The Business Review, Cambridge

Vol. 5 * Number 2 * Summer. 2006

The Library of Congress, Washington, DC   *   ISSN 1553 - 5827

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 Endless Surpluses: Japan’s Successful International Trade Policy

Dr. James W. Gabberty,  Pace University, NY

Dr. Robert G. Vambery, Pace University, NY



In 1991, authors Akio Morita, chairman of Sony and Shintaro Ishihara, member of the Japanese Diet, published a book titled “A Japan That Can Say No”. This work called for the nation of Japan to take a much more self-assertive and aggressive attitude toward the rest of the world (especially the U.S.) in its diplomatic and business relations. The caustic tone of the book, with chapter titles such as “America Itself is Unfair”, “American Barbaric Act!”, and “Let’s Become a Japan that Can Say No” caused much consternation in the West. Nonetheless, before and after the publication of this book, the U.S. - Japan trade deficit was (and still is) enormous [Morita, Shintaro]. Consequently, Americans who express concern about large and persistent trade deficits are not engaged in Japan bashing, but rather may be strong supporters of free trade who are analyzing the effects of large-scale adverse economic phenomena that may need remedy [Lincoln]. In the 1950s and 1960s, the U.S. was the world's leading export powerhouse. The Marshall plan helped provide the capital needed to rebuild Europe and Japan, and fueled a tremendous demand for U.S. exports. During this period, the U.S. ran a substantial trade surplus of about one percent of gross domestic product. The U.S. also benefited initially from strong export demand in a wide range of industries, from low-tech textiles and apparel to sophisticated aircraft and machine tools. Since the 1970s the U.S. moved from a trade surplus to a deficit position, as Europe and Japan began to compete effectively with the U.S. in a range of industries. Now, China has come online as a major trade partner with the U.S. However, China has become not only a surplus trading partner with the U.S, but has been so successful at penetrating the U.S. market that it has eclipsed Japan in its trade surplus position. The notion of (now) these two countries intensely selling their exports into the U.S. market unabatedly is frightful as perpetual calls by noted economists continue to warn that this trade deficit position is simply untenable. The longer the deficit problem is ignored, the harder it becomes to deal effectively with curtailing the deficit’s growth. For many, the trade imbalance with Japan seems to have always been a feature of Japan - U.S. trade relations. Indeed, it is the almost historical reflex reaction by U.S. consumers to cite the higher-quality features of Japanese products as the root causes of the trade imbalance. This, it is assumed, is the real culprit of the trade imbalance, buttressed by the lack of similar quality products produced by U.S. manufacturers and made available to Japanese customers. Although partly a false perception, this perception nonetheless helps to perpetuate the trade deficit with Japan.  A historical glance backward to the early days of the trade imbalance helps put the current trade deficit into perspective.  The trade relationship evolved as follows: In the 1970s, the time at which Japanese dominance in certain industries became evident, the quality of certain U.S. products in industries such as automobiles began to slip. The domestic automobile producers at that time enjoyed a market share of approximately 90% and the lack of useful foreign competition through which improvements to their products would have been facilitated was not a reality. This caused many U.S. producers to fall into a false sense of market supremacy and the self-absorbed attitude caused production quality to slip. New automotive entrants by Japan at the same time were lacking in major quality or technological sophistication but they had fewer defects and were cheap to produce - a chilling hallmark of Chinese imports into the U.S. witnessed today.  U.S. automobile producers all but ignored repeated calls by the marketplace to improve the worsening frequency of quality defects in their own products. Similarly, American consumers, unwilling to live with pervasive quality problems, shifted their purchasing patterns away from nationalist tendencies to ”buy American” and began to purchase the less expensive, less complex vehicles produced in Japan that were beginning to appear on U.S. showroom floors. The gradual winning of market share by the Japanese in the automobile sector continued at a not-so-gradual pace. In the span of a few short years, the popularity of the Japanese automobile radically increased and the moniker of Japanese quality for other products was transcended into the minds of U.S. consumers. The awareness of the availability of the alternative products emanating from Japan were beginning to cause these consumers to initiate purchases of other Japanese imports during the 1980s, when the birth of the video game, personal computer, video recorder and handheld electronic industries began to flourish. American consumption of all things Japanese available for import were snapped-up by U.S. consumers as U.S. manufacturers watched in awe of this flurry of economic activity and massive increase in (mostly imports) trade [Porter]. By the time U.S. automobile producers became very concerned about the slippage of their corresponding market share, it was too late: too much time had passed and the Japanese automobile product range increased dramatically.


Impacts of Computing Capability of Hispanic Business Leaders Upon WEB Search Strategies Utilized When Accessing Information

Dr. James L. Morrison, University of Delaware, Newark, DE

Dr. Titi Oladunjoye, Albany State University, Albany, GA

Dale Rose, Albany State University, Albany, GA



Based upon a survey of Hispanic business leaders in the U.S., it may be concluded that individual computer capability is not a significant factor when searching for information online.  Within this context, it may also be concluded that Hispanic leaders with a greater degree of computing capability perceive similar information search strategies being utilized to those of lesser degree.  However, computer capability is a significant factor when making decisions as the credibility of information sources located.  The Internet (or the WEB) affords organizational leaders an opportunity to enhance their information-gathering capability as critical decisions are being contemplated.  The Internet is reshaping the way businesspersons plan, organize, implement, and control daily operations.  Of particular interest here is how the Internet is reshaping the ‘information universe’ of Hispanic business leaders as they go about collecting information as a basis for arriving at decisions.  The term, Hispanic, is used as a form of classification for the immigrants and descendants of a wide range of ethnicities, races and nationalities who use Spanish as their primary language.  (Wilmington News Journal, 2005)   Currently, the U.S. Census Bureau (2000) estimates that there are 41.2 million Hispanics living in the United States.  It is important to note that the Census Bureau counts Hispanic or Latino as an ethnicity, rather than a race.  Therefore, Hispanics can be associated with any race.  Hispanic (1), as defined by the U. S. Dept. of Census, is one of several terms used to categorize native and naturalized U.S. citizens, permanent residents and temporary immigrants, whose background hail either from  Spain or the Spanish-speaking countries of  Latin America or the original settlers of the traditionally Spanish-held  Southwestern United States.  The term is used as a broad form of classification for this wide range of ethnicities, races and nationalities who have historically used Spanish as their primary language. (U.S. Dept. of Census, 2000)  In a very recent report issued by Pew Institute Research Center (2005), "Hispanics: A People in Motion,"   Internet usage and the diverse attitudes, values, beliefs and language patterns of the Latino population were analyzed.  In particular, Part 4 of this report entitled, The Internet: The Mainstreaming of Online Life, describes how race/ethnicity impact upon the growth of Internet usage in America. At the present time, it is estimated that 60 percent of Hispanics presently use the Internet for primarily four purposes:  email, information searching, entertainment, and shopping.  (Pew Institute, 2005)   According to this report, the Internet is now seen more as a utility rather than a novelty.  Hispanics are active and enthusiastic users of the Internet on a daily basis. While they value email like almost all other Internet users, Hispanics in particular look to the Internet as a valuable source of information and news. At the same time, Hispanics particularly enjoy the entertainment aspects of the Internet, like online music and online games. Generally, online transactions, such as online shopping, are not engaged in with as much frequency as other ethnic groups. However, Hispanics   also were among those most likely to credit the Internet with improving their connections to family members and friends.  (Pew Institute, 2005) The use of the World Wide Web as an information tool has increased rapidly for the past three years.  Generally, approximately 39% of those surveys in a recent Pew Internet Project (2005) indicated that the Internet has helped the way they perform on their jobs.  The use of Internet for business purposes has increased dramatically, since it is widely recognized as an efficient and cost-effective way for leaders of organizations around the world to communicate and access information for decision-making.   The Web is a new frontier for a generation of pioneers. According to Cockburn and Wilson (1995), the World Wide Web serves as a ‘fresh’ space, a vast virgin territory far removed from the major centers of civilization and the controls of current holders of power.  Within U.S. organizations, the Web allows workers to circumvent traditional power configurations, forge new connections, and access information worldwide.  Within organizations, the WEB gives significant power to individuals in organizations to challenge traditional business practices for generating change.  In this regard, the World Wide Web has become an information tool to enhance worker productivity.


Managing Change at HP Lab: Perspectives for Innovation, Knowledge Management and Becoming a Learning Organization

Dr. Michael Albert, Professor, San Francisco State University, San Francisco, CA



The purpose of this paper is to describe a change process used at HP Lab to transform it to support knowledge management, innovation, and becoming a learning organization. A major focus of the study is to summarize and discuss key change processes and actions that helped transform HP Lab.  The change process, along with actions taken, will be discussed in light of the literature on change, culture, knowledge management and the learning organization. The learning organization paradigm and the concept of knowledge management have received substantial discussion in the literature since the publication of Senge’s (1990) seminal book The Learning Organization (Argyris and Schon, 1996; Armstrong and Foley, 2003; Bierly, Kessler, and Christensen, 2000; Cohen, 1998; Davis and Botkin, 1994; Dowd, 2000; Dumaine, 1994; Ellerman, 1999; Davenport and Prusak, 1998; Drucker, 1997; Easterby-Smith and Araujo, 1999; Ellinger, Ellinger, Yang, and Howton, 2002; Garvin, 2000; Hamel and Prahalad, 1994; Holt, Love, and Li, 2000; Kim and Mauborgne, 1999; Jackson, Hitt, and DeNisi, 2003; Marquardt and Reynolds, 1994; Murray and Donegan, 2003; Nonaka, 1991; Nonaka and Takeuchi, 1995; Quinn, 1992; Senge, Kleiner, Roberts, Ross, Smith, 1994; Smith, 2000; Steward, 1997; Wang and Ahmed, 2003; Watkins and Marsick, 1993; Watkins and Marsick, 1996;; and West and Burnes, 2000). The literature stresses that organizations can create a key source of competitive advantage, embrace innovation, and improve bottom-line results by developing capabilities for knowledge management and becoming a learning organization.  Now, fifteen years after the publication of The Learning Organization, the emergence of what is being referred to as the Creative Economy is calling for organizations to adapt to a new marketplace paradigm. Major business publications, along with professional academic associations, have begun to publicize the need for organizations to embrace innovation and creativity (Brady 2005, Nussbaum 2005, WAM, 2006). According to a BusinessWeek Special Report (Nussbaum, 2005) “ What was once central to corporations – price, quality, and much of the left brain, digitized analytical work associated with knowledge- is fast being shipped off to lower paid, highly trained Chinese and Indians, as well as Hungarians, Czechs, and Russians. Increasingly, the new core competence is creativity – the right brain stuff that smart companies are now harnessing to generate top-line growth. The game is changing. It isn’t just about math and science anymore. It’s about creativity, imagination, and, above all, innovation.” (p. 62) Nussbaum (2005) reports that the greatest challenge for managers may be moving away from the structure thinking associated with their Six Sigma process skills and embracing new ways of thinking. Organizations, in turn, will require new sets of values and organizational principles for successful transformation.  According to this report, a new generation of innovation gurus is emerging. Whereas superstars of the 90s, such as Clayton Christensen focused on macro-innovation - the impact of new, unexpected technologies - the new innovation gurus focus more on micro-innovation - teaching organizations how to connect with customer emotions, linking research & development labs to consumer needs, reformulating employee incentives to emphasize creativity, and formulating organizational blueprints illustrating opportunities for innovation. As a bellwether of the need to adapt to the demands of the Creativity Economy, the CEO’s of General Electric and Proctor & Gamble have made creativity and innovation predominate corporate priorities (Brady, 2005; Nussbaum, 2005). Responding to the emerging need for companies to develop innovation capabilities, BusinessWeek has recently created a new online website - - to present the best research and thinking about the subject. The purpose of this paper is to describe a process of change used at HP Lab to transform it to support knowledge management, innovation, and becoming a learning organization. A major focus of the study is to summarize key change processes and actions that helped transform HP Lab.  The change process, along with actions taken at HP Lab, will subsequently be discussed in light of literature on change, culture, knowledge management and the learning organization. Information was obtained through interviews and internal company documents gathered during an on-site meeting with HR personnel, including the VP HR and the HR Lab manager. HP Lab is the central research lab for the Hewlett-Packard Company. The Lab's primary role is finding, inventing, and transferring technologies to maintain HP's global competitiveness. The Lab's 1200 employees consist of 300 support people and 900 engineers; more than half have advanced degrees, and the majority of these have a Ph. D. The Lab is geographically dispersed with facilities in the US, UK, and Japan. Although HP Lab had been performing well and was considered a productive organization, it functioned like most R&D technology centers. In this regard, the scientists and technical staff worked in their esoteric functional silos with little collaboration. 


Strategy, Success, a Dynamic Economy and the 21st Century Manager

Dr. Robert L. Johnson, University of Phoenix, Phoenix, AZ



Having a sound strategic plan is a given now days to an organizations long term viability.  Unfortunately, too many executives get overly focused on the minutia of surviving the month or quarter they forget the big picture.  Sometimes, they are in a very successful business and think all is well.  However, "when an industry's basis of competition shifts, competitors gain and lose relative advantage, forcing a search for new sources of differentiation" (Werther & Kerr, 1995, p. 12).  The problem is, managers too often do not remain vigilant and fail to realize the environment has changed.  New technology, new consumer tastes, changing demographics, or new competitors differentiating themselves capturing market share can go unnoticed until it is to late. This article discusses strategic leadership issues facing today’s 21st century manager in the dynamic technological, political, legal, social, and demographic environment.   There are probably as many definitions of strategy as there are academic and business researchers attempting to study and define it. "The word 'strategy' is derived from the Greek work strategia, meaning 'generalship'" (Oliver, 2001, p. 8).  Early business practices, or strategy, often copied those of the command and control structures of the military requiring little change in technique or application (Oliver, 2001).   In the early days before there was a wealth of academic research and new strategic theories published by those such as Porter, Barney, and Mintzberg; Sun Tzu's The Art of War was highly sought after reading by many top business leaders.  During the early days of strategic business thinking "strategy was primarily centered on winning the war by eliminating competitors" not by listening to and pleasing the customer, or improving quality or customer service (Oliver, 2001, p. 8). Today, the idea of a business or product strategy has received voluminous academic research and business acceptance.  A look at some views or definitions of strategy by some current thinkers that have impacted where we are today is appropriate.  One definition of strategy states "strategy is understanding an industry structure and dynamics, determining the organization's relative position in that industry, and taking action to either change the industry's structure or to the organization's position to improve organization results" (Oliver, 2001, p. 7).   As quoted by Stoner, Freeman, & Gilbert (1995), business historian Alfred Chandler defines strategy as "the determination of the basic long term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals" (p. 268).  A more modern day business researcher and Harvard academician, asserts "strategy is the creation of a unique and valuable position, involving a different set of activities.  If there were only one ideal position, there would be no need for strategy.  Companies would face a simple imperative-win the race to discover and preempt it.  The essence of strategic positioning is to choose activities that are different from rivals" (Porter, 1996, p. 67).   Strategy is about choices, who are we, what we want to be, and how we accomplish that.  While these may be good definitions of strategy, "most definitions are written by academics for other academics and their students, or . . . by consultants for their . . . clients and most fail . . . " (Oliver, 2001, p. 10).  They do not really grasp what a particular organization should be trying to accomplish.  Students of strategy must study a variety of definitions and models in order to get the general idea of what it is and apply it appropriately to their particular situation.  What ever their choice for growth and competitiveness, a strategy of innovation is required today. Companies must come to realize that “long-term survival requires a commitment to transformation via disruptive growth . . . it's not enough for companies to merely get better. They have to become different - not just at their periphery through extensions of existing businesses, but in their core, through a commitment to disruptive growth” (Denning, 2005, p. 11). It is not enough to have a strategy of being as good as the competition; one must have a strategy to be innovative, different, better, and with a sustainable competitive advantage. One can have innovative products such as the iPod, processes such as Wal-Mart’s supply chain, services such as Jet Blue or Southwest’s Airlines, or delivery such as the University of Phoenix Online with over 200,000 students in a virtual classroom. However, customers are as nervous about change as employees. It is worth noting that “in general, exotic innovation strategies usually get beaten by the slow and steady approach of incremental innovation” (Treacy, 2004, p. 29). It is all about the risk reward tradeoff and failure in a small innovation is usually less costly and easier to reverse than a significant change. Psychologically, customers, employees, suppliers, and other stakeholders prefer smaller changes. Gradual constant change for the better appears to be the better strategy for both product innovation and business model innovation (Treacy, 2004). Having a sound strategic plan is a given now days to an organizations long term viability.  Unfortunately, too many executives get overly focused on the minutia of surviving the month or quarter they forget the big picture. Sometimes, they are in a very successful business and think all is well.  However, "when an industry's basis of competition shifts, competitors gain and lose relative advantage, forcing a search for new sources of differentiation" (Werther & Kerr, 1995, p. 12).  The problem is, managers too often do not remain vigilant and fail to realize the environment has changed.  New technology, new consumer tastes, changing demographics, or new competitors differentiating themselves capturing market share can go unnoticed until it is to late. This article discusses strategic leadership issues facing today’s 21st century manager in the dynamic technological, political, legal, social, and demographic environment. 


How Service Employees Can Be Treated as Internal Customers in Hospitality Industry

Dr. Demet Varoglu, Middle East Technical University, Ankara, Turkey

Dr. Zeliha Eser, Baskent University, Ankara, Turkey



In this study, we propose a problem-based model which aims at solving the dysfunctional turnover and retention problems of the hospitality industry by applying the internal marketing concept. Mainly drawn from the Organizational Behavior and Human Resource Management literature, the model has three focal points: the organization, the job and the employee. For the organization as a focal point for effectiveness, we chose the performance measurement system to serve the firm by separating the high performing employees from the low performing ones. For the job as a focal point we picked job redesign as a field promising increase in the perceived meaningfulness of work for the employees. For the third and last focal point (the employee), the concepts of interactional justice, empowerment and career management were taken into consideration. Bringing all these concepts together, we believe that a strong service culture can be established and endured as long as the executives in the industry are committed to developing their business by looking up for various ways to apply internal marketing. Services represent the majority of today’s economy, not only in developed countries but also developing countries throughout the world. In most countries, the service sector of the economy is very diverse, comprising a wide array of different industries that sell to individual customers and business customers as well as to government agencies and nonprofit organizations (Lovelock and Wright 2002). Service industries also account for most of the growth in new jobs. In addition, virtually all companies view service as critical to retaining their internal customers as well as external customers today and in the future (Braymer 1997). Providing service quality is no longer simply an option. Customers are more demanding. They do not only expect excellent, high quality goods; but also high levels of service along with them (Lovelock 2001, DeVader and Smith 2003, Cronin et al. 2000, Zeelenberg and Pieters 2004). Business managers in general and human resource managers specifically encounter special challenges in service organizations. As services have some characteristics such as intangibility, perishability, heterogeneity and simultaneous production and consumption, marketing of services is more challenging than marketing of goods (DeVader and Smith 2003, Eade 1993, Lewis and Chambers200). Researchers have found strong correlations between employees’ and customers’ attitudes and perceptions of service quality. (Schneider and Bowen 1995). Therefore, customer intentions to switch to a competitor can be predicted based on employee perceptions of the quality of service delivered. Employee turnover probabilities are also predictable, based on customer perception of service quality. Where customers report high service quality, employees are less likely to leave (Lovelock and Wright 2002). Due to the services’ characteristics mentioned above, service employees not only have a vital role, but also become a part of the service that is delivered. As customer satisfaction depends on employee satisfaction, service firms should treat their employees just like their customers in order to decrease the turnover rate and increase the retention of employees (Kotler et al.1999). Therefore interactional justice gains in importance for service employees (Collie et al. 2000). The concept of internal marketing often refers to the employee relationship marketing which means applying marketing principles to the people who serve the customers. The emphasis of internal marketing is on the employee as the internal customer who also has needs, wants and problems. Whatever the customer is buying it is his or her job. Thus the job is the product that satisfies the needs and wants of these internal customers so that they, in turn, will better satisfy the needs and wants of the external customers (Lewis and Chambers 2000) The reasons for service employees to stay are: (a) being recognized as valued assets; (b) receiving the needed training; (c) being given greater responsibility; and (d) having their opinion sought with regard to operational changes (Lewis and Chambers 2000)  The turnover rate among service employees in Turkish hospitality industry is 70% (Akinci 2002) and unfortunately this is not only valid for Turkey but also for a developed country like USA where employee turnover rate is more than 100% in restaurants (Hudson 1997, Kotler et al.1999) and 65% in lodging industry (Hinkin 2005). This high rate leads to increased orientation, training and development, and recruitment costs.


Perspectives of Corporate Governance in the U.S. and Abroad

Dr. Balasundram Maniam, Sam Houston State University, Huntsville, TX

Geetha Subramaniam, Universiti Teknologi MARA, Selangor, Malaysia

Jim Johnson, Sam Houston State University, Huntsville, TX



Financial scandals have rocked the financial world both in the United States and across the globe.  This paper briefly explores Enron, WorldCom and some of the other major scandals that have occurred.  It uses these cases as a backdrop to a discussion of corporate governance worldwide.  This paper reviews previous work and discusses the governance of exchanges, boards, internal auditing and compensation packages.  A discussion debating the box checking methods of Sarbanes-Oxley versus the “comply or explain” mentality of Europe is also found in this paper. Recent scandals in the US and other major markets have brought the topic of corporate governance to the forefront.  It has become a major topic for both the media and everyday conversation amongst people who never talk business.  Scandals like Enron have brought previously unknown names like Ken Lay and Jeff Skilling into the mainstream media.  They have brought terms previously restricted to the business world like “off balance sheet accounting”, “cooking the books” and “overstated revenues” into everyday conversation. Sherron Watkins, former Vice President of Enron, was at the heart of the Enron Scandal.  She accidentally stumbled across what she considered to be a conflict of interest situation with Andy Fastow using a company he was a partner in to join a $600 million investment agreement with Enron.  Upon asking some questions around the office she found out that Enron was hedging with itself, which is outright fraud.  CEO Skilling retired and Ken Lay took over.  Sherron sent an anonymous memo to Lay and followed up with numerous memos expecting something positive to be done.  Enron decided nothing was wrong, but did “unwind” the questionable transactions.  This unwinding caused a loss of $1.2 billion in shareholder equity and eventually led to bankruptcy (Watkins 2003).  This left employees being told in a mass meeting one afternoon to clean out their desks immediately and leave the building.  They were given no severance check initially and could not even be guaranteed any insurance coverage.  Later they were given a $4000 severance check.  The situation was made worse by the revelations that while this was going on, executives were paying themselves millions in retention bonuses (Watkins 2003). Another example of corporate fraud comes from WorldCom.  During a 2002 audit, Cynthia Cooper found some fraudulent accounting practices.  She took her findings to the audit committee of their board.  WorldCom had fraudulently overstated its income by $11 billion.  The figures were simplified by classifying operating costs as capital expenditures.  This caused the company’s stock to drop by $180 billion and forced it into bankruptcy (Barrier 2003). Other companies besides Enron have come under fire of late.  Jack Welch, former head of General Electric, had disclosed that his retirement package was $2.5 million per year in benefits, including jet services.  In the telecommunications sector, Global Crossing and Qwest are being investigated.  Additionally, several energy companies like Dynegy, Reliant, and El Paso, as well as companies like Halliburton and AOL Time Warner are also under investigation.  Also being disclosed is that analysts have been falsely beefing up stocks in order to help their company’s investment banking side (Watkins 2003).  Possible causes for some of these fraudulent activities have been debated.  Some feel that managers’ compensation packages are structured in a manner that almost forced them to cheat due to being based on short-term increases.  Others feel that a lack of groups of major stockholders to put pressure on the companies is a problem.  They feel that dispersed stockholders have no leverage to make sure that things are done correctly. What can be done to prevent this from happening?  The focus has been put on the Securities and Exchange Commission (SEC) and the Board of Directors (BODs) of the companies, internal auditing procedures and whether governance should be standards based or “box ticking”.  The SEC’s powers of governance were created with the idea that markets would basically govern themselves and the SEC would watch to make sure that they were doing the governing they should.  This puts the onus on the BODs.  The idea being that they would know best how to manage the issues for each firm.  Recent history has told us that the BODs may not be qualified or structured to accomplish this task. The debate of “box ticking” vs. “standards” rages on.  This discussion is, of course, not limited to just corporate governance.  The two sides disagree on whether it is better to have broad standards that allow some room to move or to have strict lists to follow that are black and white. Throughout this paper these topics will be addressed using both the US and the rest of the world to review what has been done and what has been effective.  What roles have the exchange played in all of this?  What can the BODs do? Are they qualified to carry out the tasks that the shareholders require of them?  If not, what can solve this?  What other ideas are there for this problem?  The paper will now look at the issues individually.


Depictions of Health Care Consumer Empowerment: A Comparative Content Analysis of DTC Advertising at Two Points in Time

Dr. Amy Handlin, Monmouth University, West Long Branch, NJ



This study utilizes content analysis of DTC (direct-to-consumer) prescription drug advertising at different periods of time to explore whether these ads are contributing to physician-patient friction by increasingly encouraging health care consumer empowerment. Findings suggest that there was little explicit change in the degree or nature of the empowerment message, or in the framing of the message, between 1998-1999 and 2004-2005. However, advertising visuals appear to be evolving in such a way as to potentially transform perceptions of the doctor’s office from a sanctuary into just another commercial venue. Of many contentious points in the ongoing debate about direct-to-consumer advertising of prescription drugs, one raised with notable frequency by physicians is the alleged tendency of these ads to encourage consumers to take health care matters into their own hands. In particular, doctors worry that an increasing number of patients are demanding prescriptions for advertised drugs and/or arguing with those providers who prescribe alternatives (as examples, see Lowes 1999 and Rosenthal, Berndt 2002).  However, the marketing situation is complex. While a majority of physicians believe that DTC advertising is convincing patients to insist on particular drugs, the pharmaceutical companies worry that their ads are failing to convey key information (Dickinson 2000a). Indeed, there has been a drop in the percentage of consumers who characterize DTC advertising information as “reliable” – even as they claim to have acted on this information by talking to their doctor about the advertised brand (Dickinson 2000b). In part, these contradictory findings seem to result from health care consumers frequently miscomprehending or inadequately comprehending the information in DTC ads. Most researchers agree that the comprehension process proceeds in either a “top-down” or “bottom-up” direction. The former occurs when an individual makes sense of information by fitting it into a pre-existing mental framework, or schema, built up over time and reflecting experience and prior meanings associated with the subject. For example, a cold sufferer would likely process  advertising claims for an over-the-counter cold remedy by retrieving memories and past evaluations of that drug or similar ones.  In bottom-up comprehension processing, the individual constructs meaning piecemeal, beginning with his recognition of discrete sensory features of the incoming information (visual, acoustic, semantic, etc.). For example, the viewer of a television commercial may first identify familiar phrases in the dialogue, then connect those phrases to faces and voices on the screen. Health care consumers may struggle to comprehend prescription drug advertising because they lack (1) relevant schema, and/or (2) the ability to identify or make connections among key sensory features. When comprehension thus breaks down, the individual is prone to confuse or misunderstand the two basic types of meanings in any advertising communication: “asserted” versus “implied” meanings. As explained by Jacoby and Hoyer (1987): “Asserted meanings are those explicitly expressed in the communication itself. Consider the utterance: ‘Take Eradicold. It relieves cold symptoms.’ The asserted meaning is that,  according to the communication, something called Eradicold exists which either reduces or eliminates cold symptoms. Asserted meanings are thus based directly on the assertions that can be objectively demonstrated to be present in the communication…Implied meanings are not explicitly contained in the communication, but are inferences that the receiver draws from the communication. Implied meanings may be of two types – either logical or pragmatic. Logical implications are necessarily implied. For example, the sentence  ‘Robin is older than Jonathan’ necessarily implies that ‘Jonathan is younger than Robin…’Pragmatic implications are inferences the receiver makes that, though they may be correct, either were not explicitly stated nor can be necessarily (logically) inferred from the communication itself. For example…using the following hypothesized audio commercial: ‘Aren’t you tired of the sniffles and runny nose all winter? Tired of always feeling less than your best? Get through a whole  winter without [cold symptoms]. Take Eradicold pills as directed.’ Though not directly assertedthe claim that Eradicold pills will prevent colds may be easily inferred.” Within the body of DTC print ads, risk information is routinely couched in bland, non-specific and even  dismissive terms, e.g. “Most patients experience minimal or no side effects” or “Proven safe for thousands of healthy adults.” Unsurprisingly, then, the average consumer – with little knowledge of the product class or experience in analyzing risk data – is likely to draw implied meanings such as “There’s almost no downside to taking this drug” or “There isn’t any risk for a generally healthy person like me.”


Savings Rate and Income Replacement Ratio

Dr. Ahmet Tezel, Saint Joseph’s University, Philadelphia, PA



It is widely accepted to calculate income replacement ratios for measuring how much wealth is needed at retirement and for assessing retirement readiness of individuals.  In this paper, I simulate income replacement ratios using the median U.S. household incomes from 1952 to 2004.  I also present a model to estimate income replacement ratios under a variety of savings rate assumptions and other relevant variables.  In addition to the basic savings rate, the model allows additional savings based on the portion of the real increase in incomes.  Individuals, financial planners, retirement plan sponsors, and governments use income replacement ratios as their main tool for measuring how much wealth one needs at retirement and for assessing retirement readiness.  The income replacement ratio is defined as the retirement withdrawal income funded by pre-retirement wealth divided by the pre-retirement income.  A 5% withdrawal rate from a pre-retirement wealth of $1 million would provide a $50,000 withdrawal income at the beginning of the retirement period.  Note that this retirement withdrawal amount would change to reflect the rate of inflation during the retirement period.  Assuming a pre-retirement income of $80,000, the income replacement ratio would be 62.5% ($50,000/$80,000). In this paper, I present the simulation results of potential income replacement ratios using the median U.S. household incomes from 1952 to 2004.  A family investing in stocks and bonds at the national savings rate and working 35 or 30 years would retire with an average income replacement ratio of 56.6% or 40.3%.  Working an additional 5 years provides about a 15 to 25 percentage increase in income replacement ratios.  For individuals planning to work only 30 years, additional savings of at least 2% above the national average would be necessary to provide income replacement ratios of 50% or more.  These results are appropriate for individuals holding a portfolio with the following constant asset allocation: 60% invested in large stocks, 20% invested in small stocks, 10% invested in long-term government bonds, 5% invested in intermediate government bonds and 5% invested in 30-day Treasury bills.  More conservative portfolio allocations would necessitate much larger savings ratios than those reported in this paper. I also present a model to estimate the income replacement ratios under a variety of savings rates and other relevant variables.  In addition to the basic savings rate, the model allows additional savings based on the portion of the real increase in incomes.  Assuming a real return of 5% from investments, I obtain an income replacement ratio of 45.2% or 33.2% for a family committing to a 10% savings rate for 35 or 30 years with no real income increase over the working years.  If the real income rises over time, a 10% constant savings ratio would provide much smaller income replacement ratios.  As the standard of living improves over time, one needs to have a larger lifetime average savings rate to support the life style one becomes accustomed to.  For example, by saving 40% of the 3% real increase in incomes along with a 10% constant savings ratio, I can obtain a 51% replacement rate after 35 years.  In this paper, I do not attempt to estimate income replacement rate targets or assess the adequacy of the current situation.  Rather, I assume that income replacement ratios less than 100% are sufficient during retirement because most individuals will experience lower tax rates, Social Security income, no Social Security taxes, less spending on food, commuting and clothing expenses, and smaller mortgage expenses.  However, higher medical goods and services raise the income replacement rates.  Schieber (2004) estimates the income replacement rate at around 70% for a wide range of income classes.  Alford, Farnen, and Schachet (2004) report replacement ratios of 89% for the low income level of $20,000 and 78% for the high income level of $90,000.  Of course, Social Security represents a larger percentage of income for low income earners (65%) and a smaller percentage of income for high income earners (33%).  In an earlier study, Palmer (1994) reports replacement ratios of 76% and 78% for a married couple with income levels of $20,000 and $90,000 respectively.  Obviously, higher income earners have to save a larger percentage of their income to maintain their pre-retirement standard of living.  Replacement ratios are based on the situation of an average worker and need to be carefully estimated for each individual particular situation.  Simple rules of thumb may be misleading in estimating target savings and replacement rates. Devaney and Su (1997) report that, in 1995, Social Security income constitutes 42.8% of a retiree’s income while pensions, annuities, and assets comprise 37.2% of its retirement income.  The retiree’s current earnings were 17.8%.  Therefore, assuming a withdrawal rate of 40% of accumulated wealth at retirement, an income replacement ratio of 80% implies that 32% of a retiree’s income comes from his accumulated wealth at retirement.  If the withdrawals from pensions and assets range from 30% (low income groups) to 90% (high income groups) during retirement, an 80% income replacement ratio indicates that the low income and the high income groups would need income replacement ratios of 24% and 72% of their accumulated wealth at retirement, respectively.


Consumer's Perceived Value and Buying Behavior of Store Brands: An Empirical Investigation

Dr. Talha Harcar, Pennsylvania State University at Beaver, Monaca, PA

Dr. Ali Kara, Pennsylvania State University York Campus, PA

Dr. Orsay Kucukemiroglu, Pennsylvania State University, York, PA



Store brands have an important role in retail strategy due to their increasingly important strategic role for retailers. Therefore, understanding the store brand buyer behavior is a critical issue for marketers and researchers alike. This paper augments prior research by examining the factors influencing consumers’ purchase behavior of store brands.  We examine the decision to purchase a store brand using a conceptual model which incorporates a number of variables that are hypothesized to influence store brand purchase decision.  Using a sample of 782 shoppers, we have analyzed the relationships assumed in the conceptual model used.  Results confirm the relationships between store brand purchase and value consciousness, previous experience, and consumer perceptions. Managerial and academic implications of the study are discussed. Intensive competition, fast technological innovations in the retail industry has had a considerable impact on the management of the retail industry in developing and executing new competitive marketing strategies. One of the most commonly implemented marketing strategies of retailers has been the introduction of their own retail (private label or store) brands. "Store brands" or "private label" refer to merchandise that carry wholesaler's or retailer's own brand name or a brand name created exclusively for that particular wholesaler or retailer. For example, Great Value is a store brand exclusively offered by Wal Mart stores and Hi-Top is a store brand exclusively sold by Minyard /Sack-n-Save grocery stores. Brands such as Tide, Whisk, Frito Lay are examples of national brands. In this study, store brand products are defined as the “…products owned and branded by the organizations whose primary objective is distribution rather than production (Schutte 1969). According to estimates, the share of store brands in the US continues to grow and accounts approximately 20% of unit sales and 15% of dollar sales in supermarkets in 2004 (  Moreover, the store brands have an established and recognized status in some European countries such as France and the UK. Throughout the last two decades, interest in store brands in Europe has increased significantly.  In the UK, for instance, the volume market share of store brand packaged goods exceeds 35% of total sales (Dick, Jain, and Richardson, 1995). The store brand revolution in earnest began in Europe in the early 1970's. The demand by consumers in Europe for store brands has translated into a 40% market share to retailers; an envious position compared to the 20% market share enjoyed by US retailers. Store brands have become so successful in Europe that retailers have their own food technologists and R&D departments experimenting with new product formulations and concepts. In other words, retailers truly "own" the brands in Europe. In contrast, most of the US retailers rely on manufacturers to produce new products. However, this scenery is slowly shifting with the collaborative introduction of premium brands by retailers in consultation with manufacturers. Today, most US supermarkets irrespective of their size, offer store brands that are often times comparable to leading national brands in both quality and packaging. In year 2000, store brands accounted for over $50 billion in sales (PLMA 2002). Business press reports and surveys continue to show that store brands are consistently a top priority for grocery retailers (Alaimo, 2003). Wal-Mart, considered one of the most forceful and pioneering U.S. retailers, exemplifies the store brand revolution in the USA. Wal-Mart has traditionally centered its marketing strategy on nationally advertised brand names sold at "everyday low prices" (EDLP), a concept that discouraged cherry picking attitudes of consumers who basically would shop certain stores for certain products. During the mid 1990s, Wal-Mart in addition to its EDLP concept has made a commitment to a more visible portfolio of products using its store brand, Great Value, through aggressive pricing and in store product demonstrations. The growth and penetration of the store brand sales in Western markets is not a coincidence and is expected to continue (Reda, 1995). It may be argued that the popularity of the store brands are due to a set of interrelated factors including concentration in retailing (well-organized large supermarket chains), which enables retailers to develop their own brands, changes (reductions) in consumers’ loyalty levels towards established brands names, and relatively improved consumers’ attitudes toward store brands partially due to significantly improved quality of store brand grocery products over the last several decades. Moreover, well-organized large retail chains have significant promotion budgets, which is used to communicate with their customers more effectively (Steenkamp and Dekimpe 1997), and they use effective marketing strategies, such as advertising manufacturer brands to attract customers to the store and then emphasizing store brands (which typically have lower variable cost and potentially higher margins) while consumers are in the store (Hoch and Banerjee, 1993). Utilizing the information presented in the literature, the purpose of this study is to examine the store brand purchase behavior by using a conceptual model, which incorporates various factors (such as brand, price and risk perceptions, involvement, experience, familiarity, as well as psychographic and demographic factors) that assumed to influence the store brand purchase behavior.


The Importance of Strategic Roles as Determinants of Export Performance in European Subsidiaries

Joao Pedro Almeida Couto, University of Azores

Maria Teresa Borges Tiago, University of Azores

Jose Cabral Vieira, University of Azores



In order to evaluate the export performance of subsidiaries of multinational companies a study is conducted on MNCs operating in Europe. This research uses a sample of 171 companies in five countries to analyze the level of exports as a percentage of total sales, using a grouped data regression model. The results show that export performance is positively related to effective relationship and initiative capabilities and negatively related to specific strategic roles. Furthermore, we find evidence for an inverted U-shaped pattern between export performance and subsidiary age.  In recent decades, the global context in which firms develop and implement business strategies has changed considerably. The globalisation process has evolved into a more regionalized approach and more country-specific adaptation of significant variables than had previously been foreseen. In such an environment, multinational companies (MNCs) may increase the transfer of activities to foreign subsidiaries. The benefits of decentralized initiatives have been mentioned by several authors such as Pearce (1997), Birkinshaw (2000), Holm and Pederson (2000) and Birkinshaw and Hood (1997, 1998a, 1998b). This transfer of global marketing activities and in particular, export activity, are a central concept of the present paper. The relationship between global marketing strategy and export intensity in subsidiaries has been well studied and a review of export marketing fields identifies several streams of research. However, previous studies focus particularly on multinational companies’ export, while neglecting the role of the subsidiaries. The purpose of this paper is to address these issues and to examine the effects described in the literature relative to export performance, in addition to analyzing the importance the strategic role definition of subsidiaries when combined with other determinants. The paper is organized as follows: The next section sets out the theoretical framework of subsidiaries and export performance; Section 3 describes the study propositions; Section 4 describes the data; the empirical model is presented in Section 5 and the results and discussion appear in Section 6; finally, Section 7 concludes and summarizes.  Over the last two decades, multinational sales have grown at high rates, outpacing the remarkable expansion of trade in manufacturing. Subsequently, the literature on trade has sought to incorporate the mode of foreign market access. This literature recognizes that firms can serve foreign buyers through a variety of channels: they can export their products to foreign customers, serve them through foreign subsidiaries, or license foreign firms to produce their products (Caves, 1996).  A dichotomy is observed: while developing countries attempt to use their market potential to attract foreign direct investment (FDI), firms from more developed countries may choose to export their products to the unexplored markets. The earlier theories on FDI presented by Mundell (1957) and Hymer (1976) suggest that trade with a host country tends to decrease at the time that FDI increases, which raises the idea that FDI and trade are alternative modes of internationalization. However, more recently, there is growing evidence that points to a positive relationship between FDI and trade (Markusen & Venables, 1995, 1996; Pantulu & Poon, 2003). Foreign market entry can be a source of different benefits, such as diversification, risk sharing with partners, operating flexibility and host country demand. But it can also generate costs arising from agency costs, political and contractual risk and cultural differences, as mentioned in several empirical studies (see: Agarwal & Ramaswamy, 1992; Buckley & Casson, 1996; Swan & Ettlie, 1997). The literature on FDI and MNCs is large and expanding. Researchers such as Hymer (1976), Dunning (1977, 1981) and Caves (1982) made early contributions to this field of international business. In addition, international economists have contributed to this literature, mainly with formal economic models (see, Helpman, 1984; Markusen, 1984; Ethier, 1986; Horstmann & Markusen, 1987, 1992, 1995; Brainard, 1993; Ethier & Markusen, 1996). There are two types of recent literature that are closer to this empirical research: those studies that in theory evaluate the FDI-trade relationship (Blonigen, 2001; Liu et al., 2001; Bajo-Rubio & Montero-Munoz, 2001; Head & Ries, 2001; Brainard, 1993; Egger & Pfaffermayr, 2001; Bayoumi & Lipworth, 1997), and those whose methodology analyzes FDI location decisions (List, 2001; Friedman et al., 1992; Woodward, 1992; Greenstone, 1998; Henderson, 1996). However, previous studies on entry mode choice are varied but fragmented, pointing to the need to recognize the differences existing among organizations (Baek, 2003). Dunning (1971, 1974, 1988, 1993) has developed a line of research that considers the advantages of ownership, location and internalization, the background being the relationship between FDI and trade. The research developed by Markusen and Venables (1995, 1996) leads them to conclude that size, technologies and relative endowments can directly affect the importance of MNCs relative to trade.


Development of K-economy in the GCC Countries: A Comparative Study on the GCC Countries and Asian NICS

Dr. Amzad Hossain, Ajman University of Science & Technology, Ajman, UAE



The smooth growth of the variables of k-economy is the perquisite in building a k-economy. This paper is an attempt to analyze the variables of k-economy in the GCC countries and Asian NICs. To find the status of development of such variables of k-economy, both descriptive and comparative analysis is used. While comparing the socio-economic variables of k-economy, Asian NICs are performing better than GCC countries. The GCC countries also are spending very limited amounts for the improvement of socio-economic variables of k-economy even if they have higher per capita income. The growth of the economic variables of k-economy of Asian NICs is more progressive compared to GCC countries. Such economic variables are measured by long-term improvement in the share of GDP by sector, inflation rates, unemployment rates, and manufactured and high-technology exports. The study finds that Asian NICs are adapting and diffusing new technology more rapidly compared to GCC countries as measured by ICT variables. These ICT variables include telephone line users, cellular subscribers, number of Internet hosts, Internet users and PC users. To adapt with the new technology is not only influenced by higher per capita income, it is also influenced by the society’s capability to attain, and the application of existing knowledge in daily activities. Thus, the policies and strategies related to knowledge development in GCC countries should be formulated taking into consideration society’s ability to absorb, understand and elucidate knowledge to their local context. Knowledge is one of the important primary resources at the current information age. The application of knowledge in the production and consumption process brings efficient usage of all the factors of production and products or services as well. As such, the European Council Summit in March 2000 (Lisbon) outlined a strategic goal for the European Union for the next decade as: ‘to become the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion’ (Barry. N, 2001). Thus, it has become central part of discussion in any economic development strategy how the knowledge contributing to the sustainable production and consumption.  The rapid changing consumers’ preferences contributing to change in the nature of usage of goods and services become very often. Along with these changes, the world market getting more and more competitive at this globalize era. Such competitive world market is equipped with wide variety of products and services. In order to get comparative advantages in wining changing competitive market, producing innovative knowledge goods and services are crucial. The production of knowledge goods and services needs knowledge-based production process, as it is cost-effective and sustained. Such production process is replacing ‘physical-labor-intensive’ production process to ‘knowledge-worker-intensive’ production process. The transformation from ‘physical-labor-intensive’ production to a knowledge-based production requires the emergence of knowledge workers as key players in knowledge economy. The knowledge required by the knowledge workers, must not be seen as purely theoretical knowledge but is an integration and transformation of a range of different kinds of understanding, know-how and personal attributes, including business, technological, social and self management know-how (Barry. N, 2001).  The usages of knowledge workers in the production process substantially reduce the need for workers and other resources required. The knowledge workers’ productivity usually is higher compared to others. The k-workers’ production process also enhances the development of service and manufacturing sector concurrently. The outcome of such production process certainly brings productive and allocative efficiency in producing products and services for any country.  The Gulf Cooperation Council (GCC) countries historically having manpower shortage are one of the most important reasons of expatriates’ involvement as high as the three-fourths of the total workforce (Ugo. F & Zubair. I, 2003). Such a situation, on the one hand makes private sector dependent on foreign workers, and on the other hand it puts pressure on public sector for national workforce absorption. Thus, one of the unified industrial development strategies of the GCC countries is to increase the involvement of national workforce in the manufacturing sector to a minimum of 75 percent by 2020, assigning a priority to the technical and professional occupations (ASGCC, 2000). With the aim of obtaining this goal, the competitiveness of national workforce of the GCC countries must be improved so that they can compete with foreigners. Under such prevailing circumstances, building a knowledge society meaning knowledge-based economy would be an effective tool for GCC countries to attain their said development goal. Such k-economy would enhance the development of their manufacturing and service sectors and contribute to diversify the oil-based production to the horizons of service and manufacturing-based production. The prerequisite for developing a knowledge-based economy is to improve the indicators of K-economy such as socio-economic, economic and ICT indicators. This paper is an attempt to analyze the current development status of the indicators of K-economy while comparing with Asian NICs. Some policies and issues are explored for attaining sustained K-economy development in the GCC region.


New Institutional Economy and Innovation Barriers: A Microeconometric Evidence

Dr. Dilek Demirbas, Northumbria University, UK



This paper identifies some important specific external barriers to the innovation decisions of Small Medium-Sized Enterprises (here after SME). As SMEs play a particularly important role, because of their number and because of the large share of the workforce involved, the existence of innovative and internationally competitive SMEs will be a critical condition for Turkey’s future growth and prosperity.  However, despite the recognition, some crucial external barriers to innovation prevent SMEs from developing and contributing sufficiently. An analysis of 185 SME owners reveals that both formal barriers (instability on tax policies, business legislation, lack of property rights) and informal barriers (corruption, informal economic activities) form the most significant barriers for SMEs to innovate, as well as environmental barriers (low investments, lack of finance) and skill barriers (inability to grow into new markets, management problems, human capital issues). A Logit regression model was used to explain the probability of SME owner’s being affected by both formal and informal barriers. We believe that our results might be considered by policy makers to help achieve better and sustained innovation performance in the near future in Turkey. Over the last fifteen years, some technological and structural changes have made it easier for SMEs to participate in the international economy. Advances in ICT (information and Communication Technology), and other forms of telecommunication, have been a major factor in facilitating information flows and expanding the market potential of smaller firms on a global scale. Governments have been making efforts to reduce barriers to international business activity, at the global and especially at the regional level to improve innovation activities for SMEs in order to improve the international competitiveness of SMEs.  The question of why SMEs in developing countries make proportionately, a much smaller contribution to innovation is an important question to answer. The reasons are various.  International activities in developing countries expose SMEs to a more complex and risky business environment, for which, compared to larger firms, SMEs are also considered as relatively unprepared and less well-resourced in those countries.  Another very important reason is that there are so many formal and informal barriers to innovation in less developed countries.  Some of these risks, barriers and complexities have been already addressed by some economists (such as; Stewart, 1977; Lall, 1983; Fransman, 1985; Kumar and Sagip, 1996; Evanson, 1998; Johnson et. al. 2000; Glas et. al., 2000; Pissarides, 2000; Woodword, 2001; and Anderson et. al., 2004).  For the creation of a more business friendly innovation environment, and for a more integrated economy at the international level, many governments have promoted investment, to increase competitiveness to help SMEs’ integration into the world economy by harmonising their regulatory, administrative and policy environments to world standards.  However, there is still a long way to go for many developing countries to catch up to developed countries’ innovation standards.  In Turkey, SMEs are the dominant form of business organisation, representing 99.8% of business organisations; 76.7% of total employment; 46% of business turnover; 38% of capital investment; 26.5% of value added; 10% of exports and 5% of bank credit (OECD, 2004).  Like many other developing countries, Turkish governments, past and present, have also been making efforts to increase the competitiveness of SMEs since the 1960s, by promoting exports, technology and investment for SMEs, mainly since the full European Union membership debates for Turkey have taken place in the 1980s. In fact, the importance of government programmes has increased significantly since Turkey joined the Custom Union with the EU on the 1st of January 1996, and the international pressures have augmented as Turkey ratified the European Charter for Small Enterprises in April 2002.  With the impact of international pressures, Turkish governments have implemented very detailed programs in order to help SMEs with their international integration processes, but many important barriers still stand in the way of SMEs becoming innovators. The main aim of this paper is to understand the impact and determinants of innovation barriers for Turkish SME owners, by estimating a Logit model using survey data. To do that we will also be testing North’s classification of institutional factors, namely formal and informal barriers. The empirical data is from a survey of 185 Turkish SME owners.  As our question is - what are the most important barriers to innovation for SMEs, the dependent variable should be dichotomous and the applicable analytical model should come from the binary-choice genre of models, namely a Logit model, as it takes the value 1 if the SME owners have been affected by barriers to innovation, and 0 for those who did not display any pattern in their responses. In the next section, the new institutional economy is reviewed to understand the formal and informal barriers for SME owners in their innovation process.  Then, Turkish SMEs are introduced in the following section.  Next, a Logit model is estimated to identify empirically the most important sources of innovation decisions for Turkish SME owners in the data and methodology section.  The final section concludes with the results and recommends some policy decisions.


Tax Competition and Tax Burden in EU Countries

Dr. Kaie Kerem, Tallinn University of Technology, Tallinn, Estonia

Dr. Tiia Püss,  Tallinn University of Technology, Tallinn, Estonia

Mare Viies, Tallinn University of Technology, Tallinn, Estonia



One objective of the EU is to create a single economic space. The achievement of this objective is attempted with the help of economic policy. Important components of this are single monetary policy conducted by the European Central Bank and sustainable fiscal policy conducted by the Member States satisfying the criteria of nominal convergence. Economic globalization in the recent decades, tightening of the transnational economic relations and  increasing impact of internationalization on national developments have led to deepening of the convergence process, on the one hand, and increasing competition between the States, on the other. Tax burden has a notable influence on international competitiveness of the countries. High taxes suppress development of enterprises by reducing profits and increasing labor costs. At the same time, national tax revenues enable to increase investment in human capital, in research and development, through this also increasing international competitiveness of the country. In order for the single economic policy to yield positive results, the implementing economies must be close by the economic development level and work in a similar economic space. This article seeks to analyze changes in the tax burdens in EU-15 and EU-10 countries and to test for the tax competition using convergence analysis. We have used the harmonized data of tax burdens collected by OECD, Eurostat and European Commission. Data on taxes in EU-15 are available since 1980 and on EU-10 since 1995. The effect of changes in taxation is very difficult to assess for several reasons, all related to the non-experimental nature of empirical economic analysis. Some questions, such as the effects of tax reform on the long-run growth rate, simply cannot be answered in the short run. As Engen and Skinner (1996) point out, it is important to distinguish between the short-run and long-run effects of tax policy on growth. In the short run, tax policy can affect growth by encouraging labor supply, increasing saving and capital allocation, and improving the efficiency of the allocation of labor and capital in production. Over the longer run, once these effects have taken place, tax policy can influence the growth rate only to the extent that it has a permanent impact on the rate of technological progress (Auerbach, 1996). The net effect of taxation on economic performance depends on the level and structure of taxation, and whether tax revenue is spent in a productive or unproductive way. Leibfritz et al. (1997) have examined the relationship between taxation and growth for a sample of OECD countries and found that a 10 percentage-point increase in the tax/GDP ratio is accompanied by a 0.5 per cent lower growth. This result is qualitatively consistent with the findings by King and Rebelo (1990) and Barro (1992). But several other authors, including Easterly and Rebelo (1993), Levine and Renelt (1992) have found a non-significant or even positive correlation. This leaves some researchers to suggest that there may be non-linearities implying a positive growth effect if taxes are increased from a low level and a negative growth effect if they are increased from a high level. The increase in the mobility of tax bases is caused by free capital movement, the elimination of custom controls, increasing introduction of the single currency and development of information and communication technologies. Enhanced mobility within the EU area very probably creates welfare gains providing individuals and companies with options to suite better their needs. The greater exposure to international competition also provides strong incentives for the governments to raise public sector efficiency and may yield a double dividend: lower taxation and better public service. At the same time, free movement of products in the situation of differences in tax systems across EU countries extends the scope for tax avoidance and evasion. This could result in higher tax pressure on labor. While enhanced co-ordination in some areas of tax policy could moderate tax base erosion pressures, there are economic and institutional constraints in this regard.  Different financing needs may warrant significant differences in tax systems. Institutionally, the requirement of unanimity for any decision on tax policy at the EU level makes it difficult to agree on how to proceed as countries have diverging interests (Joumard, 2001).  In an open economy, tax policy of one country may affect economic activity and public revenue in other countries. This observation has led to calls for international tax coordination in the wake of deepening economic integration. Economists tend to disagree here, both phenomena are claimed to have positive as well as negative features. According to one viewpoint often expressed in economic literature, intergovernmental competition is wasteful. That view has raised questions about the appropriate degree of economic integration between countries. The Treaty on the European Union reflects a presumption in favor of the governments’ rights to function independently in most policy areas. In contrast, the tax competition literature draws attention to the potentially adverse effects of this independence (Sinn, 1997). Earlier investigations concluded that “the result of tax competition may well be a tendency toward less than efficient levels of local services. In an attempt to keep taxes low to attract business investment, local officials may hold spending below those levels for which marginal benefits equal marginal costs” (Oates 1972, p. 143). Some negative features of tax competition have been pointed out also by other economists (Keen and Marchand, 1997).


International Human Resource Management Can Be Achieved Through Cultural Studies and Relevant Training

Dr. H. W. Lee, National Chiayi University, Taiwan



Culture refers to a society and its way of life.  It is defined as a set of values and beliefs, or a cluster of learned behaviors that we share with others in a particular society, giving us a sense of belongingness and identity. Because of this, cultural understanding is becoming even more important because of the call to interact with many individuals from other countries and other cultures. This study answered several in-depth questions regarding the topic and allowed the researcher to venture into in-depth interpretation of qualitative results.  Furthermore, this research provided information on the relationship of organizational harmony to the use of cross-cultural studies and relevant training as an intervention for cultural issues.  It is the aim of this study to prove the efficacy of the above claim and to encourage further globalization in business transactions through cross-cultural studies and relevant training.  According to John H. Bodley (1999), culture refers to a society and its way of life.  It is defined as a set of values and beliefs, or a cluster of learned behaviors that we share with others in a particular society, giving us a sense of belongingness and identity.  It is predictable in form and content, uniform and similar across a particular human society that shapes behavior and cognition of individuals from generation to generation. Culture also includes a host of other disciplines such as history, language, behavior, mentality, symbolism, norms and values. It can be described in the manner by which people from a particular group, race, society or organization behave, communicate, perceive and react to the reality we are faced with.  Bodley (1999) further adds three basic components of culture, namely: what people think, what they do, and the material products they produce.  All forms of culture exhibit unique ways and value systems that aid and affect individuals in their perception and reaction to different life circumstances. In the advent of globalization, many companies, be it corporate, public or international operates on a global scale.  With the rise of companies operating in a global village, many companies are also expanding internationally.  Mostly, international organizations operating abroad are faced with employees of foreign cultures with an entirely different perspective.  Oftentimes, cross-cultural issues arise in the management of the company’s human resources.  According to Lionel Laroche (1998), the rapid globalization of the world’s economy has brought forth several changes.  Unlike the universality of the law of physics and sciences, different cultures exist in different areas of the globe.  Although many opportunities open for people in multinational companies, a great challenge also awaits.  Laroche affirms that divergence in the attitudes, perspectives and priorities of suppliers and customers with different cultural backgrounds have led to many project failures among organizations.  According to this author, communication, management style and problem solving techniques also vary in different cultures.  There are differences in body language and gestures, differences in the meanings of exactly the same words and differences in the assumptions of similar situations.  Many cultures do not use the same standard of measurements as well as in their approaches to problem solving.  In addition, different countries have different ways of organizing and managing their businesses.  Thus, cross-cultural issues can arise at the organizational level.  Differences in the hierarchy of departments, the manner by which communication is shared and the hiring process are three things that can cause real disparity.  Because of these distinctions in cultures, Laroche (1998) suggests that an in-depth understanding of the cultural backgrounds of the people one is dealing with can increase the probability of business success among investors and workers operating in foreign cultures.  Cultural studies and relevant training are very important in a multinational company’s operation.  To interact successfully with its employees, employers, customers and clients, a multinational company should orient its human resources toward cultural sensitivity and adaptation to allow resolution of cross-cultural issues in international companies.  This research attempts to confirm the effectiveness of cross cultural studies and relevant training in resolving cultural issues in the management of human resources among international companies.  According to Dean Foster (2004), the dawn of globalization has challenged the relevance of culture in the heart of business in the global village.  Many people question that if we exist in a global village, what use will our individual cultures be?  However, as many companies venture into the international arena, it was revealed that culture matters a lot.  In just about every aspect of human activity, culture is practiced.  And wherever one may go, whether in study, work, business or travel, going beyond one’s borders requires an in-depth understanding of the ways of life of societies very different from those at home.  In foreign business negotiations, it is all the more important to consider cultural issues at hand before dealing with the people in a particular country. 


Comparing Equity Valuation Models with Forecasting Capability:  A Case of Taiwan’s Tourism Industry

Nan-Juen Tseng, Chung Hua University, Hsinchu, Taiwan, R.O.C

Dr. Yao-Hsien Lee, Chung Hua University, Hsinchu, Taiwan, R.O.C



This paper makes use of various valuation models to evaluate the intrinsic value of companies in Taiwan’s tourism industry.  The results indicate that the Edwards-Bell-Ohlson (EBO) model is the best model available for valuation in terms of forecasting capability. Due to a significant growth in the national income in the last two decades, there have been rapidly increasing demands for recreation and tourism services in Taiwan.  Taiwanese people have become more concerned about how to spend their leisure time efficiently than in the past.  As a result, tourism activities have become an important life-style for people in this country.  Tables 1 and 2 indicate that Taiwan’s tourism industry has a large market size and tourists are very willing to spend their money to obtain tourism services in order to increase the level of their quality of life.  This leads to the fact that tourism-related industries are regarded as promising new industries and valuable investment opportunities for investors in Taiwan.  It is noteworthy that Stephen (2004) describes the tourism industry as having the following industrial characteristics: (1) complexity: the undertakings of tourism agents are involved in a diverse range of  businesses and institutions. They may operate by themselves or cooperate with each other to promote the tourism business in order to form a service network for tourists; (2) public welfare: the purpose of running a tourism business is not solely for economic incentives, but also for educating the citizenry, providing pleasure to the tourist, presenting appropriate life-styles, releasing pressure, and so on; (3) generality: any region with attractive natural resources can be developed as tourism destination. For economic and public welfare purposes, they have positive social outcomes: each country has enthusiasm for developing tourism businesses; (4) invisible services: the tourism businesses are set to meet the needs of tourists.  There are various and diverse types of services and different ways to calculate the tourism service costs.  These services can not be preserved and conserved and their income can not increased (decreased) by offering more (less) services in the short turn; (5) high elasticity of demand: there are significant elasticity relations between tourism business revenue and the price of tourism service; (6) low return on investments: the equity capital in tourism business has the properties of the slow capital turnover rate and low return on investments. (ROI)  This may cause serious financial crisis and result in increasing the magnitude of operational costs; (7) fixed elasticity of supply: since the landscape and facilities of tourism business are fixed, their functions cannot be transferred or extended in the short run.  Furthermore, the investments on construction and restructure can be enormous as well as of long duration.  As a result, the compatibility of services cannot be adjusted immediately and hence tourism business managers are facing high management risk.  Certainly, the above characteristics also exist in Taiwan’s tourism industry and make the task of investment evaluation difficult. Obviously, finding the available valuation models that stock market analysts use to uncover mispriced securities is an ongoing concern.  In this paper, we will use the equity valuation models presented in Reilly and Norton (2006), Bodie, Kane, and Marcus (2005), and Damodaran (1996) to analyze the investment value of firms in the tourism industry of Taiwan.  Therefore, the purpose of this paper is to find which is the best valuation model in terms of forecasting capability.  We use Theil’s U value to represent/measure forecasting capability.  The evaluation model with best forecasting capability is the model that can be used to increase and protect the investors’ investment value.


Competitive Capability Evaluation for Middle and Small Enterprises in Regional Industries

H. Y. Cheng, Science & Tech. Information Institute of Kunming

D. M. Zhang, Science & Tech. Information Institute of Kunming

M. Ye, Kunming Science & Tech. Bureau

J. Xia, Kunming Science & Tech. Bureau



The middle and small enterprises of regional industry (MSERI) are very important composition of the regional economical development in China. In this paper, we use the analytical hierarchy process (AHP) and vague comprehensive judgment to evaluate the competitive capability of MSERI. First, by way of identifying the developmental relationships and setting up the index system of MSERI, we used Delphi investigation and three-decision problem solving to obtain the rates of indexes of various tiers in the MSERI system. Then we used the vague comprehensive judgment to evaluate competitive capability. Finally, we obtained the evaluation result of competitive capability of MSERI and discussed the relevant problems for the evaluation. The middle and small enterprise (MSE) is a group of enterprises (often private units) that are in the same industry with limited capital and production ability, but occupying a very important position in regional economical development processes in China. It plays roles for cooperation between city and county, to develop local economic progress and to steady the society. The MSE grows stronger with the development of the Chinese economy in regional economic development, especially for the county economy. It is understood that China’s economics cannot develop without the development of the MSE. In this paper, the MSE is the element that provides independent production, sales, and service to the customers. Here we don’t exclude the effect of middle and large enterprises in regional economic development. Due to the differences of geographical position, culture background, science and technology development, natural conditions and resources, regional economic development exhibits unbalanced characteristics in China. The industry of a regional MSE also displays a close relationship with its geographical position and its resources. From a view of the whole, the regional economic structure may be the same in form; however, the development of the MSE shows its characteristics regionally and has a possibility to turn into competitive advantage. This phenomenon is obviously part of the development of the MSE. We also noticed that the industry development of a MSE is limited by policy, circulating capital, resources, and others factors. We understand the importance of MSERI, but we don’t know the degree of that effectiveness. Many authors have completed study and research on the enterprise competitive capability, however, it is important to dig out the competitive capability for MSERI in order to achieve the economic sustained development locally. We have used the analytical hierarchy process, identified influential factors and relationships of the MSERI, and set up an index system for the MSERI. In this paper, we apply the Delphi method, three-decision problem analysis, and vague comprehensive judgment to evaluate the competitive capability of MSERI. Finally, we obtain an evaluation result for the competitive capability of MSERI. We assume that production, sales, and service of the MSE for regional industry are operated under relatively closed, but independent and stable circumstances. The development situation of the MSERI is described, using the index system of the analytic hierarchy process. Using the expression of the index system, we can simplify the problem greatly.  According to the analytical hierarchy process, the hierarchy analysis frame is presented as Figure 1, and the index system is offered in the appendix.Here, A is the arm tier of competitive capability of MSERI. The decisive tiers are economic ability, labor resources, science and technology, culture circumstances, industry circumstances, natural resources, basic conditions, and exchanges with the outsidepresented by D1…D8, respectively. The parameter tiers are the indexes used to describe the decisive tier, corresponding to the decisive tier and presented by U1i…U8i; the U1i…U8i are composed of the corresponding index tier Wij in detail (see Appendix). We chose specialist k for a specific industry of the MSE. Each specialist ki gives the index rate in the index tier independently. We assume that Wij is the specialist’s rate for one index in the index tier in the Appendix. By way of matrix calculation and three-decision problem analysis, we obtained the results of the parameters, as U1i…U8i. Then, we used a linear weighted addition to obtain quantitative results for the decisive tier as Di. The rate calculations are as follows:


Identifying Organizational Capabilities As Predictors of Growth and Business Performance

Dr. Cemal Zehir, Gebze Institute of Technology, Turkey

A. Zafer Acar, Gebze Institute of Technology, Turkey

Dr. Haluk Tanrýverdi, Sakarya University,Turkey



The firms need organizational capabilities which they have or which they will need to develop in order to overcome the competition they face today and in the future. These capabilities are the collective skills, abilities, and expertise of an organization. This paper examines the implications of organizational capabilities on growth and business performance. On this study, a research model and hypotheses have been developed. This research model has been constructed among eight dimensions of organizational capabilities and dependent variables included growth and business performance factors. Data collected from 456 owners and senior managers of 121 firms have been analyzed to test the hypothesis using regression analysis. As a result of this study, it is found out that increasing of the level on organizational capabilities has significantly positive effects on growth and business performance. The fundamental question in the field of strategic management is how firms achieve and sustain competitive advantage (Teece et al., 1997). Organizational capabilities have vital consequences on business performance to acquire sustainable competitive advantage. Therefore, the overall problem of this study is; how do firms acquire organizational capabilities needed for sustainable competitive advantage and what are the impacts of organizational capabilities on business performance? Competitiveness has become an axiom, a fundamental belief and goal that drive executive behavior (Ulrich, 1993). Increasingly, executives are discovering that competitiveness is derived from within the organization, from how the organization manages its people and processes (Ulrich & Lake, 1991). In order to compete successfully in an industry, managers in organizations need to learn about emerging best practices and implement them in their units. An essential part of this process is the development of organizational capabilities by its managers. The development of capabilities to be flexible rests on the mandate of top management, helps firms manage environmental uncertainty, and tends to enhance firm performance. Thus, these researches focus on the organizational capabilities and its impact on business performance. Capabilities have attracted the interest of researchers (e.g. Ulrich, 1987, 1989; Ulrich & Lake, 1991; Ulrich & Smallwood, 2004; Stalk et al., 1992; Hall, 1993; Day, 1994; Lado & Wilson, 1994; Ashkenas, 1995; Davies & Brady, 2000; Lee, 2001; Matsusaka, 2001; Celuch et al., 2002; De Saa & Garcia, 2002; Kaleka, 2002; Rogers, 2004) because of their impact on the firm’s ability to identify sources of sustainable competitive advantage. When as economic and technological complexity increases, leaders must devote more attention to definition and improvement of the few critical business processes that determine success and failure. It has argued that organizational success influence by capabilities, both personal and organizational. Moreover, that organizations need to be able to manage both change and current business to achieve sustainable growth; and that the capabilities required for the management of change and current business differ (Rogers, 2004). Many researchers often use the words “ability”, “competence” and “capability” interchangeably (Ulrich & Smallwood, 2004). There is confusion in the literature of these concepts. In addition, there are various definitions for the concept of organizational capabilities. Here we used the terms of capability and organizational capability interchangeable and appropriate with resource-based theory (Wernerfelt, 1984; Barney, 1991, 1995; Grant, 1991; Peteraf, 1993; Teece et al., 1997; Eisenhardt & Martin, 2000; De Saa & Garcia, 2002) approach. The term capability is a wider concept than competence, including, besides competence, strategy, linking of resources and abilities. Ability and competencies are shown on an individual’s technical area and social issues. However, capabilities are shown on both technical area and social issues of an organization. Grant (1991) defines capabilities as complex patterns of coordination between people and resources that are learned through repetition. Ulrich (1993) uses the term capabilities to describe a firm’s ability to manage people to gain competitive advantage. Capabilities refer to a firm’s capacity to deploy resources, usually in combination, applying organizational processes to affect a desire end (De Saa & Garcia, 2002). Ulrich and Smallwood (2004) argued that an organizational capability emerges from a bundle of activities, not any single pursuit. Therefore, organizational capabilities are the collective skills, abilities, and expertise of an organization (Ulrich & Smallwood, 2004) to adapt to changing customer and strategic needs.  Despite of ascending population of interest, the components and structure of organizational capabilities are still unclear as the definition of organizational capability. It has argued that, with specifying critical organizational capabilities and identifying how to assess them we can establish our organization more competitive (Ulrich, 1993). The resource-based view (RBV) points out that firms can develop sustained competitive advantage by creating value both for customers and organization, and developing organizational capabilities in a way that is rare and difficult for competitors to imitate (e.g. Barney, 1991, 1995; Grant, 1991; Peteraf, 1993; Tecee et al., 1997).


The Relationships Between Family and Career-related Factors and Organizational Commitment: A Malaysian Case

Dr. Razali bin Mat Zin, King Fahd University of Petroleum and Minerals, Saudi Arabia



Organizational commitment of employees has been found to be a function of other personal and organizational variables. The sustained interest in organizational commitment stems, in part, from the recognition of the limitations of technological innovations in creating and sustaining competitive advantage.  For this reason, many organizations are seriously considering to undergo a paradigm shift from the control-mode model to a commitment-mode model in managing their employees. The data of this study were collected from employees who are holding managerial positions in selected public and private organizations in Malaysia. The analyses indicated that the career-related variables are most significantly related to organizational commitment. Relationship between family variables to organizational commitment received some support, though the findings revealed that it made the least contribution to the explained variance in organizational commitment. Over the past two decades the relationship between family and career related variables  receive considerable attention from industrial and organizational psychologists, management scientists, and sociologists. Much of the interest in analyzing the relationships between these variables stems from the concern for the behavioral consequences that are hypothesized to result from those hypothetical relationships. Among other topics, organizational commitment have been argued to be related to productivity, attendance at work, turnover, retirement, participation, labor militancy, sympathy for unions and psychological withdrawal from work. Many studies had established the lingkage between  work and non-work related variables and organizational commitment (Kanter, 1977; Gutek, Nakamura and Nieva, 1981; Lambert, 2000; Razali, 1998, 2004).  The first career variable examined in this research as predictor of organizational commitment is availability of career development programs. As part of a strategic human resource management system, there is now a proliferation of career development programs in several organizations (Riggio, 2003). Maurer (2001) and Razali (1998; 2004)  reported a significant positive relationship between training and psychological commitment. They interpreted their findings to mean that psychological commitment is higher among employees who believe they are being treated as resources to be developed rather than commodities.  A second career related factor hypothesized to be positively influencing organizational commitment is career planning. Steffy and Jones (1988) reported career planning as a positive predictor of organizational commitment. Although organizational commitment was not significantly predicted by career planning relative to career commitment, Razali (2004) suggested that organizations might benefit form career development programs that helped employees, particularly female employees in planning their career.  The third variable is having the opportunity to advance in the organization to move up to greater responsibility and prestige as one gains knowledge and experience.  Several studies have found that perceptions of future opportunities for career advancement are related to organizational commitment. If employees who are interested in career advancement do not perceive that opportunities available within their organizations, they may react by lowering their aspirations and desires to be committed.  Razali (1998; 2004) found that those employees who perceived the structure and policies of the organization offer a fair opportunity to advance, they are more likely to develop an exchange-based attachment and make efforts to participate in organizational affairs.  The fourth career variable examined here as a possible source of organizational commitment is career satisfaction. Gattiker and Larwood (1988) defined career satisfaction as a "stimulated response to career and work events" (p. 571) and, therefore, "an overall affective orientation toward one's career role" (p.573). Career satisfaction has not been examined as a source of organizational commitment but as a component of overall job satisfaction (Riggio, 2003) and, consistent with exchange theory predictions, it is reasonable to expect career satisfaction to positively affect organizational commitment. The organization rewards (e.g., promotion) which facilitate the realization of one's career goals and, therefore, career satisfaction, may be reciprocated with organizational commitment.  The first family variable that may affect one's level of organizational commitment is parental demands. Bedeian, Burke and Moffett (1988) suggested that parenting introduces new demands and responsibilities into a marriage that require a great deal of parenting time and energy. The implication is that the more parental demands one experiences the less time and energy one has to devote to the organization in terms of commitment. Chusmir (1982) suggested responsibility for children as a determinant of job commitment among women.


Exploring Technologic Characters of Finance Group in Business Methods: Using Patent Content Analysis and Citation Network

Shu-Min Chang, Nan Kai Institute of Technology and National Yunlin University of Science Technology, Taiwan

Dr. Shann-Bin Chang, Ling Tung University, Taiwan



With the Internet now widespread, there are huge impacts to business operations. Many new business methods based on Internet technology have become critical to the success of enterprises. Additionally, a Business Method Patent White Paper was announced by the USPTO in 2000, most companies in the relevant industry of Internet want to develop a patent strategy based on their core competencies in order to establish competitive advantages. Finance technology is one kind of business methods technology that is important as an enabler of electronic commerce, and is often combined with security, e-shopping, and other technologies. However, the boundary for industries is confusing in the Internet era, business methods technologies across many industries including hardware, software, telecomm, finance, logistic, retailing… etc. Therefore, which firms owned the advanced finance technology was not easy to find. This study was concerned with the development of finance technology. We selected the finance group based on the study of Chang et al. (2005), and tried to analyze the technologic content and citation network of patents in this group. The conclusions of this study are three: 1. we can use patent content analysis and citation network studies to understand the technologic details of the finance group. 2. The major technologies of the finance group are concerned with payment, sales and trade security. 3. The leader firm of the finance group is Citibank; the followers are Open Market and Walker Digital, both of whom followed Citibank quite closely, while and remaining firms are lagging behind. Technologic positioning and grouping are important studies before firms make technologic strategic decisions. Enterprise can observe the technologic group through patent portfolio analysis and patent citation analysis (Ernst, 1998, 2001; Karki, 1997; Breitzman & Mogee, 2002), but both of patent analyses are qualitative studies of the macro approach; these methods cannot understand the technologic characteristics and differences between every technologic group. Therefore, enterprise must use other analyses to understand more technologic information of every group. Technologies of business methods developed rapidly in recent decades pushed by the information and Internet technologies and pulled from market demand. Finance technology is one kind of business methods technology, which is important because it is an enabler of electronic commerce, and it is often combined with security, e-shopping and other technologies. Business methods technologies cross many different industries, such as hardware, software, telecomm, finance, logistic, retailing… etc. even new industries directly related to the Internet (Hamel, 1997; Chen, 2001). In order to understand the characteristics of the technologic group, this study selected the finance group based on the study of Chang et al. (2005), and tried to analyze the technologic content of patent and citation networks of patents in this group. Business methods were defined by US Class 705 from the USPTO (US Patent and Trademark Office). There are seven major sub-classes in Class 705, including Protection of distributed data files, Secure transaction, Operations research, Point of sale terminal or electronic cash register, Electronic shopping, Finance, and Postage meter system. These seven sub-classes are correlative and interdependent. Chang et al. (2005) used both patent portfolio analysis and patent citation analysis to group 37 firms of business methods into ten technologic groups. The largest group was named finance group which contained eight firms - Citibank, Walker Digital, priceline, Verifone, Open Market, VISA, Amazon, and Sun Microsystems. More than 30% of these firms’ patents belong to US Class 705 with the exception of Sun Microsystems. This phenomenon indicated that business methods were the most important technology of this group. Therefore, this study selected the finance group as its target group to analyze the technologic characteristics of them. This study was divided into three steps: 1. selected a representative patent as a basic patent of the finance group; 2. analyzed the technologic content of the basic patent, including technology classes of this patent, invention background, references of this invention, objectives and primary components; 3. discussed the citation network and technologic characteristics of this group. There are 262 patents in the finance group of the study by Chang et al. (2005). In order to explore the characteristics of this group, it is impossible to read every patent in this group. Because the finance group was formed from patent portfolio and patent citation analysis, the patents within this group must have a strong relationship. Citation refers to the evolution of technologies, which can explain the improvement of some technologies (Breitzman & Mogee, 2002; Stuart & Podolny, 1996; Tijssen, 2001, 2002). Additionally, if one patent was cited by many patents, we can say that the impact of this patent is more important, or this patent has more value and influence than others do regardless of licensing or sale (Jaffe et al., 1993; Narin et al., 1997; Stolpe, 2002). Therefore, this study tried to find the most important patent of this finance group, said basic patent, and used the citation relationship of the basic patent to explore the characteristics of this group.


The Role of External Debt, Total Trade and Labour Force in Economic Growth: The Case of Nepal

Ramesh Paudel, University of Wollongong and Lecturer, Pacific College of Technology, Sydney, Australia

Dr. Min B. Shrestha, Nepal Rastra Bank, Kathmandu, Nepal



External debt, total trade and labour force are known as the major contributors to the economy of a nation. This study examines the role of these three variables in the economic growth in Nepal employing co integration test. The results show that total trade is associated positively with the economic growth but there is no significant relationship between external debt and the economic growth. It can be inferred from these results that the external debt has not been utilized properly so as to make it a contributor to economic growth in Nepal. The results do not support the general assertion that the labour force contributes to the economic growth positively. Economic growth is a fundamental issue in the global economy. This issue is more crucial for the least developed countries, where poverty is widespread. There are various factors affecting the economic growth of a country among which external debt, total trade and labour force are considered to be more crucial for developing countries. As capital is an important factor of production, the capital coming in the form of external debt can play a vital role in increasing the national output. However, excess use of such capital may have negative impact. Labour force is another key determinant of economic growth, which requires an efficient management for it to make positive impact in the economy. Similarly, the external trade is viewed as increasing the performance of an economy, but the import-dominated trade may affect the balance of payments situation adversely. Thus, although these three variables, viz. External debt, external trade and labour force are the key contributors to the economy, their balanced level and or efficient management are crucial for optimising their contribution. Otherwise, the economy may not achieve expected outcomes and in some cases their contribution may become negative. In this paper, the role of external debt, total trade and labour force are analysed in order to ascertain their contribution to the economic growth of Nepal. Nepal is a land-locked Himalayan kingdom, which lies in South Asia. Nepal has a GDP of USD 7.17 billion and the external debt of USD 3.32 billion (Nepal Rastra Bank 2005). The external debt has increased from USD 1.64 billion in 1990 to USD 3.32 billion in 2005. The volume of external debt is more than 40 percent of the annual GDP. Total trade increased from USD 0.88 billion in 1990 to USD 2.44 billion in 2005. In the total trade, the share of import is very high accounting for about 75 percent. The labour force increased to 11.27 million in 2005 from 8.77 million in 1990. Thus, the external debt, total trade and labour force have registered a steady growth in Nepal. However, the economy of the country has not grown in a satisfactory rate. In this regard, this paper examines the role of these variables in the economic growth in Nepal. The subsequent section presents a brief literature review on the role of external debt, total trade and labour force in the economy. A general model for empirical test is constructed in Section 3. Section 4 presents the unit root and cointegration test results. Finally, concluding remarks are presented in Section 5. In the developing countries, external debt is viewed as the lubricant for mobilising other factors of production. In many countries, external debt has been the main source of capital investment for development of the physical infrastructure. However, there has been a concern regarding the proper utilisation of external debt in poverty alleviation and overall economic growth of the country. In the second half of the 1990s, high external indebtedness of developing countries received increased attention around the world, as one of the main factors contributing to limit the development of numerous poor countries. Most of these countries had received very large amount of loans over the past decades, often at highly concessional interest rates. Despite the importance of external debt, the recent initiatives of the countries have focused on reducing the volume of the external debt (Pattillo, Poirson and Ricci 2001). A number of studies have examined the relationship between external debt and economic growth. The majority of these studies have found one or more debt variables to be significantly and negatively correlated with growth. Maureen Were (2001) analyses the magnitude and structure of Kenya’s external debt and examines its impact on economic growth and private investment using time series data for the period 1970- 1995.


Credit Rating of Corporate Debentures in India

Dr. Sudha Vepa, Pendekanti Institute of Management, Hyderabad, India



The initiation of liberalization in India led to a huge capital need. One of the means used for financing the needs of the private corporate sector is the Debenture.  Credit rating is compulsory in all countries where corporates have the freedom to borrow directly from the public. The concept of credit rating was introduced in India in 1987, for the purpose of rating debt obligations of companies. The service, used by a large number of companies in the private sector while making public issues in the past, is, in recent times being sparingly used. The study is an attempt to investigate and analyse the reasons for the same. The major findings of the study are: Corporate debenture issues made by the private sector, closely associated with the happenings in the capital market have been replaced by private placements. As a result, there is a reduced demand for credit rating. But an important aspect noticed is that over the years, credit rating of debentures introduced primarily as a regulatory requirement is now happening as a result of investor demand. The initiation of liberalization in India led to a huge capital need. Initiatives were taken to reduce the dependency of private enterprises on public sector (banks) for financing and to depend more on internal resources and capital markets for their financing needs.  An instrument frequently used by the private corporate sector to meet its financing need is the Debenture.   The Debenture is an instrument of medium/long term financing which provides the investor a fixed return during its tenure and repayment of the Principal at maturity.  Credit Rating of public issues of debentures is mandatory in India.  Credit rating is the index assigned by rating agencies as a measure of creditworthiness and default probability of a company regarding its debt obligations.  Credit rating plays an important and extensive role in financial markets. With regard to firms seeking financing, few of them would enter corporate debt markets without evaluations from rating agencies.  It also helps the issuers of debt instruments to price their issues correctly and to reach out to new investors. From the investors' point of view, they rely on credit ratings to determine their investment policy and the riskiness of their bond portfolio. As for regulators, throughout the world, where corporate entities enjoy freedom to borrow directly from public, credit rating has become obligatory for the companies. In India, regulators like Reserve Bank of India (RBI) and Securities & Exchange Board of India (SEBI) often use credit rating to determine eligibility criteria for some instruments.  In general, credit rating is expected to improve quality consciousness in the market and establish, over a period of time, a more meaningful relationship between the quality of debt and the yield from it. Credit Rating is also a valuable input in establishing business relationships of various types. In India there are four credit rating agencies – Credit Rating Information Services of India Ltd. (CRISIL), Investment Information and Credit Rating Agency of India Ltd. (ICRA), Credit Analysis and Research Ltd.(CARE) and Fitch. CRISIL has been chosen for study as it is the pioneer in the rating industry and also has the largest market share in the ratings business in terms of largest number of ratings assigned.  The concept of credit rating was introduced in India in 1987, for the purpose of rating debt obligations of companies. Rating provides great advantages to the issuers and investors. To the investors, it communicates the relative ranking of the default loss probability for a given fixed income investment in comparison with other instruments. To the issuer, it is a marketing tool which provides grater access to a much wider investor base as compared to unrated securities. The service, used by a large number of companies in the private sector while making public issues of debentures in the past, is, in recent times being sparingly used. This study attempts to investigate and analyse the reasons for the same. The period of study is from 1991-92 to 2004-05. The present study is empirical and has the following objectives: 1. To trace the trends in the corporate debenture issues of the private sector. 2. To examine the role and importance of credit rating in an emerging market like India. 3. To analyse the rating trends of debentures issued by the private corporate sector with respect to CRISIL.  The study depends on Secondary data. Books, Periodicals, Journals, CMIE Monthly Intelligence Services and Rating Scan of CRISIL have been referred. Raghunathan and Verma (1993) made an attempt to assess the quality of credit rating in India. They compared the ratings assigned by the leading Indian rating agency – CRISIL with that of the US rating agency Standard and Poor’s on the basis of financial ratios. They contended that the widely used measures for quality of ratings such as default risks and yield to maturity were not suitable in the Indian context for various reasons including the infancy of the rating industry. They assessed the quality of CRISIL’s ratings by (i) comparing CRISIL’s standard of ratings with international standards and (ii) internal consistency of CRISIL’s ratings. Chandrasekhar and Vaikuntanath (1994) tried to develop a prediction model to predict the ratings of the Indian rating agency – CRISIL using Artificial Neural Networks.  Goswami and Venkatesh (1994) made an attempt to assess the performance of rating agencies. They tried to find the usefulness and understanding of assigned ratings to the individual and institutional investors in India. The objective of their study was to find out whether the investors were aware of the nuances in the rating scales in use and whether they had an understanding of what the symbols intended to convey. The other objective of their investigation was to find out how information on ratings was obtained and used by the respondents. Venkatesh and Gupta (1997), examined the universe of ratings assigned by investment firms and find there is a significant concentration of ratings on the border between speculative and investment grades. According to them, a possible explanation could be obliging agencies which assign “on-the-border”investment grades to firms which could otherwise find it difficult to raise money in markets. Such expeditious strategy can result in a significant number of such ratings being downgraded subsequent to the issue of debt.


Trading Breakout Rules: Evidence from South Korea

Massoud Metghalchi, Ph.D., University of Houston-Victoria

Xavier Garza-Gomez, Ph.D., University of Houston-Victoria

Chien Chen, Ph.D., University of Houston-Victoria



This paper tests trading breakout rules for the South Korean stock market. Our results indicate that trading breakout rules do indeed have predictive power and could discern recurring-price patterns for profitable trading. Moreover, our results support the hypothesis that technical trading rules can outperform the buy-and-hold strategy. Fama (1970) defined an efficient financial market as one in which security prices always fully reflect the available information; any new information will be quickly and instantaneously reflected in prices. Furthermore, since news on any company, by definition, is unpredictable (arrives randomly), price changes will be unpredictable or follow a random walk.  Fama made a distinction between three forms of Efficient Market Hypothesis (EMH): (a) the weak form, (b) the semi-strong form, and (c) the strong form. Advocates of the weak-form market efficiency hypothesized that investors could not drive profits above a buy-and-hold strategy using any trading rule that depended solely on past market information such as price or volume, implying that technical trading rules are useless. After more than three decades of research and literally thousands of journal articles, financial economists and practitioners have not yet reached a consensus whether technical trading rules can discern recurring-price patterns for profitable trading. The overwhelming majority of financial economists support the “weak-form” efficient market hypothesis. This is because much of earlier research supported the random walk hypothesis. While the semi-strong form of EMH has formed the basis for most empirical research, the following studies have long supported the weak-form market efficiency: Larson (1960), Osborne (1962), Alexander (1964), Granger and Morgenstern (1963), Mandelbrot (1963), Fama (1965), Fama and Blume (1966), Van Horn and Parker (1967), Jensen and Benington (1970).  However since the early 1990s, technical trading has been enjoying a renaissance both on Wall Street and in academic circles. Several papers have presented evidence that some simple trading rules are useful for predicting stock market returns. The cornerstone of this new research on technical analysis is an article by Brock, Lakonishok and LeBaron, (1992), BLL analyzed moving averages and trading range breaks on the Dow Jones Industrial Index from 1897 to 1985. They used various short and long moving averages of prices to generate buy and sell signals. They tested long moving averages of 50, 150 and 200 days with short averages of 1, 2 and 5 days. They point out that “all buy-sell differences are positive and the t-tests for these differences are highly significant…” and they go on to conclude that their “results are consistent with technical rules having predictive power”. Other researchers have used some variants of BLL’s moving averages to investigate whether stock market indices can be predicted by some simple form of technical analysis. Bessembinder and Chan (1995) conclude that the BBL’s rules are successful in predicting stock price movement in Japan, Hong Kong, South Korea, Malaysia, Thailand and Taiwan, with the predictability strongest in the last three markets. Ergul, Holmes and Priestley (1997), using daily closing prices of 63 stocks traded on the Istanbul Stock Exchange, conclude that technical analysis on volume can aid the prediction of returns which cannot be predicted by the analysis of past returns in isolation. Pruitt and White (1998), using the University of Chicago’s CRSP daily data tapes over the 1976-1985 period, conclude that technical trading rules are capable of outperforming a simple buy-and-hold strategy even adjusting for transaction costs. Bessembinder and Chan (1998) confirm the basic BLL results; however, they argue that the BLL results can coexist with the notion of market efficiency when considering transaction costs. Gencay (1998a, 1998b), Ratner and Leal (1999) also support the predictive power of technical trading rules. Kwon and Kish (2002), applying three popular technical trading rules to NYSE index over the period 1962-1996, conclude that the technical trading rules have the potential to capture profit opportunities over various models when compared to buy and hold strategy.  However, in a recent study Ready (2002) points out that the apparent success of the BLL moving average rules is a spurious result of data snooping and need not persist in the future. Technical trading rules have also been applied to foreign exchange markets. For a survey of technical trading on foreign exchange markets, see Taylor and Allen (1992) and Maillet and Michel (2000). In this paper, we investigate whether changes in the South Korean stock market index can be predicted by some form of technical analysis. Secondly, if the South Korean stock market exhibits substantial deviations from random walk hypothesis, can we identify a trading strategy that will beat the buy-and-hold strategy? This paper is structured as follows: section II discusses data and methodology, section III presents empirical results on technical trading rules, section four compares various strategies with the buy-and-hold strategy, and finally section V concludes. We use DataStream’s daily closing price index of the South Korean stock market over the period of January 2, 1991 to June 3oth, 2005 and compute daily returns as changes in logarithms of the stock index level. For daily overnight  interest rate, we have used annual call rate divided by 365 days.


Co-opetition and Strategic Business Alliances in Telecommunications: The Cases of BT, Deutsche Telekom and Telefónica de España

Dr. Raymond Cairo, London School of Economics, United Kingdom



As a relatively new phenomenon compared to other ways of executing an international strategy, Strategic Business Alliances (SBAs) lack the theoretical support that most of their longer-established counterparts enjoy. Yet, the widespread use of SBAs in a large number of manufacturing and service sectors necessitates the development of a theoretical foundation. This paper’s contribution lies in the assessment of the suitability of an established theory in strategic management literature. Nalebuff and Brandenburger’s game theoretical “Co-opetition” has found wide acclaim as a theory that allows for applicability of game theory to strategic issues of business. Whilst the authors had a much wider focus than the specialized subject of SBAs in mind when they developed their theory, we argue that Co-opetition can be an extremely suitable theory to assess deciding developments with regard to a specific phenomenon as SBAs. Thereto, our empirical analysis of deciding developments within major alliances of three European telecommunication operators will be presented. The developments will then serve as input to our assessment of Co-opetition’s suitability as a theory in relation to SBAs. Applying Co-opetition’s PARTS  framework allows us to evaluate our empirical input and determine Co-opetition’s applicability as far as our cases concerns. That evaluation reveals that the theory can contribute in a practical way which is beneficial to corporate management involved in alliances. The occurrence of these contributions warrants our conclusion on Co-opetition’s suitability with regard to SBAs in the telecommunication sector. It also prompts us to propose further testing of the theory in order to include different types of alliances. Such an expansion of Co-opetition’s assessment will not only serve as building blocks in the quest for a more mature  theoretical foundation on alliances but will also be beneficial to those seeking to enhance their understanding of the elusive phenomenon of SBAs from a more practical angle. Compared to exporting, building operations through FDI, traditional joint ventures between Western parents and developing country-affiliates and even compared to M&As, Strategic Business Alliances (SBAs) are a relative newcomer as a strategic option for firms to engage business across their national borders. The relative novelty of this phenomenon leads to a variety of definitions. In our view SBAs are form-free corporate partnerships that refer to the companies’ core area of activities in which the partners maintain their statutory independence. Our definition of SBAs highlights the important feature that partners maintain their statutory independence. This marks a notable difference with mergers or acquisitions and generates a number of specific challenges to management which are absent in the case of unitary hierarchical situations. Besides the definition issue, the lack of applicable theories to the subject is an even greater problem. In this paper an attempt is made to fill some of the existing theoretical lacuna. Much of the practice-oriented literature on alliances relates to such challenges typically through a concentration on the management of risks associated with alliances. Borrowing from the mature and well-developed theoretical legacy of transaction cost, more theory-oriented literature on alliances has promoted the concentration on reducing costs as the prime focus. In our aim to gradually work towards a solid theoretical foundation for alliances we have turned our attention to a game theoretical application that has the potential to incorporate both the reduction of risk and the reduction of cost. We subject Nalebuff and Brandenburger’s Co-opetition to a first time assessment of its applicability as a valid and workable theory with regard to SBAs.  Co-opetition’s approach to business is on the premise that companies’ activities involve two central elements: creating value and capturing value. The former refers to the establishment of new or the enlargement of existing demand and is popularly referred to as “creating the pie” whilst the latter is the dividing up of the pie. Nalebuff and Brandenburger consider creating value as an inherently co-operative process while they see capturing value as inherently competitive. The recognition of these two different processes requires companies to adopt a new Mindset. This Mindset will include the traditional war-like, competitive approach of business but will also need to incorporate a peace-like approach of co-operation. “Co-opetition” is the literal amalgamation of the fusion of competition and co-operation.  Co-opetition has received broad acclaim as a useful way of looking at business and the book’s variations of cases provide ample evidence of the applicability of the “Co-opetition-way” to a wide array of managerial issues. Whilst Nalebuff and Brandenburger’s intended domain for the application of their theory is evidently strategic management in a wider context, the fusion of competition and co-operation is a symptomatic feature of SBAs. What Nalebuff and Brandenburger consider the main structure of business at its macro-level occurs in equal fashion within SBAs on a micro-level: in both cases attempts are made to create value and then divide it or, put differently, compete in some instances and co-operate in others. This detection invites the question whether Co-opetition can, therefore, serve as an adequate theory to analyse occurrences regarding the specific phenomenon of SBAs in an equally successful manner as it has proven to be able to do with business in a far more general sense. 


Outsourcing Operations: A Case of One Machine Tool Manufacturer and its Subcontractor in Taiwan

Nelson N. H. Liao, Chaoyang University of Technology, Taiwan

Tsui Chih Wu, Shih Chien University, Taiwan



The present study samples all employees of a leading machine tool manufacturer and its outsourcing in-plant subcontractor in Taiwan to examine the intricate relation of leadership, teamwork, management control systems and the levels of their influences on product quality and service quality and additionally, which benefits can be created from this subcontracting partnership operation that will benefit both the firm and its subcontractor. The major findings of the study were as follows: (1) Each paired dimensions for leadership, teamwork, management control systems, product quality, and service quality were highly and significantly correlated to each other; (2) The degrees of agreement between the employees of its subcontractor on the dimensions of leadership, teamwork, and management control systems were higher than, and significantly different from, those of the employees of the manufacturer; (3) The highest explanatory power for product quality for the manufacturer was management control systems, but for its subcontractor the highest was leadership; (4) The highest explanatory power for service quality was management control systems both for the manufacturer and its subcontractor; (5) Outsourcing the assembling task to its subcontractor proved to be a significant way for the manufacturer to achieve its competitive advantage and managerial flexibility in the marketplace.  Managing employees has become more and more challenging due to the increasing awareness of liberalization and democratization in Taiwan. Therefore, to reduce running costs and managerial headaches, many firms have switched the burden of managing employees to their outsourcing subcontractors (Polivka and Nardone, 1989). Increasing performance of operational efficiency and effectiveness, indeed an art, offered by a qualified experienced individual who is accountable to a third party that has a code of ethics and is consequently subject to a high quality control level (Lapierre, Filiatrault and Perrien, 1996). In the case of the primary processes of development and production, the subcontractors are often called suppliers. Subcontracting can be defined as having some of the activities of a firm performed by qualified third parties (Berden, Brombacher and Sander, 2000). Supply chain management is the management of material and information flows both in and between facilities, such as between subcontractors and manufacturing or between assembly plants and distribution centers (Thomas and Griffin, 1996). The goal of supply chain management is to reduce costs, risk, and lead-times associated with these transactions, thus releasing value (Hicks, McGovern and Earl, 2000). Team-oriented Assembly (TOA) systems (Bukchin, Darel, and Rubinovitz, 1997) support the objectives of modern assembly systems, while creating a more satisfactory working environment. The objectives of these assembly systems are to enhance quality and flexibility, while satisfying the humanitarian/human needs of the workers.  The machine tool industry is one of the important industries in Central Taiwan, its revenue was approximately USD1.85B in 2001, and its market influences are growing year by year. The present study sampled all employees of a leading machine tool manufacturer and its outsourcing subcontractor in Taiwan. The subcontractor focuses on a critical task, namely assembling the required machine tools for the manufacturer. The objectives of this paper are thus: (1) Investigate which benefits can be created for both the manufacturer and its subcontractor from this type of partnership operation; (2) Investigate the correlations of each paired dimension for leadership, teamwork and management control systems, product quality and service quality; (3) Investigate whether there are perspective gaps of employees between the manufacturer and its subcontractor on organizational features (leadership, teamwork, and management control systems) and effectiveness performances (product quality and service quality); (4) Examine the levels of influence of leadership, teamwork, and management control systems on product quality and service quality both for the manufacturer and its subcontractor.  Leadership can be categorized into two styles, namely task-oriented style and human-oriented style (Halpin and Croft, 1962). Leadership is the ability of superiors to motivate subordinates to work toward achieving goals (Liao and Yen, 2001). A leader’s behavior in terms of production, employees, and change orientation positively relates to effectiveness as well as subordinates’ satisfaction with their leader. Without leadership and clearly defined responsibilities, the team may lose direction. Varying types of responsibilities and leadership may coexist, but their differences must fit well and be appreciated by all team members (Young, 1998). The super leader enacts a strong change and development oriented role while planning and structuring the processes using cooperative and considerate means. By creating a positive and considerate work climate and facilitating the development of the abilities and effectiveness of the employees, the leader contributes to corporate competitiveness (Norrgren and Challer, 1999).


Corporate Boards, Ownership and Agency Costs: Evidence from Australia

Thanh Truong, RMIT University, Australia



This study examines the impact of board characteristics and corporate ownership on agency conflicts between managers and shareholders using a sample of top 500 Australian listed firms. Unlike previous studies such as Ang, Li and Cole (1999), Sigh and Davidson (2003), this study assumes that board characteristics are endogenously determined. Our findings are consistent with Singh and Davidson (2003). Overall results provide some insights into the changes recently emerged in the corporate governance environment in Australia.  Boards of directors exist, independently from management, to ensure that the firm’s managers do not pursue their own interest at the expenses of other stakeholders (Fama 1980; Fama and Jensen 1983; Jensen 1986). This gives the base for policy reformers to formulate corporate governance principles and/or recommendations that have been adopted around the world. For instance Australian Stock Exchange (ASX) Corporate Governance Council released the Principles of Good Corporate Governance and Best Practice Recommendation in March 2003, and in the document, a more “independent and responsible” board is highlighted. Much has been written in media regarding their likely consequences of the implementation for listed firms since the document came in effect in 2004. Some argue that this is just a box-ticking exercise, others believe that Australian firms already have the board superior to most other major countries; the US and UK (Buffini 2003). This provides a good setting for analysis of the likely benefits and costs if a firm choose to comply with the guidelines. This study revisits this line of literature by investigating the effectiveness of the board of directors in mitigating agency conflicts between managers and other stakeholders. A number of studies have suggested that the board varies with both firms specific factors and the institutional environment in which firms operate (Hermalin and Weisbach 2003). This implies that imposing a “one size fits all” board, with majority seats held by outside directors and the roles of the CEO and chairman is split, may be optimal for some but not for others. In addition, the effectiveness of a board as an internal governance mechanism depends on three characteristics – board composition, size and leadership structure (Jensen 1986). However there is much evidence that it is not that board composition that mitigates agency problems and improves firm performance, but rather its size and leadership structure (Bhagat and Black 1999). (1) For instance, consistent with Jensen (1993), Yermack (1996) finds that a smaller board works more effectively. Hermalin and Weisbach (2005) conjecture that the entrenched CEO tends to control the composition of the board and hence lessening the monitoring ability of the board. (2) The focus of these studies has been the direct association between the board and overall firm performance, which Hermalin and Weisbach (2003) argue is theoretically problematic and sometimes may be plagued by complex test procedure (Agrawal and Knoeber 1996).  Corporate ownership (managerial ownership and blockholder ownership) is also identified as a major governance mechanisms that help mitigate agency conflicts (Jensen and Meckling 1976). Despite a great deal of empirical work on this area, (3) Ang, Lin and Cole (1999) (hereforth ACL) is the first attempted to measure the magnitude of agency costs in terms of asset utilisation and operating expenses. Since our sample consists of large publicly traded firms, we do not have a zero-agency cost base case where a firm is fully owner managed. Following Singh and Davidson (2003), the ACL’s absolute level of asset utilisation efficiencies is adopted and the estimate for operating expenses is slightly different. We use a firm’s selling, general and administrative (SG&A) expenses instead of total operating expenses used by the ACL.  This study contributes two additional innovations. First, in carrying out the analysis this study also examines the impact of other governance mechanisms that were often ignored in previous studies. (4) Following Mak and Li (2001), the interaction between corporate ownership (managerial ownership and block ownership) and the board is incorporated. Second, this study employs a data set from an institutional environment (Australia) that is very different from other developed countries such as the US and UK. The literature in this area for Australian firms is not as extensive as that of US firms, and tends to be descriptive (Kiel and Nicholson 2003; Lawrence and Stapledon 1999). Hence, the results generated are important because differences across countries may influence the relation between governance mechanisms and agency conflicts, and hence gaining a better understanding of this relation. This paper is structured as follows. The next section presents theoretical background and empirical studies relating the board, corporate ownership and other governance mechanisms in minimising agency costs. Section 3 describes the sample and data used for analysis. Section 4 explains our methodological approach. Conclusions are presented in Section 5.


Economic Freedom and Inflation Performance: Cross Country Evidence

Dr. Fahim Al-Marhubi, Sultan Qaboos University, Sultanate of Oman



Although the role of economic freedom on investment and economic growth has received considerable attention, its effects on inflation are less well known. The purpose of this paper is to bridge this gap in the literature by analyzing empirically the effect of economic freedom on inflation performance. The results indicate that countries that are freer economically have lower inflation rates, suggesting that the institution of economic freedom is a significant complementary pillar to formal institutions for monetary restraint.Over the past three decades, a distinguished body of empirical literature on the political economy of inflation has emerged offering insights into the deep underlying causes of cross-country differences in inflation outcomes (Alesina et al., 1997; Romer and Romer, 1997; Kirchner, 2001). Instead of focusing on the specifics of policy, as is characteristic of much of traditional theories of inflation, the political economy approach places particular emphasis on the underlying institutions and political economy processes that shape these policy choices - and ultimately determine inflation outcomes. Notable among these institutions are central bank independence, exchange rate regimes, collective bargaining arrangements, and the degree of political instability and social polarization, among others. Surprisingly, the relationship between inflation performance and economic freedom, a critical component of a country’s institutional framework, has not been adequately analyzed as perhaps it should be in view of the empirical evidence that has accumulated supporting the desirable influence of economic freedom on other yardsticks of economic performance (Berggren, 2003). The purpose of this paper is to bridge this gap in the literature by analyzing empirically the effect of economic freedom on inflation performance using a large sample of countries, both developed and developing, in the decades spanning 1970-2000. Understanding the determinants of inflation performance and its link with economic freedom is important for several reasons. First, concern over inflation arises because it is economically and socially costly (Fischer 1986). Inflation and its associated variability have a detrimental effect on economic activity by making economic agents less willing to enter long-term relationships and by reducing the effectiveness of market price signals as indicators of relative scarcity. More recently, numerous empirical studies have documented that inflation and its associated variability entail large real costs to the economy (for citations to the literature, see Fischer et al., 2002). Finally, the question of whether inflation performance is affected by economic freedom is crucial in an era of increased trade and financial liberalization, deregulation, and a widespread reduction on the role of government in many economies. Thus it seems suprising that despite the vigorous debate about the pros and cons of economic freedom and liberalization in countries around the world, little is known conclusively about the relationship between economic freedom and inflation performance. Economic theory does not provide definitive guidance concerning the impact of increased economic freedom on inflation performance. That is, it is hard to find formal models that address this linkage explicitly. Nonetheless, different strands of the political economy literature imply a number of possible channels through which economic freedom could promote low inflation rates. First, the issue of economic freedom and its impact on inflation outcomes may be related to the broader literature on the welfare costs of inflation. According to this literature, inflation imposes welfare costs on a society and that the costs of any given rate of inflation differ depending on its rate, the variability and uncertainty it engenders, whether it is anticipated, and the degree to which contracts and the tax system are indexed (Fisher, 1986). Welfare losses arise because inflation is often associated with greater variability of inflation rates and greater relative price variability, which in turn distort relative prices and interfere with the efficient operation of the price system. This suggests that the costs of a given rate of inflation (and its variability) will be higher, and the incentive to inflate lower, for relatively free economies that place greater reliance on the price system for the allocation of resources. Another channel of influence from economic freedom to inflation performance relates to the modern credibility and time consistency literature elaborated in the seminal papers of Kydland and Prescott (1977) and Barro and Gordon (1983). According to this literature, the existence of distortions (such as imperfect competition, labor market rigidities, and distortionary tax system) that cause the natural level of output to be sub-optimal provide policymakers with an incentive to generate surprise inflation and an output boost. But policy cannot on average be more expansionary than what price and wage setters expect. As a result, the equilibrium rate of inflation will be inefficiently high, but output remains at its natural rate. Greater economic freedom, however, by increasing competition and reducing structural distortions, may relieve political pressure on the central bank to inflate. First, by reducing distortions that cause actual output to deviate from its natural rate, economic freedom may reduce directly policymakers’ incentives to generate surprise inflation. In addition, if greater economic freedom results in making prices more flexible, as suggested by Rogoff (2003), then unanticipated inflation becomes less potent as means of raising output and employment. Under this logic, then, the central bank can more credibly commit to a pre-announced low inflationary monetary policy.


Financial Market Reactions to Monetary Policy and Open Market Operations: The Australian Case

Xinsheng Lu, Monash University, Clayton Campus, Vic., Australia

Yaomin Wu, Monash University, Clayton Campus, Vic., Australia



This paper investigate the reactions of asset prices and return volatility in broader financial markets   to Australian monetary policy announcements and the Reserve Bank’s Open Market Operations (OMOs) with an extended GARCH (1, 1) model. The effects of monetary policy and the open market operations are tested in an integrated model that incorporates announcement effect of the official interest rate target. The empirical results indicate that the Bank’s open market operations have significant contemporaneous impacts on the short-end interest rate spot and futures markets. Significant lagged impacts of OMOs are found for all six spot and futures markets considered in this study. Financial futures markets tend to have stronger reactions to the central bank’s policy stance and domestic market operations. In this paper, we investigate the impact of Open Market Operations (OMOs) conducted by Reserve Bank of Australia (RBA) on interest rate and foreign exchange markets. We examine the influence of the Reserve Bank’s domestic market operations on asset returns volatility through an extended GARCH (1, 1) model. The effects of the Reserve Bank’s open market operations are examined in a model that incorporates announcement effect of the official cash interest rate target. The investigation deals with six markets: 90-day Bank Acceptable Bill (BAB) spot and futures markets, 3–year bond spot and futures markets and the AUD/USD spot and futures markets. The RBA manages the economy and influences financial markets by manipulating the short-term interest rate, or the overnight cash rate in Australian money market. The Reserve Bank has the ability to influence the availability and the ‘price’ of the short-term cash fund supply in the money market, and hence has the power to maintain or change the cash rate whenever necessary. The Central Bank’s policy objectives are realized mainly through its daily OMOs. The Reserve Bank Board set an appropriate target for the official interest rate level and the Domestic Markets Department of the RBA has the daily task of maintaining conditions in the money market in order to keep the cash rate at or near the operating target decided by the Board.  The primary target of the central bank’s OMOs, by its original policy design, is to influence the level of the official interest rate. This target is reached through the RBA’s two types of market operations, cash fund add and cash fund drain transactions. The former operation involves the RBA’s daily purchase of government securities issued either by the commonwealth or state government so as to add cash liquidity in the banking system. The latter operation involves the RBA’s selling off government securities so as to drain cash from the banking system. On days when monetary policy is being changed, market operations are aimed at bringing the cash rate to the new target level, while between changes in policy, the focus of market operations is on keeping the cash rate close to the target, by managing the supply of funds available to banks in the money market. The objective of these OMO transactions is therefore to balance the supply and demand in the cash market at the desired cash rate.  This paper examines the impact of Open Market Operations on interest rate and foreign exchange rate spot and futures markets. We examine the influence of the Reserve Bank’s domestic market operations on asset returns volatility through an extended GARCH model. The effect of the Bank’s OMOs is examined in a model that incorporates announcement effect of the official cash interest rate target. The investigation deals with six markets: 90-day Bank Accepted Bill (BAB) spot and futures markets, 3–year bond spot and futures markets and the Australian Dollar/US Dollar spot and futures markets. There is only a small literature on the impact of central banks’ OMOs on financial markets. Harvey and Huang (2002) examined the impact of the Federal Reserve Bank’s OMOs on return volatility and trading patterns of the U.S. interest rate and foreign exchange rate futures markets. They tested a particular historical time between 1982 and 1988, and provided some insights into the impact of the Federal Reserve Bank’s market operations on both fixed income instruments and foreign exchange markets. Their study finds a dramatic increase in volatility during the Fed announcement time, consistent with the fact that the markets try to infer the central bank’s policy implications with uncertainty as to the Banks’ behaviours and policy intentions. However, their results also provide some evidence of higher volatilities on days when there are no OMOs, suggesting that higher volatilities are not necessarily dependent of whether the Fed actually trades in the markets, and that the conduct of OMO might act so as to smooth market expectations.  Harvey and Huang (2002) also indicate that, when the central bank keeps its policy intention highly secret, the effects of the central bank’s OMOs are limited since they cause confusion among market participants as a result of their inability to identify the policy intentions and the implications of open market operations.  This calls for further examination of the impacts of OMOs, using new data that relates to more transparent monetary policy change. Here we examine the impact of the Australian Reserve Bank’s OMOs, with a first-time released data set for a period from 2000 to 2004.


The Corporation Tax applied in the Member States of the European Union: The Case of Spain

Dr. Maria Luisa Fernandez de Soto Blass, San Pablo-CEU University, Madrid, Spain



 Unlike indirect taxes, the EC Treaty does not specifically call for direct taxes, income and corporate taxes, to be harmonised. However, article 94 of the EC Treaty provides for approximation of such laws, regulations or administrative provisions of the Member States as directly affect the establishment or functioning of the common market. In any event, national tax rules must respect the fundamental freedoms provided for the EC Treaty. The following text summarises a consolidation of existing directives in this field.  The present paper introduces new figures and formulas never seen before at book of taxes, analyses the concept of the corporation tax., makes a brief approach to the history of the tax in the European Union, studies the elements of this tax in Spain as the beneficiary, taxable person, territoriality, basis of assessment, exemptions, explains the basic mechanism of the tax, deductions, the taxable base, the tax rates, collections and examples.  This paper is the result of three researches that the author is carrying out at The Institute for Fiscal Studies, Ministry of Economy and Finance, Spain, University of San Pablo-CEU, Madrid, Spain, from 2003 to 2006, and at University of Leeds, United Kingdom, from 1st July to 1st September of 2004, 2005 and 2006 that is going to continue at the same time and place.


Manufacturing Innovations: Case of Croatia

Jasna Prester,  University of Zagreb, Croatia

Najla Podrug, University of Zagreb, Croatia



 In cooperation with Frauenhofer Institute, Graduate School of Economics and Business Zagreb and Faculty of Electrical Engineering, Mechanical Engineering and Naval Architecture (University of Split) conducted a survey with aim of collecting in-depth information about the innovativeness of Croatian manufacturing companies. The research is part of a broader project on European level and survey targets are discontinuous piece manufacturing companies with 20 or more employees.  The paper analyses the main domains where innovations in Croatian companies take place. Since the minority of Croatian companies have the privilege to finance innovation through self investment, authors identify locations in which Croatian government should intervene with incentive loans in order to enable innovation and help Croatian companies to compete on equal level in EU.  The aim is to identify gaps between innovation practices in Croatian companies to those prescribed by theory. Which modernization efforts have been done is examined as well as the changes in product specifications within last two years. The results for Croatian manufacturing companies are compared with the latest prescribed technology in field of “operations management” and other comparative studies.  Furthermore, the paper analyses increase in  financial performance as a result of investing in modernization and innovation. The side effects of modernization, for example the decrease in employment, are also investigated. Based on survey results, prescriptions are provided for manufacturing innovations in Croatia. 


When Does Corporate Governance Add Value?

Hsiu-I Ting, National Kaohsiung First University of Science and Technology, Taiwan (R.O.C.)



 This paper examined when corporate governance added firm’s value.  Using sample of TSE-listed companies from 1992 to 2002, this paper endorsed the positive effect of corporate governance on firm performance.  Different from the previous studies, this paper concluded that the corporate governance effect performed better under poor economic conditions, higher agency costs, and complicated firm structure.  Furthermore, corporate governance mechanism could work effectively when the executives realize the importance of the corporate governance.  Recent research shed light on the importance of corporate governance in emerging markets. La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998 and 2000) demonstrated that, across countries, corporate governance is an important factor in financial market development and firm value.  There are good reasons to think that the effectiveness of corporate governance might be different based on different situations.  First, economic cycle could be an important factor that contributes to the effectiveness of corporate governance.  Several studies examined a link between corporate governance and firm value during East Asian financial crisis of 1997-1998.  Mitton (2002) indicated that stronger corporate governance was especially important during extreme economic distress.  Lemmon and Lins (2003) also adopted a sample during the East Asian financial crisis.  The authors showed that cumulative stock returns of firms in which managers and their families separate their control and cash flow rights through pyramid ownership structures are lower by 12 percentage points compared to those of other firms.


Compensation Management in Croatian Enterprises: An Empirical Study

Lovorka Galetic, Ph.D. and Ivana Nacinovic, University of Zagreb, Croatia



 Compensation management is an important factor for attaining higher labor effectiveness, thus also improving competitive abilities of an enterprise. To determine the state of compensation management in Croatia we conducted at the end of 2004 an extensive research in 63 Croatian enterprises. The results of the research have been analyzed with the purpose to determine whether salary represents an important motive for higher work engagement, to see whether Croatian enterprises develop compensation strategy and adequately formulate compensation system and to determine objectives that enterprises want to achieve with the compensation system. Do Croatian enterprises use more fixed or incentive salaries and do they apply group incentive plans such as profit sharing, gain sharing, stock options, ESOP etc.? As well, we examined if performance appraisal is used in Croatian enterprises and does the compensation strategy in Croatian enterprises bring to creation of the competitive advantage? All results have been analyzed from the aspect of the small, medium and large enterprises with the purpose to support the main hypothesis of this paper that “large enterprises have implemented a more developed, complex and elaborated compensation system than small and medium ones”.  Croatian economy faced significant changes in the last 15 years – transition from central planned to market economy along with separation from former Yugoslavia and creation of a separate state. Nevertheless, in the beginning of 1990’s Croatian enterprises were at a high level of economic development for that time with long tradition and present at developed international markets. Unfortunately, the war that occurred in Croatia (1990-1995) and poorly performed privatization starting from 1996 caused huge drawbacks for Croatian enterprises. Although companies even prior to imposed changes did not have fully implemented modern compensation management standards, in restructurings that occurred within the companies compensation management became one of the most neglected areas in enterprises. Along with privatization, reasons for this disappointing state include high unemployment rate - 18,3% of registered unemployment rate (Croatian bureau of statistics, 2006), numerous organizational restructuring processes in all areas of the company and labor market inefficiency.


Procedural and Distributive Justice: Differential Effects on Employees’ Work Outcomes

Dr. Sarminah Samad, Universiti Teknologi Mara, Malaysia



 This paper presents the findings of a study, which examined the differential effects of procedural and distributive justice on employees’ work outcomes (organizational commitment and job satisfaction). The sample consisted of 500 manufacturing employees in the electronic and electrical manufacturing industries in Malaysia. The results hypothesized that procedural and distributive justice perceptions were positively related to organizational commitment and job satisfaction. Both procedural justice and distributive justice made significant effect on employees’ organizational commitment and job satisfaction. The results revealed that distributive justice had more effects on both job satisfaction and organizational commitment than procedural justice. Findings and implications for managerial practices in the study were discussed and put forwardThrough the past several decades of empirical research in organizational behavior and other related fields, a great deal of literature has documented the antecedents of employees’ work outcomes mainly job satisfaction and organizational commitment in work organization.  Expanding on these studies numerous empirical studies in literature reviews have shown many different variables that affect employees’ work outcomes. This study narrowed these variables down to organizational justice focusing on procedural justice and distributive justice factors. The rational of this study was due to most of the previous research on employee’s work outcomes and organizational justice, has been carried out among managerial and professional level of employees. Little is known about the effects of procedural justice and distributive justice on employee’s work outcomes in terms job satisfaction and organizational commitment particularly among lower level of employees in electrical and electronic manufacturing industries in Malaysia. This group of employees has played a significant role to the Malaysian economy growth. Manufacturing sector has also contributed significantly to the Malaysian Gross Domestic Product (GDP) and total export products.


Impact of Exchange Rate on Foreign Private Investment in Nigeria

Salami O. Adeleke, Ph.D., Adekunle Ajasin University, Akungba Akoko

Olayinka A. Esuola, Adekunle Ajasin University, Akungba Akoko



 Nigeria in the last few years has been clamoring for Foreign Investment in the country. This believed to be a facilitator to economic growth and development, which is believed to lead to industrialization of the economy in the long run. Foreign Investment is known to play an important role in the future as a source of capital, managerial expertise and technology for both the developing economies and economies in transition. Foreign Investment performance is based on certain factors that determine its flow. This study is focused at seeing the relevance of Exchange Rates on Foreign Private Investment In Nigeria.  Augumented Dickey - Fuller (ADF) unit root test statistics was used on the series for the model to check their stationarity of exchange rate and other relevant variables after which it was estimated. Times series data from period 1970 to 2001 was used for the analysis.  It was discovered after estimation that Exchange rate is the most important variable that affects Private Foreign Investment in Nigeria of all the other macroeconomic variables such as interest rates, inflation rate and Gross Domestic Product used in this study.  Exchange rate was recommended to be more market responsive, inflation rate should be pursued to single digit and there should be more generous incentives for foreign direct investment in the country.  According to Krishna (2003), Foreign Private Investment can be classified as Foreign Direct Investment (FDI) and Foreign Portfolio Investment (PFI). FDI is an investment in real assets where real assets consist of physical things such as factories, land, capital goods, infrastructure and inventories. The Multinational Corporations (MNCs) is chief source of DFI. This may come in both joint ventures as well as fully owned subsidiaries. Whereas, international investment in financial assets such as shares, debentures and bonds are called PFI (Foreign Portfolio Investment).


Factors Influencing Individual Investor Behavior:  An Empirical study of the UAE Financial Markets

Dr. Hussein A. Hassan Al-Tamimi, University of Sharjah, United Arab Emirates



 The paper aims at identifying factors influencing the UAE investor behavior. This paper develops a modified questionnaire. The questionnaire included thirty four items that belonged the five categories, namely self-image/ firm-image coincidence; accounting information; neutral information; advocate recommendation; and personal financial needs.  Six factors were found the most influencing factors on the UAE investor behavior. The most  influencing factor was by order of importance: expected corporate earnings, get rich quick, stock marketability, past performance of the firm’s stock, government holdings and the creation of the organized financial  markets. On the other hand, five factors were found the least influencing factors on the UAE investor behavior. The least  influencing factor was by order of importance: expected losses in other local investments, minimizing risk, expected losses in  international financial markets, , family member opinions,   gut feeling on the economy. Two factors had unexpectedly least influence on the behavior of the UAE investors behavior, namely the religious reasons and  the factor  of family member opinions.  Research in behavioral finance is relatively new. Within behavioral finance it is assumed that information structure and the characteristics of market participants systematically influence individuals’ investment decisions as well as market outcomes. According to behavioral finance, investor market behavior derives from psychological principles of decision making, to explain why people buy or sell the stocks. Behavioral finance focuses upon how investors interpret and act on information to make investment decisions. In addition, the behavioral finance  places an emphasis upon investor behavior leading to various market anomalies.


Quality Management through Human Resources: An Integrated Approach to Performance Improvement

M. Akdere, University of Wisconsin-Milwaukee, Milwaukee, WI



 Quality management has become one of the methods to improve quality of products and services and increase organizational productivity and performance across industries around the world. Furthermore, Human Resources professionals and researchers have been focusing on the ways to integrate quality management as a core and strategic business process. This paper provides an overview on quality management through Human Resources and presents its implications for performance improvement.  The challenge of becoming a strategic partner and participating in the strategic planning of an organization has been significant for Human Resources (HR) scholars and practitioners as a way to help the organization gain a competitive advantage. In many HR departments, strategic partnering has become one of the goals of the overall HR function and serves as a source of motivation and rationale for HR’s bottom line contribution to organizational performance. This is not unique to U.S.-based organizations but is the case for many organizations in developed and developing countries. In their annual reports, most organizations state that their people—employees—are their most important assets (Barney & Wright, 1998). However, a major challenge for the field of HR involves finding ways to effectively and efficiently utilize organizations’ human capital.


A Model for an Internet-Based International Resource Center

Dr. Gail Kellersberger, University of Houston-Downtown, Houston, TX

Dr. Shohreh Hashemi, University of Houston-Downtown, Houston, TX



 This paper introduces a creative model for an Internet-based international resource center (IRC) that provides a medium for knowledge exchanges in a variety of fields and presents a forum for cross-cultural exchanges and collaboration, both locally and globally.  This IRC, as a repository for a wide variety of media and information, can be a worldwide conduit for eradicating the existing boundaries among cultures.  The IRC, which can contain public and private features, can offer different kinds of user-friendly experience, anything from a simple read to an intriguing self-test or survey with immediate feedback, from a posted message on a bulletin board to a full chat room exchange.  It can also be used to establish outreach to academicians and businesses around the globe.   The IRC’s modular design and implementation allows both for continuous enhancements and planned growth.  Our model offers immediate use, yet allows for evolution and creativity in the hands of various developers – it is collaboration in the making.  We recommend this model to any campus interested in developing a hub of “matters international” without dedicating hefty funding for the privilege.  In a flat world where individuals have to communicate and compete on a global level, there is an urgent need for cross cultural awareness and sensitivity to the values and practices of other nationalities and cultures.  Unfortunately, U.S. international illiteracy is an accepted fact, and more than one expert has bemoaned American ignorance in a dangerous world (Sovern, 1989).  Studies have been undertaken to identify and meet U.S. national security needs, as well as the needs of international business and trade, in the area of foreign languages and international studies (Burn, 1980) and this move toward internationalization is clearly demonstrated in the recent National Security Language Initiative (NSLI) of the U.S. government which cites the lack of Americans who speak other languages fluently and aims to redress that deficiency (Powell and Lowenkron, 2006).


The Drivers of Corporate Social Responsibility: A Critical Review

Dr. Matthew Haigh, University of Amsterdam

Dr. Marc T. Jones, Ashridge Business School



 The paper criticises the dominant discourse of corporate social responsibility (CSR) by examining six sets of factors conventionally considered as promoting outcomes consistent with core principles of social responsibility: intra-organizational factors, competitive dynamics, institutional investors, end-consumers, government regulators and non-governmental organizations.  Each factor is addressed conceptually, empirically, and with respect to its likely future significance in promoting outcomes consistent with CSR.  Our overall conclusions are not promising on any of these dimensions.   Business ethicists borrow from the works of such as Thomas Hobbes, John Locke and Jean-Jacques Rousseau to assert that normative obligations on the firm imposed by the social contract require constructive responses to the needs of owner and non-owner groups (Palmer, 2001).  Ethics and responsibility are most often unreflexively presented as atomised problems for individual decision-makers in the firm, solvable through straightforward application of logical rules and codes of conduct.  Relevant definitions of responsibility are narrow: “issues of corporate responsibility are of smaller scope than the ethical foundations of capitalism” (Goodpaster, 1983, p. 3).  Ethical questions are restricted to external corporate effects such as the means of production, in which relevant questions are held to arise in places such as stockholder and consumer protection and occupational health and safety.  Exemplary behaviour is encoded in governance guidelines emanating from organisations such as stock exchanges. 


The Development of a Menu

José Villacís, Ph.D., Universidad San Pablo, Madrid, Spain



 The consumer rationally looks for the highest utility being guided by the instinct of getting pleasure. This has been the starting point and the conclusion of all the theories dealing with the theory of consumption. Discarding the analysis of utility measurement, all theories analyzed how the individual looked for utility maximization to the limit. This paper shows that the only and best way to achieve such maximization is to look for the combination (not the group) of goods allowing for behavior optimization. This point of view, that must be the first one, comes from the combinatorial mathematics theory. The phases of economic activities that end in obtaining utility are, at a first stage, the choice of goods in two ways: diversity and quantity. The combinatorial order of consumption or creation of the menu will be established. The combinatorial theory that establishes menus takes place at the second stage. A disorganized, non entropic world can be established where individuals do not know their preferences and cannot create their own combinatorial menus. Economic individuals are enemies of pure, non compensating risk and, therefore, will prefer the advantages in the choice to obtain the best menu to the adventure of risk without reward.


Examining the Effects of SARS on the Risk Profile of Airline Stocks

Dr. Elaine Loh, University of Adelaide, South Australia



 This paper examines the effects of SARS on the risk profile of various airline stocks listed at the stock exchanges of Canada, China, Hong Kong, Singapore and Thailand – a partial set of nations affected by the disease in 2003.  The analysis was conducted via a three-stage methodology to examine the impact of SARS on the total risk (volatilities) of airline stocks, the systematic risk component of the stocks and the ratio of systematic risk to total risk associated with the airline stocks.  Our results indicate that airline stocks had a tendency to become more volatile and were also more likely to adopt an “aggressive” nature in the wake of SARS, although formal structural break tests provided no evidence to suggest a structural break in the systematic risk component of airline stocks.  The impact of SARS on the ratio of systematic to the total risk of airline stocks was, however, ambiguous.  The increase in total risk was explained primarily by either a rise in systematic or idiosyncratic risk, depending on the airline stock under consideration.   Severe acute respiratory syndrome, or SARS, was first reported in Asia in February 2003.  Over the next few months, the disease spread to more than twenty countries in North America, South America, Europe and Asia before the global outbreak was contained.  Since SARS spreads easily between humans and is associated with significant mortality rates, the outbreak of SARS was especially detrimental on transport-related industries such as tourism and airlines.  Harbison (2003), for instance, notes that passenger traffic decreased by 5.6 percent at the peak of SARS in March 2003 and that some airlines operating in the Asia Pacific region were forced to defer orders and engage in staff outlays to decrease expenditures.  Declining profits and reductions in international demand for air travel services was also reported in several media sources (BBC, 2003; Sydney Morning Herald, 2003).  Despite the vigorous discussion on the damaging effects of SARS on airline services operators, no attempt has been made to investigate the impact of SARS on airline stocks using robust econometric methods.  This study therefore attempts to fill this gap in the literature.


Economic Development in Nakhchivan: Role of Entrepreneurship Centers

Jamaluddin Husain, Purdue University Calumet

Zafreen Husain, Entrepreneurship Development Foundation, Inc.



 This paper discusses the need for and the role of an Entrepreneurship Center under the auspices of the Nakhchivan State University in Azerbaijan. It outlines the pre-requisites that have to be satisfied before an E-Center can be successfully established. The paper then recommends what should be the E-Center’s initial objectives and functions. It also lists the roles that the different collaborating agencies/partners need to play in order to allow the E-Center to have the desired impact on the region’s economy.   At the macro level, economic development is regarded as the sustained increase in the economic standard of living of a country’s population. Generally, an increase in the country’s production, measured by gross domestic product (GDP), complemented by positive macroeconomic indicators such as the stabilization of inflation, increased inflows of foreign investment, higher levels of international reserves and a strong exchange rate, are indicators of economic growth.  On the micro level, alternatively, economic development is characterized by an individual’s increased ability to generate income, which may be the result of increased physical and human capacity by means of formal training to further skills and competence or improvements in technology.


Using Mystery Shoppers as a Benchmarking Tool to Compare Quality of Banking Services: A Study of Turkish Banks

Zeliha Eser, Baskent University, Ankara, Turkey

Musa Pinar, Valparaiso University,Valparaiso, IN

Ibrahim Birkan, Baskent University, Ankara, Turkey

Henry L. Crouch, Pittsburg State University, Pittsburg, KS



 This paper examines the quality of bank services in Turkey. Specifically, utilizing mystery (secret) shopper as a benchmarking technique, the study compares the quality of services offered by state banks, private banks, and foreign banks to identify the strong and weak service quality areas. The results indicate that all the banks collectively were offering an above average quality of service. Using the overall mean as a benchmark, it seems that the banks are providing fairly good service in each area except in building rapport and greeting and closing. Comparisons of the service quality by three types of banks show that state banks offer lower quality service than private banks and foreign banks, whereas private and foreign banks offer similar quality banking services. The paper also discusses the implications of the findings and the limitations of the study.  In today’s global economy, consumers have more choices and a wide variety of alternative banking services. A major challenge for banks in this dynamic market is to understand how a customer decides which bank to choose when most of the banks offer similar products and services, such as free checking, phone access, and on-line and/or mobile banking. According to Stickler (2001), two things that can differentiate one bank from another and attract the customer are (1) customer service and (2) how the banks present and sell their products and services. Customers tend to go where they are made to feel welcome and where they are offered the best quality service (Stickler, 2001).


Bringing Practicality and Theory Together. The Case of Importing Current Practical Examples to Support the Theory of Teaching Project Management

Dr. Jan Meyer (PrM), Monash University, South Africa



 An area of concern in most academic work is based on the practical relatedness of the subject matter. By this is meant that the student is to understand the theory of the subject matter based on practical cases as is experienced in the private and public domain. This way the theory will make more sense and the applicability of this theory in their way forward and in practice will make more sense. This does not imply that the current structure for example of lectures and tutorials must change but merely the method in which the work is presented. The author of this paper utilised the method of Participatory Action Research (PAR) to address the situation.  Participatory Action Research addresses the problem identified by the researcher in a real time mode. This implies that the identified problem is corrected and again evaluated and validated as it occurs. The author had identified the need for this practicality orientation in his field of teaching Project Management subjects (the concern) and had the opportunity to correct these shortcomings by applying participatory action research (PAR) in his field.  The aim of this project was to attain a practice based project management course. This is to be addressed in three phases with the aim of phase 1 centred on electronic searches. Phase 2 was to incorporate guest lectures from public and private enterprises on project planning and management. Phase 3 is to have as its aim site visits to places which have active projects or managing large projects and duplicate the planning and managing process.


Regional Inequalities and Effectiveness of Investment: Russia and China in the Period 1999-2003

Dr. Andrey Belov, Fukui Prefectural University, Japan



 This paper is focused on the dynamics, scale and consequences of territorial differences in Russia. The dynamics are analyzed for the five years from 1999 to 2003. In that period, most Russian regions turned from depression to growth, but a highly uneven territorial distribution of benefits had raised concerns about the sustainability of post-crisis recovery. The scale of Russian territorial differences is contrasted with China. A cross-country comparison provides both a measure of spatial inequalities and information on possible regional development policies. The consequences are related to mechanisms which translate inequalities within a country into the inefficient allocation of resources negatively influencing overall efficiency and growth. Statistical analysis suggests that in Russia, investments tend to concentrate in regions with a higher per capita GDP rather than in those with better investment performance. Such distribution could be considered as a case of capital market imperfection, which poses serious binding concerns on regional development and needs to be addressed by the government.   This analysis employs a set of data which generally reflects an inequality of outcome between regions. At the same time, the primary focus is on inequality of opportunity, resulting from an uneven distribution of power and wealth. This approach mirrors the recent “Equity and Development” report by the World Bank (World Bank, 2005). Special attention is given to the effects of unequal opportunities when markets are imperfect. For instance, if capital markets work imperfectly, as they do in many countries, the allocation of resources can be more closely associated with the distribution of assets and status rather than with the profitability of investments. The resultant underinvestment by those who have high potential but lack money and power, and vice versa, can harm the effectiveness of allocation and slow down overall growth. The same concept is used in this paper to analyze a correlation between regional investments and gross output and to answer why spatial inequality matters and how it influence Russian economic development. 


Benchmarking of General Hospitals to Improve Financial Performance

Nermin Ozgulbas, Ph.D., Baskent University, Turkey

Ali Serhan Koyuncugil, M. Sc., Capital Markets Board of Turkey, Turkey



 The aim of this study is to determine the relation between service provision type of hospitals and financial performance thereof, and to carry out financial benchmarking to improve level of financial performance. To this end, the study covered 559 hospitals, which are Revolving Fund Enterprises associated with the Ministry of Health. Data used in the study was obtained from Directorate General of Treatment Services of the Ministry of Health.  According to results of the study it was found that 38.46% of the covered hospitals (215) had good financial performance and 61.54% thereof (344 hospitals) had bad financial performance.  It was also determined that there was statistically significant relation between service provision type and financial performance, and that specialty hospital may take general hospitals as example. Based on those results, such financial ratios or indicators as liquidity, activities, equity, and profit ratio of financially good performer and bad performer hospitals were undergone statistical analysis to specify the strategies to be followed by specialty hospitals when taking general hospitals as an example, and recommendations were developed if there were statistically significant difference among such financial ratios or indicators.  Financial performance ultimately defines how well a company is performing but not necessarily why it’s performing that way. Benchmarking can answer that question as organizations compare processes and identify performance gaps and areas for improvement (Powers, 2004). Financial benchmarking is a tool commonly used for comparing financial performance of competing companies. 


An Application of Fuzzy Logic to Explain Hurricane Evacuation Behavior

Dr. Tufan Tiglioglu, Alvernia College, Reading, PA



 Evacuation is a traffic management strategy.  Estimating evacuation participation rate for each census block group is crucial to implement “phased evacuation.”  Implementation of phased evacuation will minimize “shadow evacuations” and reduce clearance time because getting the people at high risk out is the key for preventing traffic chaos.  This study provides a methodology to assess evacuation participation rate for each census block group for Corpus Christi, Texas.  Therefore, traffic demand and loading time for each group can be estimated under different hurricane scenarios and clearance time can be calculated more accurately.  The classical approach to phased evacuation is based on discrete risk zones designed according to the Saffir-Simpson Scale and thus does not consider individuals’ risk assessments and decision-making criteria.  This is the main problem for unsuccessful evacuations and also for excessive clearance times.  The WTE model developed in this study will provide a coherent and clear strategy for estimating evacuation participation rates for each census block under a variety of hurricane scenarios.  I estimate the willingness to evacuate (WTE) to measure valuable evacuation information regarding population at-risk and the number of vehicles likely participating in an evacuation for Corpus Christi, Texas.  The WTE model provides a risk map for the area under a hurricane threat by assessing risk factors for each census block.  Since location is the key element for people to assess risk under a hurricane threat, two census block groups are used to distinguish the evacuation response for different locations under the same hurricane threat scenario.


Takeover Rumor and Merger Premium

Khalil M. Torabzadeh, University of Lethbridge, Alberta, Canada



 This study investigates the association between the takeover rumor and the premium involved in bank acquisitions.  The study investigates a total of 512 acquisitions from 1993 to 2003.  The results indicate that those target banks subject to prior takeover rumors as published in the Wall Street Journal receive about 3 percent higher premium compared to their counterparts with no prior takeover rumors.  The study also finds that the premium becomes smaller in acquisitions involving larger target banks.  Other variables which significantly and positively affect the size of premium include return on assets, non-performing assets, and method of payment.  While rumor has a major and traceable social effect, its economic role has not been received widespread attention in the financial economics literature.  An early study of the economic property of rumor relates to the work of Rose (1951) who investigates the effect of rumor on the stock prices of a sample of US firms between 1937 and 1938 and between 1948 and 1949.  Rose devices a measurable index of rumor named the “factor of stickiness” to evaluate the role of rumor in stock price run-up.  His findings support the hypothesis that if rumor affects the stock market, it will do so by creating “a unidirectional trend” over a short period of time.  Two recent Studies by Pound and Zeckhauser (1990) and Zivney, Bertin, and Torabzadeh (1996) address the economic role of rumor in the market for corporate control.  They provide evidence of the market moving power of the takeover rumors.  Both studies find that stock prices of firms subject of takeover rumors tend to increase surrounding the published rumor dates (1).


The Performance of Malaysian Equity Funds

Mohammad Badri Rozali and Fikriyah Abdullah, Universiti Utara Malaysia, Kedah, Malaysia



 This paper aims to empirically examine the performance of Malaysian equity funds based on the specific types of funds, namely growth funds, income funds and balance funds.  Using a sample of 102 unit trust funds for the period from January 1995 to December 2004, the study analyzes the funds’ risk-adjusted performance, security selection skills and market timing abilities of fund managers, and the level of diversification achieved by these funds. The findings show that all types of funds outperform the market portfolio and there are no significant differences in the performance of all funds. The study provides evidence of inferior security selection skills and poor market timing abilities among unit trust fund managers. The degree of diversification of all types of funds is significantly low and below expectation.   The Malaysian unit trust industry began in 1959 and has since gradually evolved to play a pivotal role in the development of Malaysian capital market. Over a short history of slightly more than four decades, the period from 1992 to 1996 witnessed the fastest industry growth in terms of the number of unit trust management companies (UTMCs) established and the number of unit trust funds launched.  The UTMCs grew from 13 to 30 while the unit trust funds almost doubled from 40 to 77. As the institutional and regulatory framework for unit trusts became more established in the late 1990s, the range of products broadened considerably. The Capital Market Master Plan, launched by the Securities Commission in 2001, paved the way for the proliferation and progressive development of unit trust industry.  Several revisions to the Securities Commission’s Guidelines on Unit Trust Funds have brought about higher compliance standards and modernized the industry’s regulatory framework as well as provided greater


Development of the IT market in the Russian Regions: Case of Moscow, St. Petersburg and Novosibirsk

Yana Selioukova, MSc., Lappeenranta University of Technology, Finland



 The sharp devaluation of the national currency in Russia in 1998 delivered a stronger than expected boost to the Russian economy. The gross domestic product (GDP) that had continuously fallen since 1990 started to rise in 1999. High world oil prices have also helped to sustain this recovery. These trends, along with a renewed government effort to advance structural reforms, have bolstered business and investor confidence in Russia's economic prospects. It is unlikely that oil prices will fall in the immediate future, which means that economic stability in Russia should not suffer. However, the current export structure (the exports of oil and natural resources make up 80 % of all exports) is rather dangerous because Russia’s economy is now more dependent than before on the international commodities markets. It is necessary for Russia to develop other sectors of its economy to increase the competitiveness of the country. Therefore, the growing information technologies (IT) sector will play an increasingly important role in the future of Russia’s economy. This paper looks at the development of IT market in various regions of Russia by studying the country’s three biggest cities, Moscow, St. Petersburg and Novosibirsk. Historically, these cities have been centers of research and development and the homes to large numbers of scientific institutions. Nowadays, these same cities have become the most developed in Russia in terms of the number of IT companies based in them.


Is There a Specific Measure for Financial Performance of SMEs?

Ali Serhan Koyuncugil, M. Sc. Capital Markets Board of Turkey, Turkey

Nermin Ozgulbas, Ph.D., Baskent University, Turkey



 The objective of this study is to obtain a specific measure for financial performance of the small and medium enterprises (SMEs) listed in the Istanbul Stock Exchange, which is the current capital market of Turkey. CHAID Decision Tree Algorithms, one of the most efficient and up-to-date data mining methods were used for determining the segmentation and then measure in the study. Data of covered firms (135 firms) was obtained from financial statements published on web pages of the Istanbul Stock Exchange. The 2004 data was used in the study. SMEs were categorized into 4 different profiles in terms of level of financial performance by CHAID method. As required under CHAID method SMEs profiling is based on return on equity, which has the strongest relation with the financial performance (p=0.000). At the end of study it was determined that Return on Equity (ROE) can be used as a performance measure for SMEs.  Also, it was finned that financial performances of 41.48 percent (56 firms) of the covered SMEs were good whereas 58.52 percent (79 firms) of them have bad financial performance. In addition, it was determined that the best performer SMEs were from the 3rd profile which have ROE between 0.04 and 0.22.


What ‘Technical Change’ Really is in a Disaggregate Production Function

 Dr. Camilla Josephson, London School of Economics, Houghton Street, London



 This paper identifies causes of the biases in the Solow (1957) measurement of  ‘technical change’ that has not been recognized before. Data on the Swedish manufacturing industry is disaggregated into separate data sets for labour-intensive, capital-intensive and knowledge-intensive industries.  Hypotheses on steady state relations between the Solow residual and other variables suggested in the growth literature – such as machinery investments, human capital and economies of scale –  is tested in a cointegrated VAR model. The α coefficients for speed of adjustment reveal the importance of each source. The main findings are that the biases for ‘technical change’ are firmly connected to what is  produced and what technology is used, therefore the causes for TFP growth  can be outlined in much greater detail when disaggregating the data before carrying out the empirical analysis. TFP or ‘technical change’ is pinpointed as different  sorts of knowledge accumulating mechanisms in different industries, such as learning-by-doing, embodied technological change, increased  relative numbers of workers in technology based R&D, or an increased relative number of employees in sales and organisational based R&D.


A Period Study of Short-Term Performance Pressures: Case of the British Biotechnology Industry

Dr. Angathevar Baskaran, Dr. Jatin Pancholi, and Firoozeh Ghaffari, Middlesex University, London, UK



 Since early 1990s, a number of studies argued that short-term performance pressures have deterred firms from investing in R&D, innovation, and training.  Nearly all these studies focused on the failure of firms to invest substantially in long-term assets such as R&D. In contrast this paper focuses on the experiences of R&D intensive firms. This paper is a study of short-term performance pressures on selected biotechnology firms in the UK.  Since early 1990s, there has been increasing interest in studying ‘short-termism’, that is, pressures on firms to achieve short-term gains at the expense of long-term prospects (e.g. Marsh, 1990; Ball, 1991; Williams, 1991; Demirag, 1998; Grinyer et al., 1998; Marston and Craven, 1998; Groot, 1998; and Demirag, ed., 1998 ).   Particularly in recent years, it has been argued that short-term performance pressures from capital market on managers and their operations have affected the long-term investment in intangible assets such as R&D, innovation, education and training (Demirag, 1998; Marston and Craven, 1998; and Demirag, ed., 1998).    This argument was mainly based on experiences of firms that failed to invest substantially in R&D and other long-term intangible assets.  There appears to be little or no attempt to explore the nature and influence of short-term performance pressures on firms that are R&D intensive, particularly, the impact on management decisions in small and medium R&D intensive firms. Therefore, this study analyses the impact of short term performance pressures on small and medium Bio-pharmaceutical firms in the UK, which tend to invest significantly in R&D. Small and medium biotechnology firms offer interesting cases to investigate the presence of short-term pressures, as they are considered as big-science firms with high R&D investment and many of them are yet to establish in the market place.   This study analyses three biotechnology firms -- British Biotech, Celltech and Cortecs -- to trace the nature of influence of short-term performance pressures on management decisions after making significant R&D investment (here after referred to as post-R&D).   


A Study on Analysis of Technological Economic Effects of Introducing the MVNO System

Dr. Sung Uk Park, KISTI, South Korea

Dr. Sang Ho Lee, Chonnam National University, South Korea

Dr. Byung Woon Kim, ETRI, South Korea



 The objectives of this study are to examine the competition environments and economic welfare effect in MVNO business, and to suggest useful policy implications on the introduction of MVNO business into Korean mobile telecommunications market. We devote this project to two tasks. The first is to overview the technical concepts and service characteristics of MVNO business. Finally, we develop the techno-economic, theoretical model to analyze welfare effects in competition equilibrium and to suggest some policy guidelines for the introduction of MVNO into Korean mobile telecommunications industry. Based on the economic model of product differentiation, we compare the competition patterns of simultaneous game and measure the welfare effect depending on the entrance forms of MVNOs. MVNO (Mobile Virtual Network Operator) is an organization that offers mobile telecommunications services without owning a wireless network. They instead use the wireless network of a Mobile Network Operator (MNO) and then re-brand and resell mobile services. Thus, the introduction of MVNO can contribute to more competitive dynamics in the mobile telecommunications industry since this policy can add the number of service providers available and thus enhance competition within a market as well. As more mobile business operators in various niche markets make the decision to host an MVNO, other operators tend to follow so as not to lose competitive advantage. Consequently, consumer advantage that MVNO offers is their targeting of niche consumer/business segments.  There are a growing number of MVNO that are most prolific throughout the world including UK, Europe, USA, Australia, Japan, Singapore and Hong Kong. Virgin Mobile is the most well known and successful MVNO with more than 5 million subscribers worldwide. Although the MVNO concept is relatively new, many experts foresee an explosive outlook for this business model. They may offer services that previously didn't exist, or at a lower costs more accessible for specific segments. In this research, in case MVNOs will be introduced to the domestic mobile market, the corresponding social welfare benefits will be evaluated if the MVNO enters as the key communications provider Full MVNO, and if it enters as the reseller SP MVNO.


The Impact of Personal Values on Perception of Service Provider Empathy and Customer Loyalty

Ebi Marandi, Senior Lecturer, Bournemouth University, UK

Ed Little, Senior Lecturer, University of Gloucestershire, UK

Yasmin Sekhon, Senior Lecturer, Bournemouth University, UK



 This paper reports on a research conducted within the health and fitness sector in the UK, to test whether personal values impact on consumers’ rating of the importance of empathy shown by service providers towards clients and, if so, whether this has any impact on the clients’ loyalty to the service provider. A multi-dimensional empathy scale was used to design a questionnaire which was completed by 493 health and fitness club members in the UK. The findings show that certain values correlated to the importance attached to empathy and that these in turn impacted on the respondents’ degree of loyalty to their clubs. Studies of consumer behavior generally acknowledge the role of culture as an important influence on the decision making process. According to Schiffman and Kanuk (1997: 407) culture exists to satisfy the needs of the people within a society. It offers order, direction and guidance in all phases of human problem solving by providing ‘tried-and-true’ methods of satisfying physiological, personal and social needs.  Moreover, definitions often identify values as an important component of culture. For example, Balabanis and Mueller (2002) suggest that human values constitute a core element of culture. Schiffman and Kanuk (1997: 406) highlight the role of values in their definition of culture: the sum total of learned beliefs, values, and customs that serve to direct the consumer behavior of members of a particular society.  


Computer Implementation of a New Production Optimization Planning Model in the Framework of a Corporate Information System

Gennadiy S. Senichev, Magnitogorsk Iron and Steel Works, Magnitogorsk, Russia

Vladimir I. Shmakov, Ph..D., Magnitogorsk Iron and Steel Works, Magnitogorsk, Russia

Victor M. Salganik, D.Sc., Magnitogorsk State Technological University, Magnitogorsk, Russia

Alexander M. Pesin, D.Sc, Magnitogorsk State Technological University, Magnitogorsk, Russia



The approaches to planning currently used at Russian industrial enterprises do not fully meet such requirements as conformity to companies' goals, optimization of management actions, and completeness and accuracy of information used in the planning models. A number of Russian industrial enterprises are currently implementing integrated management information systems or corporate information systems (CIS). Their use is warranted, on the one hand, by "the spirit of the times,", an ever- deeper integration of Russia in the world economy, and, on the other hand, by the objective necessity of using modern information technologies as a powerful tool for processing and applying management information. The use of a CIS provides a number of important advantages to an enterprise, but it doesn’t always lead to efficient decision -making in different fields of management. This research covers the a sample of the creation of a software package, based on the development of the Ttheory of Cconstraints’ methodology, as a "superstructure" to CIS. There are We also describe a description of particularities the particulars [peculiarities?] of a developed model of production planning, and the results of its adaptation to an industrial enterprise, using created software.  Undoubtedly, the use of a CIS provides a number of important advantages to an enterprise, such as the information integration of information of the enterprise's divisions and services, the speeding upacceleration of the document turnover, and information processing. A The CIS providess a real- time access to available data on which managers can base their decisions. Important elements of the a CIS are decision-making support systems, which allow toallow for the simulatione and optimizatione of the processes under examination. They It also permits managers to gain prompt access to management information presented in the most convenient form, and in this way ensures efficient decision -making. Today such "superstructures" are included in many ERP-class applications, and are grouped under the name of "advanced planning systems" (APS) (Cassis, 1997). They are based on the use of economic mathematic[al?] methods (linear, non-linear, dynamic programming, etc.), and on the philosophy of modern management approaches. One of such approaches is called the Ttheory of Cconstraints – ТОС (Goldratt, 1990). We consider TOC as an effective method of improvement of improving company performance, and respectively accordingly make it a backbone of our research. Created in the mid-80's by E. Goldratt, this theory has revolutionized the ideas of many managers regarding economic analysis and production planning. Its basic principles can be described as followingfollows: 1. Viewing the financial and economic performance as the main goal of a commercial enterprise. To improve the bottom- line measurements (such as return on investment, cash flow, and net profit), the Ttheory of Cconstraints proposes to focusing on increasing the throughput, and reducing inventory and operating expenses, on the assumption that these criteria are the key yardsticks to for measuringe the success of the company's goal of "making money."'.  2. A sSystemic approach to the analysis of an enterprise, viewing it as a complex of inter-related and interacting elements, the most important of them beingwhich is a bottleneck. It This is the element of the a system whose throughput capacity is inadequate for satisfying the demand. Bottleneck defines a the possibility of the a company to achievinge its goal. That’s why, the vehicle for attaining the a company's business goals is a five-step focusing process, requiring first implying a the consistent identification of a bottleneck, the decision ofdeciding how to exploit it, and subordinateing all other elements of the system to it, subsequent elevation ofelevating this bottleneck, and then searching for the next one.  The experience of aApplying the Ttheory of Cconstraints at more than 100 enterprises of in different sectors attests toresulted in an average 20% increase in sales of 20%, inventory reduction of 40-50%, and a 50% increase in operational margins.  Within the framework of TOC’s development and implementation, the a new model of production planning was proposed whose structure is presented in Figure 1 (Senichev, 2005). The purpose of the first block of the developed model is to set the planning period, which in turn determines the further application of the production program optimization algorithm. The next step is to calculate the requirement for material, production facilities, and manpower (resources), followed by locating the required quantities thereof for satisfying the market demand. The determination of available resources allows us to calculate the necessary load and identify the bottlenecks in the process flow.  The next step is to analyze the identified constraints, taking into account the planning horizon. Thus, when planning ahead for a period of over one1 year, it is convenient to work out a set of steps to replenish the resources which might become shortbe in short supply. In terms of the five-step focusing process it this actually means a transition from the stage of identifying to the stage of eliminating the bottlenecks, skipping the stage of working out and implementing the plans of for their efficient use. A situation is possible whereby a deficit of a certain type of resource is forecast related to the impossibility of taking steps to eliminate such a deficit. In this case the course of action should be similar to that taken in the short term, that is, using the optimization algorithm according to the type of the constraining resource.



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