. Generally
speaking, Chinese apparel firms are not patient in cultivating target markets, and also lack of strategies to keep
lasting relationships with their target consumers. It is hard to conceive that global brands can be built in the absence
of domestic consumers‘ involvement.
Table 4: Apparel Clusters in China
Products
Men‟s wear
Ladies wear
Lingerie
Children‟s wear
Cities/towns
Provinces
Ruian City
Zhejiang
Tancheng County
Shandong
Rongcheng County
Hebei
Huicheng District in Huizhou
City
Guangdong
Zhucheng City
Shandong
Humen Town in Dongguan City
Guangdong
Xiaolan Town in Zhongshan
City
Guangdong
Shenhu Town in Jinjiang City
Fujian
Yanbu Town in Nanhai District
in Foshan City
Guangdong
Chendian Town in Chaonan
District in Shantou City
Guangdong
Gurao Town in Chaoyang
District in Shantou City
Guangdong
Huanshi Town in Chancheng
District in Foshan City
Guangdong
Cixian
Hebei
Fengli Street in Shishi City
Fujian
Zhili Town in Huzhou City
Zhejiang
Table 4 Continued: Apparel Clusters in China
Products
Cities/towns
Provinces
Leisure wear
Leqing City
Zhejiang
Yinglin Town in Jinjiang City
Fujian
Ningjin County
Hebei
Changshu City
Jiangsu
Shaxi Town in Zhongshan City
Guangdong
Haiyu Town in Changshu City
Jiangsu
Shajiabang Town in Changshu City
Jiangsu
Shishi City
Fujian
Lingxiu Town in Shishi City
Fujian
Xiashan Street in Chaonan District in Shantou City
Guangdong
Dayong Town in Zhongshan City
Guangdong
Xintang Town in Zengcheng City
Guangdong
Huangqiao Town in Taixing City
Jiangsu
Junan Town in Shunde District in Foshan City
Guangdong
Sanbu Town in Kaiping City
Guangdong
Yushan Town in Changshu City
Jiangsu
Gongqing Town
Jiangxi
Guli Town in Changshu City
Jiangsu
Gaoyou City
Jiangsu
Anyang City
Henan
Zhutang Town in Jiangyin City
Jiangsu
Qingshanhu District in Nanchang City
Jiangxi
Xinzhuang Town in Changshu City
Jiangsu
Denim wear
Down
Knitted wear
Yiwu City
Zhejiang
Bridal dress and Tuxedo
Chaoshou City
Guangdong
Tie
Shengzhou City
Zhejiang
Glove
Gaozhou City
Guangdong
Garment accessories
Baogai Town in Shishi City
Fujian
Garments for exports
Pinghu City
Zhejiang
Taoyuan Town in Wujiang City
Jiangsu
Jintan City
Jiangsu
Sports wear
Xintang Street in Jinjiang City
Fujian
Brand garments
Yexie Town in Songjiang District
Shanghai
Hosiery
Lishui Town in Nanhai District in Foshan City
Guangdong
Datang Town in Zhuji City
Zhejiang
Trousers
Hanjiang Town in Shishi City
Fujian
Woolen garment
Honghe Town in Xiuzhou District in Jiaxing City
Zhejiang
Shirts
Fengqiao Town in Zhuji City
Zhejiang
Source: China National Textile and Apparel Council
Conclusion
Country image building and industrial upgrading are interrelated. Country image is determined by
consumer‘s perception about innovation, workmanship, design and prestige of one country while industrial
upgrading involves process upgrading, product upgrading, functional upgrading and inter-sectoral upgrading. The
tasks facing country image building are the same ones facing industrial upgrading. Therefore, country image can be
built through industrial upgrading. In global production context, firms in China need to leverage both external and
internal forces in industrial upgrading. In terms of external forces, firms in China can improve their workmanship
and innovation by insertion into global production networks, and improve their design by cooperating with small
and medium-sized importers overseas. In terms of internal forces, big players in China should integrate domestic
clusters into entire value chain and produce for internal markets. Domestic markets, with large number of increasing
income consumers, are the driving forces for firms to gain marketing and branding capabilities. Brand reflects firms‘
ability to build lasting relationship with their target consumers.
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AN EXPANDED MODEL OF NATIONAL COMPETITIVE ADVANTAGE:
EMBRACING CORPORATE SOCIAL RESPONSIBILITY1
Austin B. McKinney, U.S. Air Force Academy
Steve G. Green, U.S. Air Force Academy
Kurt A. Heppard, U.S. Air Force Academy
The connection between corporate social responsibility (CSR) and corporate competitive advantage is well
documented in scholastic literature. However, the relationship between CSR and national competitive advantage,
the focus of this paper is largely unproven. The paper concludes that a long-term national competitive advantage
will accrue to nations who foster a higher commitment to CSR practices.
Introduction
In recent years, academic and business leaders have devoted increased attention to the strategic
implications of corporate social responsibility (CSR). The connection between CSR and competitive advantage has
become increasingly clear as it continues to be studied and documented. What remains less clear, however, is the
relationship between CSR and national competitive advantage. People may like to think that corporations, or even
nations, always act with the best interests of their stakeholders. But often decisions that include components of CSR
may result in ethical dilemmas. This paper focuses specifically on environmental and social components of CSR,
and in helping establish a public consensus on socially responsible norms and values that will add to national
competitive advantage.
We describe an extension of Porter‟s model of national competitive advantage which reinforces and
illustrates the proposition that nations that foster a higher commitment to socially responsible practices will enjoy
enhanced long-term national competitive advantage. After putting CSR into context, this paper uses PEMEX,
Mexico's state-owned petroleum company, to demonstrate that CSR can become an integral part of a firm‟s
corporate-level strategy, and it can also be a factor in influencing national competitive advantage.
Our paper also proposes that a long-term national competitive advantage can accrue to those nations who
embrace CSR, or at least foster a higher commitment to socially responsible practices. As an example, we briefly
examine “Let‟s Move!”, an American health-care related initiative that is a campaign against childhood obesity. In
both cases, we focus specifically on how addressing CSR policies can be important in understanding national
Definition of Corporate Social Responsibility
CSR has been defined in a myriad of ways. In its broadest sense, CSR refers to “the firm‟s consideration of,
and responses to, issues beyond the narrow economic, technical and legal requirements of the firm…to accomplish
social benefits along with the traditional economic gains which the firm seeks” (Davis, 1973, pp. 312-313). The
Europeans view CSR as a concept where companies integrate social and environmental concerns in their business
operations on a voluntary basis (Commission of the European Communities, 2006, “Implementing the partnership
for growth and jobs: Making Europe a pole of excellence on corporate social responsibility,” p.2.). On the other
hand, Porter (2011) feels that CSR programs focus more on reputation and consequently they are hard to justify in
the long run. Elkington (1994) viewed CSR as a “win-win-win” strategy because of what he referred to as a triple
bottom line of economic, environment and social ends. McWilliams, Siegel, and Wright (2006) determined that
CSR activities combined a wide range of actions, including incorporating social characteristics or features into
products and manufacturing processes, adopting progressive human resource management practices, achieving
higher levels of environmental performance through recycling and pollution abatement, and advancing the goals of
community organizations. But it can also be argued that businesses can use CSR rhetoric for “social window
dressing” or “green wash” (Steurer, 2010, p. 53).
1
Opinions, conclusions and recommendations expressed or implied within are solely those of the authors and do not necessarily
represent the views of USAFA, USAF, the DoD or any other government agency.
CSR can also be viewed as a commitment by a company to manage its role in society as; producer,
employer, customer and corporate citizen – in a responsible and sustainable manner. The key is that this orientation
includes a set of voluntary principles that seek a positive impact on societies as well as returns on investment. CSR
can also be directly related to the contemporary initiative referred to as corporate governance, which has evolved
into a different and separate body of business knowledge.
Recently, in part because of increased awareness, there has been a global-wide movement to standardize
the definition of CSR. The International Organization for Standardization‟s ISO 26000 is an international standard
similar in scope and intent to the widely-accepted ISO 9000 Quality Standards (International Organization for
Standardization, Management and Leadership Standards, 2010). ISO 26000 recognizes that previous initiatives
have tended to focus solely on the “corporate” aspect of CSR and decided to provide broader social responsibility
guidance not only for business organizations, but also for public sector organizations of all types. It was established
to encourage the implementation of best practices, and provides an international consensus among expert
representatives of the main stakeholder groups. ISO 26000 contains voluntary guidance, not requirements, and
therefore is not for use as a certification standard (International Organization for Standardization, Management and
Leadership Standards, 2010). It defines social responsibility as the responsibility of an organization for the impacts
of its decisions and activities on society and the environment through transparent and ethical behavior that
contributes to sustainable development including health and the welfare of society; takes into account the
expectations of stakeholders; is in compliance with applicable and consistent with international norms of behavior;
and is integrated throughout the organization and practiced in its relationships (International Organization for
Standardization, 2009, “Guidance on social responsibility,” pp.3-4). But even these ambitious initiatives may not be
sufficient to motivate companies toward comprehensive CSR adoption.
History of Corporate Social Responsibility
Examples of CSR from the business community are not a new phenomenon. While CSR received
considerably increased attention in the early 2000s, the idea that businesses have societal obligations was evident at
least as early as the nineteenth century. In the aftermath of the Industrial Revolution, hordes of unfortunate factory
workers were subject to highly dangerous working conditions and miserably unsanitary living conditions. However,
Crawford (1995) and Smith (2003) observed, among other phenomena, that in Britain visionary business leaders
responded to this wretched situation by building improved factory towns – such as Bourneville which was founded
by George Cadbury in 1879; and Port Sunlight, which was founded by William Lever in 1888 and named after the
brand of soap made there. These factory towns were intended to provide workers and their families with housing
and other amenities, such as churches, schools, and hospitals, when many parts of the newly industrialized cities
were virtual slums. While the underlying inspirations of CSR may not be new to the business world, CSR has
certainly never been more prominent on the corporate agenda and global opinion as it is today.
It would also appear that there is a historical trend that consumers are increasingly looking to purchase
products and services from companies with robust CSR programs. The World Business Council for Sustainable
Development (WBCSD), a coalition of 120 international companies, refers to the increasing calls for business to
assume wider responsibilities in the social arena and claims that CSR is firmly on the global policy agenda (World
Business Council for Sustainable Development, 2009).
Looking at CSR from a historical perspective, it is possible to distinguish two contrasting cases for CSR:
the normative case, which searches for motivations in the desire to do good; and the business case, which focuses on
the notion of enlightened self-interest. “The normative case suggests that a firm should behave in a socially
responsible manner because it is morally correct to do so. The business case can be presented by asking how
companies view the possibility of furthering their economic success by paying attention to social responsibility”
(Branco & Rodrigues, 2006, p. 112). While there is a clear difference between the two, the reasons for a company to
engage in CSR activities might reflect mixture of both perspectives (Smith, 2003, p. 53). The personal values of
managers and their alignment with CSR values are important aspects to be taken into account; however, it is highly
unlikely that managers will initiate CSR activities found to be detrimental to the firm‟s performance (Branco &
Rodrigues, 2006, p. 112). Therefore, this essay will focus on the business case for CSR, while personal values will
not be examined.
Numerous theories have been put forth on the subject of CSR and the ideas surrounding the strategic
implications of CSR have evolved substantially since the middle of the twentieth century. Theodore Levitt (1958)
can be credited with setting the original academic debate over the social responsibility of business in his 1958 article
“The Dangers of Social Responsibility.” Levitt warns that “government‟s job is not business, and business‟ job is
not government” (Levitt, 1958, p. 47). Levitt‟s sentiments were echoed years later by the famous economist Milton
Friedman. Friedman (1970) argues that a business person who acts socially responsible is wrongly spending the
shareholder‟s money for a general societal interest. He contends that even if the businessperson has shareholder
permission or encouragement to do so, he or she is still acting from motives other than economic and may, in the
long run, harm the very society the firm is trying to help. “By taking on the burden of these social costs, the business
becomes less efficient” (Wheeler & Hunger, 2010, p. 72). Friedman referred to the social responsibility of business
as a subversive doctrine and stated, “there is one and only one social responsibility of business – to use its resources
and engage in activities designed to increase its profits so as it stays within the rules of the game, which is to say,
engages in open and free competition without deception of fraud” (Friedman, 1970, p.126). Friedman added that the
mere existence of CSR was a signal of an agency problem. His perspective was that CSR is an executive perk in the
sense that managers use CSR to advance their own career or personal interests, at the expense of the firm (Friedman,
1970).
The work of R. Edward Freeman (1984) however, presented a more positive view of management‟s support
for CSR. His stakeholder theory argues that every organization involves a system of primary stakeholder groups
with whom it establishes and manages relationships. “Stakeholders are the individuals and group who can affect the
vision and mission of the firm, are affected by the strategic outcomes achieved, and have enforceable claims on a
firm‟s performance” (Freeman, 1984, pp. 53-54). Freeman‟s stakeholder theory contends that managers must satisfy
a variety of constituents (e.g. workers, customers, suppliers, local community organizations) who can influence firm
outcomes. According to Freeman, it can actually be beneficial for the firm to engage in certain CSR activities that
broader organizational stakeholders perceive to be important; because without CSR stakeholders might withdraw
their support (Freeman, 1984). Freeman‟s stakeholder theory appears to directly counter Friedman‟s earlier claims.
To the extent that firms engage in CSR strategically can be examined through the lens of the resourcebased model of above-average returns. Resources are inputs into a firm‟s production process that can be either
tangible or intangible. In general, a firm‟s resources are classified into three categories: physical, human, and
organizational capital (Hitt, Ireland, & Hoskisson, 2009, p. 16). “The resource-based model assumes that each
organization is a collection of unique resources and capabilities. The uniqueness of its resources and capabilities is
the basis for a firm‟s strategy and its ability to earn above-average returns” (Hitt, Ireland, & Hoskisson, 2009, p.16).
This theory presumes that firms are bundles of heterogeneous resources and capabilities that are imperfectly mobile
across firms. Strategic management scholar J. Barney asserts that if these resources and capabilities are valuable,
rare, costly to imitate, and non-substitutable; they can constitute a source of sustainable competitive advantage
(Barney, 1995). Valuable capabilities allow the firm to exploit opportunities in the external environment; rare
capabilities are capabilities that few, if any, competitors possess; costly to imitate capabilities are capabilities that
other firms cannot easily develop; and non-substitutable capabilities are capabilities that do not have strategic
equivalents (Hitt, Ireland, & Hoskisson, 2009, p. 82).
The resource-based model of CSR has several strategic implications. Branco and Rodrigues (2006) argue
that, from a resource-based perspective, CSR can provide internal or external benefits, or both. Investments in CSR
activities “may have internal benefits by helping a firm to develop new resources and capabilities that are related to
know-how and corporate culture. These resources and capabilities, acquired internally, would then lead to a more
efficient use of resources…” (Branco & Rodrigues, 2006, p. 120). The external benefits of CSR are “related to its
effect on corporate reputation. Firms with a good social responsibility reputation may improve relations with
external actors such as customers, investors, bankers, suppliers, and competitors. They may also attract better
employees or increase current employees‟ motivation, morale, commitment and loyalty…” (Branco & Rodrigues,
2006, p. 122). Consequently, it can be argued that CSR provides intangible resources that can form the basis of a
sustainable competitive advantage and above-average returns. As such, CSR can be an integral element of a firm‟s
business and corporate-level differentiation strategies and can be considered as a form of strategic investment.
CSR strategic role in organizations have been the subject of vigorous debate between academics and
professionals that has intensified in the last decade. While the debate over even the definition of CSR continues,
albeit less heatedly than in the past, many significant questions still loom over whether CSR can play as a factor into
national competitive advantage.
Porter’s Model of National Competitive Advantage
Harvard Business School Professor Michael Porter (1990) published the results of an intensive effort that
attempted to determine why some nations succeed and others fail in international competition. His work, The
Competitive Advantage of Nations, examined 100 industries in 10 nations (Porter, 1990). For Porter, the essential
task was “to explain why a nation achieves international success in a particular industry. Why does Japan do so well
in the automobile industry? Why does Switzerland excel in the production and export of precision instruments? Why
do Germany and the United States do so well in the chemical industry?” (Hill, 2011, p. 181). The traditional
economic theory of comparative advantages, originally articulated by David Ricardo in his 1817 book Principles of
Political Economy and Taxation, states that a country that trades for products it can get at lower cost from another
country is better off than if it had made the products at home (Boudreaux, 2011). The theory of competitive
advantage would say that Switzerland succeeds in the production and export of precision instruments because it uses
its resources very productively in this industry (Hill, 2011, p. 181). Although it may be correct, it does not explain,
however, why Switzerland is exponentially more competitive in this industry than Japan, the United States or
France. Porter addresses this problem with The Competitive Advantage of Nations.
Figure 1 – Porter’s Determinants of National Competitive Advantage
Firm Strategy,
Structure and Rivalry
Factor Endowments
Demand Conditions
Related and
Supporting Industries
Porter contends that four broad attributes of a nation influence the environment in which local firms
compete, and these attributes promote or impede the creation of competitive advantage (See Figure 1) (Hill, 2011, p.
181). These attributes are: factor endowments, demand conditions, relating and supporting industries, and firm
strategy, structure and rivalry. Porter calls these four attributes, as a whole, the diamond. He argues that “firms are
most likely to succeed in industries or industry segments where the diamond is most favorable. He also argues that
the diamond is a mutually reinforcing system. The effect of one attribute is contingent on the state of others” (Hill,
2011, p. 181).
Factor endowments are “a nation‟s position in factors of production such as skilled labor or the
infrastructure necessary to compete in a given industry” (Hill, 2011, p. 181). Porter organized the factor
endowments into a hierarchy, “distinguishing between basic factors (e.g., natural resources, climate, location, and
demographics) and advanced factors (e.g., communication infrastructure, sophisticated and skilled labor, research
facilities, and technological know-how) (Hill, 2011, p. 182). Porter asserts that advanced factors are most important
for competitive advantage. Unlike the naturally endowed basic factors, “advanced factors are a product of
investment by individuals, companies, and governments” (Hill, 2011, p. 182).
Demand conditions constitute “the nature of home demand for the industry‟s product or service” (Hill,
2011, p. 182). Porter emphasizes the role home demand takes in improving national competitive advantage because
firms are normally most responsive to the needs of their closest customers. Thus, “the characteristics of home
demand are particularly important in shaping the attributes of domestically made products and in creating pressures
for innovation and quality” (Hill, 2011, p. 182). Porter also argues that a nation‟s businesses gain a stronger
competitive advantage if their domestic consumers are sophisticated and demanding, because such consumers
“pressure local firms to meet high standards of product quality and to produce innovative products” (Hill, 2011, p.
182).
Relating and supporting industries, according to Porter‟s theory, comprise “the presence or absence of
supplier industries and related industries that are internationally competitive” (Hill, 2011, p. 182). The benefits of
investments in advanced factors of production by related and support industries can spill over into another industry,
thereby helping it form a strong competitive position internationally (Hill, 2011, p. 182). One consequence of this
process is that successful industries within a certain country tend to be grouped together into successful clusters of
related industries.
The final attribute of Porter‟s national competitive advantage model - firm strategy, structure and rivalry can be described as “the conditions governing how companies are created, organized, and managed and the nature of
domestic rivalry” (Hill, 2011, p. 183). Porter makes two important points that relate to our study. First, “nations are
characterized by different management ideologies, which either help them or do not help them to build national
competitive advantage.” His second point is that “a strong association exists between vigorous domestic rivalry and
the creation and persistence of competitive advantage in an industry” (Hill, 2011, p. 183).
Expanding Porter’s Model
As seen in Figure 2, we propose an expanded model of the determinants of national competitive advantage.
Consistent with the diamond, the expanded “pentagon” model includes the original four attributes of Porter‟s model,
with the addition of a fifth attribute: level of CSR. The level of CSR can be defined as the national consensus over
the consideration of, and responses to, issues that move beyond the narrow economic, technical and legal
requirements of the firm, to accomplish social benefits along with the traditional economic gains which the nation
seeks. In accord with Porter‟s diamond, the pentagon is a mutually reinforcing system; the effect of one attribute is
still contingent on the state of others.
Figure 2 –Expanded Porter’s Model with Determinants of National Competitive Advantage
Level of Social
Responsibility (CSR)
Firm Strategy,
Structure, and
Rivalry
Related and
Supporting Industries
Demand Conditions
Factor Endowments
Recent studies have determined that CSR correlates to financial performance. Brammer and Millington
(2008) found that firms with both unusually high and low CSR have higher financial performance than other firms.
However, they determined that unusually poor social performers only do well financially in the short run, while
unusually good social performers do best over longer time horizons (Brammer & Millington, 2008). These
differences in financial performance show that twenty-first century customers value CSR in the products and
services they buy. It is highly likely that this trend will only increase in the coming future. When Porter created the
diamond model in 1990, CSR was not as highly placed on the consumer agenda or international stage. The
expansion of information technology and the spread of globalization, however, have created globally-conscious
consumers who demand that their purchasing power be used in a socially responsible manner.
These same principles can be applied to the concept of national competitive advantage. Concurrent with the
ideas presented by Brammer and Millington (2008), it can be argued that nations who are known to foster higher
levels of CSR will perform better, specifically financially, in the long-term. Consumers will increasingly look
towards products and services that are from nations who are known to sponsor CSR practices within their borders.
On the other hand, consumers will increasingly denigrate products from those nations with reputations for poor
CSR. For these reasons, we contend that it is necessary to update Porter‟s diamond model to fit the twenty-first
century consumer, by adding the fifth attribute: level of CSR.
Albeit not a direct modification to his diamond model, Porter recently addressed this fifth dimension with
what he calls “shared value.” His concept of shared value focuses on the connection between societal and economic
progress and that this value has incredible potential power (Porter, 2011). He feels that the competitiveness of a
company and the health of the communities around it are closely intertwined. Companies can create economic value
by creating societal value. In essence he presumes that there are three ways that companies can create shared value
opportunities; reconceiving products and markets, redefining productivity in the value chain, and enabling local
cluster development (Porter, 2011). All of these initiatives can be directly associated with the intent, if not spirit, of
CSR. But Porter also recognizes the potential direct economic impact by citing the implementation of wellness
programs, as opposed to merely expense cutting, the American firm Johnson and Johnson saved $250M on health
care costs, a return of $2.71 for every dollar spent on wellness from 2002-2008 (Porter, 2011, p. 71). Porter even
takes his proposed creating shared value (CSV) and offers that it could supersede CSR as a guiding principle (Porter,
2011, p. 76).
As we have presented, our expanded model of national competitive advantage allows an analytical view of
specific cases of CSR to determine whether a CSR program might be considered adding to national competitive
advantage rather than simply a competitive advantage for the specific company or companies. We briefly examine
the efficacy of the expanded model with primary and secondary case studies. In the first case example of
“PEMEX,” our model seems to indicate that a CSR program, which is a competitive advantage for a state owned
entity, does not rise to the level of national competitive advantage. In the second case we present “Let‟s Move.”
Our analysis using the expanded model seems to indicate the CSR program in question can be viewed as both a
competitive advantage for the various enterprises involved, while also creating national competitive advantage.
First Case Study: PEMEX and the Expanded Model of National Competitive Advantage
Petróleos Mexicanos (English translation: Mexican Petroleum), or PEMEX, is Mexico's state-owned
petroleum company. Asphalt and pitch had been worked in Mexico since the time of the Aztecs. By 1917
commercial quantities of oil were being extracted and refined by subsidiaries of British and American companies,
and had attracted the attention of the Mexican government (Miller, 1985). On 18 March 1938, Mexican President
Lazaro Cardenas created PEMEX by citing Article 27 of the Mexican Constitution and announcing the
nationalization of all foreign petroleum companies (Miller, 1985, p. 320). This bold act culminated a two-year
dispute over wages for oilfield workers. The seventeen British and North American firms had refused to pay the
amount set by arbitration and confirmed by a Supreme Court order (Miller, 1985). Even though Mexico agreed to
compensate the former owners, nationalization of the oil properties caused unfavorable international reaction. For a
few years “oil production declined under the new government monopoly and most foreign oil companies boycotted
and refused to transport Mexican oil or sell the nation vital petroleum equipment. Upon the outbreak of World War
II and a subsequent financial settlement, Mexico‟s petroleum industry boomed again” (Miller, 1985, p. 321). Today,
PEMEX is the biggest enterprise in Mexico and Latin America and the highest fiscal contributor to the country
(Petróleos Mexicanos, 2011, “About PEMEX,” para.1).
Currently, CSR is a separate platform of PEMEX‟s strategy. It is aimed at actions that enhance image and
relationships with its counterparts, strengthen environmental protection, and puts CSR as a key operational element
(Petróleos Mexicanos, 2011, “PEMEX strategy,” para.11). PEMEX has been publishing corporate responsibility
reports since 1999. Also, PEMEX has a Code of Ethics, applied since 2003, where it identifies commitments to
many stakeholders, and requires employees to act with high levels of honesty, legality, integrity, diligence,
efficiency, and impartiality in the performance at all times (Petróleos Mexicanos, 2011, “Code of ethics,” para.6).
PEMEX has made great strides in one of the largest aspects of its CSR platform, occupational safety. Over
the last few years, PEMEX has substantially improved its accident rate indicators. According to the 2008 Social
Responsibility Report, it had been the best year in PEMEX history, in regards to employee safety. Thanks to recent
implementation of best practices, PEMEX experienced its lowest incapacitating accident rate in 70 years, only 183
accidents, or 0.47 accidents per million man-hours worked (Petróleos Mexicanos, 2011, “2008 social responsibility
report summary,” p. 13). In 1998, the year before CSR reporting began; there were 2.68 accidents per million manhours worked (Petróleos Mexicanos, 2011, “2008 social responsibility report summary,” p. 12). PEMEX‟s
commitment to CSR has clearly improved occupational safety.
Another key pillar of PEMEX‟s CSR plan – commitment to the oil-producing communities- has also
progressed. PEMEX has worked hard to specifically benefit those communities which carry a heavy presence of the
state‟s oil industry. Its community development programs include mutual benefit works, donations, and grants.
Table 1 shows the total amount of funds dedicated to community development increased 21.7% between 2006 and
2008 (Petróleos Mexicanos, 2011, “2008 social responsibility report summary,” p. 22).
Table 1 – PEMEX Contributions to Communitarian Development 2006-2008
Year
Mutual Benefit Works
Donations and Grants
Total
2006
$561 Million
$1,632 Million
$2,193 Million
2007
$714 Million
$1,702 Million
$2,416 Million
2008
$762 Million
$1,901 Million
$2,669 Million
Not specifically illustrated above, is that PEMEX attempted to primarily benefit oil producing
communities. In that light, 91.8% of the donations and grants were given to oil-producing communities, including
the states of Campeche, Chiapas, Puebla, Nuevo Leon, San Luis Potosi, Tabasco, Tamaulipas and Veracruz
(Petróleos Mexicanos, 2011, “2008 social responsibility report summary,” p. 22). The vast majority of the funds
aim to benefit infrastructure, education, health, social welfare, housing and environmental protection. PEMEX‟s
commitment to benefit the areas of the country that may have been harmed by its presence is commendable.
While PEMEX‟s CSR program has made a real impact, it is unlikely to serve as the basis for national
competitive advantage for several reasons. First, it is inherently difficult for any organization in the oil industry to be
considered truly socially responsible. While PEMEX‟s efforts to increase social reporting, foster occupational safety
and promote communitarian development seem successful thus far, the oil industry is viewed by many to be socially
irresponsible by its intrinsic nature. The detrimental effects to the environment, caused by the global oil industry,
cannot be denied. Rising carbon dioxide levels in the atmosphere and the environmental havoc created by oil
industry infrastructure and mishaps encourage many global citizens to view enterprises like PEMEX as socially
irresponsible. PEMEX may compensate for some of the environmental damage it has created through its CSR
platform; however, it is highly unlikely to be viewed by the average global consumer as the staple of social
responsibility.
In addition, PEMEX lacks other factors of our mutually reinforcing pentagon model. As the only stateowned oil enterprise in Mexico, PEMEX does not enjoy any domestic competition. As Porter points out, “a strong
association exists between vigorous domestic rivalry and the creation and persistence of competitive advantage”
(Hill, 2011, p.183). Its complete monopoly further weakens its opportunity to build a national competitive
advantage for the Mexican oil industry.
Also, PEMEX‟s domestic customers do not provide the sophisticated demand that Porter argues will
pressure local firms to produce innovative products. 47% of the Mexican population lived below the poverty line in
2008 (Central Intelligence Agency, 2011, para.5). It is highly unlikely that the impoverished masses will provide
the impetus for innovative, socially responsible petroleum. Furthermore, indicators point to a low level of interest in
CSR among the more affluent members of Mexican society. For example, in 2007 “only eight graduate theses
directly related with the topic and four partially linked were identified in the most important universities” (Brum and
Castilla, 2007, p. 4.). With a low level of domestic demand for socially responsible petroleum, there is a lack of
national consensus, and PEMEX reduces the potential to form the basis of a Mexican national competitive
advantage in the oil industry.
And finally, there is limited national consensus on the value of the CSR program. This lack of national
consensus and investment across multiple enterprises mitigates the argument for a PEMEX inspired national
Second Case Study: ―Let’s Move!‖ and the Expanded Model of National Competitive
Advantage
We feel that national consensus is fundamental to successful CSR initiatives. We also propose that
associating national consensus while embracing CSR will more likely result in voluntary “soft” policies as opposed
to “hard” laws and regulations. Steurer (2010) reinforces these positions and has provided a systematic account of
how governments approach CSR. He identified five “instruments” that governments can implement; followed by
the specific actions they can take. The five instruments are policy tools have been widely used and studied. They
include: informational, economic, legal, partnering, and hybrids policy instruments. These instruments can also
metaphorically be summarizes as sermons, sticks, carrots, ties, and adhesives (Steurer, 2010). He further takes
these policy instruments and identified four CSR themes that can be referred to as “fields of action” (Steurer, 2010,
p. 58). They include; raise awareness and build capacities for CSR; improve disclosure and transparency by
provide reliable information and easy access and wide dissemination of information; facilitate Socially Responsible
Investment (SRI) and; lead by example (walk the walk) by directing public procurement and investments with CSR
in mind (Steurer, 2010)
An example of this CSR policy instrument – theme approach can be seen by applying it to “Let‟s Move!”,
a comprehensive initiative dedicated to solving the problem of obesity, launched by the American First Lady,
Michelle Obama. President Barack Obama signed a Presidential Memorandum creating the first-ever Task Force on
Childhood Obesity to conduct a review of every program and policy relating to child nutrition and physical activity,
and to develop a national action plan to maximize federal resources and set concrete benchmarks toward the First
Lady‟s national goal (Let‟s Move America‟s Move to Raise a Healthier Generation, “About let‟s move,” 2011).
Put into CSR context, the strategic goal of decreasing childhood obesity in the U.S. has a direct relationship
to social responsible policy mainly due to the obvious social benefits of healthier children. National competitive
advantage gains may also be realized through short-term availability of improved food resulting in healthier children
and less work-days lost for parents, as well as the long-term benefits of lower health costs and greater productivity.
In the spirit of Steurer (2010) the CSR information instruments included the First Lady‟s “bully pulpit”
approach and a well-organized and orchestrated media campaign. Economic instruments included reduced cost
meals, USDA supplemented framers‟ markets, and tax subsidies for grocery stores. Legal instruments included laws
mandating physical education and regulations on nutritional information on labels. The partnering and hybrid
agreements are pervasive in that they not only tie the public and private sectors, but they also connect diverse
organizations such as faith-based non-profits to the National Football League (Let‟s Move America‟s Move to Raise
a Healthier Generation, “Let‟s move accomplishments,” 2011).
These programs were elements of CSR initiatives at multiple enterprises (grocery chains, food producers,
etc.). Because of the integrating and consensus generating activities of the First Lady‟s initiative, it may indicate
that these linked CSR programs will allow a national competitive advantage for the United States.
A look at the Let‟s Move!‟s CSR-related initiatives in the context of Steurer‟s (2010) policy themes reveals
that it has been a very successful program. Did it raise awareness and build capacities for CSR? – Yes. It has
improved disclosure and transparency with new regulations and voluntary participation in label content, and
provides reliable information and easy access and wide dissemination of information with a comprehensive website.
Did it facilitate Socially Responsible Investment (SRI)? - Yes. It has considered and highlighted economic, social,
environmental, and other criteria while remaining embedded in shareholder capitalism. Did it leading by example
(walk-the-walk)? – Yes. Public procurement in this arena has become more sustainable and there has been many
government-backed financial incentives offered to participate. In summary, America‟s national competitive
advantage was enhanced with this CSR-related initiative supported and made possible by national consensus.
Conclusions
The connection between CSR and corporate competitive advantage has become increasingly evident as
CSR aims to better integrate environmental and social issues into the strategic orientation of companies on a
voluntary basis. In fact some argue that CSR provides intangible resources that can form the basis of a sustainable
competitive advantage and above-average returns. Most recently, Porter (2011) cites specific examples of the
economic and social benefits of embracing a CSR-related concept of shared value. What remains unproven, and
what we are addressing, is the relationship between CSR and national competitive advantage. In parallel with the
ideas presented by Brammer and Millington (2008), we propose that a long-term national competitive advantage
will better accrue to those nations who foster a higher commitment to CSR practices. As with Porter‟s diamond
model, however, our expanded model needs to be subjected to detailed empirical study and testing to determine
further validity. We describe a strategic model that reinforces and illustrates the proposition that nations that
harness national consensus and foster a higher commitment to CSR practices will enjoy enhanced long-term national
competitive advantage. PEMEX and Let‟s Move! are two data point examples of our model application.
While many companies remain trapped in outdated approaches to value creation (Porter, 2011), specifically
a short-term financial gain mind-set, we feel that embracing CSR in a systematic and systemic manner, will help
them maximize shareholder wealth. Further, even though there may be negativism associated with CSR, in part
because in the past some governments have attempted to address social issues at the expense of business (Porter,
2011), we feel that with the increased national consensus associated with the international attention being drawn to
CSR, in addition to the promise of potential increased financial gains for individual firms, there is also hope for
increased national competitive advantage. As the noted CSR scholar, Jeremy Moon mused, “CSR is not simply a
feature of the new global corporation but it is also increasingly a feature of new societal governance” (Moon, 2007,
p.302).
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ARE SALARY AND PROMOTION, PREDICTORS OF JOB
SATISFACTION? A COMPARATIVE STUDY OF PUBLIC AND PRIVATE
BANKS IN INDIA
Nawab Ali Khan, Salman Bin Abdulaziz University, Saudi Arabia
Suhalia Parveen, Aligarh Muslim University, India
Beyond the research literature and studies, job satisfaction is considered a need. This issue is addressed on
the basis of multifarious aspects of job satisfaction, which covers, salary, healthy growth of an organization,
promotional techniques, and implementation of objectives, emotion regulation of employees, productivity, efficiency,
turnover etc. The study is descriptive in nature and the data has been collected through a self designed
questionnaire administered to 200 employees who are employed in different branches of public and private sector
commercial banks. The study reveals that employees need to be satisfied with their job to overcome the situation of
absenteeism, role conflict, job induced tension, negative intention to leave the job and discrimination against them.
Introduction
In 1935, Hoppock described job satisfaction as ―any combination of psychological, physiological, and
environmental circumstances that causes a person truthfully to say, ‗I am satisfied with my job‘. In 1964, Vroom
defined satisfaction as valence, or anticipated satisfaction of an outcome. Later, Smith, Kendall and Hulin (1969)
associate job satisfaction with the feelings a worker has about his job that are related to the perceived difference
between what they think is fair and reasonable and what they actually experience (Goodall & Moore, 2003). Job
satisfaction is simply how people feel about their jobs and different aspects of their jobs. It is the extent to which
people like (satisfaction) or dislike (dissatisfaction) their jobs (Report, 2007).
Job satisfaction is a key factor in today‘s job market especially when the industry is somewhat stagnant.
The financial market in India, specifically the banking industry has boomed in the last few years. There has been a
cut throat competition in the banking sector due to foreign as well as local investments. The major players have
changed the rules of the game and adapted modern techniques for satisfying their customers. This led to a major
shift in the human skills required for the job and many employees switched jobs for better prospects, higher salary
and compensation and incentives (Yasir & Fawad, 2009).
Many investigations have been carried out to determine the factors that lead to job satisfaction. In most of
these studies, job satisfaction has been treated as the dependent variable and the factors assumed the role of
independent variables. The factors contributing to job satisfaction seem to vary according to the nature, complexity
and intensity of the occupation. Intrinsic aspects of the job, such as, salary, supervision, working conditions,
opportunity for advancements, security, inter-relationships with boss and co-workers, communication, job benefits
and social aspects of the job, emerged as the independent variables affecting job satisfaction.
The old adage ―you get what you pay for‖ tends to be true when it comes to staff members. Though a good
salary is not in itself a motivator for job satisfaction, employees do want to be paid fairly. If individuals believe they
are not compensated well, they will be unhappy working in an organization. Employees can easily find out if they
are fairly compensated through salary surveys and local help-wanted advertisements. In addition, every employee
needs to have a clear understanding of the policies related to salaries, perks, raises and bonuses (Family Practice
Management, 1999).
In essence, the degree of job satisfaction is determined by the ratio between what we have and what we
want. Job satisfaction is also dynamic and can dissipate as quickly as it is acquired. It is a positive emotional state
that occurs when a person's job seems to fulfill important values, provided these values are compatible with one's
needs. Satisfaction is a pleasurable or positive emotional state resulting from the appraisal of one's job experience.
In short, satisfaction is a synchronization of what an environment requires of its people and what the people are
seeking of the environment (Bhatt, 2004).
Promotion occurs when an employee makes an upward shift in the organizational hierarchy and assumes a
position of greater responsibility (Dessler, 2008). Promotion can generate a significant increase in the salary of an
employee as well as in the span of authority and control. If employees feel they are making a positive contribution to
the organization and the organizations shows that these employees are valued, they will be more satisfied with their
job.
In addressing the question salary and promotion being a predictor of job satisfaction, the banking industry
was used as a test case because of the availability of a wealth of information both documented and non-documented
(Naveed, 2011).
Literature Review
Job satisfaction is regularly measured by organizations for employee growth and development. For this
reason, this topic has been a subject many quantitative and qualitative studies. Some of the earlier studies are
discussed below.
Llorente & Macias (2005) carried out a study to assess the extent of the relation between different variables
measuring working conditions and job satisfaction. The study explored whether differences between countries in job
satisfaction can be explained by variables. They studied the relationship between measures of job quality and job
satisfaction in a given country, using Spain as a case study.
Kamal & Sengupta (2008) attempted not only to ascertain the degree of overall job satisfaction prevailing
among the Bank Officers but also to elicit officer‘s views on the different factors contributing to their job
satisfaction. The study also found out that as a person ages, his or her job satisfaction generally increased. Younger
employees have more energy, more expectations and more options, and hence have lesser job satisfaction levels.
Overall the job satisfaction of bank officers though needing considerable improvement was found to be satisfactory.
Yasir & Fawad (2009) in their study explained that satisfaction with the pay produced a positive effect on
job satisfaction and workers who are dissatisfied with their bosses are more sensitive to their pay in deciding on
whether they are satisfied with their job. Satisfied employees are more likely to be friendly and responsive to
customer needs thus attracting more customers. Dissatisfied employees on the other hand can lead to customer
dissatisfaction and subsequent loss of customers.
Shrivastava & Purang (2009) in their study examined the job satisfaction level of a public sector and
private sector bank employees in India. Public and private sector banks differ with respect to their background and
work culture. Writers of this study observed that the work culture of public sector banks was based on the concept of
socio-economic responsibility, in which profitability is secondary. On the other hand, the profit maximization
motive is the objective of the private sector banks. These differences play an important role in shaping the work
culture in an organization, and its impact on job satisfaction was explored.
Card et al, (2010) attempted to propose and implement a new strategy for evaluating the effect of pay
comparisons, on job satisfaction. Their evidence confirmed the importance of the relative pay on job satisfaction.
Nawab & Bhatti (2011) threw more light on the impact of employee compensation on job satisfaction and
employee‘s organizational commitment among Pakistani university teachers. They defined job satisfaction as one‘s
feelings or state of mind regarding the nature of their work and it can be influenced by a variety of factors such as
the quality of one‘s relationship with their supervisor, the quality of the physical environment in which they work,
and the degree of the fulfillment of their work.
Khan et al, (2011) in their research paper highlighted the problems faced by the banking industry in Pakistan
which is severely affecting the loyalty of the customers and the employees. The employees‘ satisfaction and
retention are critical to the business in today‘s ever changing and competitive business environment. The purpose of
their research was to establish a link between perceived human resources internal service and quality practices with
employee retentions.
Objectives of the Study
This study is different from the above studies because it segregates the private from the public banking
industry in determining the effect salaries and promotion on job satisfaction. The following are the main objectives
of the study:
 To find out the overall job satisfaction of the employees of public and private sector banks.
 To find out the significance level of variables like salary and promotion.
 To identify the factors responsible for satisfaction or dissatisfaction of bank employees.
 To suggest some ways of improving the state of job satisfaction of the bank employees.
Hypotheses of the Study
To test the statistical association between the considered variables, the following null hypotheses are
designed:
Ho1: Significant difference does not exist in the satisfaction level of the employees of Canara and ICICI Bank
regarding their salary.
Ho2: Significant difference does not exist in the satisfaction level of employees of Canara and ICICI Bank regarding
their promotion.
The other variables to be tested in this study are: salary, annual salary increment, financial benefits, rewards
and bonuses, overtime allowances, rewards for new ideas or suggestions, frequency and amount of bonuses and
promotional policy of the bank, performance evaluation methods, promotion implementation methods, and welfare
measurement.
Research Methodology and Limitations of the Study
Sampling used in this research is convenience sampling. Employees of 15 branches of two commercial banks,
namely, ICICI Bank from the private sector and Canara Bank from the public sector of Aligarh District, UP state were
targeted. The diversity of the study is that it involves bankers of all age groups and career levels. Questionnaires were
circulated among 200 employees. Out of which 102 questionnaires were returned by the respondents. However, only 91
respondents‘ responses were found fit for the purpose of analysis. The major problems faced during the data collection
procedure were mostly people‘s unwillingness to fill the questionnaire. The employees were weary of the potential
punishment should they be found out by their supervisors. However, once they realized that this effort is done purely for
research purposes and their responses would be kept confidential, they filled the questionnaires with ease.
Data Analysis Procedures
The analysis part has been dealt with using a Statistical Package for the Social Sciences (SPSS). The
variables were coded in SPSS and certain statistical methods were applied on the data to get the results which were
analyzed. In the first instance, the frequencies were calculated for the general information of both the banks and
given in the Appendix. Mean comparisons were used to determine whether the salary is a major factor for job
satisfaction among various commercial bankers. Their satisfaction with salary, promotional policy, job security,
relation with colleagues and training techniques was considered. Frequency analysis was employed to examine the
relationship between different banks with salary, promotional policy, security of the job, relation with colleagues
and training techniques etc. Independent Sample t-test along with p- value was used to compare the results.
However, the main focus of the study was the effect of the salary and promotion and their related factors job
satisfaction among commercial bankers in India. Other variables such as gender, level of education and age trends
related to job satisfaction were also identified.
Analysis of Important Factors
The analysis of the survey responses focused on establishing the effect of salary and promotion on job
satisfaction. For each factor, the frequency response was taken from the respondents from the public (Canara Bank)
and the private banks (ICICI bank). The results of the analysis are shown in Table 1.
The data suggests that 53.33% employees of Canara Bank agreed that salary is an important factor for
maintaining job satisfaction, while 15.6% of them strongly agreed and 20% of employees disagreed. On the other
hand 26.1% of employees in ICICI Bank agreed, 34% were neutral and 34% employees disagreed.
The mean, standard deviation, and Levene‘s test for equality of variances in the salary for public and
privatized banks are depicted in Tables 2 and 3. The p value is 0.039 which is less than the alpha value (0.05);
therefore the null hypothesis Ho 1 is rejected. The data suggests that a significant difference exists between the job
satisfaction levels of employees in both banks in relation to the salary. The mean values from both banks show that
there is little difference in the perception that the employee salary is a factor in job satisfaction.
Promotion is an important variable for job satisfaction. The data in Table 4 shows that 62.2% employees in
Canara Bank agreed that promotion is an important variable for job satisfaction, while 15.6% of them are strongly
agreed and 8.9% were disagreed. On the other hand, 39.1% employees of ICICI Bank agreed, 19.6% were neutral,
21.7% of employees disagreed and 15.2% strongly disagreed.
Table 1: Satisfaction Level of Employees towards Salary
Canara Bank
Frequency Percentage
Status
Strongly
disagree
Disagree
Neutral
Agree
Strongly agree
Total
01
2.2
09
04
24
07
45
20.0
8.9
53.3
15.6
100.0
ICICI Bank
Frequency Percentage
03
6.5
10
16
12
05
46
21.7
34.8
26.1
10.9
100.0
Table 2: Salary Analysis Group Statistics
The salary.
Respondent‘s
bank
N
Mean
Std.
Deviation
Std. Error
Mean
Canara Bank
45
3.60
1.053
.157
ICICI Bank
46
3.13
1.087
.160
Table 2: Independent Sample Test Results for the Salary Analysis
Levene's Test for Equality of
Variances
salary
Equal
variances
assumed
F
Sig.
.000
.987
t-test for Equality of Means
T
df
2.092 89
Sig. (2Mean
tailed) Difference
.039
.470
Std. Error
Difference
.224
95% Confidence
Interval of the
Difference
Lower
Upper
.024
.916
The results in Tables 5 and 6 show the mean, standard deviation, and Levene‘s test for equality of
variances of promotion in both public and private sector banks. The p value is 0.000 which is highly significant at
1 %( alpha value- 0.01), therefore the null hypothesis Ho 2 is rejected. There is a significant difference between
the satisfaction levels of employees in both the banks regarding promotion. The mean values of ICICI and Canara
bank depict that recognition of promotional policies for job satisfaction in ICICI is comparatively less than that of
Canara bank.
Table 4: Satisfaction level of Employees towards Promotional Policies
Canara Bank
Status
ICICI Bank
Frequency
Percentage
Frequency
Percentage
Strongly disagree
00
00
07
15.2
Disagree
04
8.9
10
21.7
Neutral
06
13.3
09
19.6
Agree
28
62.2
18
39.1
Strongly agree
07
15.6
02
4.3
Total
45
100.0
46
100.0
Table 5: Group Statistics for the Promotion Analysis
Promotional policy of the
bank.
Respondent‘s
bank
N
Mean
Std.
Deviation
Std. Error
Mean
Canara Bank
45
3.84
.796
.119
ICICI Bank
46
2.96
1.192
.176
Table 6: Independent Sample Test for the Promotion Analysis
Levene's Test for
Equality of
Variances
Promotional
policy
Equal variances
assumed
F
Sig.
T
df
Sig. (2tailed)
13.710
.000
4.1
89
.000
Mean
Differenc Std. Error
e
Difference
.888
.213
95% Confidence
Interval of the
Difference
Lower
Upper
.465
1.311
Descriptive Analysis
Main variables and the related factors are considered for the descriptive analysis-regarding salary, annual
increment, financial benefits, rewards and bonuses, overtime allowances, rewards for new ideas or suggestions,
frequency and amount of bonuses and promotional policy of the bank, performance evaluation methods, promotion
implementation methods, welfare measurement, promotions to higher positions are usually on time and proper
utilization of employees‘ talent. Interpretation of various related factors follows below.
In descriptive analysis various related factors are considered for comparing the results in public and private
sector banks. Group statistics (Table 7) contains the salary and its related factors like annual salary increment,
financial benefits, overtime allowances, reward for new ideas and frequency and amount of bonuses. In comparing
means of all these variables (Table 8) it was concluded that salary, financial benefits and rewards for new ideas has
about the effect on job satisfaction in both banks. While it is less in ICICI Bank than that of Canara Bank if we
compare the mean values of annual salary increment. Mean values of overtime allowance and amount of bonuses for
job satisfaction is less in Canara Bank than that of ICICI Bank.
The values of p values for the variables, salary, annual increment and amount of bonuses (0.39, 0.00 and
0.00) are lower than the alpha value (0.05). It can be deduced that the above three variables differ significantly
between the two banks. The remaining variables like financial benefits and overtime allowances have p values
(0.928 and 0.064) which are higher the alpha value (0.05), indicating that there is a significant difference between
these two banks.
The analysis of the promotional polices of both banks with all the related variables of promotion including
promotion itself (promotion, performance evaluation methods, promotion implementation methods, welfare
measurement, promotion on time, proper utilization of employee‘s talent) contain mean values less in ICICI Bank as
compared to Canara Bank (Table 9). This shows that recognition of all these factors for job satisfaction is less in
ICICI Bank as compared with Canara Bank.
The p-values of all the related factors of promotion, revealed that all the variables except the welfare
measurement and proper utilization of employees talent have p-value (sig. 2- tailed) (0.1980 and 0.088) which is
more than the alpha value (0.05). This shows that these two factors do not differ significantly between ICICI Bank
and Canara Bank. While other variables like promotion itself, performance evaluation methods used in both the
banks, promotion implementation methods and timings for promoting he employees, all these factors differ
significantly as their P-values are less than that of alpha value which is 0.05.
Table 7: Group Statistics for other Variables and Salary
Respondent‟s
bank
The salary paid to me.
Canara Bank
ICICI Bank
The annual salary increment. Canara Bank
ICICI Bank
Other financial benefits.
Canara Bank
ICICI Bank
Overtime allowances.
Canara Bank
ICICI Bank
Rewards for new ideas or
suggestions.
Canara Bank
ICICI Bank
Frequency and amount of
bonuses.
Canara Bank
ICICI Bank
N
Mean
Std.
Deviation
Std. Error
Mean
45
3.60
1.053
.157
46
3.13
1.087
.160
45
3.62
.960
.143
46
2.83
1.081
.159
45
2.91
1.125
.168
46
2.89
.948
.140
45
1.73
1.176
.175
46
2.22
1.281
.189
45
3.44
1.235
.184
46
3.20
1.108
.163
45
1.89
1.071
.160
46
3.07
1.162
.171
Table 8: Independent Sample Test for Salary and other Variables
Levene's Test for
Equality of
Mean
Std. Error
Sig. (2-tailed) Difference Difference
95% Confidence
Interval of the
Difference
Lower
Upper
0.224
0.024
0.916
0.796
0.215
0.37
1.222
0.928
0.02
0.218
-0.413
0.453
89
0.064
-0.484
0.258
-0.996
0.028
1.012
89
0.314
0.249
0.246
-0.24
0.737
-5.01
89
0
-1.176
0.234
-1.642
-0.711
F
Sig.
T
df
0
0.987
2.092
89
0.039
0.47
1.377
0.244
3.711
89
0
3.615
0.06
0.091
89
1.007
0.318
-1.87
0.427
0.515
0.116
0.734
The salary Equal variances
paid to me. assumed
The
annual
salary
increment.
Other
financial
benefits.
Overtime
allowances
.
Rewards
for new
ideas or
suggestio
ns.
Frequency
and
amount of
bonuses.
Equal variances
assumed
Equal variances
assumed
Equal variances
assumed
Equal variances
assumed
Equal variances
assumed
Table 9: Independent Sample Test for Salary and Other Variables
Respondent‟s bank
N
Mean
Std.
Deviation
Promotional policy of
the bank.
Canara Bank
45
46
3.84
2.96
0.796
1.192
0.119
0.176
Performance
evaluation methods.
Canara Bank
45
46
3.67
2.87
0.853
1.24
0.127
0.183
Promotion
implementation
methods.
Welfare measurement.
Canara Bank
45
46
3.64
2.8
1.048
1.147
0.156
0.169
45
46
3.13
2.83
1.198
1.06
0.179
0.156
45
46
3.62
2.91
1.267
0.985
0.189
0.145
45
46
3.58
3.15
0.988
1.333
0.147
0.197
ICICI Bank
ICICI Bank
ICICI Bank
Canara Bank
ICICI Bank
The promotions to
higher positions are
usually on time.
The proper utilization
of my talent.
Canara Bank
ICICI Bank
Canara Bank
ICICI Bank
Std. Error
Mean
Table 10: Independent Sample Test for Promotion and Other Variables
Levene's Test
for Equality
of Variances
F
Sig.
Promotional
policy of the
bank.
Performance
evaluation
methods.
Promotion
implementation
methods.
Welfare
measurement.
The
promotions to
higher
positions are
usually on
time.
The proper
utilization of
my talent.
T
df
Sig. (2tailed)
.000
Mean
Difference
Std. Error
Difference
.888
.213
95%
Confidence
Interval of the
Difference
Lower Upper
.465 1.311
Equal
variances
assumed
Equal
variances
assumed
Equal
variances
assumed
Equal
variances
assumed
Equal
variances
assumed
13.710
.000
4.169
89
11.169
.001
3.565
89
.001
.797
.224
.353
1.241
2.270
.135
3.645
89
.000
.840
.230
.382
1.298
2.328
.131
1.296
89
.198
.307
.237
-.164
.778
4.551
.036
2.986
89
.004
.709
.238
.237
1.181
Equal
variances
assumed
7.582
.007
1.727
89
.088
.426
.246
-.064
.915
Concluding Observations
A satisfied employee is an asset for the organization because happy employees are more likely to be
pleasant to customers and therefore attract more customers. This is the reason why this study evaluated the
factors that affect employee job satisfaction. The lessons from this study could be used to solve employee
dissatisfaction problems depending on the type of bank.
A detailed analysis was done to understand the impact of variables of job satisfaction in private and public
sector banks. General information was analyzed with charts (See the Appendix) to understand and reach
conclusions about the data. Overall consideration of the salary as an important variable for job satisfaction in both
banks is shown in Table 1. The data reveals that, 53.33% of employees in Canara Bank agreed that salary is an
important factor for job satisfaction, while 15.6% of employees strongly agreed and 20% disagreed. On the other
hand 26.1% of employees in ICICI Bank agreed, 34% were neutral and 34% employees disagreed. There is
enough evidence to show that the two banks differ significantly regarding the salary as an important variable. The
mean values in both the banks also depict that recognition of the salary as a factor for job satisfaction is almost
equal.
Promotion as an important variable for job satisfaction in both banks is shown in the Table 4. The data
reveals that 62.2% of employees in the Canara Bank agreed that promotion is an important variable for job
satisfaction, while 15.6% employees strongly agreed and 8.9% disagreed. On the other hand 39.1% of employees
in the ICICI Bank agreed, 19.6% were neutral, 21.7% did not agree while 15.2% strongly disagreed. The
evidence shows that significant differences do exist between the satisfaction levels of employees in both banks
regarding promotional policies. The mean values of ICICI bank and Canara Bank depict that recognition of
promotional policies for job satisfaction in ICICI Bank is comparatively less than that of Canara bank.
The average means of the private sector banks were higher when compared with those of the public sector
banks. It showed that the private sector banks are using various management techniques aggressively to attract more
customers. If the job satisfaction factors are improved there will an increase in the overall job satisfaction among the
bank employees.
Appendix: General Information
Chart 1: Frequency Distribution of the Gender of Employees in both the Banks
120
100
80
60
Frequency
40
Percent
20
0
Canara
Bank Female
Male
Total
ICICI
Bank
Male
Female
Total
Chart 2: Frequency Distribution of level of profession of Employees in both the Banks
120
100
80
60
40
20
Frequency
0
Percentage
Chart 3: Frequency Distribution of Experience of Employees in both the Banks
120
100
80
60
40
20
Frequency
0
Percentage
Chart 4: Frequency Distribution of Qualification of Employees in both the Banks
120
100
80
60
40
20
Frequency
0
Percentage
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THE EMERGENCE OF SOVEREIGN WEALTH FUNDS: IMPLICATIONS
FOR GLOBAL FINANCIAL SYSTEMS
Surendar Singh, Invertis University, Bareilly, India
R.C Mishra, Uttarakhand Open University, Haldwani, India
This paper focuses on a major global phenomenon: the rise of sovereign wealth funds (SWFs) and its
implications to global financial system. It also investigates the perspectives of a developing country like India for
setting up – SWF in the ever changing global economic environment. The paper finds out that SWFs have emerged as
an important source of liquidity for the global financial markets and they also play a vital role vis-a vis the other
players such as mutual funds, hedge funds and private equity. SWFs are the important investors in the leading global
financial companies but they pose a serious challenge to global financial markets due to their non – transparent
nature of investment. The paper concludes that India should not go for setting up of SWFs as the nature of the capital
flows in India is very volatile and it poses a serious challenge to the economy in case of capital flight from the
domestic market, a phenomenon it has experienced earlier
Introduction
Sovereign Wealth Funds‟ (SWFs) is a not a new concept in the global financial market. In fact, these were
introduced for the first time in 1953 as a financial instrument when the global financial system was disorganized;
fragmented; under-networked, and disintegrated. As a result, it did not get much prominence during the period.
Later, in the era of global economic financial liberalization and globalization under the World Trade Organization
during the nineties and in the first decade of the 21st century; the landscape of global financial system was
transformed allowing nations to plan for Sovereign Wealth Funds as financial instruments at global level. Thus,
SWFs emerged as an important instrument in the global financial markets and got significant attention in emerging
economies. SWFs are a viable financial instrument for countries with current account and capital account surplus.
However, sovereign wealth funds are state -owned investment fund comprising financial assets such as bond, stocks,
property, precious-metals and other financial instruments. These are derived from the excess liquidity in public
sector, government fiscal surplus, and current account surplus. The economists have categorized the sovereign
wealth funds into two broad categories – the first is based on commodity exports such as minerals, oil and gas and
the second is the non commodity funds, where the countries running persistent current account surpluses (that is
excess savings over investment) dedicate a sizable portion of the foreign exchange reserves to be managed by a
separate entity. In other words, SWFs can be defined as public investment agencies operating directly under the
central and the state governments. The paper is divided into four sections – the first section of the paper reviews the
literature on sovereign wealth funds, key trends, size and investment of sovereign wealth funds; second section
analyzes the growth of foreign exchange reserves in different parts of the developing world and their relative
importance of the current vs. capital account as the source of those assets. The third section of the paper reviews the
impact of sovereign wealth funds on global financial markets and emerging issues pertaining to sovereign wealth
funds, whereas the fourth section discusses India‟s approach towards setting up a SWF and its potential implications.
Literature Review
In the last decade, a large number of studies have been conducted on SWFs and their impact on global
financial markets. In this context, Summers (2007) pointed that the extra dimension added by SWFs is the
possibility that sovereign investors may use their strategic leverage for narrow nationalistic objectives. Buiter (2007)
advocated that SWFs should be allowed to invest only in nonvoting equity shares as they pose significant risk to
global financial markets. Truman (2007) has raised concerns about the lack of transparency of SWFs, including their
size, and has called for more disclosure of their investment holdings and strategies. Aizenman and Glick (2007)
found two major reasons i.e. boom in commodity prices and precautionary approach of South Asian Economies after
the East Asian crisis. Abhijit Sen (2008) pointed out that India has been loosing more than 2% of its GDP by
accumulating reserves instead of employing resources to increase the physical capital of the economy. Gilson and
Milhaupt (2008) proposed the suspension of voting rights of SWFs to mitigate concerns that SWFs as governmentcontrolled funds will influence firm strategies in ways that are not aligned with shareholder, wealth-maximization
and to reduce the risk of a protectionist response on part of the host government. Lam and Rossi (2009) developed a
theoretical model that aims to examine the impact of SWFs on global financial stability during periods of stress.
Kotter and Lel (2010) found, positive and significant buy-and-hold abnormal returns over the 2 and 3 year holding
period, using a sample of 172 deals and following an SWF investment. Dewenter el al. (2010) also found positive
cumulative abnormal returns over the 3- and 5-year periods following the acquisition by SWFs.
Thus, the brief review of literature highlights the implications of Sovereign funds with regard to their „strategic
leverage for narrow nationalist objectives‟; „risk-element‟; „transparency‟; „capacity to enhance earning potential,
„capacity to influence decisions of firms‟, and „impact on global financial stability‟. In this paper, therefore, an
attempt has been made to study the impact of these variables on the global financial system.
Market Size and Growth Drivers
Normally sovereign wealth funds are governed by the central and the state governments, but sometimes,
SWFs directly operate under the Central Banks of the countries. Therefore, it is difficult to find the exact size of
their operations, and the total volume of assets. However, based on the market estimates, assets under management
of SWFs may currently amount to over USD 3.1 trillion. This is just double the size of hedge funds industry, i.e.,
USD 1.4 trillion, but these are only a seventh of the global investment-fund industry (USD 21 trillion). These figures
establish that it is a very promising instrument in the ever changing global economic environment.
The rapid economic growth and sound macroeconomic fundamentals of the emerging economies are the key
contributors to the unprecedented growth of SWFs. The growing forex reserves and official reserves of the leading
economies have given the impetus to the growth of sovereign wealth funds. This has been happening particularly in
the emerging economies which benefited from oil revenues, say oil exporting nations in the Middle East and Latin
America, or rising competitiveness and improving balances of payments vis-à-vis established industrialized
economies, especially China, South Korea and Taiwan.
At the time of global economic boom, emerging economies have generated huge sums of forex reserves
through commodity exports, particularly earnings from minerals and through pro – cyclical capital flows. The
growth of SWFs has been very robust with the strong compound annual rate of growth of 13% over the past decade
and even 20% in the past five years. The accumulation of reserve and revenues in the emerging economies are
mainly driven by high consumption in the developed countries. Further, it has been supported by the globalization
which has shifted the production centre from west to east. Consequently, emerging economies have accumulated
huge sums of reserves which they invested in different parts of world in the form of equities, debt and other financial
instruments. This movement is further supported by the ongoing debt crisis in US and European markets. Many of
the US and European banks are in trouble and desperately looking for the capital in international markets. SWFs
have emerged as a primary source of funding for many leading investment banks.
Source of Funding
SWFs are primarily funded from excess revenues and reserve-surpluses of State and Central governments.
These funds are managed strategically for better returns in the international markets. However, the sources of these
funds vary from region to region, e.g., funds originating from Middle East are created from out of the oil and
commodity exports. Similarly, funds originating from China are mainly created out of a large volume of exports.
Table-1 presents a bird‟s eye view of some of the important sovereign wealth funds, their sources of creation and
assets under their management.
Investment pattern of Sovereign Wealth Funds
SWFs typically seek to diversify foreign exchange assets and earn a higher return by investing in a broader range of
asset-classes, including long-term government bonds, agency and asset-backed securities, corporate bonds, equities,
commodities, real estate, derivatives, and foreign direct investment. As illustrated in Table 1, investment patterns of
SWFs differ from location to location. Investment in African countries is mainly confined to minerals and other
natural resource sectors whereas investment in the US and European markets is mainly targeted in the investment
banking industries. However, it is important to note that sometimes SWFs have tried to invest in strategic sectors of
the developed economies, for instance, China‟s state owned oil enterprise CNOOC acquired the U.S. oil firm Unocal
in 2005 and the United Arab Emirates‟ DP World acquired several major U.S. ports.
Table 1: Top 15 SWFs Worldwide
Country
UAE
Singapore
Norway
Saudi
Arabia
Kuwait
China
Hong
Kong
Russia
China
Singapore
Australia
Libya
Qatar
United
States
Brunei
Total
AUM (USD
Billion)
875
Inception
Year
1976
Source
Oil
330
322
1981
1990
Non-commodity
Oil
Various funds
Kuwait Investment Authority
China Investment Company Ltd
Hong Kong Monetary Authority Investment
Portfolio
Stabilization Fund of the Russian Federation
Central Hujin Investment Corp.
Temasek Holdings
Australian Government Future Fund
Reserve Fund
Qatar Investment Authority
300
250
200
NA
1953
2007
Oil
Oil
Non-commodity
140
127
100
108
50
50
40
1998
2003
2003
1974
2004
NA
2000
Non-commodity
Oil
Non-commodity
Non-commodity
Non-commodity
Oil
Oil
Alaska Permanent Reserve Fund
Brunei Investment Agency
40
35
2,967
1976
1983
Oil
Oil
Fund
Abu Dhabi Investment Authority
Government of Singapore Investment
Corporation
Government Pension Fund - Global
Source: Various Public Sources, DB Research 2007,
Note: Data reflect latest available figures as reported by individual entities or other authoritative sources such as
annual reports. Various reporting dates between 2004 and 2008.
Table 2: SWF’s major Cross-Border Equity Investments
Sovereign Wealth Fund
Acquired Company
GIC of Singapore
Abu Dhabi Investment Council
GIC of Singapore
Investment Corporation of Dubai
China Investment Company
Temasek (Singapore)
Qatar Investment Authority
KIA (Kuwait)
China Development Bank
China Investment Company
UBS
Citigroup
Citigroup
MGM Mirage
Morgan Stanley
Merril Lynch
Sainsbury
Merril Lynch
Barclays
Blackstone
London Stock
Exchange
China Eastern Air
Total
British Petroleum
Investment Corporation of Dubai
Temasek
SAFE (China)
SAFE (China)
Total
Transaction Value
(in USD
(in % of firm
billion)
value)
9.8
8.6
7.6
4.9
6.9
4.4
5.1
9.5
5
9.9
5
11.3
3.7
25
3.4
7
3
3.1
3
10
3
2.8
2.8
2
63.1
28
8.3
1.6
1
Source: Company websites and media reports 2008
These are very well known examples which have created political tensions between the US and Chinese
governments.
The largest part of these funds is invested as foreign investment, while some portion of their portfolio is restricted to
domestic assets or diversified across foreign and domestic assets both. It is also found that investment of sovereign
wealth funds is mainly concentrated in the financial sector only. It is reflected in Table 2.
Since 2007, the majority of SWF investment was made public and it was parked in financial institutions
and large five international banking corporations. In fact SWFs have taken the stake in all the financial companies at
the time when global capital markets were negatively affected by the turmoil of financial market (See Table 3).
There are some transparent funds such as Singapore‟s Temasek, US endowment funds and Middle East oil exporters‟
investment projects which indicate that private equity, real estate and emerging market funds include a large portion
of SWF‟s portfolios. As far as investment style of big sovereign wealth funds is concerned, it differs substantially
from traditional foreign exchange reserves. It is, however, comparable to private asset particularly the mutual funds
managers. The large SWFs manage the portfolios that are of the magnitude of the biggest private investment
companies.
The Accumulation of Foreign Exchange Reserves and the Rise of SWFs
The worldwide rapid accumulation of foreign exchange (forex) reserves by emerging countries has got significant
attention across the US and the Europe. Based on IMF data between December 2001 and October 2007 (the latest
available figures), global reserves tripled, from US$2.1 trillion to US$6.2 trillion. The growth of SWFs has been
seen mainly in oil exporting and export led economies. They have accumulated major share of forex reserves in the
last five years, with gulf of countries having accumulated the reserves at a remarkable pace. According to IMF, till
October 2007, Gulf countries had reserves in excess of US$430 billion, an increase of 2.5 times from the previous
year. China and India have also accumulated a major portion of forex reserves through exports and capital inflows.
Latin America has also shared this trend, and it has approximately doubled its international reserves during this
period. Figure 1 below reveals the pattern of reserves accumulated by the leading economies during 2003 to 2007.
Figure 1: Global Reserve Accumulation--Selected Groupings and Countries (US $ billions)
2003 -2007
1600
1457
1411
1400
1200
1000
841
800
600
400
436
408
436
257
189
176
200
99
389
73
0
China
India
Asia minus
China
Oil Exporting
Countires
Russia
Latin America
Adopted: Stephany Griffith-Jones, Sovereign Wealth Funds: Developing Country Perspective 2008
It is quite obvious from the diagram that the trend of accumulating forex reserves in all these countries has
changed. China, Asia- China and Middle East are the major gainers which have accumulated huge sums of reserves.
At this point, the most important question automatically arises as to what are the major factors which contributed to
the growth of SWFs. In order to understand this phenomenon, it is important to make a distinction between the
contribution of current account and capital account in the growth of forex reserves. In the period between 2003 2006, there has been substantial net transfer of resources from rest of world to these regions. For instance, China and
Singapore have experienced net transfer of resources driven by buoyant current account surpluses. On the other
hand, Argentina and Venezuela have also accumulated reserves through current account surplus. It is important to
note that in some cases countries have accumulated reserves through external assets but capital inflow has also
played an important role in accumulation of reserves in most of the countries
Further, the importance of current account and capital account in accumulation of reserves has changed over time.
For instance, in the early 1990s, Latin America accumulated huge amount of reserves through large component of
current account surplus. The capital account came to play a more important role during the two periods of
“exuberance” in capital flows to Latin America observed by Ocampo (2007b) (from mid-2004 to the first quarter of
2006 and, between mid-2006 and mid- 2007). The second boom of capital inflow came because of skyrocketing
commodity prices in international markets.
However, it would not be appropriate to make a final statement regarding accumulation of reserves over a
very short span of time. Official holdings managed by SWFs are difficult to estimate because of limitations of
information. In some cases, there may also be double counting (Truman, 2007). According to Morgan Stanley, assets
under management of SWFs are approximately US$3 trillion that is, a sum equivalent to fifty per cent of official
reserve holdings.
Aizenman and Glick (2007) identify two main reasons behind the recent accumulation of foreign assets in
SWFs. The first is the recent boom in commodity prices, particularly oil. Mindful of the wastes and inefficiencies
associated with the boom of the 1970s, these countries have preferred to save a share of the current gains in SWFs to
smooth consumption and preserve the wealth for future generations. This is a major reason behind the exponential
growth of SWFs in the recent years. SWFs account for nearly three-quarters of total assets under management by
these funds. At end- October 2007 oil-exporting countries managed an estimated US$2.2 trillion of SWFs. Of these,
about US$1.5 trillion are related to SWFs of countries of the Gulf Cooperation Council, and “with oil at or above
$90, the future size and market impact of the large gulf funds is hard to overstate” (Setser and Ziemba, 2007).
The second reason for the development of SWFs advanced by Aizenman and Glick (2007) is, as mentioned in other
parts of the paper, the hoarding of international assets by non-commodity-exporting countries which are running
persistent current account surpluses. Some countries seem to have more reserves than needed for precautionary
motives, and have transferred part of them to special investment vehicles to maximize their returns. This is the case
of East Asian countries, which have combined SWFs in excess of US$740 billion, to be added to more than US$2.2
trillion of foreign exchange reserves.
SWFs are not a new word for the East Asian Economies. SWFs have existed since the 1950s, when they
were first established in Kuwait in 1953 and in Pacific Island of Kiribati after some time (The Economist). SWFs
have got prominence in the era of high commodity prices when the countries have faced the problem of exchange
rate management due to high capital flows. For neutralizing the impact of capital inflows they set up SWFs for the
outward flow of capital. Given the growth and dynamics of SWFs, these could grow to over USD 5 trillion within
the next five years and perhaps to more than USD 10 trillion within the next ten years.
Rationale behind the Reserves Accumulation
There have been numerous studies on the accumulation of reserves and these provide the good explanations
of such a development. But there are two main approaches, which have been discussed widely: “The
Competitiveness” and the “Self Insurance” The first has been emphasized by the literature on the “Second Bretton
Woods” (see Dooley, Folkerts-Landau and Garber, 2003). This school of thought says that the Asian Countries have
adopted the export led strategy to maintain their export competitiveness in the international market, which led them
to run massive amount of current account surpluses and reflection of this can be in rising trade with developed
countries. This movement is further supported by the stable and weak exchange rate of the Asian Economies.
A few years ago, Sakakibara (2003) built an argument for financial cooperation among the East Asian economies. It
is well known that competitive intervention reduces the benefits of interventions of foreign exchange market by each
individual country. Such steps change the country‟s perspectives to increase the competitiveness vis-a-vis that of the
neighbors into costly accumulation of excessive reserve.
The competitiveness approach for accumulation of reserves as well as the absence of proper coordination
mechanism for exchange rate policy have prompted the process of accumulation of reserves in export led
economies. Further, self-insurance motive also provides a logical explanation for this trend. In fact, this trend of
accumulation of excess forex reserves started after the South East Asian Crisis. However, after the economic crisis
of 1997, there was a sudden outflow of capital from these economies which created an imbalance in the exchange
market. After the crisis, South East Asian Economies understood the importance of forex reserves better and adopted
the approach of “self insurance” against the risks of closer financial integration and growing exposure to global
financial instabilities. To reduce this risk, many countries have followed the policy of accumulation of excess
reserves and the East Asian Economies are no exception in this regard.
The renowned former chief of Federal Reserve Board, Alan Greenspan, put-forth a very crisp, simple and
understandable theory, which is called Greenspan-Guidotti rule of argues that the foreign exchange reserves should
at least be equal to short term liabilities, especially in view of the risk associated with the capital flows. The
rationale is that the countries should have enough reserves to resist a massive withdrawal of short term foreign
capital. Therefore, the main purposes of accumulating reserves in the emerging economies are associated with the
volatility of capital flows and exchange rate management caused by the terms of trade shocks and the vulnerability
due to financial inclusion. It is obvious that these reserves mitigate the risk of real exchange rate in terms of trade
shocks, and this is especially important for the countries dependent on the performance of export sector.
Implications for Global Financial Stability and Markets
In order to assess the impact of financial markets, it is useful to refer to the pattern of investment of SWFs
(Table-1). These instruments have sizeable and strategic presence in the global financial markets and their
investment pattern can further influence the global financial markets positive by or otherwise. Further, these are
controlled by the governments and investment strategies are governed by political considerations having different
dimensions. Developed world has mainly been concerned about the Sovereign funds of China, Russia and Venezuela
because their socialist pattern is not acceptable to the capitalist economies.
It is also true that SWFs do not reveal the exact information about their investments. For instance in a deal that was
meant to be secret, China agreed to buy $300 million Costa Rican bonds as an incentive for Costa Rica to drop its
diplomatic recognition of Taiwan in favor of China. Similarly, some other implications of SWFs could be as follows;
 SWFs have become the critical agents of financial stabilizations or otherwise because of their size and
volatility.
 Recent studies confirm that SWFs invest in diversified and riskier portfolios. Accordingly the gains,
motives and the impact also vary.
 SWFs substantially impact the sovereign debt market because a major portion of these excess funds is
conventionally invested in US Treasury Bills. However, in view of the diversification strategy, investments
in US T-Bills may reduce causing an increase in real interest rate differentials and depreciation of dollar. It
may, further, lead to the financing of current account through capital account surplus causing pressures on
the bond-market with ultimate adverse impact on the dollar.
 The absence of SWF data can hinder economic analysis and potentially mislead policymakers, market
participants, and other commentators about a country‟s economic performance. SWFs have been separated
from the national accounts, monetary and financial, fiscal and external accounts. It is important to keep
sovereign wealth funds in the national accounts because they have significant affect on the generation and
distribution of income and consumption behavior of the economy. Capturing SWFs‟ activities in public
finance statistics is also crucial, so that accurate assessments can be made of the integration of SWF
operations with the overall fiscal accounts can be made, and the fiscal risks on the public sector‟s balance
sheet are minimized. There is no information available on the direct and indirect holding of SWFs, i.e.; a
significant part of an economy‟s external wealth is not fully known. Information about SWFs is also very
important for developing sound and stable macroeconomic policy framework.
 Recently, other important issues regarding SWFs‟ investment and corporate governance have surfaced. As
SWFs have affected the large private sector and their growing presence in financial companies has raised
the concern about strategic decisions of these companies. However they abstain from using their voting
power in companies which they own. However, the role of state owned investment remains a suspicious
from the private investor point of view.
 Sometimes SWFs adversely impact the asset prices though it is difficult to answer accurately without
having the empirical evidence of this trend. It fact there exist two situations, wherein SWFs can influence
the assets prices say, additional investment by SWFs in assets can trigger the asset prices, which are likely
to induce the domestic retail investors to chase the securities of that particular sector. However, excess
liquidity in the respective sector will automatically overheat the segment, which may cause the bubble burst
at any time. For instance, In 1980 Japan has seen the bubble burst in its property market, which was mainly
driven by overheating in real estate vis-a-vis its other sectors. Similarly rapid credit expansion in the US
housing market is another such example of the recent past.
India’s Approach towards setting up SWF
According to RBI report of April 2008, India has accumulated the massive amount of $300 billion as forex
reserves. In fact, India„s forex reserves had declined rapidly after the global economic crisis. It is interesting to know
that India has doubled its forex reserves in the last two years. After building the sustainable amount of forex
reserves, the important question arises regarding utilizing of this excess reserve in an effective manner. Many
economists have suggested to the Ministry of Finance and the RBI should use the part of forex reserves and invest
them in high yield securities and equities.
The setup of SWFs in India has been a controversial issue because of its nature. The Former RBI Governor Y.V
Reddy expressed some concerns for establishing SWFs - the high volatility in capital account, current account
deficit and its vulnerability to oil prices. Further, according to IMF, a country must maintain the forex reserves for 3
to 4 month to meet its import requirements. Currently Indian forex reserves have the coverage of 14 months‟ importrequirement. Greenspan-Guidotti rule argues that the countries should keep foreign exchange reserves sufficient to
meet their short term liabilities, in view of the risk associated with the capital flow. India has large margin on this
ground also and our short term liabilities are well below the forex reserves. Empirical research conducted by Abhijit
Sen Gupta (2008) from ICRIER suggests that India has sufficient of amount forex reserves. He based his study on to
the regression model which includes various influencing parameters like capital account openness, share of imports,
exchange rate stability and even political stability. Further, this study reveals that in the worst case if the oil prices
jump to $ 200 a barrel by 2011, India will have the import coverage for ten months, which is well above the IMF
standards fixed for the purpose.
In 2006-07 India invested a major portion of its forex reserves in the low yielding US Treasury Bills giving
a return of only 3 to 4 percent. When adjusted for the annual average inflation of 5 to 6 percent in the same period, it
is converted into a negative return. So, it is rather essential to think differently. It would be logical for India to
establish its SWFs as a desirable investment strategy. In absolute terms the returns generated by major SWFs around
the world make this option very attractive for India. If we look at the returns-profile of some of the funds, we find
that Government Pension Fund of Norway has given the return of 12.67% in 2007-08, China Investment
Corporation of China, and Abu Dhabi Investment Fund have posted the returns of 9 % and 10% respectively. It
indicates that India should set up SWFs because returns from these funds will be much higher than the US T- Bills.
Rising energy demand worldwide is another important factor which supports that India needs to launch a SWF for
securing the energy assets in foreign markets through such investments. In the recent years, SWFs have played an
important role in influencing the global financial markets and these have emerged as an important tool in the global
financial markets. Gulf countries, Brazil, Russia and China have infused a large portion of capital in distressed US
banks. It suggests that India should act swiftly in this regard but it is important to analyze the potential implications
of this decision for the Indian economy. Let us take a look at the potential risk to India economy from SWFs.
Trinity Factor
There are three main factors which suggest that India should not launch its sovereign wealth funds. Let us
examine these. Firstly, India has fiscal deficit as well as current account deficit, which indicates that India does not
have extra safe funds to invest in foreign market till the position of fiscal deficit and current account deficit gets
normalized. Secondly, India does not have the windfall earnings from commodity exports, whereas gulf countries,
Brazil, Russia and Venezuela have large windfall earnings though the commodity exports. In fact, the primary
source of funding of SWFs in case of these countries is the surplus from the huge surplus of commodity exports.
Thirdly, India‟s forex reserves are built on capital account inflows and hence it is subject to capital flight, so funding
the SWF from out of capital account surplus is risky since capital flows can reverse the direction any time. In the
recent global recession, Foreign Institutional Investors (FIIs) have withdrawn large sums of money from the Indian
capital market, which further put the pressure on the exchange market and Indian rupee lost its value vis-à-vis the
other currencies is. After the collapse of Lehman Brothers, investors all over the world were concerned about their
investment and they started pulling out their money from the emerging markets. The prime reason behind this
massive withdrawal from the emerging markets was that these investors were looking for the quality assets.
Therefore, it was a flight for quality assets. It suggests that the countries, which are dependent on the capital account
inflows should not, launch a SWF. Before launching SWF, a country like India needs to be exceptionally careful
about all these factors.
It is also important to remember that a democratic government has a mandate to promote public welfare. It
is also not a secret that India needs a massive investment in its infrastructure, education and healthcare. Thus, India
needs two-pronged approach; first, the country should develop a plan wherein excess reserves are used to fund
infrastructure, education, agriculture, and healthcare projects. Investment in these sectors will reduce the
government„s reliance on tax revenues and effective tax-cuts may be possible. These will eventually increase the
consumer spending and further accelerate the production and the employment in the economy. The reduced
dependence on tax-revenue will, in turn, add to reserves and eventually these can be used for investment in SWF.
Second, India should focus on building its capabilities in high potential investment areas for the better returns, just
as the government Singapore did through Tamsek (Singapore‟s sovereign wealth fund). Such strategies would be
more helpful in managing the national savings of the country and these would be more suited for India, than rushing
ahead to set-up a sovereign wealth fund.
Conclusion
Sovereign wealth funds have a great potential to grow in the coming years. The growth of these funds
reflects rising wealth of nations for investors and the emerging markets both. Further, better management of public
wealth is bound to increase the importance of sovereign wealth funds in global financial markets. The sources of
such investment will also vary in the years to follow and these investments shall have an important impact on the
global financial landscape. The impact of such investment on the financial markets shall also depend on the
underlying motives of the investing nations. In fact, SWFs may contribute to a widening of the long-term investor
base for risky assets such as stocks, corporate bonds, emerging market assets, private equity and real estate. On the
other hand, some economists are concerned regarding abrupt selling of assets by SWFs. Further increasing stake of
SWFs in sensitive sectors like military, oil and gas and bailout of distressed companies in current economic
recession is a matter of concern. In addition, their dominance in a particular country may influence its foreign policy.
However, so far there is no evidence to support this concern, but the fear is valid. In this respect, it is important that
SWFs need to be transparent about their size, assets allocation and investment motives so that this instrument gains
its true status in the global and national economic-systems.
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Crisis”, Dpto of Economics University Of Surrey.Mason George,University School Of Public Policy
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Capitalist Logic.” Financial Times, July 2
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International Economics
India Economic Survey 2008
The Business Standard 2010
THE VIABILITY OF FEDERAL PREEMPTION DOCTRINE
AS A DEFENSE TO LAWSUITS AGAINST THE BUSINESS WORLD
Larry Bumgardner, Pepperdine University
The concept of federal preemption – whether U.S. federal law overrides similar state law or regulation – is
crucial to the business world. Business defendants often seek to block lawsuits based on state law theories by
claiming federal preemption. Yet it is exceedingly difficult to predict whether state law will be preempted in a
particular case. In five major Supreme Court rulings on the issue in 2011, federal preemption applied in three
cases, but not in two others. This paper will analyze the facts and outcomes of those five decisions in an attempt to
find clues on when preemption is likely to be a successful defense.
Background and Literature Review
The U.S. Supreme Court‟s 2010-11 term saw five major decisions turn on the issue of federal preemption –
whether federal law in a particular case precludes comparable state regulation or even lawsuits that are premised on
state law claims. Large businesses generally prefer the consistency of one legal standard nationwide, rather than the
unpredictability and uncertainty of a myriad of different state law provisions and regulatory schemes. Thus the
business world often contends that U.S. federal law preempts any arguably overlapping state regulation or state tort
claim brought by a consumer who has been harmed by the company‟s product or service. If that argument succeeds,
the state court lawsuit will have to be dismissed.
The complicated legal issue of preemption has great practical significance to the business world, especially
in the areas of product liability law and personal injury cases. The legal question often is whether an injured
consumer can recover damages from the manufacturer of the product that caused the injury. For example, in a 2009
law review article, Professor Richard Cupp analyzed the impact of several Supreme Court preemption rulings on
product liability reform efforts in the area of prescription drugs and medical devices. i
The preemption issue has been a recurring one for the court in recent years, and with uncertain results. A
law review article by attorney Gregory Dickinson surveyed Supreme Court rulings from 1994 through 2009 on one
type of preemption claim – obstacle preemption.ii Attorneys Daniel Troy and Rebecca Wood analyzed preemption
decisions of the Supreme Court in 2008 – a year when preemption claims prevailed in four of the six cases. iii Thus it
seems timely to add analysis of the preemption decisions in the most recent completed term of the Supreme Court.
Preemption can also have political implications. The administration of President George W. Bush
advocated strongly for federal preemption in business-related settings such as product liability suits. iv Often this
was accomplished through administrative law, as federal agencies inserted preemption mandates in new
administrative regulations. A preference for federal preemption tends to protect the business world not only from
inconsistent state laws, but also from the prospect of runaway juries in especially plaintiff-friendly states.
The Bush Administration approach was quickly reversed by President Barack Obama, who told his
department heads to employ a more restrictive approach to preemption. The effect of limiting preemption is to
preserve the importance of state law and regulation – especially tort and product liability laws that often make it
easier for injured victims to sue business defendants. In a formal memorandum issued on May 20, 2009, only four
months after taking office, Obama noted that “preemption of State law by executive departments and agencies
should be undertaken only with full consideration of the legitimate prerogatives of the States and with a sufficient
legal basis for preemption.”v He instructed agency and department chiefs to “review regulations issued within the
past 10 years that contain statements in regulatory preambles or codified provisions intended … to preempt State
law, in order to decide whether such statements or provisions are justified under applicable legal principles
governing preemption.”vi
Beyond the political and administrative changes, another reason that the Supreme Court keeps returning to
the preemption issue is that the justices often have reached seemingly inconsistent – or at least unpredictable –
results on when federal law will override state law. That longstanding trend continued in the five preemption rulings
of the 2010-11 Supreme Court term. The justices found preemption in three instances, thereby sparing the business
defendant from defending against a lawsuit based on state law. The opposite result was reached in two other cases,
where the court decided that state law was not preempted by federal law. Moreover, two of the three cases where
preemption did succeed were 5-4 decisions, indicating the precariousness of those precedents.
The cumulative effect of the five opinions came nowhere near deciding the underlying conflict between
state and federal law in the field of business regulation. Because most preemption cases that reach the Supreme
Court turn on minor distinctions, it is necessary for this paper to analyze the facts and circumstances of all five
rulings, as well as the federal law or regulation involved in each case. The purpose will be to seek out any patterns
that might help businesses and their legal counsel anticipate the likely result of future preemption battles.
Basics of Preemption Law
At first glance, the broad theory of federal preemption may appear deceptively simple. Under the
Supremacy Clause of the U.S. Constitution, federal law is deemed supreme and thus must override any conflicting
state law. Specifically, Article VI, Clause 2 of the Constitution states: “This Constitution, and the Laws of the
United States which shall be made in Pursuance thereof … shall be the supreme Law of the Land; and the Judges in
every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary
notwithstanding.”vii In reality, though, it can be surprisingly complicated for a court to determine whether there is
such a conflict in a particular lawsuit or regarding a specific law or regulation.
Express preemption, such as when a statute passed by Congress clearly says it intends to preempt state law,
provides the strongest argument for overriding state law. Yet even this type of preemption claim remains subject to
statutory interpretation by courts, as ambiguously worded statutes may make it hard to determine which aspects of
state law Congress sought to preempt.
The more difficult cases generally involve some type of implied preemption. Though the precise wording
used by courts will vary some, there are several different ways to find implied preemption. “Conflict preemption”
applies when a clear conflict between state and federal law makes it impossible to follow both (“impossibility
conflict”), or when the state law stands as an obstacle to the purposes and objectives of federal law (“obstacle
conflict”). Another category of implied preemption, “field preemption,” occurs when federal regulation of a subject
is so pervasive that it has “occupied the field” and left no room for comparable state regulation.
If any of these grounds for either express or implied preemption is found in a particular case, federal law
controls and the state law must fail. If none of these preemption theories is present, the parallel state law or claim
remains valid and supplements the federal law. The application of these various legal theories to facts and
circumstances of individual cases is what makes preemption law so difficult to understand and predict.
Medical Drugs and Devices
The Supreme Court in recent years has considered a series of preemption cases in the highly regulated
medical field – but without resolving the uncertainty about when preemption will or will not apply. The conflict
usually comes in the form of state tort lawsuits brought by injured patients, versus the federal regulatory scheme
based on congressional statutes and regulatory decisions of the Food and Drug Administration (FDA).
For example, in Riegel v. Medtronic, the justices in 2008 dismissed a product liability suit against a medical
device manufacturer, deciding that the state law claims were preempted by federal law. viii The case involved a
coronary angioplasty procedure where Medtronic‟s balloon catheter ruptured while being implanted into Charles
Riegel‟s artery. Riegel was left severely disabled, and he and his wife sued Medtronic for strict liability and for
negligence in the design, labeling, and marketing of the catheter. The federal district court dismissed the case on
federal preemption grounds, and the Second Circuit Court of Appeals affirmed the decision. ix
The Supreme Court agreed that the plaintiffs‟ state law claims were preempted. Before Medtronic‟s
catheter had been approved by the FDA, it had passed the extensive premarket approval process for medical devices
specified by the applicable statute, the Medical Device Amendments of 1976. That act of Congress included an
express preemption clause, stating that “no State or political subdivision of a State” may impose “any requirement
which is different from, or in addition to, any requirement applicable under this chapter to the device.” x On an 8-1
vote, the justices ruled that a state product liability suit was such a “requirement” that was “different from, or in
addition to” the FDA‟s approval process.
Only a year later, the Supreme Court reached the opposite result on preemption in a case involving a
medical drug, rather than device, approved by the FDA. Plaintiff Diana Levine developed gangrene after Wyeth‟s
anti-nausea drug, Phenergan, was injected into her vein, forcing doctors to amputate her right hand and forearm.
Levine sued Wyeth under state tort law, contending that Phenergan‟s FDA-approved label did not adequately warn
against the danger of one particular method of injecting the drug. A Vermont state court jury awarded her $6.8
million in damages, and the Vermont Supreme Court affirmed the judgment. xi
The Supreme Court upheld the verdict in 2009 in Wyeth v. Levine.xii The 6-3 ruling rejected Wyeth‟s
argument that Levine‟s claim was preempted because the FDA had already approved the drug‟s warning label. A
crucial difference from the Riegel case was that the controlling federal statute for medical drugs, the Food, Drug,
and Cosmetics Act, did not include an express preemption provision passed by Congress (unlike the Medical Device
Amendments). Rather, Wyeth‟s preemption argument in Levine was based primarily on the FDA‟s own assertion of
preemption. That was found in a preamble to a 2006 FDA regulation stating that “FDA approval of labeling …
preempts conflicting or contrary State law.” xiii
The court‟s majority opinion referred to the FDA‟s preemption claim as “an agency‟s mere assertion that
state law is an obstacle to achieving its statutory objectives.” xiv For several reasons, including that this 2006
preemption statement reversed the FDA‟s “longstanding position without providing a reasoned explanation,” the
court determined that the FDA‟s preamble language “does not merit deference.” xv In simpler terms, the FDA‟s own
assertion of preemption, especially when it was based on implied conflict preemption, was not as powerful as
express preemption emanating from a statute passed by Congress in the medical devices case.
Generic Drugs
The medical series continued in 2011 in the setting of generic drugs, which are governed by a different
federal statute and regulations than the brand name drugs at issue in Levine. Under the Hatch-Waxman
Amendments of 1984, generic drug makers are required to use the same warning label that has been approved for
the underlying brand name drug. xvi
In two separate cases appealed to the Supreme Court, the plaintiffs sued the makers of metoclopramide, the
generic version of the brand name drug Reglan. The drug is designed to relieve digestive problems such as
gastroesophageal reflux disease (GERD), but various studies have indicated that its long-term use can cause a severe
neurological disorder in some patients. The two plaintiffs contended that they were harmed by this side effect of
metoclopramide, and that the drug makers had failed to warn of this danger. The generic drug makers responded
that it was impossible for them to change the label of the generic drug because of federal law, and thus a failure to
warn claim based on state law had to be preempted. (The label for the brand name drug eventually was revised to
add a warning about this particular side effect, but that happened several years after the plaintiffs had been taking
the generic version.)
In lower court rulings only a few months after the Supreme Court‟s Levine decision, the generic drug
makers‟ preemption argument was rejected by both the Fifth and Eighth Circuit Courts of Appeals. xvii The appellate
courts relied on the rationale of Levine, despite acknowledging that the ruling did not directly address preemption in
the different regulatory scheme for generic drugs.
After consolidating the two appeals, a 5-4 majority of the Supreme Court in Pliva v. Mensing reversed the
federal appellate court rulings and decided that the plaintiffs‟ claims were indeed preempted by federal law. xviii The
five more conservative justices sided with the generic drug makers in shielding them from state law claims. The
four more liberal justices dissented, as they would have allowed the plaintiffs‟ state tort suits to proceed.
The majority opinion, written by Justice Thomas, found a case of conflict preemption based on
impossibility. “It was not lawful under federal law for the Manufacturers to do what state law required of them,”
Thomas wrote.xix Even though the plaintiffs had proposed several alternative ways that the generic manufacturers
might have updated their labels, the FDA contended that all of those would violate the “sameness” requirement for
brand name and generic labels. The court majority in this case deferred to the FDA‟s interpretation because it was
not clearly erroneous. (Yet in Levine, the court had rejected the FDA‟s regulatory assertion of preemption as it
applied to brand name drug labels.)
A vigorous dissent written by Justice Sotomayor was joined by Justices Ginsburg, Breyer, and Kagan. The
dissenting opinion rejected the defendants‟ preemption claim by noting that Congress has not expressly preempted
state tort suits against either brand name or generic drug makers. Sotomayor contended that the implied preemption
doctrine of impossibility should be held to a “demanding standard” – not just the “possibility of impossibility” that
the dissenters found under the facts of this case. xx She also noted the disparity in result on preemption in the Levine
and Mensing cases. “As a result of today‟s decision,” Sotomayor wrote, “whether a consumer harmed by inadequate
warnings can obtain relief turns solely on the happenstance of whether her pharmacist filled her prescription with a
brand-name or generic drug.”xxi
Even Thomas‟s majority opinion acknowledged the inconsistency in outcome between the two rulings.
“But different federal statutes and regulations may, as here, lead to different pre-emption results,” Thomas wrote.
“We will not distort the Supremacy Clause in order to create similar pre-emption across a dissimilar statutory
scheme. As always, Congress and the FDA retain the authority to change the law and regulations if they so
desire.”xxii
Medical Vaccines
Preemption prevailed again in a second medical decision from the same court term. The case involved
vaccines and the National Childhood Vaccine Injury Act of 1986, a federal statute providing vaccine manufacturers
some protection from the threat of excessive litigation over their vaccines. In 1992, 6-month-old Hannah
Bruesewitz began suffering seizures within a day after receiving a diphtheria-tetanus-pertussis (DTP) vaccine, and
later was diagnosed as being developmentally impaired. The child‟s parents first sought compensation
administratively from a special Vaccine Court established by the 1986 statute. The Vaccine Court denied their
claim, finding they had not proved that the vaccine was the cause of their child‟s condition. The parents then
brought a Pennsylvania state law tort claim against Wyeth, the owner of the company that manufactured the vaccine.
Their suit alleged negligent design of the vaccine and strict liability for defective design. A federal district court and
the Third Circuit Court of Appeals found their suit was preempted by the federal statute.xxiii
On a 6-2 vote, the Supreme Court agreed in Bruesewitz v. Wyeth.xxiv The outcome depended on very
detailed analysis of the ambiguous wording of the National Childhood Vaccine Injury Act. Both sides agreed that
the statute protects manufacturers from liability for a vaccine‟s “unavoidable side effects,” but the problem came in
interpreting the meaning of that phrase. The relevant section of the statute provides:
No vaccine manufacturer shall be liable in a civil action for damages arising from a vaccinerelated injury or death associated with the administration of a vaccine after October 1, 1988,
if the injury or death resulted from side effects that were unavoidable even though the
vaccine was properly prepared and was accompanied by proper directions and warnings. xxv
The statute initially makes a general statement of preemption, but the “even though” clause at the end of the
sentence appears to carve out exceptions from preemption for at least two types of tort claims – manufacturing
defects and failure to warn. Does that statutory exception to preemption also cover claims involving a defective
product design, as alleged by the parents of Hannah Bruesewitz?
The Supreme Court majority said no. To reach that conclusion, Justice Scalia‟s majority opinion delves
deeply into rules of grammar. He discusses adjectives, adverbs, coordinating and subordinating junctions – and
even “a concessive subordinate clause” – to decide that all state-law design defect claims are preempted by the
federal statute.xxvi The “even though” language in the statute, Scalia wrote, “delineates the preventative measures
that a vaccine manufacturer must have taken for a side-effect to be considered „unavoidable‟ under the statute.
Provided that there was proper manufacture and warning, any remaining side effects, including those resulting from
design defects, are deemed to have been unavoidable.”xxvii
As in the generic drugs case, the five more conservative justices all found preemption. The sixth vote in
the vaccine case came from Justice Breyer of the more liberal group. Breyer added his own concurring opinion,
arguing that the statute‟s legislative history also supported the view that Congress intended that design defect claims
be preempted.xxviii
Justice Sotomayor again wrote the dissent. She interpreted the statutory language entirely differently,
focusing more on the “if the injury or death resulted from side effects that were unavoidable” phrase. If the design
defect were unavoidable, such a state law claim would be preempted, in her view. But not all design defects are
unavoidable, Sotomayor wrote, and for preemption to apply, the manufacturer should have to prove “that the side
effects stemming from the vaccine‟s design could not have been prevented by a feasible alternative design that
would have eliminated the adverse side effects without compromising the vaccine‟s cost and utility.” xxix Justice
Ginsburg joined her dissent, while Justice Kagan recused herself because of her prior work as Solicitor General, who
represents the U.S. government before the Supreme Court.
In fact, both interpretations of the awkwardly worded statute are at least plausible ones, though Scalia‟s
approach gained wider acceptance among the justices. The case further demonstrates the uncertainty of preemption
cases – the outcome may even depend on applying rules of grammar. Practically speaking, the determinative factor
in this case might actually have been the fear that vaccine makers would leave the business entirely if they faced
design defect litigation on a regular basis. In fact, that was the policy concern that prompted Congress to pass the
1986 statute in the first place.
Mandatory Arbitration
The third case resulting in federal preemption in 2011 dealt with arbitration clauses in consumer contracts.
It was another 5-4 decision, with the five conservative justices again finding preemption, and the four liberal justices
wanting to preserve the effect of state law. In AT&T Mobility v. Concepcion, the conflict came between the Federal
Arbitration Act of 1925 and the California state common law of unconscionability. xxx
A clause in AT&T Mobility‟s cell phone contract with its customers, Vincent and Liza Concepcion,
required individual arbitration of any disputes, and expressly prohibited class action arbitration. The Concepcions
were charged $30.22 in state sales tax based on the retail value of cell phones that AT&T advertised as being “free.”
Despite the arbitration clause, they filed suit alleging false advertising and fraud in federal court in California. Their
case was consolidated into a similar class action suit, and AT&T sought to compel arbitration.
California courts are skeptical of mandatory arbitration clauses, especially in contracts between a business
and its customers. In 2005, the California Supreme Court in the Discover Bank case struck down a similar ban on
class action arbitration, finding that use of an adhesion contract to force consumers to waive their right to bring
class-wide claims was unconscionable under state common law. xxxi Similar to the AT&T case, Discover Bank
involved claimants who alleged fraud involving only a small amount of potential damages for each individual. A
federal district court and the Ninth Circuit Court of Appeals relied on the Discover Bank precedent to find that the
class action ban in the AT&T Mobility contract was unconscionable – even though AT&T‟s arbitration clause was
fairly generous in its terms for any customers forced into arbitration.xxxii
The Ninth Circuit further determined that provisions of the Federal Arbitration Act of 1925 did not preempt
the California state common law of unconscionability. The FAA generally favors enforcement of contractual
arbitration agreements, stating that they are “valid, irrevocable, and enforceable, save upon such grounds as exist at
law or in equity for the revocation of any contract.” xxxiii The Ninth Circuit ruled that unconscionability was such a
ground as provided for in this statutory “savings clause,” thus exempting the Concepcions‟ state claim from the
federal statute‟s general preemption provision.
The Supreme Court majority disagreed, with Justice Scalia again writing the opinion in favor of
preemption. The decision turned in part on determining the precise meaning of “grounds as exist at law or in equity
for the revocation of any contract.” The majority opinion interpreted that as meaning “generally applicable contract
defenses … but not … defenses that apply only to arbitration or that derive their meaning from the fact that an
agreement to arbitrate is at issue.”xxxiv In the majority‟s view, the Discover Bank unconscionability rule dealt
specifically with arbitration, rather than being a generally applicable contract defense that would have been covered
by the savings clause.
Moreover, the Discover Bank rule would frustrate the purpose of the FAA – to promote the use of
arbitration. Scalia contended that the Discover Bank principle could lead to class-wide arbitration, which is far less
efficient and much more risky than individual arbitration. That makes the Discover Bank rule “an obstacle to the
accomplishment and execution of the full purposes and objectives of Congress.” xxxv Thus the obstacle type of
conflict preemption applied, and the Concepcions‟ state law claim was not preserved by the FAA‟s savings clause.
Speaking for the court‟s liberal bloc, Justice Breyer wrote the dissenting opinion. He argued that
California‟s unconscionability doctrine applies to any contract. It is not directed only at arbitration clauses, meaning
that the savings clause of the FAA should save this case from preemption. Moreover, Breyer found that the
Discover Bank rule makes only some, but not all, class action waivers unconscionable. As there is no “blanket
policy in California against class action waivers in the consumer context,” the state‟s common law does not stand as
an obstacle to the FAA‟s purposes and objectives, Breyer contended. xxxvi
Once again, both the majority and dissenting opinions made plausible arguments to support their divergent
views. The underlying factor in this case may have been the justices‟ view of mandatory arbitration in general. In a
variety of settings over the past decade, the court‟s conservative and liberal blocs have battled over the
enforceability of mandatory arbitration clauses. The conservative bloc generally favors arbitration, while the liberal
bloc often tries to limit its availability. The result has been that most cases reaching the court have gone in favor of
arbitration, though often on close votes.
No Preemption for Seat Belts
The preemption argument did not work in two other cases before the Supreme Court in 2011. Perhaps the
most surprising decision, Williamson v. Mazda Motor of America, involved a claim that the federal government‟s
vehicle safety regulations should block state product liability suits against automakers. xxxvii The 1993 Mazda MPV
minivan had only a lap seat belt, rather than a combination shoulder and lap belt, in the middle seat of the van‟s
second row. The applicable Federal Motor Vehicle Safety Standard at the time gave automakers the choice of using
either type of seat belt for inner rear seats (middle seats or next to an SUV‟s aisle), but required a combination
shoulder-lap belt for outer rear seats (ones adjacent to the vehicle‟s door or frame).
In 2002, Delbert Williamson was driving his family when their 1993 MPV was struck in a head-on
collision. The father and his daughter, Alexa, who was seated in the second row immediately behind the driver,
survived the wreck despite being injured. Both were wearing the combination shoulder-lap belts in their respective
seats. Thanh Williamson, Delbert‟s wife, was riding in the second row‟s middle seat, immediately adjacent to their
daughter. She died in the wreck, allegedly because of fatal injuries she suffered when her body jackknifed around
the lap-only seat belt in that location.
The surviving family members sued Mazda in California, alleging negligence, strict liability, and similar
state law claims. They contended that Mazda should have installed a combination shoulder-lap belt for that
particular seat in its MPV, even though it was not required by the 1989 version of the Federal Motor Vehicle Safety
Standard (FMVSS 208) in effect for the 1993 model. The California trial court found their claim was preempted
and dismissed the suit, and the California Court of Appeal affirmed the dismissal. xxxviii
The California appellate court‟s decision was understandable, as the Supreme Court had previously found
preemption in a strikingly similar case, Geier v. American Honda.xxxix There the plaintiffs had contended that
Honda automobiles should have included airbags, even though the federal safety standard in place at the time gave
automakers the choice of which specific type of passive restraint system to use. (The FMVSS applicable to the
Honda case was the 1984 version of the same safety standard at issue in the Mazda case.) On a 5-4 vote, the
Supreme Court in 2000 had ruled that a state tort suit against Honda was preempted by the federal vehicle safety
standard.
Yet the justices found preemption did not apply to the similar Mazda case in 2011. To add to the surprise,
Justice Breyer, who authored the 5-4 opinion preempting the state tort suit against Honda in Geier, wrote the
unanimous decision rejecting Mazda‟s preemption argument in Williamson. The difference, Breyer explained in the
Mazda case, was that “providing manufacturers with this seatbelt choice is not a significant objective of the federal
regulation.”xl Thus a state tort suit that might hold automakers liable for failing to install the combination shoulderlap belt would not be an obstacle to the purposes and objectives of the federal regulation, the court decided. By
contrast, in the Honda case, the court majority found that regulators there deliberately sought to give automakers a
choice on the type of passive restraint system as a means of ensuring greater passenger safety. As a result, a state
suit seeking to impose liability for not installing airbags could be an obstacle to the federal regulation under those
circumstances, and conflict preemption was found in the earlier case.
The court identified this difference in the federal objectives by examining the history of the two
regulations, including statements from Department of Transportation regulators at the time each was promulgated.
Another key distinction was that the federal government, through the Solicitor General‟s office, had argued for
preemption in the Honda case, but against preemption in the Mazda suit.
Although there were no dissents in the Mazda case, Williamson was only an 8-0 decision, as Justice Kagan
again did not participate because of her prior role as Solicitor General. Justice Thomas concurred in the result, but
attacked the majority opinion‟s approach to the case. His concurring opinion argued for reaching the same
conclusion by a more direct route – by finding that the suit against Mazda was not preempted based on the terms of
the underlying statute that authorized the FMVSS. xli Justice Sotomayor, who is emerging as a strong voice against
preemption in most settings, agreed with both the result and reasoning of Breyer‟s majority opinion, but wrote a
separate concurrence seeking to emphasize the limited effect, in her view, of the pro-preemption precedent from the
Honda case in 2000.xlii
State Immigration Laws
The other ruling that went against preemption arose in a much different legal setting. Business interests in
general once again argued for preemption, but this case did not involve a lawsuit against a business defendant based
on state law. Rather, the U.S. Chamber of Commerce joined with various civil rights organizations to oppose the
state of Arizona‟s legislative attempt to address illegal immigration, contending that immigration law is controlled at
the federal level.
It should be noted that this case involved a 2007 statute, the Legal Arizona Workers Act. xliii That is a
different law than Arizona‟s broader and far more controversial 2010 immigration statute, best known as S.B.
1070.xliv A federal district court has issued a preliminary injunction against enforcement of portions of S.B. 1070. xlv
The Ninth Circuit Court of Appeals affirmed that injunction, but the case seems destined for the Supreme Court. xlvi
The justices‟ ruling on the 2007 Arizona statute will not dictate the outcome of the preemption challenge to S.B.
1070. Nevertheless, the court‟s 2011 ruling on the older law, Chamber of Commerce v. Whiting, undoubtedly will
be plumbed by both sides for clues on how to argue that S.B. 1070 should be either preempted or upheld. xlvii
The narrower Legal Arizona Workers Act provides that a company‟s business licenses may be suspended
or entirely revoked if the firm has knowingly hired illegal aliens. Because the statute defines licenses to include
articles of incorporation and partnership certificates, the result is that a business could be entirely shut down for a
knowing violation of the law – the so-called “business death penalty.” The Ninth Circuit Court of Appeals found
that the 2007 Arizona statute was not preempted by the federal Immigration Reform and Control Act of 1986
(IRCA).xlviii
The Supreme Court agreed, though on a close 5-3 vote (with Justice Kagan again not participating). The
conservative bloc found neither express nor implied preemption applied to this case, while three more liberal justices
argued that the Arizona statute should have been preempted. Perhaps indicative of the case‟s importance, Chief
Justice Roberts chose to write the majority opinion himself, rather than assigning the task to one of his colleagues on
the prevailing side.
The crucial part of the 1986 federal immigration law states: “The provisions of this section preempt any
State or local law imposing civil or criminal sanctions (other than through licensing and similar laws) upon those
who employ, or recruit or refer for a fee for employment, unauthorized aliens.” xlix Once again, the court had to
interpret a statute that includes both an express preemption statement, as well as a savings clause designed to
preserve some state powers. One issue was whether a law affecting articles of incorporation or partnership
certificates should qualify as a licensing law, or whether the savings clause instead applied only to a narrower type
of business license. Chief Justice Roberts wrote that these were licensing laws – or “at the very least „similar‟ to a
licensing law, and therefore comfortably within the savings clause.”l
Nor was this a case of implied preemption based on conflict between the state and federal laws, Roberts
reasoned, because the Arizona statute “closely tracks IRCA‟s provisions in all material respects.” li (On part of this
implied preemption analysis, Justice Thomas concurred only in the majority‟s outcome, but did not write separately
to explain any disagreement he had with Roberts‟ reasoning.)
Justices Breyer and Sotomayor wrote separate dissenting opinions, interpreting both IRCA‟s preemption
statement and its savings clause differently from the majority (and to some extent, from each other). Despite their
divergent routes in statutory interpretation, Breyer and Sotomayor reached the same conclusion that Arizona‟s
statute went beyond “licensing” laws and was both expressly and impliedly preempted by the federal immigration
statute.lii While Chamber of Commerce v. Whiting was an important decision on its own, the full scope of
preemption in the setting of immigration law will not be known with any certainty until the court rules on the newer
and broader Arizona immigration statute, or on immigration laws enacted by other states to emulate the Arizona
legislation.
Looking for Patterns
So what are the lessons to be drawn from these five preemption cases? The most obvious one is that the
outcome of any preemption case is highly unpredictable, and will depend on the precise circumstances of each
particular case. After all, a majority of the justices found preemption in three of the cases, but not in two others. liii
To further complicate matters, preemption applied to a tort suit against generic drug manufacturers in 2011, but not
to a comparable suit against brand name drug makers in 2009. Preemption did not block a lawsuit regarding
Mazda‟s choice of type of seat belt in 2011, but it did preclude a claim based on Honda‟s similar decision regarding
airbags only eleven years earlier.
In fact, the outcome of a federal preemption case may depend on one or more of several different variables.
The factors include the type of preemption claim being made (whether express preemption or one of several forms
of implied preemption), the specific kind of state law involved (whether a direct state statute or regulation, or a
lawsuit based on state law theories), the sort of federal law involved (congressional statute or administrative
regulation, and perhaps the legislative history of that federal law), and even the justices‟ own interpretation and
analysis of all of these variables.
The legal and philosophical approaches of the justices may also affect the outcome. As virtually all cases
that reach the Supreme Court are close calls, a strong or perhaps even compelling argument usually can be made on
each side. No matter how hard they might try, justices cannot completely eliminate their own views of law and
government in general as they analyze the interaction of complicated federal statutes or regulations with various
state regulatory schemes. Nor can they completely stop themselves from speculating on the potential real-world
impact of their decision either to preempt, or not to preempt, a particular state statute or lawsuit.
hus it could be instructive to examine how all the justices voted on these preemption cases – both
cumulatively and individually. Even there, though, the results have only limited predictive value for future cases.
Combining all five rulings, there were a total of 42 votes cast either for or against preemption (as Justice Kagan
recused herself from three cases). The votes were fairly evenly split, with about 55 percent, or 23 of 42 votes in raw
numbers, going against preemption. The other 45 percent, or 19 actual votes, favored preemption. (The unanimous
decision against preemption in the seat belt case skewed the combined vote totals slightly from what one might
expect when preemption prevailed in three cases, but failed in two others.)
Then one might look at how various justices or blocs of the court voted on preemption. Those viewed as
being part of the conservative bloc voted together on all five of these preemption cases. That includes Justices
Roberts, Scalia, Thomas, Alito, and Kennedy (though Kennedy is more moderate and less predictable than the other
four). With only nine votes possible on each case, simple math dictates that the court‟s decision would reflect
however this five-member bloc voted. Yet this majority bloc voted for preemption in three cases, and against it in
two others.
The group identified as the more liberal or progressive members – Justices Ginsburg, Breyer, Sotomayor, and
Kagan – were more inclined to vote against preemption. Ginsburg and Sotomayor opposed preemption in all of
these cases except for the Legal Arizona Workers Act – the one case that did not involve a consumer lawsuit against
the business world. Justice Kagan opposed preemption in the only two cases in which she voted. Justice Breyer
voted with the liberal bloc on the generic drug, mandatory arbitration, and Mazda seat belt cases, but joined the
conservative bloc in finding the suit against vaccine manufacturers was preempted.
Conclusion
For those still seeking trends or tools for predicting future cases, it may be useful first to recap the results of the
2011 decisions. Federal law prevailed, and state law was preempted, in three Supreme Court cases. A state tort suit
against generic drug makers was preempted because of implied conflict preemption, as it would have been
impossible to follow both state and federal law. Express preemption, after very detailed analysis of the wording and
even grammar of the applicable federal statute, protected a vaccine maker from a state tort suit in a second case.
Also, the Federal Arbitration Act impliedly preempted state common law of unconscionability because the state
law‟s effect would be an obstacle to the purposes of the federal law.
On the other hand, implied preemption did not apply to a state tort suit against an automaker for its choice of the
type of seat belts used in some seats of a minivan, as the court found that particular state claim would not be an
obstacle to the purposes of the relevant federal regulation. In addition, a state statute imposing penalties on
businesses that knowingly employ illegal aliens was neither expressly preempted by the federal immigration statute,
nor impliedly preempted because of a conflict between state and federal laws. The table below briefly summarizes
the results in these five cases:
Case
Mensing
Bruesewitz
Concepcion
Williamson
Chamber of Commerce
Subject Matter Preempt?
Generic drugs
Yes
Vaccines
Yes
Arbitration
Yes
Seat belts
No
Immigration
No
Vote
5-4
6-2
5-4
8-0
5-3
Reason
Impossibility conflict
Express preemption
Obstacle conflict
Not obstacle conflict
Not express nor implied
The best answer seems to be that there is no guaranteed pattern in the Supreme Court‟s preemption
jurisprudence. While the result in each individual case can be adequately explained on its own specific facts and
legal setting, the split decision on the availability of preemption in the five 2011 cases as a whole leaves the law of
preemption somewhat inconclusive. It remains difficult to find or explain any over-arching approach to the issue of
federal preemption, as the justices themselves often do not agree on when it should apply or even how the issues
should be analyzed. The close votes and strong dissents on three of these cases vividly demonstrate their own
disagreement.
For the short term, it appears that the key for Supreme Court litigants will be to devise a legal argument –
based on the precise circumstances of each preemption case – that will appeal to the five more conservative justices,
who controlled the outcome in all of the 2011 preemption decisions. Beyond that, the only point that is indisputable
is that these five rulings did nothing to preempt many more Supreme Court battles over preemption in coming years.
Endnotes
i
Richard L. Cupp, Jr., Preemption’s Rise (and Bit of a Fall) as Products Liability Reform: Wyeth, Riegel, Altria, and
the Restatement (Third)’s Prescription Product Design Defect Standard, 74 BROOK. L. REV. 727 (2009).
ii
Gregory M. Dickinson, An Empirical Study of Obstacle Preemption in the Supreme Court, 89 NEB. L. REV. 682,
693-700 (2011).
iii
Daniel E. Troy and Rebecca K. Wood, Federal Preemption at the Supreme Court, 2007-08 CATO SUP. CT. REV.
257 (2008).
iv
Alicia Mundy and Brent Kendall, Shift Toward State Rules on Product Liability, WALL ST. J., May 21, 2009, at
A3.
v
Presidential Memorandum, Preemption, 74 Fed. Reg. 24,693 (May 20, 2009).
vi
Id.
vii
U.S. CONST. art. VI, cl. 2.
viii
Riegel v. Medtronic, Inc., 552 U.S. 312 (2008).
ix
Riegel v. Medtronic, Inc., 451 F.3d 104 (2d Cir. 2006).
x
21 U.S.C. § 360k(a) (2010).
xi
Levine v. Wyeth, 183 Vt. 76, 944 A.2d 179 (2006). The fact that plaintiff Levine had been a guitar player before
losing her right hand certainly could have made her a sympathetic plaintiff to the trial court jury.
xii
Wyeth v. Levine, 129 S. Ct. 1187 (2009).
xiii
Requirements on Content and Format of Labeling for Human Prescription Drug and Biological Products, 71 Fed.
Reg. 3922 (FDA Jan. 24, 2006).
xiv
Wyeth v. Levine, 129 S. Ct. at 1201.
xv
Id. at 1201, 1203.
xvi
21 U.S.C. 355(j) (2010).
xvii
Demahy v. Actavis, Inc., 593 F.3d 428 (5th Cir. 2010), and Mensing v. Wyeth, 588 F.3d 603 (8th Cir. 2009).
xviii
Pliva, Inc. v. Mensing, 131 S. Ct. 2567 (2011).
xix
Id. at 2577.
xx
Id. at 2582 (Sotomayor, J., dissenting).
xxi
xxii
Id. at 2582.
xxiii
Bruesewitz v. Wyeth, Inc., 561 F.3d 233 (3d Cir. 2009).
xxiv
Bruesewitz v. Wyeth, Inc., 131 S. Ct. 1068 (2011).
xxv
42 U.S.C. § 300aa-22(b)(1) (2010).
xxvi
Bruesewitz v. Wyeth, Inc., 131 S. Ct. at 1077-78.
xxvii
Id. at 1075.
xxviii
Id. at 1082 (Breyer, J., concurring).
xxix
xxx
AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).
xxxi
Discover Bank v. Superior Court of Los Angeles, 36 Cal. 4th 148 (2005).
xxxii
Laster v. AT&T Mobility LLC, 584 F.3d 849 (9th Cir. 2009).
xxxiii
9 U.S.C. § 2 (2010).
xxxiv
AT&T Mobility LLC v. Concepcion, 131 S. Ct. at 1746.
xxxv
Id. at 1753.
xxxvi
Id. at 1756-57 (Breyer, J., dissenting).
xxxvii
Williamson v. Mazda Motor of Am., Inc., 131 S. Ct. 1131 (2011).
xxxviii
Williamson v. Mazda Motor of Am., Inc., 167 Cal. App. 4th 905 (4th Dist. 2008).
xxxix
Geier v. American Honda Motor Co., 529 U.S. 861 (2000).
xl
Williamson v. Mazda Motor of Am., Inc., 131 S. Ct. at 1134.
xli
Id. at 1141 (Thomas, J., concurring in judgment).
xlii
Id. at 1140 (Sotomayor, J., concurring).
xliii
Legal Arizona Workers Act, Ariz. Rev. Stat. § 23-211 et seq. (2010).
xliv
Support Our Law Enforcement and Safe Neighborhoods Act, 2010 Ariz. Sess. Laws ch. 113 (S.B. 1070).
xlv
United States v. Arizona, 703 F. Supp. 2d 980 (Ariz. 2010).
xlvi
United States v. Arizona, 641 F.3d 339 (9th Cir. 2011).
xlvii
Chamber of Commerce v. Whiting, 131 S. Ct. 1968 (2011).
xlviii
Chicanos Por La Causa, Inc. v. Napolitano, 558 F.3d 856 (9th Cir. 2009).
xlix
8 U.S.C. § 1324a(h)(2) (2010).
l
Chamber of Commerce v. Whiting, 131 S. Ct. at 1978.
li
Id. at 1981.
lii
Id. at 1987 (Breyer, J., dissenting), and at 1998 (Sotomayor, J., dissenting).
liii
In fact, the disagreement on preemption is so thorough that it apparently extends even to the word‘s spelling. The
opinions written by some of the justices regularly included a hyphen, as in ―pre-emption,‖ while it was spelled
―preemption‖ without a hyphen in opinions authored by other justices.
References
AT&T Mobility LLC v. Concepcion. 131 S. Ct. 1740. Sup. Ct. 2011.
Bruesewitz v. Wyeth. 561 F.3d 233. 3d Cir. Ct. of App. 2009.
Bruesewitz v. Wyeth. 131 S. Ct. 1068. Sup. Ct. 2011.
Chamber of Commerce v. Whiting. 131 S. Ct. 1968. Sup. Ct. 2011.
Chicanos Por La Causa, Inc. v. Napolitano. 558 F.3d 856. 9th Cir. Ct. of App. 2009.
Cupp, Richard L, Jr. ―Preemption‘s Rise (and Bit of a Fall) as Products Liability Reform: Wyeth, Riegel, Altria,
and the Restatement (Third)‘s Prescription Product Design Defect Standard.‖ Brooklyn Law Review 74
(2009): 727.
Demahy v. Activis, Inc. 593 F.3d 428. 5th Cir. Ct. of App. 2010.
Dickinson, Gregory M. ―An Empirical Study of Obstacle Preemption in the Supreme Court.‖ Nebraska Law
Review 89 (2011): 682.
Discover Bank v. Superior Court of Los Angeles. 36 Cal. 4th 148. CA Sup. Ct. 2005.
Food and Drug Administration. ―Requirements on Content and Format of Labeling for Human Prescription Drug
and Biological Products.‖ Federal Register 71 (2006): 3922.
Geier v. American Honda Motor Co. 529 U.S. 861. Sup. Ct. 2011.
Laster v. AT&T Mobility LLC. 584 F.3d 849. 9th Cir. Ct. of App. 2009.
Levine v. Wyeth. 944 A.2d 179. VT Sup. Ct. 2006.
Mensing v. Wyeth. 588 F.3d 603. 8th Cir. Ct. of App. 2009.
Mundy, Alicia, and Brent Kendall. ―Shift Toward State Rules on Product Liability.‖ Wall Street Journal 21 May
2009: A3.
Obama, Barack. ―Presidential Memorandum: Preemption.‖ Federal Register 74 (2009): 24,693.
Pliva, Inc. v. Mensing. 131 S. Ct. 2567. Sup. Ct. 2011.
Riegel v. Medtronic, Inc. 451 F.3d 104. 2d Cir. Ct. of App. 2006.
Riegel v. Medtronic, Inc. 552 U.S. 312. Sup. Ct. 2008.
Troy, Daniel E., and Rebecca K. Wood. ―Federal Preemption at the Supreme Court.‖ Cato Supreme Court Review
(2008): 257.
United States v. Arizona. 703 F. Supp. 2d 980. AZ Fed. Dist. Ct. 2010.
United States v. Arizona. 641 F.3d 339. 9th Cir. Ct. of App. 2011.
Wyeth v. Levine. 129 S. Ct. 1187. Sup. Ct. 2009.
Williamson v. Mazda Motor of Am., Inc. 167 Cal. App. 4 th 905. CA Ct. of App. 2008.
Williamson v. Mazda Motor of Am., Inc. 131 S. Ct. 1131. Sup. Ct. 2011.
CALL FOR PAPERS
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Spring 2012
Volume 3 Number 5
THE JOURNAL OF
GLOBAL COMMERCE RESEARCH
CONTENTS
An Institutional Approach to Entrepreneurship: The Case of China
Jean-Michel Quentier,
Building a Country’s Image through Industrial Upgrading: Evidence from
China’s Apparel Industry
Hongmei Xi, Nicholas Grigoriou and Xia Ying
An Expanded Model of National Competitive Advantage: Embracing
Corporate Social Responsibility
Austin B. McKinney, Steve G. Green and Kurt A. Heppard
Are Salary and Promotion, Predictors of Job Satisfaction? A Comparative Study of Public and
Private Banks in India
Nawab Ali Khan and Suhalia Parveen
The Emergence of Sovereign Wealth Funds: Implications for Global Financial Systems
Surendar Singh and R.C Mishra
The Viability of Federal Preemption Doctrine as a Defense to Lawsuits
against the Business World
Larry Bumgardner
Produced by
School of Management, 3333 Regis Blvd, Denver, Colorado 80221
www.regis.edu
AA/EOE/ADAI
Journal Homepage: http://www.journalofglobalcommerceresearch.com
Copyright © 2011 The Global Commerce Forum (WWW.GLOBALCOMMERCEFORUM.ORG)

12 Spring Edition - Journal of Global Commerce Research

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