Management & Change

Management & Change VOLUME 7

NUMBER 1

SUMMER 2003

ARTICLES Capital Structure Practices in India, Singapore and Thailand: A Comparative Study

P. K. Jain and Surendra S. Yadav

1

India's Trade-Links with the European Union Facts and Possibilities

Bhaskar Majumder

49

Absenteeism of Workers in Manufacturing Industries of Bangladesh: A Comparison between Private and Public Sectors

M. Ekramul Hoque and Md. Mayenullslam

75

Knowledge Creation in Business Organizations: A Study Using Activity Theory Framework

Anjan Roy and Rajen K. Gupta

89

Research Issues on Strategic Human .Res~e Management and \OPganizational Performance

T. J. KamaIanabhan and I. R. Nagaraj

121

Determinants of Business Performance in the Developing Economy: an Integrated Framework

Vijay Kumar Kaul

133

Supply Chain Management in the New Millennium

Subrata Mitra

159

Pay Satisfaction as Related to Distributive, Procedural and Interactional Justice

Namrata Gulati and Kanika T. Bhal

171

BOOK REVIEWS

P. Vijaya Bhaskar and B. Mahapatra. Derivatives Simplified: An Introduction to Reviewed by T. P. Ghosh.

Risk Management.

Sadhak H. Mutual Funds in India: Marketing Strategies and Investment practices (2nd edition). Reviewed by Kamal Ghosh Ray. Ramanathan RoOAn Introduction to Data Envelopment Analysis: A Tool for Measurement. Reviewed by Naseem Abidi.

Performance

N. S. Siddharthan and Y. S. Rajan. Global Business, Technology and Knowledge Lessons for Developing Country Enterprises. Reviewed by Sunita Gupta Konwar.

Sharing,

Sushi I and K. Momaya. Globalization Flexibility and Competitiveness A TechPerspective. Reviewed by M. K. Moitra.

nology Management

.

I"

J') I' .

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P. K. Jain and Surendra S. Yadav

Indian Institute of Technology, New Delhi.

Bhaskar Majumder

G. B. Panth Social Science Institute, Allahabad.

M. Ekramul Hoque and Md. Mayenul Islam

School of Business, Bangladesh Open University, Gazipur.

Anjan Roy and Rajen K. Gupta

Management Development Institute, Gurgaon.

T. J. Kamalanabhan and I. R. Nagaraj

Indian Institute of Technology, Chennai and International Crops Research Institute for Semi-Arid Tropics, Patancheru.

Vijay Kumar Kaul

DepartmeNt of Business Economics, University of Delhi, New Delhi.

Subrata Mitra

Indian Institute Calcutta.

Namrata Gulati and Kanika T. Bhal

Indian Institute of Technology, New Delhi.

of Management,

CAPITAL STRUCTURE PRACTICES IN INDIA, SINGAPORE AND THAILAND: A COMPARATIVE STUDY

â&#x20AC;˘!

I

r

P. K. Jain

Surendra S. Yadav

Decision on an appropriate mix of debt and equil.' ,n the capital of a corporate enterprise is a vital aspect of financial management. A judicious mix of the two has an impact on share price as well as retuTll on equity.

While a high level of debt may endanger the survival of a company, a low level may mean not taking full advantage of cheaper source of finance.

This paper examines corporate practices in India, Singapore and Thailand on this important subject. Secondary data of 238 Indian, 86 Singaporean and 126 Thai companies has been analysed, in addition to primary data obtained through a survey. The study reveal,~that Indian companies employ greater amount of total debt as compared to Singaporean or Thai companies. However, there is a greater proportion of long-term debt among Indian companies vis-a-vis their counterparts in Singapore and Thailand. The proportion of short-term debt is particularly high in Thai companie~'.

INTRODUCTION

C

apital structure decisions (related to appropriate debt-equity mix) are significant financial decisions of the corporate firms in that they influence the return as well as the risk of equity shareholders. That there exists close nexus between optimum/judicious use of debt and the market value/valuation of the firm is well recognised in literature of finance (for details, see Solomon, 19691; Brealey and Myres, 19972; Brigham and Johnson, 19763). While the excessive use of debt may endanger the very survival of the corporate firms, the conservative pol icy may deprive its equity-holders the advantage of debt as a cheaper source of finance to magnify their rate of return. Following such an over-conservative policy runs counter to the basic objective of financial decisionmaking to maximise the wealth of equity-holders.

Apart from financial risk-return considerations, non-financial factors are also likely to be very decisive in designing capital structure of the

Management & Change, Volume 7, Number I (Summer 2003) (Q 2003 Institute for Integrated Learning in Management. All Rights Reserved.

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2 Capital Structure Practices in India corporate firms. For instance, use of debt, unlike equity, does not dilute the controlling power of existing owners. In brief, debt is not an unmixed blessing and, hence, a dilemma for the corporate finance manager.

Corporate finance manager is expected to resolve this dilemma by designing such an optimum mix of debt and equity as is best suited to both the shareholders and the lenders. What should be this judicious mix? What are the major considerations in designing their capital structure? Is there any preferred hierarchy among sources of raising funds by the corporate firms? Is capital structure of the private corporate enterprises debt or equity dominated? Inter-se, what is the magnitude of short-term debt to long-term debt? Are there any significant differences in the capital structure practices of the domestic companies, vis-a-vis, foreign controlled companies in India? These and related questions constitute the subject matter of tl;1ispaper pertaining to the sample corporate enterprises from India, Thailand and Singapore. The analysis is based on the secondary data of 238 companies of India, 86 companies of Singapore and 126 companies of Thailand, as also the primary data of 41'cQ,mpanies (28 from India, 10 from Singapore and 3 from Thailand) that responded to the survey.

For better exposition, this paper is divided into six sections. Section I describes capital structure practices in terms of major capital structure ratios, namely, debt-equity (DIE) ratio and total debt to total assets (D/ A) ratio. Composition of debt in terms of long-term debt and short-term debt forms the subject matter of section II. Sections III and IV deal with aspects relatiJtg to risk and industry considerations respectively. Corporate firm's capacity to service debt has been analysed in section V. Concluding observations are contained in section VI.

SECTION I CAPITAL

STRUCTURE

RATIOS

The objective of this section is to examine the financing policies of sample corporate firms from India, Singapore and Thailand in terms of employment of debt. In the case of India, the additional aspect of an academic enquiry has been whether there are any major changes in the capital structure policies of the private corporate sector in the wake of the economic and financial liberalization policies of the government. For this Management

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Jain and Yadav 3

purpose, 1991-98 data is segregated into two phases, namely, 1991-95 (post-liberalization Phase I) and 1996-98 (Post-Jiberalization Phase II).

This apart, the sample companies from India have been bifurcated into domestic companies (DCs) and foreign-controlled companies (FCCs) in India to ascertain whether their financing pattern is the same or different. A foreign controlled company is the one in which foreign holdings (in percentage) are more than the shareholding of any of groups such as financial institutions, corporate bodies, directors and relatives, top 50 shareholders.

We have attempted to address these questions using ratios which are based on the relationship between borrowed funds and owners' capital.

It is hypothesized that the corporate firms will generally be inclined to use more debt in financing their assets. The major reasons are: (I) debt is a cheaper source of finance in view of tax advantage on interest paid; (ii) it does not lead to the problem of dilution of corporate control for its existing owners/management; (iii) it is more convenient to be procured from financial institutions, vis-a-vis, equity and (iv) compared with equity issue, it causes lower transaction costs.

The major ratios used for the purpose of analysis are debt-equity (total shareholders funds) ratio and debt to total assets (net of depreciation and other intangible and fictitious assets) ratio. In the context of these ratios, we preferred to have debt inclusive of short-term debt for the following reasons: (i) Bank/cash credit which is ostensibly short-term is generally renewed year after year and hence serves the long-term needs of the firm. In India, it has been a common practice to use short-term debt instruments like bank cash credit practically as long-term debt (Sen, 19794) (ii) Likewise, the short-term debt-holders (like the long-term debt-holders) have a prior right on the assets of the business in the event of the liquidation of the business firm. Therefore, the exclusion of the short-term debt will present the distorted picture of the magnitude of debt; it will be shown on the lower-side. These factors, then, constitute the rationale to have a broader measure of debt which includes short-term debt obligations also. Total debt, so defined, in our perception, is likely to indicate true and fair view of debt used by the sample companies.

It is important to state that, in our earlier study 5, debt has been defined more comprehensively; it included current liabilities also, in addition to short-term debt and long-term debt. Therefore, the findings of the present chapter are not comparable with the' earlier study. The rationale I

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for using different definition in this study was to have insight into the extent of true outside debt/borrowings rather than total external obligations.

For the purpose of analysis, we have employed book values, as shown in the balance sheet. Apart from convenience, book values have been preferred to market values in view of the fact that debt-equity ratio based on market value creates systematic bias in financial risk measures (for details, see Barges 6, 1963; Chakraborty 7, 1977).

Debt-equity (DIE) ratio: Relevant data in terms of mean, median and lower and upper qUal.tiles for 1991-98 of Indian sample companies have been presented in Table-I. The D/E ratio of these companies lies in the range of 1.27 to 1.81 during 1991-98, signifying that debt is a significant source of financing for corporate enterprises in India (mean value being 1.45 for the 8 years period, 1991-98 of the study).

Table-1 Mean, median and quartile values of debt-equity (DIE) ratio pertaining to the sample companies of Indian corporate enterprises, 1991-98 Year

1991 1992 1993 1994 1995 1996 1997 1998 1991-95 1996-98 1991-98 Notes:

Number

Mean

Median

Quartile 1

Quartile 3

180 181 180 197 207 197 183 98 225 220 225

1.73 1.81 1.80 1.43

1.47 1.54 1.44 1.22 1.05 1.02 1.03 0.99 1.32 1.03 1.14

0.96 1.03 0.9 0.68 0.67 0.60 0.62 0.59 0.83 0.60 0.73

2.21 2.21 2.20 1.80 1.65 1.50 1.63 1.59 2.02 1.59 1.83

lAO

1.30 1.27 1.27 1.62 1.27 lAS

= Bank

I. Total Debt

+

deposits

2.

3.

4.

borrowings

Debentures

+

+ Borrowings

Commercial

from institutions

=

Equity Shareholders' funds Extreme values of greater than 5 are excluded The average of the entire period (1991-98) as well as of two sub-phases (1991-95 and 1996-98) is based on the average of the individual firms (in the relevant phase, say 1991-95) instead of the simple average of each year period. say, 1991, 1992, 1993, 1994 and 1995.'The same holds true for other tables.

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Jain and Yadav 5 Table-2 Frequency distribution of debt-equity ratio of sample related to Indian companies, 1991-98 (Figures are in percentages)

Less than 0.5 0.5-1.0 1.0-1.5 1.5-2.0 2.0-3.0 3.0-5.0 Above 5 Total Nos.

1991

1992

1993

1994

1995

1996

1997

1998

5.8 20.7 22.8 15.9 18.6 11.1 4.8 189

6.6 16.7 23.9 19.5 20.0 12.3 1.1 183

3.7 18.3 21.4 17.3 11.7 10.6 17.0 200

16.5 20.9 22.4 16.1 12.2 5.80 5.70

16.5 27.9 20.8 17.5 6.60 5.70 5.00 218

15.3 29.7 25.4 11.0 8.2 4.3 5.7

15.7 30.8 17.8 13.6 12.0 5.2 5.2 193

20.2 29.3 21.2 12.1 10.9 3.0 3.0 101

2If)

2If)

Note: Totals may not tally due to rounding off of the figures. The same holds true for other frequency distribution tables.

However, a marked decline in debt-equity proportion has been noted in post-liberalization phase-II (1996-98) as compared to post- liberalization phase- I (1991-95), the respective figures being 1.27 and 1.62.

Though median DIE is lower (1.14) than mean DIE ratio (1.45), the former still shows pre-eminent position of debt in that debt is more than shareholders funds. Further, all the positional values (median and quartiles) have lower values in post-liberalization phase-II, vis-a-vis, the phase-I. The decreasing share of debt is also apparent from frequency distribution of DIE ratio of the sample companies (Table-2). It is apparent from the data that there has been a notable decrease in DIE ratio during postliberalization phase-II (in particular 1996 and 1998). It is borne out by the fact that there has been a sizeable decline in the number of the firms having DIE ratio of greater than 2 during the referred years of the postliberalization phase-II. For instance, during the initial years of phase-I (1991-93), the sample firms within the range of more than one-fourth to one-third, had DIE ratio of more than two, their number is less than onesixth in 1995,1996 and 1998.

The lower DIE ratio in phase-II is more prominently brought but when we compare the number of sample companies having DIE ratio of less. than 1.5 in these two phases. Whereas less than half of the smpple Management

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6 Capital Structure Practices in India companies had DIE ratio of less than 1.5, during 1991-93; the proportion of such companies was considerably higher at more than two-thirds during 1996-98.

That there is a significant difference (at 95 percent confidence interval) between the DIE ratio of two phases -is also supported by 't' test.

(Appendix A-I); other t tests have also been carried out at this level of confidence.

With the onset of globalization and economic liberalization from early 1990s, the Indian corporate sector is also attracting many global players.

This apart, foreign holdings in corporate enterprises have also gone up.

Therefore, it was desired whether foreign controlled companies in India have the similar financing pattern as that of domestic companies.

It is hypothesized that the FCCs in India will generally follow the financial policies of their parent company and are likely to employ more equity in their capital structure. Hence, the debt-equity ratios of the FCCs in India are likely to be lower than that of the DCs. The relevant data in terms of average DIE ratios of the DCs and the FCCs for the period 1991-98 have been shown in Table 3.

Table-3 Mean, median, quartile values related to debt-equity ratio of domestic and foreign controlled companies in India, 1991-98 Year

Number

Mean

Domestic Companies 1991 130 1.80 1992 130 1.95 1993 129 1.96 1994 141 1.58 1995 151 1.54 1996 141 1.44 1997 150 1.33 1998 (Xi 1.30 1991-95 1.76 1.44 1996-98 1.37 1.14 1991-98 151 1.63 Foreign Controlled Companies 1991 51 1.56 1992 51 1.47 Management

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Median

Quartile 1

Quartile 3

1.49 1.66 1.59 1.35 1.20 1.14 1.15 1.12 0.89 0.66 1.31

0.98 1.06 0.91 0.85 0.76 0.66 0.70 0.63 2.19 1.64 0.80

2.35 2.50 2.54 2.03 1.75 1.62 1.65 1.60 151 150 2.00

1.41 1.44

0.89 0.90

2.09 1.85

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1993 1994 1995 1996 1997 1998 1991-95 1996-98 1991-98

51 56 56 56 53 32 56 56 56

lAO

1.06 1.03 0.97 1.11 1.07 1.29 1.04 1.20

1.27 0.89 0.86 0.85 0.80 0.82 1.08 0.82 1.00

0.85 0.44 0.49 0.49 0.50 0.43 0.64 0.49 0.58

1.84 1.42 1.20 1.30 1.57 1.24 1.62 1.36 1.57

It is very apparent from the data that the DIE ratios of the FCCs have been significantly lower than those of the DCs during the entire period of the study, the mean ratio being 1.20 and 1.63 respectively. While the DIE ratios of the FCCs in India have been in the range of 0.97 to 1.56 during the period under reference, the corresponding range for DCs has been higher at 1.30 to 1.96 (Table-3). This difference is also found to be statistically significant. (Appendix A-I). Further, it is gratifying to note a declining trend in the DIE ratios both for the FCCs and DCs. In contrast, DIE ratios are much lower both for Thailand and Singapore. For instance, the average DIE ratio of the sample companies from Singapore was 0.42 for the six years period (1991-96) of the study; the median value was lower at 0.30 (Table-4). The Quartile 1 value of 0.10 in this regard signifies that one-fourth of the sample companies had very low DIE ratio and only one-fourth of the companies had this ratio higher than 0.60. Frequency distribution table further reinforces the point that Singapore companies have less inclination towards use of debt. The fact that only a handful of the companies had DIE ratio of higher than 1~OOis a pointer towards the same. (Table-5).

Table-4 Mean, median and quartile values of debt-equity (DIE) ratio of sample related to corporate enterprises in Singapore (1991-96) and Thailand (1991-95) Year

Nmnber

Mean

Median

Quartile 1

Quartile 3

43 49 57 75

0.35 0.44 0.39

0.23 0.26 0.35 0.30

0.04 0.13 0.08 0.11

0.56 0.59 0.69 0.52

Singapore

1991 1992 1993 1994

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1995 1996 1991-96

75 40 81

0.51 0.38 0.42

0.30 0.34 0.30

0.13

0.71 0.59 0.59

om 0.10

Thailand 1991 105 0.83 0.47 1992 119 0.86 0.60 1993 121 0.86 0.63 1994 118 0.75 0.54 1995 113 0.80 0.68 1991-95 122 0.82 0.60 Note: 1. Extreme values of DIE ratio (i.e. values of than 5) are excluded from the observations.

2. The "Debt" in the D\E ratio involves both the long-term debt.

0.21 0.29 0.26 0.22 0.32 0.25

1.21 1.18 1.09 1.02 1.07 1.11 DIE ratios greater

,

~

the short-term

debt and

Likewise, Thailand sample companies had mean DIE ratio of 0.82 for 5 year period (1991-95) for which data were available; similarly, median and lower quartile values were 0.60 and 0.25. Only upper quartile value was higher at 1.11. It shows that only one-fourth of the sample companies had DIE ratio of more than one (Table-5). Frequency distribution on the subject (Table 6) also presents similar conclusions. It is amply borne out by the fact that virtually two-thirds of the total sample companies had DIE ratio of less than one in all the years covered by the study.

I

~

Table-5 Frequency distribution of debt-equity ratio of sample related to corporate firm~ from Singapore, 1991-96 (Figures are in percentages) Debt-equity 1991(44) 1992 (50) 1993 (57) 1994 (75) 1995 (75)1996 (40) ratio Less than 0.05 0.05 - 0.15 0.15 - 0.30 0.30 - 0.50 0.50 - 0.70 0.70 - 1.0 Above 1.0

25.0

16.0

18.2 15.9 9.2 15.9 9.0 6.8

16.0 20.0 12.0 16.0 12.0 8.0

17.5 10.5 24.6 7.0 21.1 3.6

Total

100

100

100

Note:

14.7

12.0

15.0

I I

Figures

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16.0 17.4 26.7 8.0 4.0 13.3

17.4 20.0 14.6 10.6 14.7 10.6

17.5 15.0 15.0 20.0 10.0 7.5

100

100

100

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,---Jain and Yadav 9 Table-6 Frequency distribution of debt-equity ratio of sample related to corporate firms from Thailand, 1991.95 (Figures are in percentages) Debt-equity ratio Less than 0.10 0.1 0 - 0.25 0.25 - 0.50 0.50- 1.00 1.00 - 2.00 2.00 - 4.00 4.00 - 10.00 Above 10.00 Total Note:

1991(109) 11.0 17.4 20.2 12.8 27.5 7.3 3.7

100

1992(121)

1993(123)

10.7 9.9 20.7 24.0 24.8 6.6 2.5 0.8

10.6 12.2 17.9 29.3 17.9 8.9 3.3

100

100

1994(120) 7.5 20.0 17.5 27.5 20.0 5.8

1995(115) 7.8 13.9 16.5 34.8 20.9 5.2 0.9

1.7 100

100

Figures in brackets are the number of companies.

However, while interpreting the results in respect of Thailand, it should be borne in mind that nearly more than 20 percent of the sample companies had D/E ratio of more than 5.00. Being extreme values, all these observations have been excluded, in arriving at mean and other positional values.

In sum, it can be reasonably concluded that the domestic companies in India have relatively debt dominated capital structure, the recent downward trend notwithstanding. In contrast, equity dominated capital structure exists for the vast majority of the sample companies from Singapore and Thailand. The FCCs in India occupy intermediate position.

Total debt to total assets (D/A) ratio: Total debt (sum of long-term and short-term) constitutes a significant source of financing corporate assets is also corroborated by total debt to total assets ratio (Table-7).

External borrowings have been a source of financing more than one-third of the total assets (38 percent) of Indian sample companies during the entire period of the study (1991-98); similar conclusions follow on the basis of median (37 percent). The quartile values of 0.28 and 0.48 suggest that 50 percent of the sample companies have 28 percent to 48 percent of their total assets financed through debt.

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10 Capital Structure

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As per the trend, like DIE ratio, the decline has been noted in respect of the mean and other positional values of 01A ratio during second phase (1991-98) as compared to the first phase (1991-95). Statistically, this decrease was significant (Appendix A-I). Frequency distribution drawn in this regard provides further evidence (Table-8). For instance, nearly one-third of the sample companies during the initial years (1991-93) of the study had fifty percent or more of the assets financed through debt; the proportion of such companies has decreased to the range of one-fifth to one-eight duTing subsequent years (1994-98).

Table-7 Mean, median and qU3l1ile values of sample pertaining to total debt to total assets (TDITA) ratio of Indian corporate enterprises, 1991-98

(Figures are in Percentages) Year

1991 1992 1993.

1994 1995 1996 1997 1998 1991-95 1996-98 1991-98

Number

Mean

Median

200 205

0.42 0.44 0.43 0.41 0.39 0.38 0.39 0.37 0.42 0.38 0.38

0.39 0.42 0.40 0.38 0.36 0.35 0.37 0.37 0.39 0.36 0.37

2m 219 221 219 200 200 224 219 224

Quartile

1

Quartile

3

0.51 0.52 0.52 0.48 0.47 0.46 0.47 0.48 0.50 0.47 0.48

0.29 0.30 0.31 0.27 0.27 0.26 0.27 0.27 0.29 0.26 0.28

Table-8 Frequency distribution pertaining to relative share of total debt to total assets of sample related to Indian companies, 1991-98 TDITA Ratio

1991

1992

1993

1994

1995

1996

1997

1998

Less

0.50

0.48

22.86

2.74

3.59

5.26

4.02

5.05

than 0.1 0.1-0.2 0.2-0.3 0.3-0.4

7.00 18.5 26

7.77 16.02 23.30

10 8.57 25.24

10.96 16.89 22.83

10.76 17.94 25.56

9.09 22.01 27.27

9.04 21.62 23.11

10.1 14.14 31.31

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0.4--0.5 0.5-0.6 0.6-0.7 0.7-0.8 0.8-0.9 Above 0.9

21 16.5 6.00 2.50 0.50 1.50

20.87 20.39 4.85 2.91 0 3.40

22.86 16.67 6.19 4.28 0 3.33

24.66 11.41 5.94 0.91 0.91 2.74

24.21 10.31 4.48 0.90 0.90 1.34

24.40 5.74 3.83 0 0 2.39

22.11 11.05 4.02 0.50 0 1.00

18.18 15.15 4.04 2.02 0 0

Total

200

205

209

219

223

219

200

100

The analysis of sample Indian corporate enterprises, inter-se, indicates that the share of outsiders' funds in the total assets of. DCs was higher than that of the FCCs in India (Table-9). D/ A ratio of the FCCs was lower than that of DCs in each of the eight years covered by the study.

This apart, the analysis also shows a declining trend in the use of debt by both categories of companies during phase-II as compared to phaseI. The 't' test result shown in (Appendix A-I) further confirms ourconclusion that there is a significant difference in the use of debt by the FCCs in India as compared to DCs. From the results, it can be concluded that the FCCs in India significantly differ from the DCs in the use of outsiders' funds in financing their assets.

In contrast, only less than one-fifth (17 percent) of the total assets of the Singapore sample companies is financed through debt (Table-IO) throughout the period of the study. In fact, the percentage figure varied in a narrow range of 3 percent (16-19 percent). Further, only in onefourth of the companies, the debt proportion was 30 percent or more. In effect, therefore, it can unmistakably be concluded that equity constitutes a major source of'financing assets in Singapore. This inference gains further strength by frequency distribution data presented in Table-II. Data contained in this table indicate that more than two-thirds of companies have debt share of less than 25 percent in all the years covered by the study.

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12 Capital Structure Practices in India Table-9 Mean, median, quartile values related to total debt to total assets ratio of domestic and foreign controlled companies in India, 1991-98 Year

Number

Mean

Domestic Companies 147 0.43 1991 150 0.44 1992 0.44 1993 153 0.43 1994 161 164 0.41 1995 lED 0.40 1996 147 0.41 1997 1998 65 0.38 164 0.43 1991-95 lED 1996-98 0.40 164 0.42 1991-98 Foreign Controlled Companies 1991 53 0.39 55 0.42 1992 0.40 56 1993 0,35 1994 58 0,33 59 1995 0,30 59 1996 0,33 55 1997 0,37 1998 35 0,38 59 1991-95 0,33 1996-98 59 0,36 1991-98 59

Median

Quartile 1

Quartile 3

0.40 0.43 0.44 0.40 0.38 0.38 0.39 0.37 0.41 0.38 0.40

0.30 0.29 0.31 0.28 0.29 0.28 0.28 0.27 0.29 0.28 0.29

0.51 0.53 0.53 0.51 0.48 0.47 0.48 0.48 0.52 0.48 0.50

0.37 0,39 0,37 0.34 0.29 0,32 0,32 0.37 0,35 0,33 0.34

0.20 0,31 0,30 0.22 0.23 0.20 0.22 0.21 0.27 0.20 0.24

0.50 0.49 0.45 0.42 0,39 0.38 0.45 0.48 0.44 0.43 0.44

Table-l0 Mean, median and quartile values of total debt to total assets (TDrrA) ratio of sample companies from Singapore, 1991-96 and Thailand (1991-95) Year Singapore 1991 1992 1993 Management

Number

Mean

Median

Quartile 1

Quartile 3

43 53 59

0.16 0.17 0.17

0.10 0.14 0.16

0.03 0.06 0.04

0.28 0,30 0.26

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Jain and Yadav 13 1994 1995 1996 1991-96 Thailand 1991 1992 1993 1994 1995 1991-95

T7 75 43 82

0.16 0.19 0.18 0.17

0.15 0.16 0.15 0.15

0.06 0.D7 0.04 0.06

0.27 0.29 0.32 0.27

110 121 124 122 118 125

0.29 0.31 0.32 0.32 0.35 0.32

0.28 0.31 0.32 0.31 Q.35 0.32

0.13 0.18 0.18 0.15 0.20 0.16

0.45 0.46 0.46 0.44 0.45 0.45

Table-ll Frequency distribution pertaining to total debt to total assets (TDrrA) ratio of sample companies from Singapore, 1991-96 (Figures are in percentages) 1994(77) 1995(75) 1996(43)

1991(43)

1992(53)

1993(59)

Less than 0.05 0.05-0.15 0.15-0.25 0.25 - 0.35 0.35 - 0.45 0.45 - 0.60 Above 0.60

27.9

22.6

27.1

19.5

13.3

25.6

27.9 16.3 16.3 4.7 7.0

34.0 13.2 15.1 15.1

15.3 28.9 22.1 6.8

28.6 23.4 20.80 6.5 1.3

32.0 22.6 18.7 10.6 2.6

20.9 21.0 14.0 16.3

Total

100

TDffA ratio

Note:

2.3 100

100

100

100

100

Figures in brackets are the number of sample companies.

Thailand sample companies occupy intermediate position in that debt share in financing their total assets is less than that of India but significantly higher than that of Singapore. For instance, less than one-third of total assets (as manifested by mean 31 percent and median 30 percent) of the sample corporate enterprises in Thailand has been financed by debt (Table-l0). Similar conclusions follow on the basis of frequency distribution data (Table-12).

Management

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Volume 7, Number

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2003)

14 Capital Structure Practices in India Table-12 Frequency distribution pertaining to total debt to total assets (D/A) ratio of sample companies from Thailand, 1991-95 (Figures are in percentages) 1991(110)

TDITA

1992(121)

1993(124)

1994(122)

Less than 0.1 13.6 0.1-0.2 23.6 0.2-0.3 16.4 003-0.5 13.9 0.5-0.7 13.6 0.7-0.9 1.80 0.9-1.0 Above 1.0

14.0 15.7 15.7 43.0 9.10 2.50

13.7 14.5 18.5 34.7 14.5 3.20 0.80

11.5 2103 18.0 32.8 13.1 2.50

11.9 12.7 2003 38.1 12.7 2.50

0.80

1.70

Total

100

100

100

1995(118)

ratio

Note:

100

100

Figures in brackets are the number of the sample companies

In sum, it is reasonable to conclude that debt plays a relatively minor role in financing assets in Singapore, greater role in Thailand and it has maximum share in India. However, in post-liberalisation phase II, change in preference for equity has been noted. This trend can be attributed to two major reasons: a sustained economic slow down and the policy of the companies to retire debt in order to shore up ilie bottomlines.

It is noted, that corporate firms are liquidating some of their assets or placing equity to retire existing debt as debt-service eats into bottom-lines.

Thus, the financial liberalization seems to have caused material impact on capital structure practices of private corporate sector enterprises in India. This conclusion gets reinforced from the questionnaire survey related to 1998. While all the sample companies from Thailand and ninetenths from Singapore have stated that liberalization and globalisation have not caused significant changes in their capital structure practices, fifty per cent of the Indian sample companies have stated that it has affected or likely to affect their capital structure in future (Table-l3).

Management

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Jain and Yadav 15 Table-13 Changes in capital structure of sample companies of India, Singapore Thailand due to liberalisation and globalisation Changes in capital structure

Yes/ Expected in near future No 14

Corporate

firms responding

from

Singapore Number

Thailand Number

India Number

(%)

14

50.00

50.00

9

90.00

3

100.00

28

100.00

10

100.00

3

(%)

and

(%)

10.00

I

Total

100.00

Debt is likely to be the main-stay of Indian companies in future also, the recent changes notwithstanding. It is eloquently borne out by our survey findings. The relevant data contained in Table-14 indicate that twothirds of the sample companies hold the view that debt should be tapped to the maximum possible extent. However, the survey results from the other two sample countries, in particular from Singapore, are revealing.

There, as much as nine-tenths of the total sample companies have responded in the affirmative to the question of maximum utilization of debt; the debt norm in Singapore appears to be on the lower side as capital structures of the Singapore sample companies are primarily equity-dominated as per our preceding analysis.

Table-14 Debt preference (in terms of its maximum use) of sample companies of India, Singapore and Thailand Utilisation of debt to the extent possible

Corporate India Number

Yes No No response

19 8 1

(%) 67.86 28.57 3.57

Total

28

100.00

Management

firms responding

Singapore Number. (%)

9 1

90.00 10.00

from Thailand Number

2

(%)

66.67 33.33

10

& Change.

100.00

Volume 7, Number

3

100.00

1 (Summer

2003)

16 Capital Structure Practices in India This finding is in tune with findings of another study (Kester, Chang and Tsui 8,1994) dealing, inter-alia, with Singapore executives (6S responses); as per the study, internal equity was ranked first as a source of finance by 89.3 percent of executives.

The survey findings are also revealing as far as the finance managers' views on the question of desired level of DIE ratio is concerned, particularly in the case of India. It is borne out by the fact that nearly half of the sample companies prefer to have DIE ratio of 2: I or more (3: 1); the inferences are similar for Thailand (Table-IS). Given the current focus on fundamentals by lenders and ratings of the corporate firms by credit rating agencies, it was expected that the sizeable majority of the companies would have inclination to have lower DIE ratio; the survey findings are contrary to these expectations. However, the survey findings are, by and large, in broad conformity with the expectations as far as the Singapore sample companies are concerned.

Table-IS Desired level of debt-equity ratio of sample companies of India, Singapore and Thailand Preferred debtequity ratio

India Number

Less than I: I

1.5 : 1 2: 1 3 : I Greater than 3

Total

Corporate firms responding from Singapore Thailand (%) (%) Number Number

(%)

3 7 4 12 1

11.11 25.93 14.82 44.44 3.70

4 3

40.00 30.00

2 1

20.00 10.00

2

66.67

27

100.00

10

100.00

3

100.00

Notes: 1.

33.33

One company O)lt of the 28 Indian companies did not give any response on this question, hence it is not included in calculations for this table.

2. Four Indian companies gave their choice, for preferred debt-equity ratio to be 1.5: 1. This choice was added to the table as it was not present in the options of the corresponding question given in the survey-question nai reo

Management

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Volume 7. Number

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Jain andYadav 17 The survey also sought from corporate firms, the probable reasons for their preference for debt. The significant finding of the survey (based on data contained in Table-16) is that the 'flexibility of debt instruments' such as call ability clause, repayment schedules, etc. has been cited as the, major factor for debt preference by corporate firms from India as well as Singapore. The premise that debt is relatively cheaper source of fi- , nance, and therefore, the foremost factor in designing capital structure has been relegated to the second position in India and to the last place in Singapore. However, in Thailand, all the sample companies have branded debt as a cheaper source of finance as the major reason for its preference. Other reasons cited (but not specified in questionnaire) are: (i) tax shield of debt, (ii) dilution of control with equity, (iii) debt can be raised periodically on need; equity is inflexible - more so in India, (iv) large joint venture partners are interested in making operations viable and (v) debt fits in short-term requirement with small size of fund needed.

Table-16 Reasons for debt-preferences given by sample companies of India, Singapore and Thailand

!

l

Corporate firms responding from India Singapore Thailand Nmnber Number Nmnber

Reasons for preferences

Debt is more flexible than equity in terms of callability clause, repayment schedules, etc. 21 Debt is cheaper thfln equity The perceived advantage of flexibility in payment of dividend is more illusory than real 8 It is easier to raise debt as investors are risk averse and equity is risky capital Others Note:

3

2

15

1

6 3

.2

3

2

Two out of the ten companies of Singapore have given no response, stating 'not applicable' and each of the remaining eight companiesmarked only one reason as their response.

Management

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Volume 7. Number

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2003)

18 Capital Structure Practices in India In sum, it may be mentioned that debt forms the backbone of financing as well as it is likely to be mainstay for corporate enterprises in India, the recent changes notwithstanding. As far as Singapore and Thailand are concerned, equity plays a major role.

SECTION II

â&#x20AC;˘

I COMPOSITION

OF DEBT

1

1

The preceding section has eloquently brought out the importance of debt for private corporate enterprises both for India and Thailand. The present section is concerned with examining composition of debt.

First, most of the empirical studies on capital structure hitherto have focussed on total debt/total financial leverage. Second and more important is that the focus on short-term debt has increased in recent years for many reasons. The cost of short-term financing has gone up; short-term interest rates have become more volatile in character. The effect of more volatility, in conjunction with the higher level of short-term borrowing costs may be quite dramatic on the earnings of the firms and can increase the risk of bankruptcy.

The second point has been corroborated by an empirical study carried out by Gupta9. He reported in his findings on corporate sickness in India that sickness is more strongly associated with excessive short-term borrowings than with long-term borrowings. This signifies that the excessive short-term debt poses a more serious threat to the continued survival of corporate firms than the excessive long-term borrowings. This, then, constitutes the rationale to compute long-term debt to short-term debt (LTD/STD) ratio. This ratio, inter-alia, reflects the corporate firm's reliance on the type of debt.

Relevant data in terms of mean, median and quartile values of LTD to STD, on an year to year basis for the companies from India is exhibited in Table 17. The value of LTD/STD ratio has been considerably higher than one in all the years, covered by the study. It implies that the long-term borrowings greatly outstrip the short-term borrowings in all the eight years covered by the study. The study brings to fore that corporate enterprises in India have shown marked preference for long-term borrowings to short-term borrowings, the relevant mean figure of LTD/STD ratio is two for 1991-98.

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Table.17 Mean, median and quartile values of sample pertaining to long-term debt to short-term debt ratio of Indian corporate enterprises, 1991-98 Year 1991 1992 1993 1994 1995 1996 1997 1998 1991-95 1996-98 1991-98

Number

Mean

Median

Quartile 1

Quartile 3

179 186 194 201

2.22 2.25 2.06 2.14 1.90 1.75 1.68 2.07 2.10' 1.77 2.00

1.38 1.62 1.61 1.65 1.27 1.11 1.03 1.32 1.25 1.14 1.24

0.72 0.68 0.65 0.56 0.60 0.56 0.53 0.71 0.59 0.52 0.62

3.07 3.58 3.07 3.03 2.66 2.45 2.39 2.61 2.39 2.47 2.44

2fJl

202 192 %

189 180 2fJl

However, as per the trend, the LTD to STD ratio has declined, signifying the increased substitution by short-term debt for long-term debt in phase II as compared to phase I, the relevant mean figures being 2.10 and 1.77 for phase I and II respectively.

Frequency distribution pertaining to LTD/STD ratio of the sample companies also brings to fore the smaller proportion of companies having higher ratio in the latter years of the study (1995-97), compared to the initial years (1991-94). For instance, while during 1991-94, virtually twofifths of the sample companies have LTD/STD ratio exceeding two, the proportion of such companies has declined to the range of around 30 per cent by 1996-97 (Table 18). The reliance on short-term is expected to grow due to correction of inverted yield curve. Earlier, DFIs were the main source of term finance, which was, provided at rates lower than that of short-term loans.

Statistical results, shown in (Appendix A-I), substantiate that there is significant difference in the post-liberalization phase-I and phase-II. However, it is important to stress here that only as per trend, the proportion of short-term debt has enhanced; long-term debt continues to be higher than short-term debt to a marked extent.

r,

l i,

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20 Capital Structure Practices in India

..

Table-18 Frequency distribution of long term debt to short term debt ratio of sample related to Indian companies, 1991-98 (Figures are in percentages) 1991

1992

1993

1994

1995

1996

1997

1998

than 0.25 0.25-0.5 0.5-1.0 1.0-1.5 1.5-2.0 2.0-2.5 2.5-4.0

9.5 7.3 19.0 16.8 10.6 5.6 12.9

11.8 5.4 22.6 8.7 10.8 9.7 11.8

12.9 8.3 15.5 11.3 12.9 7.7 18.0

10.9 11.9 11.9 11.9 11.4 7.0 19.9

13.0 8.7 21.3 13.0 9.7 7.3 13.0

14.9 9.4 21.3 13.5 9.9 5.9 13.9

18.2 6.3 22.9 14.1 7.8 6.7 14.6

13.5 9.4 13.5 17.7 6.3 12.5 11.5

Above 4.0

18.4

19.9

13.4

14.9

14.0

10.9

9.4

15.6

Total No.

179

186

194

201

207

202

192

96

.Less

(

The data for sample companies from India, inter-se, indicate that the proportion of long-term debt to short-term debt is higher for the foreign controlled companies, as compared to the domestic companies (Table-19) for the entire period of the study, the relevant mean figures being 2.31 and 1.90 for FCCs and DCs respectively; likewise, the median figures were 1.83 and 1.21.

That the composition. of debt is significantly different between the FCCs and DCs is further corroborated by '(' test. (Annexure A-I).

However, the findings are exactly opposite both for Singapore and Thailand as far as the proportion of LTD/STD ratio is concerned. For instance, the mean LTD/STD ratio for Singapore sample companies is 0.87 for the period of the study (1991-96); the median value was much lower at 0.53 (Table-20). These figures imply that the magnitude of short-term debt is higher than long-term debt in debt profile of Singapore corporate enterprises. In as many as one-fourth of the sample companies LTD is even less than one-fourth of STD (Quartile I is 0.24); only in one fourth of the companies LTD is higher than STD (Quartile 3 is LIS).

Managemcnt

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Jain and Yadav 21 Table-19 Mean, median, quartile values related to long-term debt to short- term debt of domestic and foreign controlled companies in India, 1991-98' Year

Number

Mean

Median

Quartile 1

Quartile 3

1.24 1.50 1.36 1.14 1.05 1.01 1.14 1.28 1.03 1.21

0.6 0.61 0.49 0.45 0.55 0.47 0.50 0.46 0.54 0.48 0.53

2.82 3.23 2.75 2.74 2.42 2.29 2.18 2.43 2.72 2.33 2.56

1.98 1.85 1.90 1.50 1.84 1.52 1.17 2.01 2.04 1.52 1.83

0.96 0.97 0.88 0.49 0.86 0.70 0.67 0.98 0.96 0.68 0.86

3.42 4.12 3.60 2.75 2.86 2.85 2.61 3.69 3.85 2.84 3.50

Domestic Companies

1991 1992 1993 1994 1995 1996 1997 1998 1991-95 1996-98 1991-98 .

125 130 138 142 164 144 135 61 164 144

164-

2.15 2.39 2.08 2.09 2.04 1.78 1.60 1.79 2.00 1.67 1.90

1.51

Foreign Controlled Companies 1991 1992 1993 1994 1995 1996 1997 1998 1991-95 1996-98 1991-98

54 56 56 59 43 58 57 35 59 58 59

2.56 2.60 2.47 2.08 2.06 1.90 1.86 2.58 2.50 2.04 2.31

The pre-eminent position of STO is more prominently brought out by frequency distribution (Table-21). For instance in nearly two-fifths of the sample companies from Singapore the ratio of LTO/STO is less than 0.5 and in nearly two-thirds of the companies, this ratio is less than one during the entire period of the study.

Management

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22 Capital Structure Practices in India Table-20 Mean, median and quartile values of long-term debt to short-term debt (LTD/STD) ratio of sample companies from Singapore, (1991-96) and Thailand (1991-95) year Singapore 1991 1992 1993 1994 1995 1996 r 1991-96 Thailand 1991 1992 1993 1994 1995 1991-95 Note:

Number

Mean

Median

25 31 32

0.90 0.70 0.82 0.90 0.81 1.18 0.87

0.42 0.53 0.65 0.50 0.53 0.62 0.53

0.26 0.18 0.26 0.24 0.23 0.25 0.24

1.08 0.96 1.15 1.41 1.16 2.31 1.15

0.67 0.54 0.71 0.58 0.60 0.62

0.39 0.25 0.39 0.30 0.26 0.33

0.14 0.10 0.11 0.11 0.10 0.11

0.88 0.70 0.79 0.70 0.83 0.73

50 49 26 70 59 (f)

67

68 78 93

Quartile

1

Quartile

3

Extreme values of LTD to STD ratio (i.e. values of LTD/STD greater than 5) are excluded from the observations.

Table-21 Frequency distribution pertaining to the long-term debt to short-term debt (LTD/STD) ratio of sample companies of Singapore, 1991-96 (Figures are in percentages)

LID/SID

1991(29)

1992(32)

1993(34)

1994(57)

1995(53)

1996(28)

8.8 35.1 19.3 5.3 5.3 7.1 7.0 12.3

1.9 41.5 17.0 18.9 5.7 5.7 1.9 7.6

3.6 35.7 21.4 7.1

100

100

100

Less thanO.l 0.1-0.5 0.5-1.0 1.0-1.5 1.5-2.0 2.0-3.0 3.0-5.0 5.0 & above

6.9 37.9 17.2 10.3

12.5 34.4 31.3 15.6

6.9 6.8 13.7

3.1 3.1

U.8 20.6 38.2 14.7 2.9 2.9 2.9 5.8

Total

100

100

100

10.7 14.2 7.2

Note: Figures ill brackets are the number of the sample companies.

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Jain and Yadav 23 The dominance of short-term debt is still more pronounced than LTD in the case of Thailand sample companies. It is eloquently brought out by the fact that the average LTD/STD ratio of the sample corporate enterprises was 0.61 for 1991-95 and the median figure was at alarming low figure of 0.29 (Table-20). In all the years, covered by the study, this ratio was substantially lower than one. Similar conclusions follow from frequency distribution data contained in Table-22. For instance, companies in the proximity of less than one-fourth to less than one-third have LTD/ STD ratio of more than one. In other words, the vast majority of the sample companies have this ratio lower than one. Inasmuch as about twofifths of the companies have virtually no long-term debt.

Table-22 Frequency distribution pertaining to the long-term debt to short. term debt (LTD/STD) ratio of sample companies of Thailand, 1991-95 (Figures are in percentages) 1991 (65)

1992 (75)

1993 (76)

1994 (74)

1995

Above 10.0

20.0 IO.S 23.1 16.9 13.S 6.20 3.10 6.20

24.0 17.3 IS.7 20.0 6.70 5.30 2.70 5.30

IS.4 13.2 23.7 17.1 7.CXJ 7.CXJ 3.90 7.90

21.6 17.6 24.3 13.5 S.IO 6.S0 2.70 5.40

22.7 IS.2 IS.2 15.9 S.oo 6.S0 3.40 6.80

Total

100

100

100

100

100

Year

Less than 0.1 0.1-0.2 0.2-0.5 0.5-1.0 1.0 -2.0 2.0-5.0 5.0-10.0

(88)

Note: Figures in brackets are the number of the sample companies.

From the perspective of financial management, these findings are very significant. The substitution of short-term finance for long-term finance causes grave risks at least in terms of interest rate t1uctuation, risk of nonrenewal/refinancing and loss of operating autonomy. In other words, there is a greater degree of risk and uncertainty attached with short-term funds, entailing higher risk of bankruptcy.

Management

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24 Capital Structure Practices in India

â&#x20AC;˘

We may venture to state that South-East Asian crisis, emanating from Thailand may, in some measure, be attributed to the excessive use of STD, unwarranted by the sound tenets of finance theory. Gupta's study (1985) (in the Indian context) further-reinforces our contention. Corporate enterprises in Singapore should learn a lesson from Thailand in this regard and should endeavour to substitute STD with LTD. Given their prudent DIE ratio, this should not be a formidable task for them, given their positive attitude (Table-27). _ , As stated earlier, short~term funds, in general, are more risky in nature. Is it out of compulsion that they have to go for such hmds or do they have preference for such funds, given the flexibility for early payment and low cost? Therefore, we considered it appropriate to seek opinion of finance managers regarding their preferences on the type of loan.

Response summary contained in Table-23 indicates that vast majority of Indian companies (nearly four-fifths) and three-fifths of Singapore companies prefer to employ long-term funds, while majority of firms in Thailand prefer short-term funds. These findings based on survey are in broad conformity to the earlier findings based on the analysis of secondary data. This apart, the survey also shows that a sizeable number of Indian and Singapore companies employ short-term funds to serve their long-term business requirements (Table-24).

Table-23 Preference for short-termlIong-term sources of funds by sample companies Preferences India Number Long-term sources Short-term sources No reply Others(must match the need)

22

Total

28

Management

& Change.

Corporate firms responding from Singapore Thailand (%) Number (%) Number (%)

5

78.57 17.86

1

3.57

6 2 1

60.00 20.00 10.00

2

33.33 66.67

3

100.00

1

10.00 100.00

Volume 7. Number

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Jain arid Yadav 25

Use of short-term

Long-term

Table-24 funds to cater long-term sample companies

sources India Number

requirements

by

Corporate firms responding from Thailand Singapore (%) Number Number (%) (%)

Sometimes Never Often No reply Always

16 9 2 1

57.14 32.14 7.14 3.57

3 5 2

30.00 50.00 20.00

3

100.00

Total

28

100.00

10

100.00

3

100.00

The findings are revealing as far as the response from Thailand companies is concerned. While short-tenn funds constitute the backbone for them, all the sample companies have stated that they "never" use short-term funds to cater to long-term requirements. This, prima-facie, does not seem to be true in actual practice. This assertion seems to be corroborated by the fact that the majority of Thailand companies did not prefer to respond to the survey question asking them to state experience of substituting short-term funds to serve long-term requirements. (Table25).

Table-25 Experience of substituting short-term funds to serve long-term requirements of sample companies of India, Thailand and Singapore Corporate firms responding from Singapore Thailand India Number (%) Number (% ) Number (%) 2 20.00 1 33.33 14 50.00 Mostly satisfied 5 50.00 2 fii67 6 21.43 No responses/NA 2 20.00 5 17.86 Mostly dissatisfied 2 7.14 Very much dissatisfied 1 3.57 10.00 Very much satisfied .

28 100.00 10 100.00 3 100.00 Total Six companies from India, five companies from Singapore and two Note: companies from Thailand did not either give any response or marked their response as "not applicable" on this question.

Nature of experience

Management

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2003)

26 Capital Structure Practices in India The experience on the subject seems to be equally unsatisfactory for Indian and Singapore cDmpanies as quite a large number of companies from these countries have either not responded to this question or stated their dissatisfaction. .

The findings are of vital significance in that finance theory suggests that long-term needs should be funded from long-term sources only; it is risky proposition to opt for short-term funds. It is not surprising to learn unsatisfactory experiences of the practicing managers on the substitution of STD to cater to the long-term business needs. This finding suggests that the employment of short-term debt instead of long-term debt seems to be more a matter of compulsion than one of preference.

SECTION III RISK CONSIDERATIONS The risk which a business firm is exposed to are of two types, namely, business/operating risk and financial risk. Although we are primarily concerned with financial risk for capital structure decisions, the discussion of business risk is in order as it serves as a guideline for financial managers to decide about the type of capital structure. In operational terms, if business risk (caused by operating fixed costs) is high, the corporate firm is expected to opt for low financial risk (emanating from use of debt and senior securities, necessitating payment of fixed financial charges) on the basi~ of sound tenets of financial management so that total risk is within "safe/tolerance" limits.

Thus, from the perspective of designing capital structure both business risk (measured by the degree of operating leverage, DOL) and financial risk (measured by the degree of financial leverage, DFL) are relevant. The objective of this section is to examine the gravity of business risk and financial risk of the sample corporate firms.

The DOL has been determined on the basis of percentage change in operating profitlEBIT due to percentage change in sales (with reference to the previous year). The value of DFL is measured with reference to percentage change in earnings per equity share (EPS) as a result of percentage change in EBIT. It will be appropriate to provide some more explanation about the data processing and its tabulation. The sample companies from Thailand could Management

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Jain and Yadav 27 not be covered as the required data was not available. Further, the number of sample companies is lower (in particular for Singapore) due to exclusion of all observations/companies with negative DOLIDFL in the concerned year(s). The negative values have been excluded from analysis as they do not serve the intended purpose of measuring risk on the one hand and more importantly would have caused distortion in determination of average values on the other. To have better and more representative data on the subject, we have excluded extreme values (exceeding 5) of DOLI DFL also. These facts should be borne in mind while interpreting the results of this part of the Section.

Relevant data pertaining to mean and other positional values of DOL and DFL of Indian corporate firms are contained in Tables-26 and Table27 respectively. Frequency distribution pertaining to DOL and DFL of these sample companies is presented in Table-28 and Table-29. Following major inferences can be deduced regarding risk dimensions from the data contained in these tables.

Table-26 Mean, median and quartile values of sample pertaining to operating leverage of Indian corporate enterprises, 1991-98 Year 1991 1992 1993 1994 1995 1996 1997 1998 1991-95 1996-98 1991-98

Number

Mean

Mediml

Quartile 1

Quartile 3

186 190 190 209 208 203 193

1.92 1.87 1.87 1.76 1.75 1.67 1.81 1.99 1.83 1.82 1.83

1.79 1.73 1.73 1.63 1.62 1.55 1.68 1.81 1.7 1.72 1.71

1.53 1.46 1.46 1.34 1.33 1.28 1.41 1045 1.43 1.37 1041

2.17 2.08 2.08 2.05 1.98 1.93 2.01 204 2.08 2.13 2.1

94-

225 220 225

Management

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28 Capital Structure Practices in India Table-27 Mean, median and quartile values of sample pertaining to financial leverage of Indian corporate enterprises, 1991-98 Year 1991 1992 1993 1994 1995 1996 1997 1998 1991-95 1996-98 1991-98

Number

Mean

Median

Quartile 1

Quartile 3

172 163 152 179 195 169 143 76 225 220 225

2.27 2.17 2.12 1.99 1.99 1.79 1.91 1.92 2.1 1.86 1.99

1.88 1.9 2.02 1.82 1.71 1.57 1.72 1.71 1.86 1.61 1.76

1.42 1.43 1.46 1.3 1.26 1.22 1.19 1.22 1.38 1.21 1.32

2.68 2.58 2.67 2.41 2.54 2.24 2.43 2.57 2.6 2.34 2.39

Table.28 Frequency distribution pertaining to degree of operating leverage (DOL of sample related to Indian companies, 1991-98 (Figures are in percentages) Degree of operating leverage

1991 1992

1993

1994

1995

1996

1997

1998

Less than 1.0

2.16

5.76

5.8

6.6

9.16

8.00

8.51

1.0-1.5

21.08 23.34

23.08

29.43

31.52

36.44

25.11

23.4

1.5-2.0

41.62 41.86

37.27

37.65

36.86

28.06

37.44

26.59

2.0-2.5

20.54

18.58

14.71

16.02

13.29

10.84

10.05

19.15

2.5-3.0

11.89

3.5

7.85

5.6

5.62

6.2

9.04

7.44

Above 3.0

2.7

9.6

11.33

6.4

6.1

9.8

10.8

14.89

Total number

187

198

199

215

214

209

203

95

3.5

Totals may not tally due to rounding off the figures.

Management

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•• __

•

.'l1li1 _

•••

Jain and Yadav 29 Table-29 Frequency distribution pertaining to degree of financial leverage (DFL of sample pertaining to Indian companies, 1991-98 (Figures are in percentages) Degree of operating leverage

1991 1992

1993

1994

1995

1996

1997

1998

Less than 1.0 1.0-1.5 1.5-2.0 2.0-2.5 2.5-3.0 Above 3.0

4.12 27.06 24.7 14.12 11.76 18.23

7.59 20.25 27.21 20.89 8.86 15.19

9.93 17.22 21.85 19.87 13.24 17.88

8 28 24 16 6.86 17.14

9.84 33.16 16.06 15.54 8.29 17.1

13.17 32.93 24.55 11.98 8.38 8.98

14.19 20.94 25 12.16 12.16 15.54

16 24 21.33 10.67 10.67 17.33

Total number

172

163

152

179

195

169

134

76

Corporate firms are exposed to higher DOL as well as DFL, signifying higher degree of business risk and financial risk. The respective mean figures of DOL and DFL are 1.83 and 1.99 for 8 year period (1991-98); median values are lower at 1.71 (DOL) and 1.76 (DFL). As per trend, a decline in DFL is notable (duly supported by 't' test, as indicated in Annexure A-I).

Similar conclusions follow on the basis of frequency distribution; a sizeable number of sample companies have high DOL (Table-28). For instance, nearly one-third of the sample companies have DOL of higher than two in most of the years of the study. Likewise, more than two-fifths of the sample companies in most of the years have DFL higher than two (Table-29).

Further, the segregated data of Indian corporate enterprises into domestic companies (DCs) and foreign controlled companies (FCCs) bring revealing aspects to fore. While no significant difference pertaining to DOL between the DCs and FCCs (Table-3D) is noticeable, there exists difference between these two sets of companies as far as DFL is concerned (Table-31): For instance, in the case of DOL, the mean and median values for the DCs were 1.8 and 1.68; the corresponding values for the FCCs were very close, i.e., 1.85 and 1.70. Whereas in the case of DFL, a marked difference is observable between mean values (2.14 domestic companies and 1.77 of the FCCs) values as well as median Management

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30 Capital Structure Practices in India

values (the respective figures are 1.92 and 1.54). This is duly supported by 't' test (Annexure A-I). ' Table-30 Mean, median and quartile values related to operating leverage of domestic and foreign controlled companies in India, 1991.98 Year

Number

Mean

Median

Quartile 1

Quartile 3

1.9 1.89 1.84 1.72 1.73 1.68 1.78 1.98 1.81 1.77 1.8

1.79 1.74 1.71 1.64 1.62 1.51 1.64 1.83 1.7 1.6 1.68

1.53 1.48 1.42 1.34 1.35 1.25 1.39 1.43 1.41 1.33 1.39

2.16 2.08 2.08 1.97 1.94 2.04 2.02 2.41 2.07 2.16 2.08

1.83 1.68 1.7 1.67 1.66 1.6 1.77 1.74 1.7 1.69 1.7

1.51 1.45 1.49 1.43 1.32 1.87 1.5 1.48 1.44 1.43 1.43

2.17 1.99 2.17 2.02 2 1.3 2 2.14 2.14 2 2.1

Domestic Companies

1991 1992 1993 1994 1995 1996 1997 1998 1991-95 1996-98 1991-98

135 137 136 153 150 148 143 65 153 148 153

Foreign Controlled Companies

1991 1992 1993 1994 1995 1996 1997 1998 1991-95 1996-98 1991-98

51 53 54 56 58 55 50 29 58 55 58

1.95 1.78 1.9 1.82 1.81 1.67 1.9 2.01 1.87 1.83 1.85

Table.31 Mean, median and quartile values related to financial leverage of domestic and foreign controlled companies in India, 1991-98 Year

Number

Mean

Median

Quartile 1

Quartile 3

2.36 2.24

1.94 2.00

2.65 1.55

1.47 2.77

Domestic Companies

1991 1992 Management

126 114 & Change,

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Jain andYadav 31 1993 1<X> 2.22 1994 127 2JJ7 1995 141 2.12 1996 II5 1.88 CJ7 1997 2.10 1998 47 2.13 1991-95 141 2.20 1996-98 II5 2.01 1991-98 141 2.14 Foreign Controlled Companies 1991 46 2.03 1992 49 2.00 1993 46 1.91 1994 52 1.78 1995 54 1.64 1996 54 1.57 1997 46 1.54 1998 29 1.58 1991 -95 54 1.87 1996-98 54 1.58 1991-98 54 1.77

2.<X> 1.93 1.95 1.61 1.87 1.92 1.97 1.81 1.92

1.56 1.33 1.34 1.24 1.41 1.44 1.44 1.34 1.41

2.83 2.60 2.94 2.34 2.79 2.84 2.77 2.54 2.72

1.56 1.60 1.83 1.59 1.43 1.45 1.48 1.66 1.57 1.46 1.54

1.35 1.33 1.42 1.22 1.15 1.17 1.09 1.39 1.30 1.12 1.20

2.81 2.18 2.30

2.<X> 1.80 1.86 1.85 2.34 2.17 1.89 2.08

As per trend also, it is noticeable that there is not significant difference between the mean values of phase-I and phase-II pertaining to DOL as well as well as DFL, both for DCs and FCCs. In contrast, both DOL and DFL are substantially lower for sample companies from Singapore. It is eloquently borne out by the fact that the mean value of DOL was 1.35 for 1991-96 and the median was lower at 1.18 (Table-32). Likewise, the respective mean and median values concerning DFL were still lower at 1.24 and 1.11 (Table-33). Similar conclusions follow on the basis of frequency distribution table. For instance, the DFL was less than 1.4 for virtually two-thirds of the sample companies in 5 years out of the 6 year period covered by the study (Table-35); substantial number of companies had DOL in safe limits (Table-34).

Management

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32 Capital Structure Practices in Ipdia Tables-32 Mean, median and quartiles values of degree of operating leverage (DOL) of Singapore sample companies, 1991-96 Year

Number

Mean

Median

16 22 34 47 47 27 77

1.19 1.27 1.41 1.29 1.43 1.38 1.35

0.66 1.11 1.16 1.01 1.25 1.31 1.18

1991 1992 1993 1994 1995 1996 1991-% Note:

Quartile

1

Quartile

3

2.03 1.76 1.87 1.46 1.73 1.84 1.77

0.42 0.61 0.63 0.55 0.84 0.55 0.62

The extreme values and the negative values of the degree of financial leverage are excluded from the observations.

Tables-33 Mean, median and quartiles values of degree of financial leverage (DFL) of Singapore sample companies, 1991-96 Number

Year

Mean

Median

Quartile

Quartile

1

3

25 1.06 1.11 0.79 1.42 30 1.36 1.1V 0.72 1.63 35 1.44 1.21 0.73 1.55 43 0.99 0.85 0.71 1.24 56 1.15 1.10 0.69 1.52 26 1.63 1.37 0.93 1.91 72 1.24 1.11 0.73 1.47 The extreme values and the negative values of degree of financial leverage are excluded from the observations.

Table-J4 Frequency distribution pertaining to degree of operating leverage (DOL) of the sample companies from Singapore, 1991-96

1991 1992 1993 1994 1995 1996 1991-% Note:

(Figures are in percentages) Degree of

1991(21)

1992 (27)

1993 (43) 1994 (51) 1995 (55)1996

(35)

Operating Leverage Less than 0.1 0.1 - 0.5 Management

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7.4 7.4 Volume 7, Number

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1.8 9.0

2.9 14.3

Jain and Yadav 33 0.5 - 1.0 1.0 - 2.0 2.0 - '3.0 3.0 - 5.0 5.0 - 10.0 Above 10

23.8 9.5 14.3 4.8 4.8 19.0

25.9 25.9 11.1 3.7 3.7 14.8

25.6 27.9 9.3 7.0 16.3 4.6

23.5 29.4 9.8 7.9 3.9 3.9

18.1 38.2 10.9 7.2 7.2 7.2

8.6 37.2 8.6 5.8 ll.5 ll.5

Total

100

100

100

100

100

100

Note:

Figures in brackets are the number of sample companies.

Table-35 Frequency distribution pertaining to Degree of Financial Leverage (DFL) of sample companies from Singapore, 1991-96 .

(Figures are in percentages) Degree of Financial Leverage

1991(29) 1992 (33) 1993 (40) 1994 (47) 1995 (61)1996 (30)

Less than 0.1 0.1 - 0.5 0.5 - 1.0 1.0-1.4 1.4 - 2.0 2.0 - 5.0 Above 5.0

6.9 10.3 20.6 24.1 17.2 6.9 13.7

3.0 12.1 18.2 30.4 12.1 15.2 9.0

15.0 10.0 37.5 12.5 12.5 12.5

4.3 8.5 44.7 21.2 8.5 4.3 8.4

3.3 14.7 21.3 27.8 16.4 8.1 8.1

6.6 23.3 13.3 23.3 20.0 13.3

Total

100

100

100

100

100

100

Note:

Figures in brackets are the number of the sample companies.

We feel from the data that financial leverage decisions of Indian corporate firms are independent of operating leverage decisions. As per sound principles of finance theory, it is expected that firms should prefer equity oriented capital structure (low DFL) to offset higher degree of business risk/operating risk. But this does not seem to be happening particularly in the context of Indian domestic companies. In effect, it implies that such Indian companies, in general, are saddled with very high degree of total risk measured in terms of product of DOL and DFL. It has grave policy implications in terms of firms' ability of raising external funds, particularly through debt instruments abroad, given their focus on Management

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Volume 7. Number

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34 Capital Structure Practices in India fundamental analysis. The FCCs are relatively better on the subject; they seem to be more conscious regarding financial risk.

Like the Indian domestic companies, Thailand companies also seem to be exposed tolfhe high degree of both business risk and financial risk.

The conclusion is based on the study carried out by Ranjit, Manoj 10.

During 1991-95, the mean DOL was 2.85 and DFL was 2.12; the respective median values of DOL and DFL being 2.27 and 1.65 (though lower) are still on the higher side from the perspective of ri$k. The study, through frequency distribution data, further indicates that nearly half of sample companies have DOL more than two and nearly two-fifths of the companies have DFL of more than two during the period of the study.

In sum, it is observed that the vast majority of corporate enterprises in India and Thailand are exposed to high degrees of business risk and financial risk during the period under reference. Inter-se, business risk is higher than financial risk.

Indian companies ought to learn lesson from the crisis that emanated in Thailand and should desist from using excessive debt.

SECTION IV INDUSTRY -WISE ANALYSIS Different industries are subject to different degrees of risk and therefore the nature of industry, ex-hypothesi, is likely to influence the capital structure decisions of corporate enterprises. The objective of this section is to empirically ascertain whether such differences exist among Indian, Thailand and Singapore industries.

While relevant data in terms of mean value of total debt to total assets ratio of 8 Indian industry groups (classification is based on the criterion followed by the Bombay Stock Exchange) have been presented in Table-36, Thailand and Singapore data on the subject are provided in Table-3=,7.(The industry-wise classification is based on the criterion followed by the stock Exchange of Thailand and Stock Exchange of Singapore).

Management

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.=

•••'m_m_.

Jain and Yadav 35 Table-36 Relative share of total debt to total assets of various industries of India, 1991-98 Industry Group

1991-95

1996-98

0.50 0.45 0036

0.42 0038 0.28

0.48 0.43 0033

0036

0030

0.34

0.40 0.43 0.46 0035

0033 0.34 0039 0030

0037 0033 0035 0033

Steel, Metal and Alloys Textiles Gen~ral Engineering Electronics, Electrical Equipment and Cables Chemical, Dyes, Pharmaceuticals and Plastics Sugar Paper, Pulp and Hardboard Electric Power

1991-98

Table-37 Total debt to total assets ratio of various industries of Thailand, 1991-95 Industry Group Thailand Electronics & IT Engineering Food & Beverages Trading & Manufacturing Singapore Textile, Clothing & Footwear Food & Beverages Chemicals & Plastic Electrical products & Computers Communication Energy Electronic components Machinery & Equipment Pulp & paper Pharmaceutical products and cosmetics Note

Number 1991-95

1991-95

25 14 14 29

0.17 0.13 0.19 0.19

31 27 12 13 10 8 8 6 5

0030 0035 0030 0.33 0.26 0.26 0030 0.33 0039

2

0.10

TDffA ratios from 1991 to 1995 are the mean values of the TDffA ratios of the sample companies of various industries.

Management

& Change,

Volume 7, Number

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u

36 Capital Structure Practices in India The available data indicate that there exists greater degree of difference in debt/asset ratio among industry groups of India and Thailand as compared to Singapore. ' For instance, in Thailand, more than nearly one-third of total assets had been financed through debt in Pulp and Paper, Food and Beverages, Machinery and Equipment, Electrical Products and Computers industries; this proportion is around one-fourth only in the case of Communication and Energy industry groups; it is the least (ten percent) in the case of Pharmaceutical Products and Cosmetics.

The redeeming feature of the analysis in the case of Singapore is that there is no significant difference among industries, as far as the use of debt is concerned, the mean range figure being 0.13-0.19 during 6-year period of the study (1991-96). However, among industries, inter-se, it is the maximum in Trading and Manufacturing, and Food and Beverages industry group, (19 percent), followed by Electronics and IT (17 per cent) and it is the least in Engineering (13 per cent).

SECTION V DEBT SERVICE CAPACITY The objective of this section is to examine the debt service capabilities in terms of the periodic payment of interest and the repayment of principal on maturity/pre-determined installments on due dates of the sample firms during the period under reference. For the purpose of judging the ability of corporate firms to service debt, we have relied on two well known ratios, normally banked upon by lenders and financial institutions, namely, interest coverage ratio and debt service coverage ratio. These coverage ratios measure the relationship between what is normally available from operations of the firm and the claims of the lenQers.

Interest coverage ratio (lCR) measures the firm's capacity to meet Hs interest obligations. It is determined by dividing operating profitlEBIT (earnings before interest and taxes) by interest. Relevant data of ICR in terms of mean, median and qum-tiles and frequency distribution of the Indian sample companies have been shown in Tables-38 and 39 respectively. The data on the similar pattern for domestic companies and foreign controlled companies in India have been presented in Table-40. The Tables-41 and 42 provide data on these lines in respect of Singapore Management

& Change.

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Volume 7. Number

1 (Summer

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'_.N_"""""."'•. iii~iiJi~4Iiaa"'i"'WLil'""i:t=il

x....

.c=1"5""',,,••""IL" ••••.•Umti-:z-.-:&-

•••• u••••c-m---••..

-"-,.-_-.

-~~~.~._------------~-----

Jain and Yadav 37

sample companies. The major inferences drawn from these tables are enumerated in the fo'Howing sections.

Table.38 Mean, median and quartile values of sample pertaining to interest coverage ratio of Indian corporate enterprises, 1991.98 Number

Year

Mean

Median

2.1 1.93 1.76 1.93 2.12 1.95 1.95 1.82 1.97 1.91 1.94

1.84 1.73 1.58 1.73 1.79 1.73 1.46 1.53 1.72 1.71 1.73

182 184 192 1<x) 189 176 176 87 192 176 192

1991 1992 1993 1994 1995 1996 1997 1998 1991~95 1996-98 1991-98

Quartile

1

1.38 1.22 1.09 1.26 1.35 1.15 1.041.12 1.28 1.06 1.2

Quartile

3

2.63 2.34 2.14 2.37 2.88 2.64 2.27 2.26 2.43 2.4 2.43

Table.39 Frequency distribution pertaining to interest coverage ratio of the sample related to Indian companies, 1991.98 (Higures are in percentage) ICR

1991

1992

1993

1994

1995

1996

1997

1998

Less than 1.0 1.0-1.5 1.5-2.0 2.0--3.0 3.0--4.0 Above 4.0

10.41 20.11 23.5 22.89 12.08 11.8

13.92 23.89 23.41 22.76 7.23 9.31

19.74 24.53 26.13 16.55 6.38 5.66

11.36 25.49 19.1 21.65 8.68 4.3

9.9 1.5 20.7 12.9 20.7 16.8

15.4 19.9 16.4 20.9 10.4 16.8

23.5 26.5 15.1 21.1 5.9 9.4

20.6 22.7 16.2 19.5 10.8 9.5

Total number

194

197

201

214

214

202

191

95

I (Summer

2(03)

Management

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Volume 7. Number

40 Capital Structure Practices in India Table-43 Mean, median and quartile values of sample pertaining to debt service coverage ratio of Indian corporate enterprises, 1991-98 Year 1991 1992 1993 1994 1995 1996 1997 1998 1991-95 1996-98 1991-98

Number

Mean

Median

Quartile 1

Quartile 3

147 152 157 163 163 150 145 79 163 150 163

3.15 2.59 2.42 2.45 2.31 2.09 1.94 1.98 2.31 2.01 2.28

2.72 2.57 2.38 2.41 2.42 2.01 1.84 1.71 2.42 1.85 2.29

1.74 1.56 1.43 1.56 1.43 U8

3.76 3.59 3.33 3.4 3.21 3.01 2.79 3.02 3.21 2.97 3.32

I

0.88 1.43 1.02 1.36

Lower quartile value is more revealing in this respect, particularly in respect of phase-H. The figure of 1.06 indicates that one-fourth of the sample firms had ICR only m~rginally higher than one. I~ operational terms, it implies that any decline in earnings may put these firms into serious difficulties in meeting even their interest obligations.

We gain better insight into the firms' ability to pay interest from Table-39 which contains frequency distribution on the subject. More than one-fifth of the sample firms during 1997-98 have lower EBIT than interest obligations, reflected in ICR of less than one; it implies that such a sizeable number of companies are not in a position to pay interest, let alone principal/loan installment.

This Table also indicates that more than two-fifths of the sample companies have ICR of more than 2 during the entire period of the study.

In other words, the data speak of vulnerability of the majority of companies to pay interest.

Further, the empirical evidence indicates that the interest coverage ratio of Des was lower than that of the FCCs in India during the entire period of the study (Table-40). The results are fall-out of the higher Of E as well as Of A ratio of the OCs as compared to FCCs. The statistical results shown in Annexure A- I also substantiate our conclusion that there exists a significant difference between FCCs in India and DCs in Mnnagement

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Volume 7. Number

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Jain and Yadav 41 their ability to pay interest. FCCs had more interest service ability than the DCs during 1991-98.

In contrast, the sample companies from Singapore were found to be in far better position to meet their interest obligations (Table-41), the respective mean and median figures being 2.76 and 2.82 for the period 1991-96. As per the trend, the values show an upward increase. Frequency distribution data (Table-42), provide additional empirical evidence on their better interest paying ability. For instance, less than 5 percent of companies (during 1991-94) only had ICR of less than one; there was not even single company with ICR of less than one during 1995 and 1996.

Virtually more than nine-tenths of the sample companies had ICR of more than two during the period under study. As much as, nearly half of the sample companies had ICR of more than ten.

Debt-Service Coverage Ratio (DSCR), in financial literature, is considered more comprehensive and more apt measure to assess debt service capacity of business enterprises. It provides the value (in terms of the number of times) the total debt service obligations (consisting of interest and repayment of principal in installm~,nJ:s~are covered by total operating funds available after payment of taxes (Earnings after taxes + Interest + Depreciation + Other non-cash expenditures like amortisations).

The DSCR, for the purpose of analysis, is determined on the basis of certain assumptions. While CMIE data (related to India) provide principal sum due for repayment (on year to year basis), there was a constraint of non-availability of such data in the case of sample companies from Singapore and Thailand; data in respect of non-cash expenditure items for both countries were not available.

The non-cash expenditures are assumed to be zero. In general, for most of the firms in most of the years, the amount of non-cash expenditure items is not sizeable. Therefore, their exclusion is not likely to affect the results significantly. For the purpose of determining denominator in the case of Singapore companies, debt sum has been assumed to be repaid in 6 years. This assumption is based on our belief that long-term debt is repayable in 6 years. These assumptions should be borne in mind while interpreting the results pertaining to Singapore corporate enterprises.

Based on the above assumptions, DSCR have been computed.

Tables-43 and 44 contain data in respect of the Indian corporate enterprises. The data pertaining to DC and FCC are exhibited in Table-45.

While mean and other positional values of DSCR related to Singapore are Management

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Volume 7. Number

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_"",''''.''''''0''

'"••••"'''''m.=''~'"="= •• _=,.='_=,.,=''.,=,

.•

~.,,=,,=~~~~~----~

42 Capital Structure Practices in India shown in Table-46, frequency distribution based data is provided in Table47.

Table-44 Frequency distribution pertaining to DSCR of sample related to Indian corporate enterprises, 1991-98 (Figures are in percentages) DSCR

1991

1992

1993

1994

1995

1996

1997

1998

Less than 1.0

Above 4.0

22.60 4.20 10.9 8.70 11.50 15.70 26.0

20.9 7.2 10.8 9.2 7.2 1.0 26.0

20.2 11.9 11.3 8.2 9.3 20.1 18.6

28.2 7.5 9.9 11.3 10.4 17.5 9.9

23.1 8,8 10.6 8.3 13.9 14.8 19.9

26.8 10.8 11.3 9.3 7.8 13.2 20.5

28.9 12.8 11.1 10.0 9.4 10.5 16.7

31.2 13.7 9.5 9.5 4.2 10.5 20.8

Total No.

208

196

193

212

216

205

180

96

1.0-1.5 1.5-2.0 2.0-2.5 2.5-3.0 2.0-4.0

While the mean and median DSCR (more than two times) for the entire period of the study is clear manifestation of quite satisfactory financial position of Indian sample companies to service debt, quartile one value of 1.02 is alarmingly low (Table-43). This signifies that nearly onefourth of India's sample companies are vulnerable and run the risk of not being able to meet the required payments in lean years which may cause financial distress.

Table-45 Mean, median, quartile values related to debt service coverage ratio of domestic and foreign controlled companies in India, 1991-98 Year

Number

Mean

Median

Quartile 1

Quartile 3

2.56 2.65 2.41 2.39 2.31 2.15

2.51 2.57 2.39 2.39 2.40 2.04

1.69 1.55 1.55 1.51 1.50 1.37

3.50 3.81 3.24 3.30 3.10 3.03

Domestic Companies 1991 1992 1993 1994 1995 1996

Management

105 95 10l 108 105 91

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Jain and Yadav 43 1.97 88 1997 1.94 46 1998 2.44 108 1991-95 2.03 91 1996-98 2.30 108 1991-98 Foreign Controlled Companies 2.66 42 1991 2.60 57 1992 2.46 56 1993 2.68 55 1994 2.39 58 1995 2.01 59 1996 1.84 57 1997 1.93 33 1998 2.55 58 1991-95 1.93 59 1996-98 2.27 59 1991-98

1.94 1.68 2.45 1.94 2.23 .

1.09 0.96 1.56 1.13 1.40

2.74 2.87 3.35 2.96 3.23

2.72 2.70 2.38 2.55 2.56 1.81 1.58 1.68 2.56 1.74 2.28

1.80 1.73 1.20 1.90 1.23 0.93 0.90 0.80 1.47 0.88 1.19

3.76 3.53 3.77 3.64 3.49 3.04 2.83 3.33 3.60 2.99 3.36

Judging data by frequency distribution, Indian companies between the range of more than one-fourth to more than two-fifths during 1995-98, have DSCR of less than 1.5. In fact, as per trend, the proportion of such companies has increased (Table-44). Statistical 't' test (Annexure A-I) indicates that there is a significant difference during phase-II as compared to phase-I. In effect, it implies that the cushion in terms of margin of safety with reference to DSCR has decreased in the latter years of the study.

As far as DSCR (computed separately for DC and FCC) is concerned, there is significant difference in two phases between these two categories of companies (Table-45). Independent sample 't' test on the subject also supports this contention (Annexure A-I).

Data related to Singapore corporate enterprises is revealing in this regard. Unlike ICR, their mean DSCR is low at 1.27 for the entire period of the study; median value is alarmingly lower at 0.90. The lower quartile value of 0.48 signifies that one-fourth of the sample corporate enterprises are just not in a position to meet financial obligations emanating from long-term debt (Table-46). Frequency distribution data further supports this apprehension in that nearly two-fifths of the sample companies from Singapore have DSCR of less than one (Table-47); only one-third companies had DSCR of more than two during the entire period of the study.

Management

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44 Capital Structure Practices in India Table-46 Mean, median and quartile values of debt service coverage ratio (assuming debt repayment in 6 years) of sample companies from Singapore, 1991-96 Year 1991 1992 1993 1994 1995 1996 1991-95 1995-96 1991-96

Number

Mean

Median

31 40 46 62

1.16 1.21 1.40 1.36 1.26 1.12 1.29 1.21 1.27

0.98 0.78 0.90 0.91 0.86 0.90 0.90 0.87 0.90

f()

28 76 62 77

Note

Quartile

1

0.52 0.45 0.51 0.42 0.47 0.49 0.48 0.47 0.48

Quartile

3

1.60 1.73 2.02 2.17 1.59 1.40 1.81 1.55 1.69

Extreme values (greater than 5) and the negative values of DSCR are excluded.

Table-47 Frequency distribution pertaining to DSCR (based on debt repayment in 6 years) of sample companies from Singapore, 1991-96

(Figures are in percentages) DSCR

1991(42)

1992(48)

1993(63)

1994(78)

1995(76)

1996(41)

Less than 0.5 0.5-1.0 1.0 - 2.0 2.0 - 3.0 3.0 - 5.0 ~.O - 10.0 10.0 - 25.0 Above 25.0

16.7 21.4 28.6 4.8 2.4 16.6 2.4 7.2

25.0 20.8 20.8

15.9 25.4 14.3 6.4 11.2 9.6 6.4 11.1

21.8 20.5 16.6 12.8 7.7 6.4 5.1 9.0

21.1 19.7 23.7 7.9 6.5 6.6 6.5 7.9

17.1 22.0 21:9 4.9 2.4 17.1 4.8 9.8

Total

100

100

100

100

100

100

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Jain andYadav 45 The DSCR computed on the similar methodology by Ranjit, Manoj 11 in the case of Thailand manufacturing companies reveals better position than those of Singapore companies; the relevant figures concerning DSCR for 1990-95 period are: mean 2.4, median 1.71, quartile one 1.17 and quartile three 2.59. Frequency distribution data further reveal that onefourth of the companies has DSCR of less than one during 1993-95.

In sum, it is reasonable to conclude that a sizeable number of companies in all three countries suffer from unsafe debt service capacity. The findings have policy implications for corporate financial managers as well as policy makers in government bodies and financial institutions in all the countries. Corporate financial managers in these countries face big challenge in terms of corporate capital restructuring leading to better debtservicing, particularly' in the wake of globalisation and liberalisation.

SECTION VI CONCLUDING

OBSERVATIONS

The study brings to fore that Indian corporate firms employ greater amount of debt as compared to corporate firms of Singapore and Thailand. Inter-se, the foreign controlled companies in India use less debt than domestic companies. As per trend, however, it is gratifying to note that during post-liberalization phase-II (1996-98), dependence oflndian corporate firms on debt has decreased. A sustained slow down and companies' policies to retire debt to shoreup the bottomlines may perhaps be conceived as the major reasons for the same. To reduce debt level the firms are liquidating some of their assets or placing equity (in view of depressed capital market conditions) with financial institutions/institutional investors.

Viewed from this perspective, it is reasonable to conclude that financial liberalization and globalization have started making some impact towards achieving more sound/safe debt-equity ratios in India.

Another notable finding of the study is that there is a greater proportion of long-term debt among Indian corporate enterprises, vis-a-vis, their counterparts in Singapore and Thailand. Between Singapore and Thailand, short-term debt is more pronounced among Thailand corporate enterprises.

Reliance on short-term debt to such a marked extent in preference to long term debt is against the sound tenets of finance theory as it causes grave risk at least in terms of interest rate fluctuation, risk of non-renewal and, Management

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~'-nr""e;: ••• ;r!=",'=r •••'""'"3"••• _ ••••

••••

46 Capital Structure Practices in India

above all, loss of operating autonomy. Further, the survey indicates unsatisfactory experience of using short-term debt in-lieu of long-term debt.

Therefore, there is need for substitution of short-term finance with longterm sources in these countries.

As a result of debt-dominated capital structure, Indian companies are exposed to very high degree of total risk and are subject to high cost of finanCial distress. It has been reflected both in high degree of operating leverage and financial leverage, measuring operating and financial risk.

Financial distress includes a broad spectrum of problems ranging from relatively minor liquidity shortages to extreme cases of bankruptcy. As per finance theory, the expected cost of financial distress will outweigh the tax benefits when the firm follows aggressive debt policy.

Among Indian companies, inter-se, the foreign controlled companies are relatively better as they encounter less financial risk and total risk compared to domestic companies in India. Like Indian domestic companies, Thailand corporate firms are equally exposed to the high degree of both business risk and financial risk; in contrast, both business risk and financial risk are substantially low for corporate firms from Singapore.

Indian corporate enterprises ought to learn lesson from crisis of Thailand and should make an effort to contain excessive use of debt. In fact, as per sound principles of financial management, it is expected of the corporate firms to have "unused debt capacity" for future needs in order to preserve operating flexibility particularly in circumstances when funds requirements are sudden and unpredictable.

Yet another notable finding of the study is that a sizeable number of companies in all the three countries neither have adequate interest coverage ratio nor have satisfactory debt service coverage ratio. Therefore, we feel that there is a need for introspection on the part of corporate managers (in particular finance managers) to review their debt policy decision with a view to keep the magnitude of debt within safe and manageable/serviceable limits, particularly in the wake of liberalisation and globalisation.

REFERENCES Solomon, E. (1969) The Theory of Financial Management. New York: Columbia University Press.

Brealey, R. A. and S. C. Myers (1997) Principles of Corporate Finance. New Management

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2003)

•••,"""'_

••••• -_.,

I Jain and Yadav 47 Delhi: Tata McGraw Hill.

Brigham E. F. and Johnson, R. E. (1976) Issues in Managerial Finance. Illinois: Dryden Press.

Sen, A. (1979) "Problems of Raising Long-term Finance," The Chartered Accountatn, Vol. 28, NO.1, p. 38-46.

Jain, P. K. and Manoj Kumar (1997) Comparative Financial Management: Practices of India and South-East Asia. New Delhi: Hindustan Publishing Corporation.

Barges, A. (1963) The Effect of Capital Structure on Cost of Capital. New Jersey: Prentice Hall, pp. 24-37.

Chakraborty, S. K. (1977) "Corporate Capital Structure and Cost of Capital," Calcutta, ICWA, pp. 62-65.

Kester, G. W. et.a!. "Corporate Financial Policy in the Pacific Basin: Hong Kong and Singapore," Financial Practice and Education, Vo!. 4, No. (I) pp. 118-127.

Gupta L. C. (1985) Financial- Ratios for Monitoring Corporation Sickness; Delhi: Oxford University Press.

Ranjit, Manoj (1997) "Capital Structure Practices in the Private Corporate Sector in Thailand-An Empirical Study of Manufacturing Enterprises (AIT Bangkok)," (unpublished dissertation), pp. 66-69. The is based on 220 companies for the period of 1991-95.

Ranjit, Manoj, Op. cit., pp. 72-74.

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48 Capital Structure Practices in India

S. No. I.

2.

3.

4.

5.

6.

7.

8.

Annexure A-I Summary of 't' tests for alternative hypothesis 't' test related to Value of 't'

Debt-equity ratio for the initial phase of liberalisation (1991-95) and the second phase of liberalisation (1996-98) pertaining to the sample companies in India.

Nature of

Zero

Significant Difference

Debt-equity ratio of FCC and DC in India, 1991-98

Zero

Significant' Difference

Total debt to total assets ratio for the initial phase of liberalisation (1991-95) and second phase of liberalisation (1996-98) pertaining to the sample companies in India.

0.008

Significant Difference

Total Debt to total Assets ratio for the FCC and DC in India, 1991-98

Zero

Significant Difference

0.002

Significant Difference

Long-term debt/short-term debt ratio for the FCC and DC in India, 1991-98.

Zero

Significant Difference

Degree of financial leverage for the initial phase of liberalisation (1991-95) and second phase of liberalisation (1996-98) pertaining to sample companies in India.

0.005

Significant Difference

DFLfor the FCC and DC in India, 1991-98

Zero

Long-term debt/short-term debt ratio for the initial phase of liberalisation (1991-95) and second phase of liberalisation (1996-98) pertaining to sample companies in India.

Interest coverage ratio for the FCC and DC in India, 1991-98 10. Debt-Service coverage ratio for the initial phase of liberalisation (1991-95) and second phase of liberalisation (1996-98) pertaining to sample companies in India.

II. Debt service coverage ratio for the FCC and DC in India, 1991-98

9.

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Zero

Zero Zero

Significant Difference Significant Difference

Significant Difference Significant Difference

INDIA'S TRADE-LINKS WITH THE EUROPEAN FACTS AND POSSIBILITIES

UNION

Bhaskar Majumder

The economy of independent India is linked with a number of countries and groups in terms of trade. The European Union (EU) is one such a group made up of fifteen developed countries from West Europe. In this paper we look at India's current export products and her share in world exports vis-a-vis imports of the EU from India. The paper explains that imports by the EU means substitution of home production by foreign goods, which in a situation of high unemployment in the countries in the EU, will be an uphill task. This is not to suggest impossibility of promotion of India's exports to the EU. Since the world trade structure, including that of the EU, is gradually shifting from material-cum-labour-intensity to weightless products and services, India's shift in internal production to such products and services should be made tradable. This will at the same time imply throwing out the following of old practices of following colonial division of labour in trade. This paper suggests planning in India for production-led trade that in a time sequence takes care of export promotion, keeping in mind the advantages of links with an integrated market like the EU.

T

he integration of any economy with the rest of the world gets channeled in a number of ways. The broad areas of these chan , nels are trade, finance, and investment. However, all these are conditioned by production of commodities and the factor endowments associated with them. Thus, when we talk about comparative' and competitive advantages in production we mean country-cum-factor specificity of production. The country-specificity covers climatic conditions and other natural factors for establishment of production workshops. The countryspecificity is not only confined to natural advantages within the country, as understood by geographic boundary, but also the relative availability of resources/advantages across countries. In keeping with these relative advantages, the countries aim at installing production network and expand Management & Change. Volume 7. Number 1 (Summer 2003) @ 2003 Institute for Integrated Learning in Management. All Rights Reserved.

50 India's Trade-Links

with the European Union Facts and Possibilities

production spaces, To start with, this space is the locality, understood by the individual as the home economy. Once home facilities show obstructions towards expansion of production possibilities, the concerned individual/firm looks for markets abroad. The external market is to be understood not only as size of the market as it exists by the revealed purchasing power for the commodities already in the sphere of production but also the scope for extension of that sphere. This may take shape in two ways, one is expansion within the host/conquered country, and the other is protecting home firms and allowing their expansion through trade and also investment in the host country. The engagement of countries in world trade also depends on the global power structure. For example, the naval power of UK and other European countries that colonized most of the countries now clubbed as decolonized countries in the Third ~orld was used to impose a particular type of trade on the countries colonized by military-diplomatic power of pre-Second World War period (Elsenhans, 1991, 21-27). Some of these countries like the UK, France, the Netherlands, Portugal etc now are the major members of the European Union (EU). Though recorded history, if maintained, shows an unforgettable past, for the purposes of this paper we will, as far as practicable, avoid the colonial consequences on the countries like India. The reason is that we are going to examine the trade prospects of India's economy with the EU of today, without denying that today's India and EU are formations from the past accumulation and deprivation in economic spaces.

The economy of independent India is involved in trade with a number of countries and groups of countries. Most of these countries and groups are from the Developed Market Economies (DMEs). This is in the sense that most of India's exports and imports, in value terms, are with the DMEs (Majumder, 1999, p. 31-32; Majumder, 1998, p. 245-246). The ED is a regional group from the DMEs located in West Europe. At present, 15 member countries constitute it. We aim at looking into the intricacies of India's trade links with the EU. This Paper will have five sections. In Section-I we deal with India's new economic policy, 1991, and associated industry-cum-trade regime. In Section-II, we examine India's Export Structure and India's Options for Export Promotion to the EU. In Section-III, we analyze WTO Regime, India's links with the EU and possibilities of India's export Promotion. In Section-IV, we pose the question whether export promotion is an end in itself. Finally, in Section-V, we offer concluding comments.

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I NEW ECONOMIC POLICY, 1991 AND INDIA'S NEW INDUSTRY-CUM-TRADE REGIME The New Economic Policy (NEP) announced by the Government of India (GOI) in 1991 opened a path of development radically different from the path earlier followed for India's economic development. The NEP, 1991 made it clear that "India can grow faster as part of world economy and not in isolation." India's trade policy, therefore, aimed to create an environment that would provide strong impetus to exports and would make exports profitable (GOI, 1991, p. 24). The package of trade policy reforms announced on 4th July 1991 aimed at access to high technology and world market. The reforms aimed at "strengthening export incentives, eliminating a substantial volume of import licensing and optimal import compression in view of the balance of payments situation. Essential imports of sensitive items such as POL and fertilizers were fully protected, but other imports of raw materials and components were linked to export performance" (GOI, 1991, p. 24). The NEP, 1991 aimed at abolisl)ing the phased manufacturing programme, which ensures abolition of any attempt to force the pace of indegenization in manufacturing or which eliminates any need for. enforcing "local content requirements." The NEP aimed at reducing the 'interference' of government, if not totally abolishing it, in matters related to import of technology and high investment priority industries (GOI, 1991, p. 3-4). As viewed by GATT Secretariat, "in July 1991, India began implementing longer-term structural reforms to address one of the root causes of its economic problems, i.e, government over-regulation" (GATT, 1993, Vol. I, p. 20). The reforms initiated in keeping with these policy objectives "aimed at creating a less regulated and more market-oriented economy" which is expected to offer "economic benefits both for India's trading partners and for the domestic economy" (GATT, 1993, Vol. I, p. 8).

The rationale of this policy may be summarized as the following: • Improved efficiency in utilization of resources, particularly in the export sector; • Utilization of post-1966 emergence of excess capacity, particularly in the capital goods sector, i.e, the argument of "vent-for-surplus"; • Utilization of economies of scale and hence ensuring both comparative and competitive advantage; • Managing "inflexibility" of maintenance imports (POL, fertilizers etc) Management

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52 India's Trade-Links with the European Union Fact" and Possibilities

via generating "export capacity to import;" Managing product-specific excess internal demand by following the "make or buy" policy, i.e, import liberalization; â&#x20AC;˘ Accepting export promotion as a derivation of import liberalization what may be called "import-led-growth-led-export".

In keeping with the NEP, 1991 and India's Eighth Plan (1992-1997) priori ties, the GO! announced the Export-Import (EXIM) Policy, 1992-97.

The EXIM Policy, 1992-97 aimed at promoting exports of sectors where India had comparative advantage. The EXIM Policy (1992-97) allowed export-oriented units engaged in agriculture and allied activities to avail of duty-free capital goods imports under the EOUIEPZ Scheme even if they export only 50.0 percent of their output (GO!, 1993-94, p. 87). Following this policy, the Budget for 1993-94 made substantial reduction in customs duties on capital goods, ferrous and non-ferrous metals and chemicals. Import duties on specific capital goods for thrust export areas such as textiles, leather, marine products, gems and jewellery, food processing, horticulture and floriculture industries were reduced (GO!, 199394, p. 87). In keeping with the NEP, 1991 and India's Ninth Plan (19972002), the Gal announced the EXIM Policy, 1997-2002. The EXIM Policy, 1997-2002, formulated in April 1997, and revised in April 1998, directed shifting a number of items from the negative/restricted list to Open General License (OGL) and hence allowing their free imports. This ongoing EXIM Policy pledges to carry forward the ambit}on of enhancing export competitiveness by simplifying procedures, minimizing transaction costs and delays and improving the attractiveness of various schemes (Gal, 1997-98, p. 84).

The post-NEP changes in Foreign Investment policies adopted by the GO! include the following, among others: (i) Majority foreign equity, even up to 100 percent is encouraged in several sectors under the New Policy; (ii) Foreign investment up to 51 percent in 35 high priority areas is eligible for automatic approval which is available from RBI within two weeks of application; (iii) There is now a single market determined exchange rate for the rupee. Foreign exchange is freely available for a number of purposes like payment of royalties, lumpsum fees, dividends, business development abroad etc. (iv) An important component of the move towards rapid integration with

â&#x20AC;˘

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Majumder 53 the global economy is the steps taken to open the Indian capital markets to overseas investors. These include the entry of Foreign Institutional Investors (FIls) in the capital market, foreign investment in off-shore funds promoted by Indian financial institutions and allowing Indian companies to float Global Depository Receipts (GDRs) which are traded in international stock exchanges. (v) Foreign institutional investors are allowed to invest in the Indian capital market.

These policy changes initiated by the GOI during the 1990s reflect a shift from a foreign exchange constrained control regime to a more open, market-driven and liberalized regime (GOI, 1994-95, p. 84). In essence, these trade and trade-related investment policies and measures adopted by the Gal during the 1990s reflect the clauses of WTO that came into operation from JanuarY,OI, 1995. The TRIMs of Uruguay Round of GATT liberalized the entry of foreign direct investment by removing restrictions like "local content requirements", "local equity requirements", "foreign exchange restrictions and limitations on remittances of profits", "export requirement" etc (Nambiar, 1996, p. 87).

II INDIA'S EXPORT STRUCTURE AND SHARE AND INDIA'S OPTIONS FOR EXPORT PROMOTION TO THE EU. A large economy like India tries to export a large number of commodities to the rest of the world. This product mix changes over time because of both the market conditions and technological changes. The market conditions are more external, determined by demand from countries outside, though the changing product-mix for a large economy like India is also determined by internal changes in taste-cum-demand pattern. We look at the' current commodity basket and hence the potentiality of that basket to be promoted as exports. This is because exports are often not supply-determined by a single country, but determined by demand. The demand also is determined by the specific changes in taste pattern along with the changing commodity composition-cum-income pattern in the destination countries. Thus, some products at some stage become dynamic products in export space. The major trade participants also often determine the dynamism.

By "major" commodities that India exports we mean the commodities that account for around half of total exports during 1990s. These Management

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54 India's Trade-Links with the European Union Facts and Possibilities

major commodities are gems and jewellery, readymade garments, cotton 'products, leather and leather manufactures, drugs and pharmaceuticals, machinery and equipment. These are in export products arranged in order of value as in 1998-99 (Table-I). The products are, in order, gems and jewellery, readymade garments, cotton products, leather and leather products, drugs and pharmaceuticals, machinery and equipment. These are the products that are considered as manufactured goods. The major commodities that cover around half of India's exports come from the listed manufactured goods, primarily because manufactured goods cover more than three-fourths of India's exports. The other items in the current export basket are agricultural goods that cover less than one-sixth of India's current exports (GO!, 2002-2003, p. S-87).

Table. 1 India's Exports of Major Commodities, 1991.2002 (Percentage Share in India's total export value, Selected Years) ltemsIYear

1991-92

Gems & Jewellery Readymade Garments Cotton Yarns, fabrics, madeups Leather & Leather Manufactures Drugs & Pharmaceuticals Machinery & Equipment Total* ($ millions) (% of Total) Total Exports ($ millions) (Percentage)

1998-99

2000-2001

2001-2002

15.3 12.3 7.3 7.1 3.5 3.2 (48.8)

17.5 13.2 8.2 4.9 4.3 3.4 (51.6)

16.6 12.5 7.9 2.9 4.3 3.7 47.9

16.7 11.4 7.0 2.8 4.7 4.0 46.6

17998 (100.0)

33651 (100.0)

44,560 (100.0)

43,827 (100.0)

Note: * means total of major merchandise exports.

Source: CMIE, 1999, Foreign Trade and Balance of Payments, July, p. 5.

GOl, 2002-2003, Ministry of Finance, Economic Survey, p. S-86 to S-87.

The developed countries have command over 80.0 percent of world export of manufactures, while the developing economies have command over one- fomth of such exports in 1997. For developing economies it was a significant improvement from one-tenth of world exports in manufactures in 1980. For the developed e 0nomies, the share has more or less

1

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remained unchanged over this period. The first-tier and the second-tier NICs command most of the share of the developing economies in world exports of manufactures. Of the large economies in the developing world, China could increase her share significantly, while India could not do so over the last two decades (Table-2).

Table-2 Share of Countries and Regions in World Exports of Manufactures, (Selected Years) CountrylRegion Developed Countries Developing Countries NIBs ASEAN China India

1980

1997

82.3 10.6 5.1 0.6 1.1 0.4

70.9 26.5 8.9 3.6 3.8 0.6

Note:

NIEs include Hong Kong, Singapore, Taiwan, and Rep. of Korea.

ASEAN includes Indonesia, Malaysia, Philippines, and Thailand.

Source: UNCTAD, 2002, Trade and Development Report, New York, p. 81.

India's share in world exports was less than one per cent by mid1960s, which was a gradual decline from her share in the 1950s and early 1960s. This share declined drastically to around 0.5 percent since the mid1970s. It maintained the trend during 1990s, from 0.5 percent in early 1990s to 0.6 percent during the end of 1990s. During the same time period, the EU maintained her share in world exports, which was between one-third to nearly half (Table-3).

Table-3 Share of India and ED in World Exports, 1965-2000 (Percentage share, Selected Years) Year India

EU

Source:

1965 '70 0.98 0.69 _ 45.6

'75 0.53 -

I '80

'85 '90 OA5 0.50 0.54 41.0 37.8 44.0

'91 0.5]

'92 0.53

'93 0.58

'94 0.59

'95 0.60 39.8

'96 0.62 39.2

'97 '98 '99 2000 0.62 0.61 38.0 39.9 39.2 35.9

CMIE, 1999, Foreign Trade and Balance of Payments, July, p, 5.

World Bank, 2002, World Development Indicators, Washington D.C., p. 346.

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56 India's Trade-Links with the European Union .Facts and Possibilities

India as a single large country (by size of population and geographic area) and the ED as a regional group of fifteen countries (with one-third of India's population) may not be readily comparable by conventional economic indicators. However, there is no doubt that India failed to promote her exports in the world market vis-a.-vis the success of the ED. India's failure was perpetu.al that started from a very low base right from the begi nning of her efforts to promote exports since the mid-1960s.

India's list of exports of manufactured goods mainly cover manufactured, but non-capital, goods. Capital goods are mostly imported by India (GOI, Ministry of Commerce & Industry, 2000, p. 413-414). The major destination countries for India's exports are the DMEs, of which the ED as the single destination has the largest share. Within the ED, the share of DK and Germany were the most. Of the fifteen countries in ED, the share of the "Big Five" in India's exports almost covered the whole of exports to the ED during the last four decades (Tables-4A and 4B).

Tahle-4A Share of EU in India's Exports, 1990-2000 (Percentage share in total exports, all commodities)

Countries/ year UK Germany France Italy Sweden Spain Denmark Portugal Belgium Nether[ands Luxembourg Fin[and Austria Ireland Greece Total

1990-91

'91-92

'92-93

'93-94

'94-95

'95-96 '96-97 '97-98 '98-.99

6.53 7.79 2.35 3.08 0.49 086 0.47 0.25 3.86 2.00 0.00 0.44 0.38 0.11 0.16

6.37 7.11 2.38 3.25 0.52 1.10 0.44 0.25 3.73 2.09 0.00 0.29 0.34 0.13 0.17

6.55 7.70 2.54 3.36 0.54 1.08 0.47 0.28 3.69 2.24 0.00 0.23 0.38 0.13 0.28

6.20 6.92 2.27 2.72 0.48 0.87 0.40 0.24 3.79 2.30 0.00 0.13 0.38 0.10 0.24

6.44 6.62 2.22 3.27 0.56 1.02 0.49 026 3.77 2.22 0.02 0.17 0.36 0.13 0.29

6.32 6.22 2.35 3.19 0.46 1.23 0.46 0.29 3.52 2.42

NA

NA

NA

NA

0.17 0.28 0.[6 0.31

0.16 0.28 0.18 0.28

0.17 0.24 0.19 0.27

0.22 0.23 0.20 0.29

28.77

28.17

29.47

27.04

27.84

27.07

25.85 26.12

26.89

6.12 5.66 2.14 2.79 0.45 1.27 0.45 0.26 3.26 2.55

6.12 5.50 2.[7 3.19 0.47 1.26 0.45 0.32 3.47 2.30

5.67 5.60 2.50 3.16 0.45 1.52 0.56 0.32 3.85 2.32

Source: CMIE, 1996, Foreign Trade Statistics ofIndia. May, p. 81-83 (For 199192 to 1995-96).

CMIE, 1999, Foreign Trade and Balance of Payments, July, p. III (For 1995-96 to 1998-99).

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In terms of India's exports to the rest of the world during 1990s, the EU accounted for around one-fourth. Within the EU, the major destinations are UK, Germany, France, and Italy, Belgium, and Netherlands. These six countries absorb the most of the exports from India that goes to the EU. Table-4B Destination of India's Exports, 1960-2002 (Percentage Share, Selected Years) 1960.61

70-71

80-81

90-91

95-96

99-00

00-01

01-02

OECD# of which EU of which Big Five*

66.1

50.1

46.6

53.5

55.7

57.3

52.7

49.3

36.2 33.5

18.4 16.6

21.6 18.3

27.5 22.6

26.5 20.8

24.7 18.7

22.7 17.1

21.8 16.4

Total**

642

1535

6711

Country/ Group

32553 106353 159561 203571 209018

# OECD is the functional expression of the DMEs. * Belgium. France. Germany. Netherlands, UK. ** Total in Rs. Crore.

Source: Gal, 2002-2003. Economic Survey. p. S-88

Most of India's exports go to the DMEs the real categories of which are the GECD, the Industrial Triad, and within Triad, the EU. The share of GECD in India's exports varied between half and two-third of India's total exports to the rest of the world. The share of the "Triad" year wise was a little behind that of the GECD. The share of the EU in India's exports during 1960-2001 varied between one-fifth and one-third of India's total exports to the rest of the world (Table-5).

Table-5 India's Exports to Countries and Groups, 1960-2001 (Percentage share in Exports) Country/ years

OECD Industrial which

2000-2001

1960-61

1970-71

1980-81

1990-91

66.1

50.1

46.6

53.5

52.7

57.7

45.2

41.6

51.5

47.6

Triad of

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58 India's Trade-Links with the European Union Facts and Possibilities US Japan E1.J LDCs of which OPEC Other LDCs Others*

16.0 5.5 36.2 18.9 4.1 14.8 15.0

13.5 13.3 18.4 26.2 6.4 19.8 24.7

11.1 8.9 21.6 30.3 11.1 19.2 23.1

14.7 9.3 27.5 22.4 5.6 16.8 24.1

20.9 4.0 22.7 37.6 10.9 26.7 9.7

Total (Rs. crs.)

642 (100.0)

1535 (100.0)

6711 (100.0)

32553 (100.0)

203571 (100.0)

%

*include East European Countries and countries not included in OECD, Industria! Triad, and LDCs as in the table.

Source: Gal, 2001-2002, Economic Survey, p. S-88.

The EU happens to 'be an attractive destination for India, if the countries only in Asia are considered. Among the major Asian countries and groups of countries, India exports the largest share to the EU. India exported to the EU around one-fourth of Asian total exports to the EU during the 1990s. This was more than the percentage share of each of China, Japan, ASEAN, and the NIEs in its exports to the EU (Table-6).

Table-6 Share of India and Selected Countries and Groups in Asia in Exports to EU, 1995-1998 (Percentage share of country'slgroup's respective export totals, Selected Years) Exports from Country/Group

Year (%

India

1995* 1998* 1995 1996 1997 1998 1995 1996 1997

China

NIEs

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Exports to EU of total by exporting country/group) 26.5 26.0 12.9 13.1 13.1 15.3 !3.5 13.1 13.6

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Majumder 1998 1995 1996 1997 1998 1995 1996 1997

ASEAN-4

Japan

59

14.7 14.9 15.2 15.5 16.7 15.4 15.6 18.5

Note:

NIEs include Hong Kong, Singapore, Taiwan, Korea.

ASEAN-4 includes Indonesia, Malaysia, Philippines, Thailand. * refer to 1995-96 and 1997-98.

Source: UNCTAD, 2001, Trade and Development Report, 2000, Bookwell Pub. India, p. 32.

GOl, 2001-2002, Economic Survey, p. S-88.

The EU grew at a rate of 2.3 percent during 198r-90 and 1.9 per cent during 1991-2000, calculated on the basis of 1995 US dollars (exchange rate basis). This growth occurred in a state of per capita income several times that of India (Table-7).

Table-?

Growth of GDP and Per Capita GDP of ED, 1980.2000

EIJ

Growth of GDP (Exchange Rate Basis, 1995 dollars) 1981-1990

1991-2000

GDP Per Capita (Exchange Rate Basis, 1995 dollars) 1980

2CXXl

Source: UN, 2001, World Economic and Social Survey, Bookwell' Delhi, p. 243.

There is, thus, scope to capture a larger chunk of robust demand of EU for goods imported from outside the ED. In other words, India can search for markets within the ED. Any export-link succeeds when it is bilateral in the sense that the importing country gets the chance to promote its exports. In the context of our analysis, it means India's imports from the ED. Of India's total imports from the rest of the world, the EU shares between one-fourth and one-third. Here the major countries are the same, Management

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60 India's Trade-Links with the European Union Facts and Possibilities

that is, UK, Germany, France, Italy, Belgium, and Netherlands (Table-8).

Table.8 Share of EU in India's Imports, 1990.2000 (Percentage share in total imports, all commodities) Country!

1990.91

91.92

92.93

93-94

94.95

95.96

96.97

97.98

98.99

Germany France Italy 2.54 Sweden Spain Denmark Portugal Belgium Netherlands Luxembourg Finland Austria Ireland Greece Major Five*

6.76 8.06 3.02 2.31 O.SI 0.45 0.31 0.08 6.29 1.84 0.03 0.33 0.34 0.05 0.03 26.67

6.19 8.04 3.17 2.40 0.S3 0.38 0.34 0.05 7.15 1.44 0.00 0.38 0.35 0.04 O.OS 26.S6

6.48 7.57 2.72 2.31 0.79 0.37 0.34 0.03 8.35 1.74 0.02 0.27 0.42 0.07 0.08 27.52

6.59 7.67 2.54 2.60 0.69 0.52 0.43 0.04 8.04 1.62 0.01 0.29 0.21 0.15 O.OS 27.15

5.45 7.59 2.14 2.90 1.03 0.63 0.65 0.04 4.15 1.33 0.00 0.37 0.19 0.07 O.Q7 2 I. 93

5.23 8.57 2.29 2.52 0.67 0.50 0.74 0.01 4.64 1.55

5.46 7.23 1.96 2.22 0.95 0.54 0.47 0.02 5.75 1.26

5.89 6.10 1.92 2.61 0.66 0.39 0.22 0.04 6.43 1.07

6.13 5.11 1.74

NA

NA

NA

0.47 0.31 0.07 0.13 23.63

0.51 0.36 0.05 0.04 22.92

0.42 0.20 0.09 0.09 22.56

0.43 0.12 0.10 0.02 21.61

Total

30.94

30.75

31.65

31.19

26.31

28.08

27.12

25.74

24.70

year UK

0.52 0.51 0.24 0.03 6.02 1.12 NA

*UK, Germany, France, Italy, and Belgium.

Source: CMIE, 1996, Foreign Trade Statistics ofIndia, May, p. 288-289 (For 199192 to 1995-96).

CMIE, 1999, Foreign Trade and Balance of Payments, July, p. 283 (For 199596 to 1998-99).

Most of India's imports are from the DMEs. These DMEs are functionally the countries in the aECD, the Industrial Triad etc. The EU, Japan, and the US constitute the "Triad". The "triad" share in India's imports is a little less than the share of the aECD. The members of the EU are also the members of the aECD. These are also the countries, which dominate the share in aECD. India's import share from these countries, however, declined during 1960-61 to 1999-2000. For aECD countries this decline was from around 80.0 percent to 40.0 percent. For the Triad, this decline was from around 70.0 percent to 30.0 percent. For the EU, it varied between one-third and one-fifth of India's imports from the rest of the world. The share of LDCs in imports from India during the same period increased from around one-sixth to less than one-fourth (Table-9).

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Majumder 61 Table-9 India's Imports from Countries and Groups, 1960-2001 (Percentage share in Imports, Selected Years) CountrieslYear

1960-61

1970-71

1980-81

1990-91

2000-2001

OECD Industrial Triad of which US Japan HJ LDCs of which OPEC Other LDCs Others Total (Rs. Crs.) (Percentage)

78.0

63.8

45.7

54.0

39.9

71.7 29.2 5.4 37.1 16.4 4.6 11.8 5.6 1122 (HXW)

52.4 27.7 5.1 19.6 22.3 7.7 14.6 13.9 1634 (HXlO)

39.9 12.9 6.0 21.0 43.5 27.8 15.7 10.8 12549 (100.0)

49.0 12.1 75 29.4 34.7 163 18.4 11.3 43198 (l00.0)

29.4 6.0 3.6 19.8 22.6 5.1 17.5 37.5 230073 (100.0)

Source: Gal, Economic Survey, 2001-2002, p. S-89.

For India's major exportable products, the major countries are the UK, Germany, France, and Italy, each of which covers around one-third to half of India's major export items. Each of these countries import at most four to five such items from India. India's exports as it is now, thus, need diversification by product category and more destinations even within the EU to ensure export stability (Table-IO).

For the EU as a whole and for the major countries in the EU, imports of capital goods from India remained negligible during 1990-2001.

These capital goods are manufacture of metals, machinery and transport equipment, Iron and Steel (Table-H).

DYNAMISM IN PRODUCTION AND INDIA'S LOCATION IN PRODUCT-MATRIX FOR EXPORTS Following Standard International Trade Classification (SITe) at the threedigit level, the tradable products can be categorized as in Box-I.

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.--.-..........

.........••....

-_---.. ~

- -

-

_.

....•..

~

-

..

_..-

.

.

:;

~-"~-~-~

...

Table-ll Imports of Capital Goods by Major Countries in EU from India, 1990- 1999 (Percentage Share, Selected Years) Capitalfrom Goods

UK

Germany

France

Italy

Belgium

--

imported 90-91 India Manufacture of Metals Machinery and Instruments Transport Equipment Primary and Semi -finished Iron and Steel

94-95

98-99

90-91

4.66

5.26

-

2.72

3.07

4.13

-

2.60

2.73

-

-

Total

10.33

12.12

Source:

0.00

94-95 98-99

90-91

94-95

98-99

90-91

2.32

-

1.66

1.70

-

2.10

4.66

-

1.06

2.47

1.37

2.15

-

3.16

1.69

-

-

0.67

-

-

0.00

6.19

9.80

0.00

5.88

94-95 98-99

90-91

94-95

98-99

0.96

1.80

-

1.00

1.01

1.05

2.06

-

0.21

0.55

-

1.34

3.29

-

0.50

0.42

0.98

1.36

1.94

2.93

0.68

1.50

6.84

1.36

5.32

10.08

2.39

3.48

CMIE, 1996, Foreign trade Statistics of India, May, p. 93-96, 99, 100, 105, 114.

CMIE, 1999, Foreign Trade and Balance of Payments, July, p. 120, 134, 136, 148,206.

64 India's Trade- Links with the European Union Facts and Possibilities Box-! Product Category and Nature of the Product Product Category

Nature of the Product

A B C D

Primary Commodities Labour-intensive and Resource-based Manufacture Manufacture with Low Skill and Technology Intensity Manufacture with Medium Skill and Technology intensity Manufacture with High Skill and Technology intensity Unclassified Products

E F

Source: UNCTAD, 2002, Trade and Development Report, p. 87.

The products with high rate of growth of exports are generally those in D and E (above 12.0 percent average annual rate of growth (percent).

For the data for 1980-1998, there are two exceptions, namely, silk and undergarments. Silk happens to be one of the twenty most dynamic agricultural cClmmodities exported by the developing countries. India is a major exporter of silk, along with other developing countries. While the share all developing countries' in world exports of silk was 87.0 percent in 1998, the share of India was only 3.0 percent as contrast to that of China at 70.0 percent (UNCTAD, 2002, p. 61, 87-88). In a product list prepared by the UNCTAD covering a total of 225 products at the threedigit level of classification following SITC, category products 'A' come mostly in growth brackets below 2.5 percent per annum. These are the products like coffee and coffee substitutes, jute, animal oils and fat, wool, iron ore, natural rubber, cocoa, that is, the products exported by the developing countries (UNCTAD, 2002, p. 88-92). Of the twenty most dynamic products that both the developed and the developing economies are involved in exports, there are only two products where India included herself, one is silk and the other is leather manufacture. In leather manufactures, India's share in world exports in 1998 was 6.0 percent. These are the products mostly controlled by the DMEs in the export market. The countries from the Third World that are exceptions to the general noninclusion or insignificant inclusion are China, Rep. of Korea, Malaysia, Taiwan, Hong Kong, Mexico, Singapore and Turkey (UNCTAD, 2002, p.

57). The inclusion of some of these countries as exceptions is also because of some additional reasons for the general exclusion of the TWCs. Management

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These are short-term successes of the first-tier NICs, namely, Hong Kong, Singapore, Taiwan, and Rep. of Korea, where the TNCs played a major role in using these countries as trade centers. Such successes in most of the cases, thus, were dependent successes. Of the twenty most dynamic agricultural products that are exported (by ranking by percentage share in export value), the share of developing countries remains very poor relative to those of the developed countries. For example, not only in products like chocolates, and cheese and curd, but also in products like cereal preparations, manufactured tobacco, fruit preparations etc the developing countries are not the main exporters (by percentage share in world exports by value product wise). In this list of twenty dynamic agricultural products exported in 1998, in addition to silk, India includes herself in fresh crustaceans, which make up six per cent of world exports.

The other country that gets berth in this list is China. All others are from the developed economies (UNCTAD, 2002, p. 61). Thus, as opposed to the conventional belief, not only the products in categories like D and E, but also for products in category 'A' the developed economies have total control over their exports.

In terms of relative positions of countries in the Third World specific to dynamic products, China is the country that has advantages'in products competitive for India. However, if we look at, for example, possibilities of export of clothing and textiles, which are the major products for both these countries, we find that China does not have distinct advantages over India in terms of labour costs and wage rates (UNCTAD, 2002, p.

158-159).

III WTO REGIME AND POSSIBILITIES OF INDIA'S EXPORT PROMOTION. India became a founder member of the World Trade Organization (WTO) in 1994. The provisions in WTO became operational since January 1995 and since 1995 the GOI reviewed and revised the EXIM Policy 1992-97.

"In accordance with the terms of the GATT, a country is required to lift quantitative restrictions on imports for Balance of Payments reasons when the position improves" (GOI, 1996-97, p. 89). In fact, "through continuous review and revisions (since NEP, 1991) control on export has been liberalized to the extent that now all goods may be exported without any restriction except the few items mentioned in the negative list of exports.

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66 India's Trade-Links with the European Union Facts and Possibilities

The items in the negative list are regulated because of strategic considerations, environmental and ecological grounds, essential domestic requirements, employment generation, and on grounds of socio-cultural heritage" (Gal, 1995-96, p. 110).

POSSIBILITIES

OF INDIA'S EXPORT PROMOTION

India is a country that was decolonized immediately after the Second World War as are many of the countries in the world who constitute the Third World (Rangel, 1986, p. 61). The TWCs had to accept colonial division of labour imposed on them by the pre-Second World War colonizers, particularly the countries in West Europe. These are the countries now included in the European Union (EU). Because of climatic reasons some of the agricultural goods and raw materials could not be produced in the colonizing countries apart from non-availability of some of the mineral products. Particular types of impossibility of production, thus, were there because of natural-biological-geographical reasons and had nothing to do with the calculation of comparative costs. However, based on the assumption of possibilities of production of all commodities in all countries (an explanation of which is offered by two-country-two commodity frame), the theory of comparative cost (Ricardian) rationalized the imposition of colonial division of labour on the Third World countries. A high size of population in many of the post-Second World War decolonized countries with little or no change in population-dependence sectorally helped the perpetuation of colonial division of labour practiced by the TWCs. This was supported also by the 19th century industrial revolution that sprouted from UK and guided the pattern of trade. This pattern of trade showed the decolonized counties exporting primary products to the DMEs while the latter exporting capital goods and technology. Since 1970s the pattern of merchandise trade has shifted from low-tech goods to high-tech goods, where in case of the latter the relative weight of R&D in industries involved in trade is high and increasing. The TWCs are obviously at a relatively disadvantageous position vis-a-vis the DMEs so far as expenditure on R&D is concerned. Post-WTO regime has made the trade pattern more adverse by gradual shifting of trade from weighted goods to weightless services, the latter showing trade in services. The labour and environmental reasons have made the scenario more against the export promotion by the TWCs. The ceasing of labour as a class in Management

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Majumder 67 the TWCs because of gradual informalization and/or sub-contracting of labour had added to the forces of imposition and prolongation of colonial division of labour.

Growth with stability in the destination country/region is a determinant of its power to absorb imports. This is more so when a country like India targets the EU as one possible destination of exports. In 2001, unemployment in Europe stood at 8.5 percent that was a decline from 11.5 per cent in 1997. The recession in the Euro area started shortly after that of the US, so that investment and exports declined, followed by a decline in consumption. The absence of growth accompanies with it unemployment.

In the Euro area, with low demand for labour, increasing population will find it difficult to get reintegrated in the job market (UNCTAD, 2002, p.

11). If in addition, the EU shows in the near future low rate of investment in machinery and equipment, non-increasing loans to the private sector despite the monetary relaxation, the scope for further investment will slow down (UNCTAD, 2002, p. 11). Non-accelerating growth in the EU will show less than enough scope for economies like India to promote exports in the EU. Also, exports to the EU means substitution of home production by foreign goods, which in a situation of unemployment is an uphill task. Because of slow increase in wages and stagnant employment, private consumption demand can rise a little implying further restriction on the possibility of promotion of exports to the EU. As a result of the Uruguay Round Agreements, changes in the conditions of market access have varied for different products as well as for different importing countries. In general, barriers to trade and industrial products have been lowered more than those to trade in agricultural products, and little has been achieved in terms of reducing trade-affecting subsidies in agriculture, particularly in the EU (UNCTAD, 2002, p.

60). Agricultural subsidies, particularly in the EU, have restricted growth of exports of a number of agricultural commodities from the developihg world. Also, the structure of Tariff Rate Quotas (TRQs) has made market access restrictive for those agricultural products, which have relatively high-income elasticities (UNCTAD, 2002, p. 62).

This is not to suggest the total impossibility of promotion of India's exports to the EU. The 15 countries in EU shares 6.5 to 7.0 percent of world population, and around 30.0 percent of world output. The trade participation ratios during the 1990s were over 40.0 percent for almost all the countries in the EU. High intra-EU trade explains these high trade parManagement

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ticipation ratios (Majumder, 2000, p. 214-215). The EU still absorbs much less and declining percentage share of exports from the developing economies to the DMEs. (UN, Dept. of Economic and Social Affairs, 1998, p.

139-140). There is, thus, scope for the developing economies to raise its export share to the EU. As an example, outward processing trade (OPT) between the EU and its trading partners has been concentrated in labour-intensive sectors, particularly textiles and clothing. The legislation on OPT goes back to the second extension of the Multi-Fibre Arrangement (MFA) in 1982, when quotas for OPT were included for the first time in MFA III. The special treatment of textiles and clothing imports into the EU generally involves application of customs relief within certain import limits, or under surveillance arrangements provided for in the bilateral textile agreements concluded by the EU with a number of suppliers under the MFA. In practice, this usually means a combination of Voluntary Export Restraints (VERs) and tariff suspension. It provides a preferential tariff quota on OPT re-imports, applied on a selective basis (UNCTAD, 2002, p. 64-65).

The main beneficiaries of this scheme are Morocco, Tunisia, Turkey and countries in Eastern Europe. The question that remains is whether India, being a major producer of textiles for exports, can grab a significant portion of the share of the developing economies.

"Generally, trade in skill-and technology-intensive manufactures has been increasing much faster than that in labour-intensive and resourcebased manufactures and primary commodities, although certain products in the latter categories have also shown considerable dynamism. These differences can not be explained in terms of differences in income elasticities or shifts in comparative advantage alone. Policies governing market access also appear to have played a major role, favouring skill-and technology-intensive sectors in which industrial countries have a competitive edge over agricultural commodities and middle-range manufactures, which are more important for less advanced countries" (UNCTAD, 2002, p. 53). Market access depends not only on diversification of products, but also on promotion of dynamic products. The developing countries that are marginalized in world trade face the non-promotion of exports of dynamic products.

The fact that growth of world trade in manufactures is faster than the growth of trade in primary products is not a new one. A falling share of rising income tends to be spent on food (major primary product). This Management

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implies that the percentage share of food in world consumption basket and in trade volume will tend to decline. For agricultural products and industrial raw materials, demand grows less rapidly than increasing household income for a number of reasons. The consumers with increasing income in the main consuming countries move towards an economic structure based on products and services that require less raw material input.

The development of synthetic substitutes (in particular for cotton, rubber and wool), and the general decline in the intensity of use of such raw materials in industrial production in developed economies support this shifting consumption pattern (UNCTAD, 2002, p. 59). As a conventional argument, "the relatively low income elasticity of demand for most agricultural products seems to have played a major role in the steady decline in the share of agriculture in developing country merchandise exports" (UNCTAD, 2002, p. 58).

In addition to the questions related to product-linked market access, export possibilities may be constrained for the TWCs like India by other factors like, for example, environmental reasons.

Example: MARINE

Environment

Reason

PRODUCTS

India faces the prospects of a total ban on seafood exports after the veterinary committee of the European Union recommended a ban on the imports of seafood items from India. The Government of India fears that this ban will affect the seafood exports, which at present stand at Rs. 15,000 crore to the EU and Rs. 3,000 crore to mostly US and Japan.

"The ban issue arose when cholera germs in some of the consignments to Europe led to a rejection of the consignment" (The Economic Times, 31 July, 1997, p. 3).

TEXTILE

l I

PRODUCTS

In the recent past, garment exporters in India faced serious problems when Germany imposed a ban on textile goods treated with Azo dyes.

Germany happens to be a major member with the EU, and one of the largest importers of Indian textiles. The ban was imposed because German consumers perceived Azo dyes as causing cancer. Garment manuManagement

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70 India's Trade-Links with the European Union Facts and Possibilities

facturers in India now face the uphill task of not only ensuring that future garment exports to Germany are free from Azo dyes, but also the obligations of phasing out the manufacture of such dyes and developing suitable substitutes. The Apparel Export Promotion Council (AEPC) has found that the environment standards in US and Europe would ultimately affect all stages of textile production in India, including cotton cultivation, spinning, processing, dyeing, printing and finishing (IIFf, 1999, p. 5).

Under such circumstances it is doubtful if conventional measures like devaluation etc. may be of much help in promoting exports from India.

Of the major importers from the EU, India devalues its currency vis-avis the currency of UK (Table-12) .

Table-12 Value of Rupee relative to Currencies of Major Countries in EU, 1980-2002 Year/Country Currency

Germany

UK

DM

Pound

1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

23.37 22.90 20.93 24.22 22.84 21.19

52.30 56.40 60.97 69.57 69.85 67.55 68.32

France Franc

Italy Lira

7.00 6.76 6.23 7.22 6.81 6.32

0.0200 0.0200 0.0202 0.245 0.023 0.021

EURO*

44.79 41.48 42.18

Not Available. *EURO currency came into existence w.eJ. January 1, 1999.

Source: CMIE, 1996, India's Balance of Payments, July, p. 23.

CMIE, 1999, Foreign Trade and Balance of Payments, July, p. 438.

Gal, 2001-2002,Economic Survey,p. S-76.

GO!, 2002-2003, Economic Survey,p. S-76.

IV IS EXPORT PROMOTION AN END IN ITSELF? A structure of commodity production that can not escape the long-term practice of relying on colonial division of labour has to face retreat of export promotion and adverse trade balance. Either because of availability of natural resources and abundant labour or because of non-development of capital-oriented competence in a relative sense, the TWCs continue the Management

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production of material-intensive lower-order low-tech goods. The TWCs often believe that this is where their comparative advantages lie. The economy of India, for example, has shown a rapid shift from material production to services. Apparently it means a shift from material-intensive production to brain-intensive production. The fact is that so far the shift in favour of the service sector has remained concentrated in nontraded services. Thus, the shift is artificial, manifested in declining share in income of people engaged in the primary sector (rural location) and increasing share of the people in the services (urban) sector, without any accompanying increase in population engaged in the latter. The implication is not only production at reducing productivity in the primary sector but also a crippled development of the services sector that could have contributed to exports via taking advantage of WTO- led TRIPs. But an economy like India, like most of the TWCs, are not in a position to change their patent regime abruptly, particularly to shift from process regime to both process and product regime. The initially low and perpetually low R&D keep this scenario in tact for the TWCs. While the product pattern has remained unchanged, the consumption pattern at least of the top minority of the population in countries like India has changed radically. The forces of globalization have encompassed at least this minority section that feel comfortable with the taste-cultureconsumption pattern of the DMEs. There has come, thus, a tendency also to divert the consumption pattern within the economy that serves the top minority within these TWCs and favours the trade, finance and investment pattern of the DMEs. Production of commodities by selection of a few in the national economy by taking advantage of global division of labour (like cars of different brands) can not solve the problems of developing internal market. It can not also widen the production base on which forward product planning could be made to ensure long-term success of exports.

For many of the developing economies efforts to promote exports are really expressions of liberalizing imports. This is because of dependence on import of technology, capital goods, and equipment, for which the developing countries continue to rely on the developed countries for production and exports. Thus, even if export promotion is accepted by the developing countries as a goal, it can not remain a single goal separated from import dependence. Export promotion, as a strategy, remains imp0l1dependent. In the ultimate analysis, in the context of operations of TNCs Management

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72 India's Trade-Links with the European Union Facts and Possibilities

in any such developing country, it becomes dependent on the particular type of capital goods, technology and spare parts that these TNCs import, often in an intra-firm frame, to the developing economies. The developing economies then become a space for assembly of the parts imported from the DMEs, or remain a trade center. Under these circumstances, the developing countries can promote neither exports that could have been thought to ensure positive trade balance nor can change the product composition to change the trade pattern. The developing countries, thus, remain dependent on the DMEs by all means.

V CONCLUDING

COMMENTS

The task for countries like India remains to develop a product structure that gradually escapes colonial division of labour. Co-existence of excess capacity in industries in India and non-promotion of exports for utilization of that excess capacity seems paradoxical. Similarly, within the national economy coexistence of excess liquidity requires its realization by investment. At the same time, the quest for foreign investment seems paradoxical. The economy will have to resolve these paradoxical issues, before it can really go for export-led success. A sudden change in the product basket is not possible, whatever be the compulsions of the economy in the context of its integration in the global economy. The given resource endowment of the economy also permits it to go slow in a step function, doing first things first. The problems are that these first things are yet to come into prominence. The first thing is product planning where both the producers and consumers within a national economy come from the same income category. This planning for production-led trade has to show ascending order-from low tech low income yielding output base to hightech high income yielding output 'base. At the first stage, the promotion of exports may take a backseat. Once the products move forward in ascending order by taste, technology, demand, both internally and externally, the economy can go for exports. The EU can playa major role in this stage, because it provides an integrated market of 15 DMEs from West Europe.

ABBREVIATIONS ASEAN EOU Management

USED Association of South East Asian Countries Export Oriented Unit

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EfYZ RJ GAIT NEP NIEs

OOL POL TRIMs WTO

Export Processing Zone European Union General Agreement on Tariffs and Trade New Economic Policy Newly Industrializing Countries Open General License Petrol, Oil and Lubricants Trade Related Investment Measures World Trade Organization

REFERENCES Elsenhans, Hartmut (1991) Development and Underdevelopment, The History, Economics and Politics of North-South Relations. New Delhi: Sage Pub. GAIT (1993) Foreign Trade Policy, India, Vol. I, Geneva.

GOl (1991) India's New Economic Policies, Ministry of External Affairs, New Delhi.

QOl, Ministry of Commerce and Industry, 2000, Handbook of Industrial Policy and Statistics, New Delhi.

GOI, Ministry of Finance, 1993-94, Economic Survey GOI, Ministry of Finance, 1994-95, Economic Survey GOI, Ministry of Finance, 1995-96, Economic Survey.

GOI, Ministry of Finance, 1996-97, Economic Survey GOI, Ministry of Finance, 1997-98, Economic Survey GOl, Ministry of Finance, 2002-2003, Economic Survey.

Indian Institute of Foreign Trade, 1999, Focus WTO, Vol. I, NO.1, May-June.

Majumder, Bhaskar (1998) "India and Globalization: Some Reflections on India"s Trade-Links with G-7," Journal of Indian School of Political Economy, Vol. X, NO.2, April-June.

Majumder, Bhaskar (1999) "India's Trade Links with G-7, An Analysis in the Context of Globalization," Review of Development and Change, Jan-June, Vol. IV, NO.2.

Majumder, Bhaskar (2000) "Regional Integration with the European Union as a Case: Any Lessons for the Third World?," Journal of Social and Economic Development, Vol. III, NO.2.

Nambiar, R. G. (1996) World Trade Organization (WTO) and India, The Role of India, Egypt and other Developing Countries in the Emerging International Order, Proceeding of the India-Egypt Seminar, Organized by the ICSSR, 10-11 Sept, 1996, at India International Centre, New Delhi ..

Rangel, Carlos (1986) Third World Ideology and Western Reality. New Brunswick, USA: Transactions Books.

UN, Dept of Economic and Social Affairs, 1998, World Economic and Social Survey, New York.

UNCTAD (2002) Trade and Development Report, New York.

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ABSENTEEISM OF WORKERS IN MANUFACTURING INDUSTRIES OF BANGLADESH: A COMPARISON BETWEEN PRIVATE AND PUBLIC SECTORS

M. Ekramul

Hoque

Md. Mayenul

Islam

Absenteeism in industry seems to have an important impact on productivity, profitability, investment and absentee workers themselves. This study was conducted to assess and compare the absenteeism of the manufacturing workers according to the nature of the organization (private sector and public sectors). The sample of the study, selected using random number table consisted of 400 workers, taking 200 from four private sector mills and 200 from four public sector mills, situated at Dhaka and Khulna divisions. The study revealed that: (1) the absenteeism rates of the workers in manufacturing industries of Bangladesh is considerably high, (2) workers of public sector have significantly higher absenteeism than their counterparts in the private sector; and (3) workers of public sector have higher absenteeism rate, absence rate, incidence rate, frequency rate and severity rate; and (4) the important causes of absenteeism of the manufacturing workers includes accident and injury, job dissatisfaction, stressful job, mental illness, personal and family problems, working elsewhere for extra income, visiting family at home (village), and bad working conditions.

INTRODUCTION

A.

bsenteeism is one of the critical factors affecting optimum utili zation of human resources. An increasing rate of absence adds considerably to the cost of industry and hinders industrial progress. The economy of Bangladesh heavily depends on agriculture. But the agricultural sector fails to meet the ever-growing needs of the huge population of Bangladesh. According to the Bangladesh Economic Survey (2001) the percentage living under poverty level is around 78 percent.

So, it becomes a crying need to change the fortune of this deprived class.

According to Chenery (1968) only the development in the industrial sector may boost up the development priority for such kind of under develManagement & Change, Volume 7. Number 1 (Summer 2(03) 2003 Institute for Integrated Learning in Management. All Rights Reserved.

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76 Absenteeism of Workers in Manufacturing Industries of Bangladesh

oped economy. Bangladesh historically lags behind in industrialization.

Although some measures were undertaken during the sixties for industrialization in this part of the then Pakistan, substantial progress could not be achieved. After liberation, the Government of Bangladesh has been endeavouring to industrialize. However, it faces manifold major problems, one of which is how to control and bring down widespread absenteeism in industries. Problems of absenteeism continue to plague our country like other developing countries. According to Mamoria (1992), "Absenteeism is the practice or habit of being an 'absentee,' and an 'absentee' is one who habitually stays away."

Mannan (1984) found that a high rate of absenteeism was an important cause of loss in production in our industries in general. Hussein (1990) reported, "absenteeism is one of the most visible behavioural problems facing today's organizations. The lost time and operational costs associated with absenteeism are very high." The industries of Bangladesh have been suffering from low productivity. The main reason for low productivity may be that the industries cannot engage their work force well or cannot e,xploit best or highest services from workers due to absenteeism.

The problem of absenteeism has been widely noticed by industrialists and researchers during the last half century (Reddy and Rao, 1989). Absenteeism continues to be an important organizational problem that affects labour and training costs; hence, it is important that a greater understanding of absenteeism and its contributing factors is achieved (Keller, 1983).

A series of studies on absenteeism have been conducted in India and Western countries. Very few studies have been carried out in our socioeconomic context. Most of the studies focus on the cost of absenteeism and the impact of some demographic and socioeconomic variables on absenteeism. However, inferences made by these studies in this field have not effectively been able to stem this malady. No comparative study has yet been made on the absenteeism of the workers of the private and the public sector manufacturing industries in Bangladesh. Lack of substantive data demands a study in this area.

OBJECTIVES

OF THE STUDY

The main objectives of the present study is to assess and compare workers of the private and the public sector manufacturing industries in Bangladesh in terms of their absenteeism. However, the present study Management

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Hoqne and Islam 77

attempts to achieve the following specific objectives: I: To measure absenteeism of the workers of manufacturing workers in Bangladesh.

To compare absenteeism of the workers of the private and the public sector manufacturing industries in Bangladesh.

3. To identify the important causes of absenteeism as perceived by the workers of the private and public sector manufacturing industries; and 4. To make suggestions for managerial policy implications in the light of the findings of the present study.

2.

METHODOLOGY Sample The sample of the present study consisted of 400 workers, taking 200 from four private sector mills and rest 200 from four public sector mills situated at Dhaka and Khulna divisions. They were selected randomly using random number table method. All the workers were male. The demographic variables of the sample are shown belo~.

Demographic Experience Age (Years) (Years)

Range 18-70 years

Range 1-44 years

Mean 37.18

Mean 13.78

SJ2

SJ2

8.56

12.00

COLLECTION

Thble-A Variables of the Sample (N = 400)

Education (Percent)

Skill Wage (Percent) (Per Month)

Marltd (Percellt)

Illiterate 20.3% Below Secondary: Secondary & above:

Skill: Range 68.2% Tk.lOOOUnskilled 5000 31.8% Mean 2315.80 SD 806.65

Married: 93.00/0 Unmarried 7.0%

Nuthber Dependents

Range 1-9 persons

~ 5.44

~ 1.51

OF DATA

The absenteeism related data were obtained from the factory records for the period from July 2000 to June 2001. For absence records the labour officer of each was requested to give the total number of days a particuManagement

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78 Absenteeism of Workers in Manufacturing Industries of Bangladesh lar worker remained absent from his work without prior permission of the authority. One open-ended question was asked to identify three most important causes as perceived by the workers that often lead them to remain absent from the work place.

ANALYSIS

OF DATA

T-test, rank order and descripti ve statistical tools were used to analyse the data. The following indices (Behrend, 1955) have been used in the present study to measures incidence of absenteeism: 1) Absenteeism Rate: The absenteeism rate indicates the total man-days lost due to unauthorized absence as a percentage of total man-days scheduled to work. Absenteeism rates on different months have been calculated from the data collected from the records maintained by the company using the following formula: Total man-days lost due to unauthorized absence during a month

Absenteeism Rate

= -------------------x

100

Total man-days scheduled to be worked 2) Absence Rate: The absence rate expresses the total time lost due to both authorized and unauthorized absence as a percentage of the total man-days scheduled to work. To measure absence rate the following formula has been used in this study: Total man-days lost due to authorized + unauthorized absence during a month Absence Rate = -------------------_ x 100 Total man-days scheduled to be worked 3) Incidence Rate: The incidence rate measures the number of absences per 100 workers in any given period. Whether a worker is absent an hour, a full week, or longer is irrelevant to this measure. The formula calculates the proportion of workers who were absent during the stated period for any of the reasons designated and for any length of time.

Number of workers absent Incidence Rate = ------------x 100 Total number of workers employed Management

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Hoque and Islam 79

4)

Frequency Rate: According to Bhatia (1981) frequency rate may be treated as inception rate (spells). It reflects the incidence of absence and is uSllally expressed as the number of separate absences in a given period, irrespective of the length of absence. The frequency rate represents the average number of absence (spells) per worker in a given period. In the present study, frequency rates were calculated by using the following formula: Total number of times or spells in which the leave was availed Frequency Rate

=

-----------------x

100

Total number of man-days scheduled during that period

Higher frequency rate indicates that the employee absents himself very frequently and vice versa.

5) Severity Rate: Severity rate is the average length of time lost per absence and is calculated by using the following formula: Total number of man-days absent during a period Severity Rate

= Total number of times absent during that period

Higher severity rate indicates that the employee is absent for longer duration each timed.

RESULTS AND DISCUSSIONS In the fiscal year, July 2000 to June 2001 scheduled working days in manufacturing industries of Bangladesh were 299 (except one weekend in a week and occasional government holidays). Total scheduled working days were 1,19,600 for 400 workers and mean score of monthly schedule working days were 9966.67. Employees in the industry were eligible for 18 days earned leave, 14 days sick leave, and 10 days casual leave, i.e. total 42 days in a year. Details of absence related rates are presented in Table-I.

Management

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80 Absenteeism of Workers in Manufacturing Industries of Bangladesh Table-l The Absenteeism Rate, Absence Rate, Incidence Rate, Frequency Rate and Severity Rate of the Workers of the Private and the Public Sector Manufacturing Industries in Bangladesh (N=400).

Months

Absenteeism Rates (0/0)

July August September October November December January February March April May June Average

6.16 5.76 7.59 5.53 5.77 5.58 5.29 3.64 5.49 4.45 5.04 6.00 5.52

Absence Rates (0/0) (authorized + unauthorized)

Incidence Rates (0/0)

Frequency Rates (0/0)

Severity Rates(%)

18.23 17.37 18.17 13.20 13.49 17.46 18.81 14.34 17.54 11.54 11.42 11.43 15.25

33.00 30.25 35.25 29.75 30.00 33.00 27.25 22.75 29.00 25.75 28.75 37.25 30.16

3.30 2.54 3.74 3.16 2.45 2.81 2.34 1.53 2.01 1.% 1.85 2.15 2.48

1.92 2.22 1.96 1.73 1.89 1.73 2.20 2.36 2.56 2.03 2.48 2.76 2.15

The results (Table-I) show descriptive statistics of absence position of the workers of manufacturing industries of Bangladesh. The results in Table-l show that mean absenteeism rate of the workers of the manufacturing industries in Bangladesh is 5.52 percent. The average absenteeism rate in Delhi Textile Mills in India was 5.4 percent in 1962 and 5.3 percent in 1963 (Vaid, 1966). The study of Ali Taha (1972) in Sudanese textile industries revealed that the annual average rate of absenteeism was 3.42 percent. Typical American absenteeism rate for manufacturing industries varies between 4 to 5 percent (Hedges, 1973). The results indicate that the absenteeism rate of the workers of the manufacturing industries in Bangladesh is much higher than those of India; Sudan and USA. In the 2000-200 I fiscal year absence rate was 15.25 percent (Table1). The results indicate that 15.25 percent of the days scheduled to work is lost during that period due to authorized plus unauthorized absence.

Management

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Hoque and Islam 81 Reddy and Rao (1989) in their study in Andhra Pradesh in India showed that the absence rates were 13.73 percent, 17.95 percent and 21.51 percent in 1881, 1982 and 1983 respectively. Mannan (1984) found that the rate of absence was 22.25 percent in 1975, 16.20 percent in 1976 and 13.50 percent in 1977.

Results in Table-1 show that the incidence rate is 30.16 percent. It implies that 30.16 percent of the workers remained absent during the stated period for any of the reasons designated and for any length of time.

Khan and Chowdhury (1982) found similar results. They found that approximately 30 percent of the workers remained absent every day. To make up this gap of 30 percent absentees, manufacturing industries employ casual/badly workers who are generally untrained and unskilled which results in machine break down, scraps and wastage leading to high quality costs.

The results further reveal that the frequency rate is 2.48 percent. It represents the average number of absence (spells) per worker. Higher frequency rate indicates that the employee absents himself very frequently and vice versa. Frequent and unpredictable absence for shorter duration affects almost all the employees and makes difficult the planning of the work schedules.

Table-I also shows that severity rate is 2.15 percent. Reddy and Rao, (1989) in a study in India found severity rate as 1.72 percent. This indicates that the workers of Bangladesh absent for longer duration each time, tha1L.the workers of India. Higher frequency rate and higher severity rate indicate that the employee is absent more frequently and for longer duration each time resulting in higher absenteeism.

Table-2 Difference between the Mean Scores of Absenteeism of the Workers of the Private and the Public Sector Manufacturing Industries (N = 400) Workers

Private (N=200) Public (N=200)

Mean Scores Absenteeism

SD

F

t-ratio

<I

P

11.75 21.98

13.19 21.07

46.770

-3.818

398

<.000

The summarized absenteeism scores of the workers in the private and the public sectors (Table-2) indicate a significant difference between the Management

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82 Absenteeism of Workers in Manufacturing Industries of Bangladesh mean scores of absenteeism of the workers of the private and the public sectors. Table-2 shows that the workers of the public sector have significantly higher absenteeism than their counterparts in the private sector. Hoque and Rahman (1999) also found that the workers of the public sector had signi-ficantly higher absenteeism than their counterparts in the private sector.

Table-3 Difference between the Mean Scores of Monthly Absenteeism Rates of the Workers of the Private and the Public Sector Manufacturing Industries (N = 400) Workers

Means Scores of Absenteeism

SD

F

t-ratio

3.92 7.11

0.86 1.39

0.403

-6.728

Private (N = 200) Public (N = 200)

P

22

The summarized monthly absenteeism rates of the workers in the private and the public sector (Table-3) indicate that the workers of the public sector have significantly higher absenteeism rate than the workers of the private sector.

Table-4 Difference between the Mean Scores of Monthly Absence Rates (Authorized plus Unauthorized) of the Workers of the Private and the Public Sector Manufacturing Industries (N = 400) Workers

Mean Scores of Monthly Absence Rates

SD

15.26

2.16

Private (N = 200) Public (N=200)

18.80

F

t-ratio

cI

P

3.516

-3.585

22

<.002

{

I

I

2.56

The summarized monthly absence rates of the workers in the private and the public sectors (Table-4) indicate that the workers of the public sector have significantly higher absence rate than their counterparts in the pri vate sector.

Management

& Change,

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Hoque and Islam 83 Table-S Difference between the Mean Scores of Monthly Incidence Rates of the Workers of the Private and the Public Sector Manufacturing Industries (N = 400) Workers

Private (N = 200) Public (N = 200)

Mean Scores of Incidence Rates

SD

F

t-ratio

d'

P

23.70 37.75

4.03 4.39

0.317

-8.159

22

<.000

The summarized monthly incidence rates of the workers in the private and the public sectors (Table-5) indicate that the workers of the public sector have significantly higher incidence rate than the workers of the private sector.

Table-6 Difference between the Mean Scores of Monthly Frequency Rates of the Workers of the Private and the Public Sector Manufacturing Industries (N = 400) Workers

Private (N=200) Public (N=200)

Mean Scores of Rates Frequency

SD

F

t-ratio

d'

P

2.00 2.97

0.542 0.845

1.152

-3.335

22

<.003

The summarized monthly frequency rates of the workers in the private and the public sectors (Table-6) indicate that the workers of the public sector have significantly higher frequency rate than the workers of the private sector.

Table-7 Difference between the Mean Scores of Monthly Severity Rates of the Workers of the Private and the Public Sector Manufacturing Industries (N=400).

Workers

Private (N = 200) Public (N = 200)

Mean Scores of Severity Rates

SD

F

t-ratio

d'

P

1.87 2.43

0.33 0.46

3.207

-3.38

22

.003

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84 Absenteeism of Workers in Manufacturing

Industries of Bangladesh

The summarized monthly severity rates of the workers in the private and the pJlblic sectors (Table-7) indicate that the workers of the public sector have significantly higher severity rate than the workers of the private sector.

The results (Table-3 to Table-7) further show that the workers of the public sector manufacturing industries have significantly higher absenteeism rate, 'absence rate, incidence rate, frequency rate, and severity rate than the workers of the private sector manufacturing industries. John and Jerome (1943) reported that internal administration of an organization is responsible for absenteeism. Vaid (1966) reported that management could significantly reduce absence, control fluctuations and perhaps bring down the rate itself. Froidovaux (1973) concludes that absenteeism is not just the result of the employee's sickness or fatigue but a sign of bad management or bad personnel policies. Baquer (1989) reported that the private enterprises are more efficient and productive than the public enterprises. Uddin (1991) reported that it is alleged that the public sector managers failed to meet the expectation mainly because of inefficient management. He also showed that public sector industries suffered from the absence of dedicated, professionalised, and efficient managerial workforce.

Table-8 Causes of Absenteeism as Perceived by the Workers Private Sector (N 200).

of the

=

Perceived Causes Absenteeism

Percentage of the Workers Who hold the Views

Accident and injury Job dissatisfaction Stressful job Mental illness Personal and family problems Working elsewhere for extra income Visiting family at home (village) Note:

Percentages

80.50 64.25 50.50 38.75 22.50 20.50 15.00

Rank Order

1 2 3 4 5 6 7

add to 300 percent as each person made three choices.

Results in Table-8 show that the workers of the private sector have identified 7 (seven) important causes of their absenteeism. The highest Management

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Hoque and Islam 85 percentages of the workers have identified accident and injury as an important cause of their absenteeism. Other important causes include job dissatisfaction, stressful job, mental illness, personal and family problems, working elsewhere for extra income and visiting family at home (village).

Table-9 Causes of Absenteeism as Perceived by the Workers of the Public Sector (N = 200) Perceived Causes Absenteeism

Percentage of the Workers Who hold the Views

Accident and injury Job dissatisfaction Stressful job Mental illness Personal and family problems Working elsewhere for extra income 'Visiting family at home (village) Bad working condition

78.50 ffi.25 46.50 38.75 22.50 15.50

14.00 14.00

Rank Order

1

2 3 4

5 6 7

7

Note: Percentages add to 300 percent as each person made three choices.

Results in Table-9 reveal that the workers of the public sector have identified 8 (eight) important causes of their absenteeism. The highest percentages of the workers have identified accident and injury as the most important causes of their absenteeism. Next in order of importance includes job dissatisfaction, stressful job, mental illness, personal and family problems, working elsewhere for extra income, visiting family at home (village), and bad working conditions. Sinha (1961), Hedges (1977), Bhatia and Yalecha (1981) and Hussein (1990) revealed similar findings.

Conclusions and Suggestions Absenteeism rate in manufacturing industries of Bangladesh is found to be higher than those of other countries like India, Sudan and USA. The findings suggest that there is a scope for reducing absenteeism of the workers in our manufacturing industries. Absenteeism of the workers needs to be controlled and held down to the lowest possible level. Though absenteeism cannot be rooted out from the industries, yet management should give adequate attention to the problem of absenteeism, and take necessary steps to reduce it to a minimum.

Management

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86 Absenteeism of Workers in Manufacturing Industries of Bangladesh The workers of the public sector manufacturing industries have significantly higher absenteeism than their counterparts in the private sector.

The findings may have significance for the Government, the management of the public sector manufacturing industries in Bangladesh. The growth of the public sector industries in Bangladesh is a matter of necessity for an even development of our economy in which both the private and the pub liS sector would play their vital roles. If the Government is to make the public sector feasible and profitable, the Government and the public sector management should immediately adopt measures to reduce absenteeism and bring down the rates. Management of the public sector needs to be more professional, dedicated, efficient and responsive to workers' expectations.

The important causes of absenteeism in the manufacturing industries as perceived by the workers lie on the accident and injury, job dissatisfaction, stressful job, mental illness, personal and family problems, working elsewhere for extra income, visiting family at home (village) and bad working conditions. Government and the concerned authorities should take necessary steps to ensure safety measures, develop a separate health policy and set up a separate pay commission for the workers of the manufacturing industries in Bangladesh.

'

!

t

:1

;1

i

1

(

REFERENCES Ali_Taha, A. R. EI. Tayib (1972) Absenteeism in the Sudan Textile Industry Limited: The Incidence, Causes, and Control. Geneva, Switzerland: International Institute for Labour Studies, 1-23.

Bangladesh Economic Survey (2001) Bureau of Statistics, Ministry of Finance, Government of the People's Republic of Bangladesh, 106-107.

Baquer, A. A. M. (1989) "Privatisation of Enterprises," The Dhaka University Studies, Part-c, 10 (1), 143-156.

Behrend, H. (1955) "Voluntary Absence from Work," International Labour Review, xxix, 109.

Bhatia, S. K. (1981) "Tackling Absenteeism: A Methodological Note," Indian Journal of Industrial Relations, 16 (2), 259-275.

Bhatia, S. K. and Valecha, G. K. (1981) "A Review of the Research Findings on Absenteeism," Indian Journal of Industrial Relations, 17(2).

Chenery, H. B. (1968) "Patterns ofIndustrial Growth," American Economic Review, 637-638.

Froidevaux, P. (1973) "Berliet Comes to Grip with Absenteeism," European Business, 37, 27-34.

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Hoque and Islam 87 Hedges, J. N. (1973) "Absence from Work-A Look at Some National Data," Monthly Labour Review, July, 24-30.

Hedges, J. N. (1977) "Absence from Work-Measuring the flours Lost," Monthly labour Review, October, 6-23.

Hoque, M. E. and Rahman, M. A. (1999) "Absenteeism in Industry and Some of its Correlates: A Study of Private and Public Sectors':' Islamic University Studies (Part-C), 2 (1), 1-11.

Hussein, R. T. (1990) "Employee Absenteeism: Cost, Causes, and Cures an Overview," Journal of Business Administration, 16 (1 & 2), 91-108.

John, B. Fox and Jerome F. Scott (1943) Absenteeism: Management's Problems.

Mass., Boston: Harvard University, Graduate School of Business Administration.

Keller, R. T. (1983) "Predicting Absenteeism from Prior Absenteeism, Attitudinal Factors, and Non-attitudinal Factors," Journal of Applied Psychology, 68, 536540.

Khan, A. A. and Chowdhury, N. K. A. (1982) "Study in the BJMC Scheme for Awards for the Best Workers, (Mimeo)," Bureau of Business Research, University of Dhaka, 84.

Mannan, M. A. (1984) '''Worker Participation in Industry; Experiences of Cotton Textile Industry in Bangladesh," The Dhaka University Studies, (Part-C) 5(1), 21-47.

Reddy, T. S. and Rao, P. B. A. (1989) Absenteeism in Industry. New Delhi: Deep arid Deep Publications.

Sinha, D. (1961) "Control of Industrial Absenteeism," The Indian Journal of Labour Economics, 5 (2), 120-125.

Uddin (1991) "The Bangladesh Public Sector Managers," The Dhaka University Studies, Part-C, 12 (1), 63-85.

Vaid, K. N. (1966) "Absenteeism in Delhi Textile Industry," Indian Journal of Industrial Relations, 2(2), 159-193.

Management

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---------------------------------------KNOWLEDGE CREATION IN BUSINESS ORGANIZATIONS: A STUDY USING ACTIVITY THEORY FRAMEWORK

I Anjan Roy

Rajen K. Gupta

~

I

I

I

i

I

Knowledge creation in organisations has largely been studied under the rubric of its economic manifestation: innovation. Prior literature has attempted to model innovation as determined by severalfirm and macro level variables. Few process models exist that attempt to capture the dynamic nature of the phenomena. These, however, provide little insight into the emergent nature of knowledge at the firm level. The Activity System framework of organisation is proposed for studying organisational knowledge creation as it occurs serendipitously situated within a business and cultural context. The case of one of the world's most innovative and long living company Corning Glass Works is analysed, to reveal the creation of knowledge within an organisation, using the Activity System framework.

INNOVATION AND ORGANISATIONS

KNOWLEDGE

CREATION

K

IN

nowledge creation has largely been studied under the rubric of its economic manifestation innovation. Innovations have been at the root of the progress and developments in civilizations and societies across time. Considered as an essential function of capitalism (Schumpeter, 1954), much has been written upon the innovating efficiency of capitalistic societies and free market economies (Baumol, 2002).

Review of the empirical studies on sources of innovation (Cohen, 1995) indicate the effect of firm level (as size, cash flow, diversification, R&D capabilities etc.) and macro level variables (as industry structure, demand, appropriability regime, technological opportunity etc). Little is, however, known about the dynamics of innovation process how the process of innovation actually operates. Rationalist views have forwarded models of linear processes (Gold, 1971) which assert the belief that technological innovation can be planned and controlled through rational deci-

Management & Change, Volume 7, Number I (Summer 2003) @ 2003 Institute for Integrated Learning in Management. All Rights Reserved.

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90 Knowledge Creation in Business Organization

sion making and evaluative feedback loops. The rational model of innovation proposes a linear staged progression of events of basic research, applied research, development and commercialization, usually termed as the "pipeline" or the "ladder" model.

Such views has been contested by Jewkes et al. (1969) and Langrish et al (1972) who found that intuition and chance were central factors in technical progress. Klien and Rosenberg have argued that "Models that depict innovation as a smooth, well-behaved linear process badly misspecify the nature and direction of the causal factors at work (Klien and Rosenberg, 1986: 275). Innovation is complex, uncertain, somewhat disorderly, and subject to changes of many sorts." Studies by Globe et al (1973) reveal that non-mission oriented researches have played a major role in the emergence of several major innovations. Nelson (1962) has advocated that innovation processes are evolutionary in nature wherein control plays an inhibiting role to the essentially knowledge creating nature of work. These findings indicate incomplete understanding of, and hence a need for more in-depth qualitative study, of innovation processes in organizations.

It is surmised here that the focus on innovation without. understanding organisational knowledge-creating behaviour would offer little insight into the phenomena. Knowledge creation in organizations involves subjective, situated and emergent events and processes whose deterministic modelling is infeasible. It is episodic and, therefore, beyond an'alysis in the scientific methodological terms, lying instead within the philosophical realms of perception and construction of social beliefs and understandings.

Nonaka and Takeuchi's (1995) model is the only known model of knowledge creation that attempts to model knowledge creation, from its philosophical origins to observed patterns in business practice. The model draws upon epistemology of knowledge as tacit and explicit, which interact and grows across ontological levels from the individual to the higher organization levels in an evolving spiral of knowledge creation. Guiding the dynamics is the definition of knowledge as "the process of justifying personal belief towards truth" which provides the primary motive driving the knowledge creating cycle. Involved processes have been conceptualized as socialization, explication, combination and internalization, which envelop several existing theories of learning and knowledge creation. The model provides a multi-level process view of the transformation of tacit Management

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Roy and Gupta 91

knowledge of the individual into organizational level knowledge through an expanding spiral involving the above processes.

The model, however, provides limited direction to guide the practice of innovation in organizations due to several reasons. Firstly, the existence of tacit knowledge in individuals is assumed as given or learnt through internalization processes at work. Knowledge creation involves formation and firming up of tacit belief through observation and exercise of reason and people perceive and infer differently in ways that are both individually and contextually determined. In this strain the role of serendipity in such creation of new knowledge has been highlighted in other literature (Horvitz, 2002). The SECI model appears to be weak in explaining such phenomenon. Secondly, the unidirectional transcendence of knowledge from individual to the group and the organization and further to inter-organization level undermines knowledge flows in the reverse direction through feedback and learning. Also, the form of knowledge when it crosses the ontological boundaries is not adequately explained (Muina, de Castro and Saez, 2002). In the absence of such details, the cycle has the danger of collapsing within a closed learning cycle, increasing only the knowledgeable breadth within an organisation (many people sharing the same knowledge) rather than the extending the boundaries through new knowledge creation. Study of the phenomenon of knowledge creation requires bringing in the context and the historical background through a framework that involves the constituents of the organization and enables plotting of their interactions and the changes associated in the process.

This paper proposes use of the Activity Theory model to study knowledge creation in organizations. The framework of this theory enables situating the organization within its context where its actions provide the links to reveal the underlying knowledge creating processes. The model provides for a rich description of the historical development and path-dependent cumulation of behavioural competencies and cognitive aptitudes and the episodic emergence of new knowledge.

The foJlowing discussion is set in four following sections. The first section describes the Activity Theory model of organizations and how knowledge creating organizations can be studied using this framework. Section two describes a brief history of Corning Glass Works, the organisation under study, focussing upon a few innovating ideas that it gave birth to.

The third section attempts to situate the innovations at Corning into its background context by formulating Activity System models for each of Management

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92 Knowledge Creation in Business Organization

them. Aspects of a knowledge creating company are thereafter drawn from the case along with the study conclusions.

ACTIVITY SYSTEM MODEL OF ORGANIZATIONS Study of knowledge creation in firms has been made through the conceptualization of the firm as an Activity System, a framework originating in the works of Russian psychologist Vygotsky (see Blackler, 1993).

Activity systems are conceptualized in terms of subject object relations, mediated by other entities as tools, community, rules, and division of labour (Figure-I). Spender (1996) has argued that study of the dynamics of tacit knowledge creation can only be possible by envisaging the firm as a system of knowing activity where the outcome of social action reveal the interaction of various knowledge forms. Blackler (1993) too has described organizations as activity systems with routines as the unarticulated aspects of common knowledge that form its genetic code determining the basic character of the firm. The underlying principles of organizational analysis using Activity Theory are as under: 1. The unit of analysis is an Activity System 2. The object of the activity is transformed both discursively and materially by the subject through mediation of physical and social mediators 3. Contradictions within and between the elements of the Activity Systems can be identified and analysed 4. Changes in activity system are stimulated through arrival of systemic contradictions and creation of cycles of expansive learning.

In Activity Theory, human activity is situated within, and reciprocally related to, the context of reality defined by social, procedural and technological relationships. By posing the activity as an intermediate concept, Activity Theory bridges the problems of analysis between individual and organization levels. The framework also attempts to overcome the divide between the actor and his context, and encompasses the distributed nature of cognitive processes of meaning making amongst multiple individuals within the collective entity of the firm. Activity system analysis, therefore, allows a holistic approach with the collective as the object of analysis, while maintaining the role of individual action within the system.

The activity theory has an established tradition and has been applied in education, linguistics, anthropology, cultural research and more recently Management

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Roy and Gupta 93

human in computer interfacing (Kaptelinin 1994), computer science, (Bodker, 1991) and information system (Kuutti, 1990). Hill and Botha (2002) have charted three generations of theoretical developments of Activity theory. The first generation contrasted the behavioural model of individual action based on stimulus and response with the notion of mediating artefacts. The second generation transcended the individual as the unit of analysis to the collective activity within a social context and community of practitioners. The third generation of activity theory is concerned with developing conceptual tools to understand the diversity and complexity existing within activity systems and within network of activity systems.

Representation

Figure.! of a Human Activity System

<===

Mediating Artefacts Tools, Technology, Concept Language etc.

Object ~ as goals

:_~-~=--->Social

rules & regulations

Community

Stimulus

Out.

<===

come

Division of labour

<::==

Activity systems theory provides a theory of expansive learning as developed by Engestrom (cited in Blackler, 1993) who claimed that we learn and develop meaning though patterning (comparing what we currently see with past experience) and puzzling (developing explanations for things that appear to be confusing, incoherent, missing or contradictory). Learning in Activity System, therefore, is a transformative process of making collective meaning through mediated action. Shared meaning exist as routines (Nelson and Winter, 1982) which are the repositories of organisation memory.

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94 Knowledge

Creation in Business Organization Figure-2 Engestrom's view of a dynamic Activity System

The

Contemporary Activity Questioning the current situation

Consolidating: new practice

(.~ Historical Analysis of Contradictions Actual (empirical) analysis

Implementing

New Models

L

Forming New Working Models and Tools

In the Activity System view, knowledge creation occurs when an external change creates dissonance and contradictions through mismatch and frictions between the existing routines following the imposition of cognitive and co-ordinative demands of the problems that arrive from the change. This leads to heuristic search for improvisation and creation of new routines (Figure-2) when people, not merely thinking in crisis, act involuntarily leading to unforeseen events and outcomes as emerging manifestations of new knowledge. As Blackler (1993) argues that expansive learning process occurs when people do more than they yet know how to do. The cycle of expansive learning evolves through Activity Systems as it constantly works through contradictions within and between the constituting elements.

While the Nonaka and Takeuchi Model leads knowledge from the individual tacit to collective organisational form, the Activity System model complements the same to provide an understanding of triggering of the tacit, thereby bringing the initiation of the process into focus. It also provides an understanding of the sustenance of the knowledge creation cycle across time. While the former brings in the epistemological factors, the latter provides a framework to situate the various elements, including the cultural context, around which knowledge is created.

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ACTIVITY SYSTEM AS A FRAMEWORK FOR STUDYING KNOWLEDGE CREATION IN ORGANIZATIONS Studies based on activity theory enables one's entry into the activity of the subject as he engages in a knowledge-evoking situation. The focus of examination is to understand the motive and instrumental conditions of the activity rather than the observable individual behaviours. This is the relevant information to understand the process of collective meaning makmg.

Activity settings are usually very complex and difficult to be captured in all their aspects. Rogoff recommended that study using this framework must focus on a specific level of analysis (cited in Yamagata Lynch, 2002) while concurrently dealing with other socio-cultural planes between the personal, inter personal, and institutional/community. The approach to such study is, therefore, in the manner of hypertext function: zooming of one plane of analysis while keeping the other two planes salient but in the background. This enables identifying the salient features of the two planes, which are not being examined, to help further appreciate the complex activities that take place on the zoomed in plane of analysis. This enables reduction of the associated complexity.

Examining learning situations using activity systems allows the analysis of collective action as a unit of analysis while allowing the capture of the dynamic nature of activity, its historical development of activity over time and the multiple interpretations that define its nature (Yamagata Lynch, 2002). Also, in examining an activity over time, a nesting of the system of activities can also be made, with the outcome of one activity system entering as a component of a later system.

THE CASE OF CORNING

GLASS

The case of Corning Glass, as a knowledge-creating firm, has been taken for study. It is the story of an industrial age glass company, that has survived for a century and a half upon its fundamental knowledge of glass making and related material sciences, and ushered the arrival of the new economy of today through its optical fibre technology, the enabler of modern telecommunication.

An extensive history of Corning has been narrated in two books by Dyer and Gross (2001) and Graham and Shuldiner (2001) which have proManagement

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96 Knowledge Creation in Business Organization vided the bulk of data on the company. The account highlights the emergence of new knowledge in Corning through interactions between its environment, the internal constituencies and the fundamental values of the organisation. Corning is a company that continuously recreated itself, basing itself upon its core identity of glassmaking research.

CORNING:

A HISTORICAL

PERSPECTIVE

The story of Corning Glass begins in 1851, when Amory Houghton Sr. invested in the Bay State Glass Company at Sommerville. Glass making, in those days was an craft form involving material compositions and skilled processing by glass blowers to produce uniquely formed articles valued much for their creativity. Properties of glass varied \Vildly with changes in the raw material mix, manufacturing processes and job requirements.

As a technological discipline glass making was yet to be developed much later (after World War-I) and at that time was only a product of fortuitous combination of the knowledge of fundamental physics and chemistry. Consequently, it remained as closely held knowledge among people and families in small clusters.

PIONEERING

RESEARCH

FROM THE START

In the early days, glass-making industry was a large volume segment of flat glass and container supply, essentially standardised products of little complexity. Corning started business with the manufacture of speciality products for technical applications. In 1880, Corning became the first supplier of glass bulb blanks used for manufacture of electric bulbs, the land mark invention then, setting it aside from other manufacturers. It remained a long time supplier to Edison's light bulb manufacturing works.

Led by growth in the electrical industry, Corning's first growth decade was built upon this industry and continued to form its major revenues for several years later.

As scientific processes spread into industrial glass making Corning refused to be led to mass production and instead chose to remain in the niche segment of specialty glass that necessitated continuous product developments and new applications. Corning set up one of its earliest corporate research laboratories, the "optical laboratory" in 1908. It staffed graduates from leading colleges and universities, several of them individuManagement

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ally distinguished for their inventive work. In 1909, it set up the Empire Machine Company in order to develop newer machines for glass making and by 1915 had already produced five generations of glass making machines. In 1912, it produced its first patented family of glasses 'Pyrex'.

The World War 1 prompted Coming to enter into development of advanced materials and in 1917 led to its second major investment in research infrastructure, the machine research laboratory. Major developments in glass making technology 'the ribbon machine' came in 1926 which has earned the distinction of being one of the most sophisticated glass making machines even in the current reckoning. The forming of the world's single piece of glass, spanning 200 inches in diameter, for Mount Palomar telescope came immediately later in 1932-1935.

Corning's first challenge for explorative research came up with the need to fuse silicon and carbon to produce a speciality material that had enhanced properties to match other competing substitutes such as plastics. This led the company, in 1930 to set its first concerted research effort and the employment of full time qualified staff for research who delved into the chemistry of organo-silicones and came up with the vapour deposition patent in 1942. All through the decades of depression, Corning sustained its research. This produced several valuable innovations foremostly that of fiber optics, of which Corning remained a long-term market leader.

POST WORLD WAR II During World War II, Corning worked for the military and defence for even more challenging applications that led to development in its optical glass applications. Post World War II, the business scenario changed for Coming as the anti-trust regulations grew stringent and military support gradually reduced. Corning sought new strategies for licensing, often overseas, which were not all successful.

Post World War II also saw developments of the new product line from Corning's stable of innovation television bulbs. The business arena was marked by changing technological paradigms. and impending settlement of standards as well as strong competition from none other than its own customer RCA, Corning leveraged its war experience in developing vacuum tube glass reinforcing it with greater R&D effort. Three Corning developments settled the competition in their favour: speciality televiManagement

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98 Knowledge Creation in Business Organization sion glass composition, electric sealing of the bulbs and centrifugal casting of funnels. The glass composition, the first no lead formula, led Coming to a newer paradigm of research - operating through a pilot plant. This composition remained the industry standard for the later two and half decades.

Corning made its second pilot plant in 1951, in which year the company emphasized fundamental research rather than mastering the existing technologies. Research paradigm moved towards more systematic innovation efforts and demand oriented as crash programs focussed towards blockbuster commercial products. This period also saw the intensification of anti-trust rules, forcing Corning to make available its patents for licensing. Consequently the company forged several strategies for guarding its intellectual assets and knowledge capital.

DIVERSIFICATION TECHNOLOGY

INTO LEADING FRONTIERS OF GLASS

End of the sixties were troubled times for Corning when it witnessed the demise of its core product business television tubes as its customers (esp.

RCA) moved back to erect their own facilities and new competition came up from Japanese products in the electronic industry. Despite such major loss, Corning still managed to thrive, but now through its bevy of innovative products.

In 1966, Corning shifted its focus to include other product businesses.

Electronics became a major focus area with about half the research budget was allocated to its development while glass received only a third.

The diversification attempt into electronics started with the purchase of a semi-conductor firm, in an area in which Coming has no expertise. The experience provided much learning to Coming before it was divested off, in 1975, when Corning revisited its core once again. Coming re-emerged with a class of products (Figure-3) that extended its knowledge of optical glass to application in communication: fiber optics, and the era of information economy. Today Corning is a $7.0 billion business engaged in display electronics, ad,,:anced materials, microwave connectors and cable systems and environmental technologies employing around 400000 employees in several nations.

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Spectrum of Glass Applications at Corning Glass Works Electronic Vacuum

Light Bulb

Thbe

Laboratory Equipment

Laboratory Waste Optical Applications

Construction Material

Building!

Glass

1

Optl~

\renceJSpace

Au t OliObiIe Glass

wall \wnOmy

guide Ophthalmic lenses

J

Fiber Optics

MANAGERIAL CORNING

CONCEPTS

AND IDEA INNOVATIONS

AT

Corning's history is dotted with emergence of new knowledge and concepts that appear common place today but were leading events in their times. More than technological innovations these managerial innovations have enabled Corning retain its industry leadership and forge ahead into newer areas to remain a respected organization till today. The following analyses a few of the new ideas and concept innovations in the ways of managing business that came at Corning:

CORE IDENTITY IN GLASS RESEARCH Corning was the first company to set a research-based identity in its public image of "Corning Means Research in Glass." Its adoption of speciality glass business and niche market segments was path breaking in its times, when the industrial paradigm in America was onwards to standardised products, mass customization and high focus on production efficiency. While most glassmakers went on to become producers of standard float glass products following the lime glass manufacturing proManagement

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100 Knowledge Creation in Business Organization cess. Corning, however, chose to enter novel high technology applications of glass through the lead glass manufacturing route. This laid the foundation of Corning's core identity as Frederick Carder, a glasscutterat Corning Works in 1903, called the factory as "the Smokestack University." Through the generations of Corning's history, the company continuously revealed this commitment in pursuing research and development across changing business and competitive contexts.

Corning's choice of focus area for research into glass composition and manufacturing processes and the garnering of support for the same, also indicat~ to a very novel way of organising research across boundaries of business and scientific communities when the concept of corporate research was even non-existent. Corning utilised knowledge of fundamental research from universities and academic institutions in areas of physics and chemistry, combining with applied work of their own laboratory.

Regular consultation with researchers from MIT, Yale, Columbia and Cornell and other institutions enabled its product developments. The company provided researches and tests facilities with the continual motivation of being the root innovator in the use of glass and glass making. It also shared and obtained application knowledge from customers and competitors and conducted joint research programs for new products and their commercialization.

SCIENTISTS AS BUSINESS MANAGERS The Houghtons, at Corning, were one of the first business owners who placed academic intellect researchers and scientists at key organizational positions for formulating strategic decisions for determining the character and the evolution of the company. Arthur Day, an eminent geo-physicist played a formative role in building Corning and instilling the creative vision in the earlier years, that still remains with the company. It was Day's idea that the pursuit of an ever-broadening knowledge of materials and processes in glass making should be the cornerstone of Corning's strategy as a specialty glass company. Also it was his philosophy for the setting of Corning's laboratory in the middle way with researcher freedom and free flow information coupled with discipline and awareness of strategic company goals. Contributions of Dr. Eugene Sullivan have been recognised at Corning in the naming of their laboratory set up in 1908 as "The Sullivan laboratory." The birth of "Pyrex" Corning's first consumer Management

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Roy and Gupta 101 product line is now mythological and recognized to arrive from the domestic chores of Dr. Jesse Littleton, a professor in physics from the University of Michigan.

INTEGRATION

OF SCIENCE

AND CRAFT

Corning provides the lead to understanding the management of research and development through a complex profile of human resource comprising of, on one hand, highly qualified scientists and on the other, highly skilled workmen and technicians. While the former educated from leading universities, the latter came from traditional community trade with little formal education. The unique melding of the two was made in Corning, when it set up its state of the art research facilities while also retaining its machine research lab for innovative pursuit in the shop floor. Corning's laboratories are distinctive of the fact that they were created at. the heart of their glass works and the scientists actually worked within the factory with glass workers.

Several developments point to the unique blending of Corning's scientific research with its craft of glass manufacture. While the de-sign and manufacture of the "hub" Machine was led by its highly qualified research staff, the machine research group led by James Giffins and his band of workmen provided the skills to produce the same. Giffen also made the .centrifugal casting machine for television tubes which stood out as landmark developments in the industry giving Corning its strongest leads over its rivals.

Coming's another major contribution to the industry, the Ribbon machine, was also a product of such integration. A glass blower's whimsical experiments and observations followed through by applied scientists led to the development of this machine, which became path breaking and revolutionary for all the extant machines of the time. The new machine not only improved productivity but also stimulated development of new material technology but also created Corning's international refractory business, Carhart.

STRATEGIC

PARTNERING

Corning is known in the history of American Business as one of the most complex and organised trusts to be attacked by the Sherman Anti-trust Management

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Act. In an industry with imitative competition and little barrier to entry, Corning devised a number of strategic ways to protect its inventions as well as to curb competition arising out of increasing number of rival firms.

Despite being small and relatively unknown Coming positioned itself at the knowledge centre of the industry controlling a network of alliances, trusts and non-competing arrangements with other manufacturers. Between Coming Glass Works, Hartford Empire Company and Owens Illinois Glass Company and multitude of related firms Coming exercised industry control through patent licenses, preserving boundaries between the various branches of glass manufacture.

When the Act forced Corning to dismantle its alliances and open up its licenses to others, the company took to new ways of protecting its knowledge assets. While continuing its reliance upon patents to protect and control its inventive knowledge from imitation, Coming also resorted to other legal measures for protection of its knowledge. It embarked upon use of trademarks and ferociously contested patent infringements but more importantly, it fl.lrther focussed on leading research that continuously led it beyond the technological reach of competitors imitating their product patents. In order to appropriate its knowledge and obtain returns, Corning Strategic partnerships and joint ventures with other companies were innovative in their equal ownership structures when asymmetric equity control was the norm.

REDEFINING

CUSTOMER RELATIONS

Corning's progress through the changing industrial eras was largely because of its innovative relation making with its customers. Corning continuously remained a long-term sole supplier to several customer organisations who were pioneers in their industry, as the Railways, Edison's light bulb factOlY (GE), Defence, Space Research, and television manufacturers (RCA) etc. The hallmark of such relationships was not only their long-term nature but also their reciprocal and mutual relationships both in business as well as technological arena. While most of the customers engaged in leading scientific research in their own area, Corning gainea through its access to such application research in keeping lead on future possibilities. Through its research tempo and by bringing about new supply material with enhanced properties and lower costs, Corning continually satisfied and even challenged its. customers for higher performance.

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Roy and Gupta 103 In 1948 RCA, a major customer who. accounted for more than half of Corning's television business, integrated television bulb manufacturipg almost leading to near elimination of Corning in its television business.

However, the determined pursuance of research ensured that Corning not only survived but also made television its most profitable business. Corning provided the technological lead by inventing the centrifugal casting process for television tubes that at once gave it the leadership edge in the industry. It further stamped its long-term position in the production of colour television blanks by developing manufacturing process for the faceplate for colour tube through the chemical route which was an innovation beyond the existing heating and aching routes available.

GROWTH BY EXTENDING CORE KNOWLEDGE Corning's material innovations demonstrate a continual extension oJ its core knowledge of glass. Despite its diversification into apparently unrelated businesses electric lighting, television and fibre optics Corning dem-. onstrates a common application of its chosen knowledge in all its ventures.

The knowledge of glass making has carried through Corning's leadership in its industry, across generations. L~ading products as railway glass, Pyrex tableware, Mount Palomar glass, Pyroceram, Vycor etc. have continuously built upon the knowledge of a previous generation of glass into newer applications. Through glass Corning went into several advanced and complex application industries as astronomy, defence, space research and automobiles.

AN ACTIVITY SYSTEM MODEL OF CORNING The innovations at Corning as described above have not arrived through rational research designs. R~ther, these have evolved over time in response to situational demands of its business. These are historically developed inimitable capabilities that form the core strength of Corning Glass. Linear innovation models would fail to explain such in-deterministic evolution of innovations. Analysis of the evolution of such events must account the organisation and its constituents within its broader context of business and social environment for which the Activity System framework has been used (Figure-4).

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104 Knowledge Creation in Business Organization FigureCorning as an Activity System Mediating Artefacts.

Research & development labs Machine research Lab

Subject Organization: Corning Owners Employees

Social rules & regulation Collaborati ve trusts implicit value chain positioning rules Freedom to Experiment Team Working

Object as goals Knowledge ~, of Glassmaking Profit

Community Competitors.

Customers Universities.

Government Defence. Trade

Outcome Sustained Industry Leadership

Division of Labour Basic Research on Glass Application Research Commercialization

The framework incorporates the goals and objectives at Corning that have driven its historical innovating performance. It brings elements of the broad community and social network - the industry competitors, academic institutions and universities, the government and military, its employees-and the society at large, all of which have played a role in determining Corning's performance in research and development. The mediating artefacts that Corning built over time: their R&D laboratory that housed the scientific knowledge of the company and the machine research lab that provided the craft environment have together spelt an entirely new perspective of research for Corning. The social rules and unconventional practices that continually evolved at Corning in tune with the times are represented. The entire Activity System of the Corning organisation appears poised as a sensitive entity, ready to respond to newer demands imposed from changes in the environment.

The framework provides for surfacing the role of tensions and contradictions that appeared within the Activity System of Corning upon stimuli of external events and changes. It emphasises the act of knowledge creation as uncertain, complex and emergent, needing a plural approach towards its triggering sources. This philosophy is built in into the Corning system by its very choice of leading business sectors that were Management

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always under competrtive threat and change. Corning's open exposure to competition in its business and the larger social environment, bereft of cushioning mechanisms as scale economies and automation, required the company to remain ever responsive to changes around.

The following table (Table-!) lists the background contexts that underlay managerial Corning's innovations. Examination of each of these contexts reveal conflicts and tensions that arose due to emerging systemic contradictions (shown in arrows in the corresponding figures) in meeting external demands. These stimulated the organisation to take on initiatives involuntarily to meet the demands leading to innovative outcomes. Such initiatives appear to have been directed by inherent organisational motives that were larger than economic gains to it. It reveals an organisational stance towards its business as a dynamic social and knowledge creating activity constantly seeking newer horizons. Cost and market leaderships are insufficient parameters of satisfaction here while the higher goals of creating a social institution drive the needs for existence of the firm.

Table-}

Background Context and Contradictions Behind Corning's Innovations Systemic contradiction and tensions

Corning's Innovation

Background Context

Core identity in Glass Research commitment to as matter of faith Research beyond firm boundaries

Underdeveloped scientific discipline of glass making and the choice of specialty glass business

The research imperative and costs failure Need for continuity of investments in R&D and maintaining profitability.

Bargaining power of trade and needs of organized production Need for fundamental work and progress in application frontiers

Practices of leveraging Private ownership and scientific intellect organization of scientific Involve scientific personnel research in strategic decision making providing intellectual fredom

Capitalist values of ownership profits and needs of organizing scientific research

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106 Knowledge Creation in Business Organization Research demands of an evolving science

Strategic Partnering Forming trusts for industry and knowledge control concentrating on strategic applications

Competititve industry with high imitative rivalry

Need for co-operation to prevent price competition and prevention of imitation

Redefining customer Deeper relationships customers joint development work

Strong and demanding customers base

Dependence on large customers for business and knowledge and threat of backward integration by customers

with

â&#x20AC;˘

Retention of qualified scientists and need for maintaining spontaneity the craft

Integration of science and craft Complementary research infrastructure and resources encouraging experimentation

of

Increasing performance requirements (as durability) and building repeat oider business Core competencies in glass and the lure of promising new business areas as electronics

Growth by extending core Growth needs with industry maturation knowledge Extending Pyrex from lampsto telescope and kitchenware glass applications in altogether new areas as Astronomy, Scientific, Aerospacce, Space, Defence

UNDERDEVELOPED DISCIPLINE OF GLASS MAKING AND CHOICE OF SPECIALITY GLASSWARE BUSINESS The Houghton's pioneering philosophy found in the strategy of entering the speciality glass, rather than the standard product business, their opportunity of being different from other glassmakers. This set an agenda for research, as the company was forced to innovate and fund R&D to remain competitive. The foundation of Coming's identity in glass research was thus set when they established their first industrial laboratory way back in mid nineteenth century, when notions of corporate research was non existent.

In doing so Corning addressed a major challenge of the underdeveloped state of the art of glass making. Glass making had been a traditional craft skill that community workers engaged and specialised in. The sciManagement

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ence was, therefore, not sufficiently developed and the state of technology was the knowledge and abilities available in the glass trade. The glass workers exercised enormous power in the industry, most of which remained unorganized and of low volume. Suecess of organized production depended upon product standardization and implementation of scientific methods or alternatively, leading the industry with knowledge beyond the trade's current capability. Between them Corning chose the latter route, the route of innovation and creation of the knowledge of glassmaking that appealed to the curiosity of its founders and owners.

The situation (Figure-5) posed tensions as tremendous fundamental work was required for progressing the manufacturing and application frontiers of glass. Glass making needed to move from the status of a craft to a more scientific discipline. The Houghtons saw industry leadership through developing knowledge in a nascent arena through research and development of glass and its use. Corning also recognized that its knowledge of glass was limited to chemistry and manufacturing while application required several domain specific requirement knowledge and expertise of other sciences. The company developed deep knowledge networks with universities, customers, and competitors as well government that lead and supported major research programmes through which it.

Figure-S Core Identity in Glass Research Mediating

Artefacts

Available Knowledge

Object as goals

Subject Organization:

Organizing Outcome research for ==> Core knowledge of glass identity in ( Organizing glass production for research profits

Corning

Social rules & regulation

Division of Labour

Community Glass workers as Trade

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capitalized on complementary knowledge that was not available within the company. Coming also mobilized application knowledge from the public at large in a few of their most successful product developments.

Adoption of research-based identity remained a conflicting strategy requiring a broad approach and patient commitment in face of failures that has been reinforced at Coming through the several failures during which the company retained its fundamental belief in the pursuit of research. Its experiments with the development of the toughened glass process Chemcor that was developed for requirements in the automobile and optical sector serve as an example. Even after its development, Chemcor, suffered lack of application development (it failed in its both ophthalmic and automobile applications) as it underestimated market potential. Other instances, however, display Coming's capacity of withstanding failure and converting seemingly failures into successes and new opportunities as the development of Vycor, a glass that found use in chemical laboratory apparatus and as a conductor of infrared light. Vycor, had earlier failed to pass on as cookware material that was resistant to heat and temperature change. The spirit is reflected in its unusual employee practices of the Houghtons by which they provided their key research staff moral support to overcome depression during such failures.

The company's faith on R&D and investment into it is also revealed in the periods of depression of 1931-40 when the company continually invested in research increasing from $400000 in 1928 and 1929 to an average of $500000 from 1930 to 1934. The zeal for research was venerated when Coming, despite its drop in sales, reduced significantly its costs of manufacture and had, on several occasions, more innovative products than they could probably manage with their existing size and capabili ties.

PRIVATE OWNERSHIP TIFIC RESEARCH

AND ORGANIZATION

OF SCIEN-

Coming has been through most parts of its history a privately owned firm where involvement and dominance of its founders and owners of five generations, the Houghtons, was high. The Houghtons were believers in the potential of glass and took deep interest in glass making, so much so that the earlier generations actually kept written notes of glass formulation and manufacturing hidden in secret. However, as technological opManagement

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Roy and Gupta 109 portunities narrowed and craft skills became limiting, efforts were needed to forward knowledge horizons of glass technology leading to dependence on science. The role of scientists, with their knowledge and insight, therefore became crucial to development. This transition brought tensions of sharing closely held family knowledge and retaining ownership of newly developed technical knowledge. There were also tensions of working together with scientists and problems of exercising control while providing them the freedom to work independently passionately towards research.

Amidst these tensions (Figure-6) evolved the unique practices that attracted and retained scientists, not for money, but intrinsic appeal of participating in the advancement of glass. These involved creating a climate of intellectual pursuit and the freedom to experiment, which has been recorded as "monkeying around." Rather than maintaining close family control over intellectual property, scientists were encouraged to obtain patents for their work. Involvement of scientists in strategic business decisions ensured the needed link-up for maintaining objectivity in their actions.

Figure-6 Practices for Leveraging Scientific Intellect Mediating Artefacts Glass Works as Laboratories

Object as goals

Subject Organization:

Capitalist values Intellectual values (

Corning

Social rules & regulation to Experiment Respect to the Individual Owning and Sharing knowledge

==>

Outcome Practices for leveraging scientific intellect

Division of Labour

Freedom

Community Business

Management

Intellectuals

& Change,

Scientific Research on Glass Entrepreneurial Support for commercialization Participation in Decising making

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" ..

110 Knowledge Creation in Business Organization

RESEARCH

DEMANDS

OF AN EVOLVING

SCIENCE

In the nascent state of the glass technology, when Corning Glass was incorporated, lay another major contradiction that led to the research approach at Corning. Glass making, with an ancient history of craft gradually evolved into to the scientific world. Corning's history is set along this evolutionary path as it participated in the eventful progress and transitions all along. Glassmaking required developments in raw material composition and process of manufacturing, both of which involved high variability when little knowledge of simulation and control existed. Progress demanded borrowing theoretical knowledge of various sciences as much as the ingenuity and skill of craft in devising and applying methodical techniques. Consequently, the route to the product development required both systematic experimentation and intuitive trials to continuously create exploratory fronts. From such conflicting demands (Figure-7) stemmed Corning's middle way of managing skilled glass workers and scientists together, through complementary infrastructure and norms of team working. Unique human resource practices emerged to organise mutual synergies based upon core values of respect to the individuals, which was propagated by the Houghtons themselves.

Figure-7 Integration of Science and craft Mediating

Artefacts

Research & development labs Machine research Lab.

Object goals

Subject Organization:

Corning

Approach to Organizing Research

(

Social rules & regulation

Integration of science and craft

Scientific Research on Glass Shop floor skill

Community Business

& Change.

Outcome

====>

Division of Labour

REspect to the Individual Team Working

Management

as

)

Intellectuals

Volume 7. Number

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j

I __

,I

wm,ma

•• aaW_iii=_U __

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Roy and Gupta 111

COMPETITIVE VALRY

INDUSTRY

WITH HIGH IMITATIVE

RI-

Situated in an industry that depended heavily on knowledge, people and little deterrent to entry, Coming was always amidst competitive challenges.

New firms continually mushroomed, several plainly imitating firms while others also engaged in research activities as Coming themselves. Innovation was quick to dissipate with worker turnover. The nature of the demands (Figure-8) on one hand forced the need for maintaining technological lead and research while on the other hand also requiring strategic actions for protection of the knowledge and quick appropriation. This remained a source of tension for most glass works more conservative strategies.

Figure-8 Conflict between Industry Competition and Mutual Co-operation Mediating Patents,

Artefacts Licences

Object as goals Industry

Subject Organization:

Corning

(

Social rules & regulation

Outcome

leadership Sharing Strategic research effort ==> Partneri ng and knowledge

Division of Labour Joint research

Collaborative trusts

work

Community Industry

competitors

For Corning, however, the flux provided a source of demand for innovation, both materially as well as in the evolution and application of business methods. It was the reason to constantly invent and improve production equipment and methods making it technologically sophisticated over its rivals. It enabled Coming to focus into areas of research into knowledge and capabilities that could be retained as trade secrets. Also, in being the Management

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112 Knowledge Creation in Business Organization industry leader Corning, had the vision of holistic development, which necessitated combined efforts of several members and firms. Rampant rivalry could be subdued by devising mutually beneficial co-operative means and understanding the competitive contribution of each rival. This led to the formation of an extensive network of trusts and arrangements where knowledge could be economically shared while competition remained in product markets. Corning's dominance over the industry came largely through its patent licenses, which came up owing to its technological dominance.

STRONG

AND DEMANDING

CUSTOMERS

Apart from competitive rivalry Corning also faced continuous pressures and threats (Figure-9) from its customers who were always large and controlled product markets. While most were highly advanced in the knowledge of glass applications to their industry, they also had incentives and opportunities to integrate backward to reduce their costs. Threats of elimination remained in which, however, Corning found the rationale for enhancing research and entering into even deeper relationships with them.

Corning recognised its need for such customers to source leading application knowledge of glass as well as its own capabilities to add value in its role as a glass manufacturer. Therefore, while it retained it is focussed approach to improve performance it also continuously built its relationships to source application opportunities of glass in areas beyond its core knowledge. Therefore, not only did Corning gain by learning from its customers and participating in leading applications, it found a strong motive for continuing research for taking glass to newer areas. The understanding of this division of work and forming of value chain positioning provided valuable direction to Corning's efforts in developing implicit rules based on mutual .benefit with customers.

GROWTH

NEEDS WITH INDUSTRY MATURATION

Corning history also demonstrates the need for continual change management and creative destruction of product businesse~ by a knowledge creating company. While its research efforts brought out inventions that were clearly ahead of times, little immediate use was realised in esoteric applications defying economic logic. Tensions (Figure-lO) of creating techManagement

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Roy and Gupta 113

Figure.9 Redefining Customer Relationships Mediating

Organization:

Artefacts

Object as goals Maintain business Outcome and source c=> Redefining knowledge protect customer against threats relationship

Subject Corning

(

Social rules & regulation Performance norms Implicit value chain positioning

Community Customers (Government.

Defence. Industry)

Division of Labour Input research at Corning Application research at Customers

nological push for enabling early appropriation of these forced Coming to look for new and path breaking application. At the same time, there were products with diminishing competitive returns and clearly' requiring phase out. Corning was plagued with maturing product lines, loss of profitability and diminishing businesses on several occasions.

Coming gained through its product life cycle management conflicts in several intangible ways. The company that identified itself solely with glass broke out of "glass industry mentality" and moved towards diverse industrial segments and possibilities beyond in its own traditional domains.

Two aspects of Corning's diversification, however, stand out. Firstly, Corning's diversification was based upon its core knowledge area glass making. Corning's belief in the potential of glass and the continuous investments in its development paid off as it could seek numerous applications of glass beyond conventional uses. Coming leveraged its historically accumulated knowledge that gave a sense of synergetic extension in its diversification attempt. Secondly, the application variety required superior skills for developing business relationships that rested upon larger objectives beyond returns and profits. Corning set up a broader standard of goals in its alliances that enhanced mutual abilities to co-operate and Management

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114 Knowledge Creation in Business Organization

thereby learn from diverse sources and combine into the company's knowledge web.

Figure-10 Growth Through Core Knowledge Mediating

Artefacts

Object as goals

Subject Organization:

Business growth Outcome Growth by diversifying ==> concentrate on its through core core ( knowledge

Corning

Social rules & regulation

Division of Labour

Diversi fication as growth paradigm

Community Growing industry

EMERGENT ASPECTS OF A KNOWLEDGE CREATING COMPANY The history of innovation and knowledge creation at Corning is woven through a maze of contradictions of choosing a uncertain business path, of the balance of craft and science and of organizing R&D towards both process and new products as per the demands of the competitive circumstances. The point of interest in Corning's case is, certainly, how it has dealt with these challenges in any given instance but, but more importantly, how it did continually foster innovation over the long run. This sustenance of innovative character is the mark of Corning's identity.

The case study has focussed upon six managerial innovations at Corning that can be classified into three broad conceptual aspects of knowledge creating organizations. These aspects have been identified by looking for elements that define the firm, its nature and boundaries subjects dealt under the literature of the theory of the firm. These aspects are tabulated in Table-2.

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Roy and Gupta 115 Table-l Conceptual Aspects of Knowledge Creating Finn

2 3

Core knowledge as prime identity of the firm Research as core identity Scientists a.s business managers Growth by extending core knowledge Plural and patient approach to research Integration of science and craft Permeable boundaries and outreaching Strategic Partnering network Redefining Customer Relation

CORE KNOWLEDGE

AS PRIME IDENTITY

OF THE FIRM

The recent knowledge based theory of the firm attempts to define the firm, its nature, behaviour and performance on the basis of the knowledge it encompasses. This view has emerged with the dissatisfaction .upon extant economic and behavioural views, which do not guide strategic actions for sustaining the dynamic capabilities of the firm. In the context of the current time the knowledge economy there has been in pervasive increase of complexity and ambiguity in the business environment leading to risk, uncertainty and anxiety in the sustenance of growth and business leadership.

Firms are forced to emphasise upon dynamic capabilities for continuously reaching a strategic fit with the changing environment, and more importantly, continually redefine and develop their own market environmentwhich is in true sense the essence of a dynamic firm. Such capabilities, however, stem from firm assets that are in themselves inherently dynamic in nature, in possessing self- renewal ability, which enable the shifting of competitive bases and internal strengths in recognition of the changing market.

Corning's long term sustainability has been driven on routes that its knowledge of glass defined. Glass took Corning into diverse areas of both plain and complex applications. It is at the heart of Corning's existence and the company has continually identified itself on glass making across time. The study shows that knowledge assets impart a dynamic characManagement

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116 Knowledge Creation in Business Organization

ter to the nature of the firm enabling long-term growth even across turbulent times.

PLURAL AND PATIENT APPROACH TO RESEARCH The case provides a new theoretical direction for the organization for knowledge creation. Much as industrial research take to the scientific methodology, the more distant research output seem to appear from being new and innovative. Reduced research productivity, proliferating variants of the same type and value-destroying warfare seem to be the competitive norm of the market This is the rut that businesses are in olSpeedily moving towards. Corning's history is a guide for business development and renewal based on continuously creating newer value propositions but from core set of competencies, erected and deeply imbibed over time. It is the story of a dynamic knowledge based company.

To understand Corning, however, requires a deeper understanding of the philosophy of knowledge and the philosophy of scientific research.

Kay (1979) attempts a distinction between science and technology ascribing a fundamentally basic and public nature to knowledge of science while attributing an applied and derived nature to technology. A differentiated use of the terms "knowledge creation" and 'innovation' becomes imminent with the former relating to new discoveries of something that did not exist before while the latter taking on a economic meaning to the use and application of a existing knowledge. Focus on the latter, in its nature of enabling economic appropriability, leads to management practices that are incompatible with the focus on pure science which has a greater public purpose and values. Strength in the latter provides well being in stable market environments while the former is the key determinant for survival and leadership in changing and dynamic environments. Only that, and paradoxically, while technological innovations are the resultant of organised scientific efforts, path-breaking developments in science almost always arrives through serendipity.

Firms, therefore, need to understand science and serendipity together, as a holistic confluence of planning and the emergent. This leads to a plural philosophy and practice of knowledge creation through well designed and controlled experimental and scientific effort along with an anticipation of the unexpected. Corning brings out the necessity of both craft and science for new knowledge creation.

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Roy and Gupta 117

PERMEABLE WORKS

BOUNDARIES

AND OUTREACHING

NET-

A knowledge-based firm, as Corning, is not defiped by its economic boundaries for its 1imits of action. Both the Nonaka and Takeuchi model and the Activity Theory Model stress the t10w of knowledge within and outside of the firm, as the key dynamic aspect of knowledge creation.

Knowledge creating firms obtain their stimulation for creativity from the environment, in form of changes and cont1iet situations. These create contradictions and force remedial actions. Knowledge surfaces through these actions many of which are borne out of innate and tacit abilities rather than objective analysis and observation. Actions are, however, less than optimal leading to a continual regress of contradictions and solution search, which is the explanation to the dynamic nature of the firm.

Firms also need find markets for its knowledge transformed in material forms. Supports from the environment, besides these, are also required in other ways as in providing mutualIy complementing services and specialized inputs whose development also depend upon knowledge spilI overs from leading knowledge creating firms.

CONCLUSIONS Knowledge is recognized as situated within action settings where it emerges episodically and serendipitously within the course of discourse and discussions amongst the people involved in work and collective problem solving. Study of knowledge creation, therefore, requires methodologies that capture the situated nature and the process interactions through which knowledge manifests itself. The study demonstrates the use of Activity System model as a framework for situating instances of innovation and knowledge creation in organizations. The framework enables analysis at various levels, thereby resolving the issue of individual and the collective, and .across multiple contexts that bear reciprocal int1uences upon each other. The framework integrates the organization and its constituents with its larger environment and provides an open system model enabling boundary passage to the inf1uences of change events. Frictions and cont1icts can be seen in response to change events following which knowledge creation is manifested in organizational action and residual formation of routines, structures and artefacts.

Management

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l~.

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~--_

..

_--------------------------------------RESEARCH ISSUES ON STRATEGIC HUMAN RESOURCE MANAGEMENT AND ORGANIZATIONAL PERFORMANCE

T.

I. R. Nagaraj

J. Kamalanabhan

INTRODUCTION

...

1f "

o

he aim of the study is to explore the possible relationship between use of strategic human resource practices and the financial per formance of manufacturing and service firms in India

GLOBALIZATION

OF ECONOMY

During the last fifty years technological advances in transportation, information and communication coupled with the steady decline on governmental ~ontrol on tariffs and trade barriers have broadened the scope for most busihesses and increased the opportunity to enlarge their competitive markets. Global communication networks allow commerce to take place around the world 24 hours a day. The compression of distance and time intensifies competition, provides more competitive opportunities, reduces entry barriers and even affect product life cycles.

THE COMPETITIVE MAN RESOURCES

ENVIRONMENT

AND ROLE OF HU-

The global economy has created a new competitive landscape where events change constantly in an unpredictable way. In the global economy, knowledge work and knowledge workers are the primary sources of economic growth and the ability to build, share and leverage knowledge will replace the traditional asset and size based competitive advantage (Drucker, 1997). Size is no longer a criterion for success. Big companies of yesteryears are now overtaken by less known and new age infotech Management & Change, Volume 7. Number I (Summer 2003) (Q 2003 Institute for Integrated Learning in Management. All Rights Reserved.

124 Research Issues on Strategic Human Resource Management between business strategy choices and human resource practices. In this study, in addition to these aspects, process aspects like the top management involvement in facilitating the competitive strategic choices and functional strategies (like human resource strategy) and line managers' collaboration in implementing the human resource polices and practices are also included.

Table-I Study Variables and their Links Business strategy

External & internal fit of human resources policies

Cost strategy

Involvement of human resources in strategy planning & implementation (external fit) Human resources policies as an integrated system (internal fit) Top management involvement Human resources-line management collaboration

Differentiated strategy

Human resource practices

Financial performance

Acquisition

Return Capital (ROC)

Competency development

Return on Net Worth (RONW)

Motivation

Tobin's q (Tq)

on

The other link that is explored in the study is as how the human resource policies and practices impact the business performance of the firm.

PARTICIPANTS OF THE STUDY The unit of analysis of the study is the firm at the corporate level in the manufacturing and service sectors located within India. From the published database of firms like Economic Times (ET 500), CRISIL, CMIE, etc public limited companies with an annual turnover of over one thousand million rupees and employing more than one hundred employees were identified. Of the 620 firms targeted, representing a wide range of industries in both public and private sector, 115 companies responded to the questionnaire.

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QUESTIONNAIRE The questionnaire developed for this study has three parts. The first part enlists the demographic information and quantitative data on financial performance and human resources. The second part covers business strategy process and part three has items that measures the "Externalinternal fit" of human resources and the "Strategic Human Resource" practices of the firm. A five Point Likert scale measures most of the items.

'STRATEGIC

HUMAN RESOURCE'

PRACTICES

INDEX

There are a few earlier attempts to develop or modify an index to measure human resource practices that impact organizational performance.

The earliest work was by Delaney et al. (1989) who had examined a wide range of human resource practices in over 7000 business units and developed a ten-item scale. Huselid (1995) added three more items and constructed two scales, "employee skills and organization structures" and, "employee motivation" scales. Taking note of the observation made by reviewers the need for greater depth and specificity in measuring human resource practices, using aspects covered by Huselid's and others scales, a revised "strategic human resource" practices index that is relevant to the Indian context was developed.

RESULTS AND DISCUSSIONS ANOVA and Regression analysis was used and the results of the statistical analyses are discussed below

Business strategy, fit and strategic human resource practices Overall 20.9 percent of firms follow cost strategy, 58.3 percent follow middle path and 20.9 percent follow differentiated business strategy.

Sivasubramaniam and Yenkata Ratnam (1998) report from a study of Indian firms that 27 percent of the firms follow defender (cost), 42percent analyzer (middle) and 27 percent prospector (differentiated) type of business strategies.

Cost strategy is the dominant business strategy in 24.7 percent of manufacturing firms whereas only 10 percent of the service firms follow Management & Change, Volume 7, Number 1 (Summer 2003)

126 Research Issues on Strategic Human Resource Management cost as the dominant business strategy. Service sector firms lean more towards the differentiated type of business strategy and manufacturing firms more towards the cost type business strategy.

Thble.2 Oneway ANOVA: Business Strategy and 'External Variable

'Externalinternalfit' ofHR

0JSt N=24 Mean SD 40.25 4.78

Middle N=67 Mean SD 44.77 8.20

.Differentiated N=24 Mean SD 47.12 7.fJJ

& internal fit' of HR SInn of Sqwres

F

Ratio BG (ill.329

\\G

6298.767

5.337*

* Significant at .01 level Thble-3 Multiple Comparisons: Business strategy and external-internal fit of human resources Business strate Cost Middle Differentiated

Comparisons between Middle & Differentiated Cost & Differentiated Cost & Middle

Mean difference

Std. Error

Sig.

-4.5261 * -6.8750* 4.5261 * -2.3489 -6.8750* 2.3489

1.784 2.165 1.784 1.784 2.165 1.784

.038 .006 .038 .572 , .006 .572

*The mean difference is significant at the .05 level Dependent variable: "External-internal fit" of human resources Method: Bonferroni ANOYA results (Table-2 & 3) show that firms pursuing different business strategies have different degree of "external-internal fit" of human resources. Also the firms pursuing different business strategies use different levels of strategic human resource practices. Multiple comparison using Bonoferroni procedure indicate that the differentiated strategy following firms' show a higher use of strategic human resource practices.

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Kamalanabhan and Nagaraj 127

FIT AND STRATEGIC HUMAN RESOURCE PRACTICES The "external-internal fit" of human resources shows significant variance in the use of strategic human resource practices. The multiple comparisons (Table-4) indicate that the use of strategic human resources practices is more among firms having higher fit and confirms the hypothesis that "External-internal fit" of human resources is a good predictor of extent of use of strategic human resource practices.

Table-4 "External-internal fit" of human resources and strategic human resource practices

'Externalinternal fit' of human resources Low Medium High

Comparisons between

Mean difference

Std. Error

Sig.

Medium & High Low & HIgh

-18.2034* -49.6476* 18.2034* -31.4442* 49.6476* 31.4442*

3.030 3.637 3.030 2.641 3.637 2.641

.000 .000 .000 .000 .000 .000

Low & Medium

*The mean difference is significant at the .05 level .

Dependent variable: Strategic human resource practices. Method: Bonferroni

FIT, USE OF STRATEGIC HUMAN RESOURCE PRACTICES AND FINANCIAL PERFORMANCE The ANOYA test confirms that the degree of "external-internal fit" of human resources and use of strategic human resource practices has significant variance for all the three financial variables, Return on Capital, Return on Net Worth and Tobin's q.

Regression results show a difference between the manufacturing and service sector firms in the variability of all the dependent variables viz. strategic human resource practices, and financial performance variables of "Return on Capital," "Return on Net Worth" and Tobin's q.

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Results of Regression

Dependent variable

Thble-S Analysis for Strategic

human resource

practices

Inde ndent variables External-internal fit No. of HR staff ofHR R s uare

Beta

R s uare

Beta

Strategic HR ractices Manufacturing Service firms All firms

firms

.782 .895 .802

.916* .946* .896*

.121 *

.785

Method used: Forward Enter method * Significance at 0.05 level

As seen in Table 5 in the manufacturing firms "external-internal fit" of human resources determine 78.2 percent of the variability of the use of strategic human resource practices. In the service sector also the variability of use of strategic human resource practices is determined by the "external-internal fit" of human resources by 89.5 percent. There is more than 10 percent difference between the manufacturing and service sector firms in the use of human resource practices, service firms being higher.

Table-6 Results of Regression Analysis for Financial performance variables (ROC, RONW & Tobin's

Dependent

variable

Return on Capital Manufacturing firms Service firms All firms Return on Net Worth Manufacturing firms Service firms All firms Tobin's q Manufacturing firms Service firms All firms Management

& Change,

Independent External-internal fit of human resources R" Beta .404

.635*

.406

.637*

.281

.530

.332

.576*

No variance

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variables Strategic

human resource practices RZ Beta

.688

.829*

.512

.716*

No variance .406 .109

.637* .330"

Kamalanabhan and Nagaraj 129

. * Significance at 0.05 level; Method used Forward enter Analysis of variance followed by regression analysis (Table-6) proves that business strategy in isolation is not a significant predictor of the financial performance. Whereas the "external-internal fit" of human resources is a good predictor of the financial performance variables of "Return on Capital" and "Return on Net Worth." The market financial performance variable Tobin's q is predicted well by the strategic human resource practices. The finding supports the shareholders perception if a firm has quality human resources (developed by proactive human resource practices) then the firm's stock deserve a higher valuation.

For a better appreciation of these results, specifically the impact of independent variables on the dependent variables, the researcher would like to refer to Likert's (1967) work on studying the relationship between leadership and firm's performance. He broadly classified the variables that affect the relationship, in his case the leadership and firm's performance.

1. Causal variable: These are independent variables that determine the course of developments and results of the organization and are under the control of management. Examples are organization structure, management policies and decisions, leadership styles, skills and behavior.

2. Intervening variable: These reflect the internal climate of the organization. Performance goals, loyalties, attitudes, perceptions and motivations are some of the intervening variables. These affect communications, participation, decision- making in the organization.

3. End-result variable: These are the dependent variables, the outcomes of the organization, like productivity, service, costs, quality and all financial outcomes.

In this study the type of business strategy represents the causal variable. The "external-internal fit" of human resources acts both as a causal and intervening variable. It determines (as causal) the extent of use of human resource practices and also facilitates (as intervening) between the business strategy and use of human resource practices. Similarly the human resource practices intervene between the 'fit' variable and the financial performance. The results show that the type of business strategy determines the variability; the differentiated business strategy enables higher 'fit' (external-interna) fit of human resources) thereby facilitating higher use of strategic human resource practices. It may be observed that Management

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130 Research Issues on Strategic Human Resource Management

the strength of the "external-internal fit" of human resources is so strorrg that it also doubles as a causal variable in determining the variability of the financial performance variables "Return on Capital" and "Return on Net Worth."

From the regression estimates (Beta), the researcher proposes that an increase of one-scale-point (the variables are measured on a 5 point scale) in the "external-internal fit" of human resources can increase the deployment of strategic human resource practices by ninety percent from the current observed level. Similarly, a one scale-point increase in the "external-internal fit" of human resources can increase the "Return on Capital" by 63.7 percent, "Return on Net Worth" by 57.6 percent and one scale-point increase in the use of strategic human resource practices can increase the Tobin's q by 33 percent from current levels.

Components of strategic human resource practices and performance The results of regression analysis of the components of strategic human resources show that acquisition and competency development practices together explain a larger variance (70.3 percent) of "Return on Capital".

Motivation practices explain 27.6 percent of "Return on Net Worth" and acquisition practices determine Tobin's q by a low 12.9 percent variance.

In these results too there exist differences in the variances between the manufacturing and service sector, with service sector finns showing higher variances.

I

TYPE OF FIRM AND PERFORMANCE The observed higher variance in service sector firms in the use of strategic human resource practices and consequent impact on the financial performance variables support the widely held view that in service sector firms the human resources is considered as a key strategic resource and their contributions have a direct and immediate impact on the customer. In the manufacturing firms it is not so as there is mostly a substantial time gap before the behavior of employees impact on the customer.

Though the observed differences between the manufacturing and service firms is an important finding of the study, considering the small sample (30 out of 115 firms) of the service sector firms, it will be more appropriate to make conclusions after further studies with large samples representing the service sector adequately.

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LIMITATIONS OF THE CURRENT STUDY AND SCOPE FOR FUTURE STUDIES The study has to be completed with a moderate sample size of 115 companies. For an exploratory study of this nature a larger sample would have helped the study to do robust statistical analyses. The area of research in strategic human resources management is still in its infancy and no concrete theories have emerged from the studies done so far. But many studies are underway to explore the links between human resource practices and firms performance. Though the current study has explored the links and found some evidence in the Indian industry it should be considered largely as exploratory in nature and the findings may require confirmation in.future studies. The unit of analysis in the study is the firm at the corporate level. In addition to this it is desirable to have a crosssectional design to investigate the shop floor level impact of human resource practices on aspects like product yield, scrap rates, quality, customer satisfaction, etc. This would have added inter-linking evidence to the current study finding of business level performance.

REFERENCES Arthur, J. B. (1994) "The effects of Human Resource Systems on Manufacturing Performance and Turnover," Academy of Management Joumal, Vol. 37, No 3, pp 670-687.

Delery, J. E., and Doty, H.D. (1996) "Modes of Theorizing in Strategic Human Resource Management: Tests of Universalistic, Contingency and Configurational Performance Predictions," Academy of Management Joumal, Vol. 39, NO.2, pp 802-35.

Delaney, 1. T., Lewin, D., and Ichniowsld, C {l989) Human Resource Policies and Practices in American Firms. Washington, DC: U.S. Government Printing Office.

Drucker, P. E, Dyson, E., Handy, C, Saffo, P. and Senge, P. M. (1997) "Looking Ahead: Implications of the Present," Harvard Business Review, Vol. 75, No. 5 pp 18-32.

Huselid, M. A. (1995) "The Impact of Human Resource Management Practices on Turnover, Productivity and Corporate Financial Performance," Academy of Management Joumal, Vol. 38, No.3, pp 635-72.

HuseIid, M. A., and Becker, B. E. (1996) "Methodological Issues in Cross-sectional and Panel Estimates of the Human Resource-firm Performance Link," Industrial Relations, Vol. 35, NO.3, pp 400-422.

Management

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132 Research Issues on Strategic Human Resource Management MacDuffie, J. P. (1995) "Human Resource Bundles and Manufacturing Performance: Organizational Logic and Flexible Production Systems in the World auto Industry" Industrial and Labor Relations Review, Vol. 48, NO.2, pp 197221.

Park, H. 1., Gardner, T. M. and Wright, P. M (2001) The True Resource in Strategic Human Resource Management: Insights from the Asia Pacific Region.

Working paper, Center for Advanced Human Resource Studies, Cornell University, New York Pfeffer, J. (1994) Competitive Advantage Through People. Boston: HBS Press.

Pfeffer, J. (1998) The Human Equation. Boston: HBS Press.

Thompson, M. (1998a) "Jet Setters," People Management, Vo1.28, No.4, pp.40-

45.

Ulrich, D. (1998) Human Resource Champions. Boston: HBS Press.

Watson Wyatt (2000 and 2001) Human Capital Index: Human Capital as a Lead Indicator of Shareholder Value. A Research Publication.

Wright, P. M. and McMahan, G. ~. (1992) "Theoretical Perspectives for Strategic Human Resources Management," Journal of Management, Vol. 18 NO.2, pp. 295-320.

Management

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, DETERMINANTS DEVELOPING FRAMEWORK

OF BUSINESS PERFORMANCE IN THE ECONOMY: AN INTEGRATED

Vijay Kumar Kaul The paper aims at investigating the factors determining the performance of an enterprise in a developing economy, and also develops a model/framework in which they can be examined. A study of literature in the field of industrial economics, organization studies and strategic management reveals that a strategic choice made by an enterprise in terms of product-market domain and resource deployment is a key factor affecting its performance.

The strategic choice in turn is influenced by four other factors, namely, environmental, organizational, past performance and ownership. It is further suggested that performance of an enterprise need to be examined using an evolutionary approach. Finally, an integrated framework of business performance is proposed. It is argued that though the developing economies are undergoing structural reform and moving towards market economy, the integrated business performance model is still relevant for the enterprises.

INTRODUCTION usiness enterprises have been recognized as main producers of goods and services, major source of employment, and biggest wealth creator for the modern society. The performance of these enterprises, that is, how efficiently and effectively these enterprises are managed, therefore, determines the prosperity and well being of the society. This led the scholars and researcher based in different discipline to observe, study and examine the various facets of these enterprises. Several scholars of advanced countries, where these enterprises first emerged, have been studying the performance and its various determinants. It is now accepted in several field that it is the strategic choices and decision made by an enterprise, which make it a success or failure. These strategic choices in turn are influenced by different factors.

The strategic choices made by the enterprises in developing economies may vary as these economies are characterized by imperfections in

IE5

Management & Change, Volume 7, Number I (Summer 2003) @ 2003 Institute for Integrated Learning in Management. h.1I Rights Reserved.

134 Determinants

of Business Performance

in The Developing Economy

their product market, capital market, labour market, and, legal system and government regulations. For instance in the developed countries, the strategic choices in terms of core competency and focusing has been advocated for enterprises to be competitive and grow (Prahalad and Hamel, 1991). However, at the same time it has been recognized that in the emerging markets, like Korea, India, the preferred choice has been diversification (Khanna and Palepu, 1997). This raises a question that needs to be examined. Are the factors affecting performance of an enterprises operating in developing country different from that of an enterprises operating in advanced countries? Further, a number of such emerging economies have undergone a structural reforms and moving towards market economy. Does it means that the factors affecting the performance would change with the changes in the economy of these countries?

The present paper aims at examining these issues. To be more specific it intends to develop a business performance model for the enterprises operating in the developing economies. It is argued that although different disciplines have been emphasizing on different factors influencing performance, yet strategy has emerged as a dominant factor. There is no universal set of strategic choices that is optimal for all business, irrespective of their resources, positions and environmental context. This makes the theory of strategy to be contingency based and a number of factors have been identified by researchers which determine the strategy and thereby the performance of an enterprise. Researchers have discussed three groups of contingency factors-organizational, environmental and performance factor. It is argued that in case of developing countries, one more factor, the linkage to Multinational Corporation is also important and need to be incorporated in the list of contingent factors.

The relationships among these contingent factors in most of the studies have been examined in a static environment setting. But in real life, strategies change over a period of time. Hence, to understand the success and failure of an enterprise a longitudinal investigation is required. The influence of various contingent factors on performance of an enterprise becomes clearer when an evolutionary approach is adopted. It is found that whereas the environmental and performance contingent factors act as a stimulation or force for change, on the other hand, organisational factors act as an inertial force that inhibit change.

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Kaul 13S The paper is grouped into six sections. The following, section discusses the strategy, its definition, and importance. Section three scribes the contingency approach to strategy. Section four presents evolutionary approach and its significance. Section five develops business performance model. Section six concludes the paper.

STRATEGY

AND STRATEGIC

two dethe the

CHOICES

The researchers in strategic management have been concentrating upon the life and death issue of concern to the top management of enterprises (Bower, 1982). The central unifying concept has been recognized as a strategy which unites the organizational efforts (Rumelts, 1981). A strategy is the pattern or plan that integrates an organization's major goals, policies and action sequence into a cohesive whole. Whether it is consciously set forth in advance or is simply a widely held understanding resulting from a stream of decisions, this becomes the real strategy of the enterprise.

This strategy encompasses those strategic decisions, which determine the overall direction and ultimate viability of an enterprise.

Even the recent researches in the field of industrial economics have started recognizing the impact of strategic move or behaviour (i.e. conduct of firm) not only in determining the market performance but also market structure itself. The traditional structure-conduct-performance paradigm argues that firm performance is strongly influenced by market structure. The logic is that market structure influences the market conduct or firms, which in turn determines market performance. Recent researchers, however, have shown not only that the structure is endogenous, but also the relationships between structure, conduct and performance are different. Rather all the three are determined together by the underlying parameters of demand and technological opportunity (Baumol, 1982; Dasgupta and Stiglitz, 1980). The strategic entry barriers, different from innocent entry barriers, are a clear example of how conduct may affect structure (Salop, 1979) although the scope of this to happen depends (once again) upon the underlying parameters of demand and technology (Morris et.aI.l986). Newer industrial organization paradigms attempt to integrate more formally the firm's performance with its conduct as well as with the market structure. Their main argument, namely, that a firm's strategic choice has an impact on the firm's performance, brings Management

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the industrial organisation and strategic management discipline closer to each other (Fiegengaum, McGee and Thomas, 1987) .

In the field of organisation studies, Child (1972) was the first one to acknowledge the role of strategic choices. Traditionally, organization studies researchers have been stressing that it is internal structure and design variables of an organization, which explain how it has performed.

The role of human choice has been relegated to a place quite secondary to the imperatives of environmental turbulence (Burns and Stalker, 1961; Lawrence and Lorsch, 1967); technological processes (Perrow, 1967; Woodward, 1965) size and ownership (Blau, 1970; Pondy 1969); information processing requirements (Galbraith, 1973) or natural selection processes (Aldrich, 1975; Hannan and Freeman, 1977). Child (1972) took a leading role in emphasizing the role of strategic choice in determining the content and form of both contextual and structural variables. It is the strategic choices made by organizational actions that determine how an organization finds itself within a particular context in the first place. The choices of goals, domain, technological and structural variable are what Child (1972) has referred to as strategic choices.

Thus, whether studied from the perspective of economics, organisation theory or strategic management, it is the strategic decisions made by an enterprise, which determines its performance. The strategy has been conceptualized in different ways. In general it has been conceptualized in terms of the content of strategy or the process of strategy. Content focuses on the specifics of what was decided, whereas process addresses how such decisions are reached in an organizarional setting (Venkatraman and Camillus, 1984). The one set of researchers viewing strategy as a process argues that strategy involves the matching or the art of reconciling the various components of the strategy mix (Andrews, 1971). Strategy process research assumes that by following a prescribed process for strategy formulation (mainly strategy planning process) an enterprise can improve its economic performance. In contrast, strategy content researchers examine the content of decision regarding the goals, scope and/or competitive strategies of an enterprise or one or more of its business units. They attempt to specify the strategic actions to be taken to match different environmental conditions. It is argued that a particular type of strategy that matches organizational strength and weaknesses with that of environmental threats and opportunities will enhance the performance of an enterprise.

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Kaul 137 The content of strategy varies along the hierarchy of strategies. Most researchers agree with a three level-corporate, business and functionalof strategy (Grant and Kings, 1982; Hofer and Schendel, 1978). However, the field of strategic management focuses on the interface between overaH organization and its environment (Schendel and Hofer, 1979) and a narrow treatment of one of the functional area is not generally viewed as a main stream strategy research (Ginsberg and Venkataraman, 1985).

PRODUCT-MARKET DOMAIN AND RESOURCE MENT AS STRATEGIC CHOICES

DEPLOY-

Strategy viewed in terms of its content emphasizes how enterprises attain competitive advantage at the business level (Hambrick, 1983b; Schendel and Patton, 1976; Tremplay 1985), and how they realize economies of scope at the corporate level (Bettis, 1981; Lambart and Anderson, 1985; Montgomery, 1985). Even though both competitive positioning and diversification ultimately entail resource and skill developments, a few researchers have attended to the actual resource allocation made by enterprises to functional areas. In practice, a strategy crystallizes from the longitudinal deployment of a firm's resources overtime (Mintzberg, 1978; Mintzberg and Waters, 1982). As such strategy represents the cumulative effect of the year to year allocation made by a firm to such functional uses as marketing, manufacturing and R&D (Hofer and Schendel, 1978). Though this argument is easily made at'the business level, Fombrun and Ginsberg (1990) have argued that even the corporate strategies of multi-business entities can also be understood as an aggregate of these longitudinal developments of functional areas.

Strategy researchers make a distinction between business strategy and corporate strategy that by-passes the functional resource allocation process (Hofer and Schendel, 1978; Bourgeois 1980; Ginsberg and Venkatraman, 1985). As a wheelright (1984) points out, strategy making at the corporate level " ...specifies two areas of overall interest to the corporation: the definition of the business in which the corporation will participate ... and the acquisition of corporate resources and their businesses." In practice, investigation of corporate strategy tends to focus on only one part of this definition the extent of diversification-at the expense of the resource deployment these diversifications entail. Yet the decision to diversify is itself a decision of how heavily to emphasize (in both Management

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138 Determinants of Business Performance in The Developing Economy quantity and kind) particular functional areas, be they commitments to plant and equipment, research and development or advertising and distribution (Fombrun and Ginsberg, 1990).

To reintegrate corporate, business and functional level assessment of.. strategy, Fombrun and Ginsberg (1990) have defined it as a pattern on the longitudinal deployment of resources to functional area across business.

There is another way to look at the relationship between diversification and resource deployment. Resources deployment depends on the product - market domains selected by an enterprise. In the long run the resources deployed in the past direct and constrain the direction of its diversification strategy. For example, a single product enterprise which has acquired intangible assets by investing heavily in R&D (that yielded expertise in other products) or by high level of advertising (that could have produced transferable brand names, expertise at branding products, underutilized capacity in the distribution system) will be in a better position to diversify into related product lines.

Hence, the type of diversification strategy not only determines the deployment of resources but is also determined and influenced by them.

Both these concepts of diversification and resource deployment are not different, rather are complementary to each other; and signify the same corporate strategy. It is also consistent with the strategy concept as defined by Chandler (1962). Therefore, strategy can be defined as the determination of product-market domains and deployment of resources to have competitive edge over others.

CONTINGENCY

APPROACH

Whether viewed in terms of process or content, ultimately strategy is the matching of organizational resources and capability with corresponding environmental context (Andrew, 1980; Chandler, 1962). However, it has been observed and believed that no universal set of strategic choice exists that is optimal for all businesses, irrespective of their resources, positions and environmental context. This has led the theory of strategy to be contingency based. Number of contingent factors have been identified by researchers which influence the strategy and thereby the performance of an enterprise.

Two main groups of contingency factors, namely organizational and environmental, have been considered by most of the researchers in stratManagement

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Kaul 139 egy. (Harvey, 1982). Another contingency factor that also dictates the ranges of strategic options available to an enterprise is the past performance. One more factor, the linkage to multinational corporation (i.e. the extent of foreign equity participation) is also an important factor influencing strategy, particularly for enterprises working in developing economies, like, India.

ENVIRONMENT The environment of an enterprise is the pattern of all the external conditions and influences that affect its life and development. An enterprise is to adapt to, co-align with, control or be controlled by these sets of environmental forces (Smircich and Stubbart, 1985). There are two extreme views relating to relationship between an enterprise and its environment: one view argues that an enterprise is supreme as it selects the environmental domain to operate (Child, 1972); the other view is that the environment chooses the type of organisation it would like to retain or weed out (Aldrich, 1979). Updated structure-conduct-performance paradigm oflndustrial economics (Porter, 1981; and Scherer, 1980) recognizes the two-way interaction between market-structure and firm conduct. The contingency view in organisation theory and strategic management is that organisations enact their environment (Weick, 1979) or define their domain (primary strategy or corporate strategy) and subsequently navigate in the chosen domain according to their secondary strategy (i.e. Business-level strategy) (Bourgeois, 1980).

The literature documents well that variability across organizational environments affects the nature of organizational strategies and strategy formulation. Large number of research studying strategy-environment interface are grounded in industrial economic paradigm. That is, a firm's performance in the market place is critically dependent on the characteristics of the industry environment in which it competes (Porter, 1981; Scherer, 1980). Others have attempted to test the external fit by operationalzing environment in terms of market structural elements.

ORGANIZATION Aligning strategy with environment refers to the external orientation of an enterprise, whereas aligning strategy with organizational variables focuses Management

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on internal forces. Organizational contingency variables, namely structure, system and style, have two fold relationship with the strategy: First, structural variables influence the process of strategy and decision-making; second, it facilitates or hinders the strategy implementation thereby showing the significance of a match between strategy and structure.

Many organization theorists, beginning with Weber (1947), have been concerned with the formal structure of organization and the implications these structures have on decision-making and performance. Theorists such as Merton (1940), March and Simon (1958), Thompson (1961), Crozier (1964), Mintzberg (1979) and Nelson and Winter (1982) have emphasized the systematic aspects of structure, showing how structure can influence strategy and decision-making while hindering adaptation to the external environment.

Strategic decision-making process is influenced by the organisational learning systems. Organization learning system is an institutionalized form of learning process in an organization. These processes shape the organizational knowledge base about action-outcome relationships and the influence of the environment on these relationships (Duncan and Weiss, 1973). To the extent that strategy formulation draws upon this knowledge base, learning processes influences it. Moreover, organizational learning processes also provide a forum for exchanging strategic information and key assumptions necessary for interpreting this information (Argyris and Schon, 1978; Mason and Mitroff, 1981).

The organisational learning systems create, acquire, communicate and interpret knowledge about the organization and its environment. To cope with environmental uncertainty in an enterprise, they attempt to objectify the subjective personal knowledge of individual managers into an organizational knowledge base, by providing rules for accepting or rejecting information, legitimizing certain types of information and providing heuristics to guide the use of information in decision-making (Hedberg, 1981; Shrivastava, 1983; Simon, 1979). However, both organizational learning system and the resulting strategic decision making processes are influenced by a number of inter-personal and organisational variables. Organizational structure and systems have been found to influence strategic decision-making process.

In contrast to strategy formulation perspective which believes in studying the impact of organizational variable on strategy (through strategy making), an implementation focus requires that strategy be aligned Management

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Kaul 141 with internal variables, such as structure (Chandler, 1962; Galbraith and Nathanson, 1978, 1979); management systems (King, 1978; Lorange and Vancil, 1977) and organizational culture (Schwartz & Davis, 1981; Stonich, 1982). Many researchers have attempted to test empirically Chandler's proposition regarding the strategy-structure fit in different settings (Channon, 1979; Pooley-Dias, 1972).

PERFORMANCE Similar to the role played by environmental and organizational contingencies, the level of performance also dictates a range of strategic option available to an enterprise. The alternatives available to an enterprise whose performance is steadily declining are very different from those available to an enterprise that is constantly increasing its performance level (Harrigan, 1980; Porter, 1980). High performing enterprises possess more organizational slack for engaging in a diversification or reorientation attempt than low performing enterprises (Romanelli and Tushman, 1986).

Teece (1982) has also argued that the choice of de-novo entry or acquisition will depend upon the amount of slack and the time period over which it is available.

Organization slack depends on the performance of an enterprise. Slack increases during periods of success and decline during periods of failure (March and Simon, 1958; Cyert, Feigenbaum and March, 1959; Cyert and March 1963). Slack seems to smooth performance in the face of a variable environment. Mueller (1977) has also argued that the profits earned in one period whether from luck or skill, provide the resources to maintain profits into the future. Some companies erect entry barriers through increased product differentiation, others via scarce natural resource or land sites. Some obtain legal protection for their positions (e.g. patents, tariffs, licenses) by purchasing the services of scientists and technicians, lawyers and lobbyists or more directly by contrfbution to politicians and public officials themselves. The means vary, but the ends are the same.

Thus firms starting out with the highest and lowest profitability levels have a greater than expected probability of remaining in their initial grouping.

Conversely, firms in the center of the distribution have a greater than expected probability of movement out of the center. Thus, movement out of the initial grouping is much more likely for firms starting towards the center than if the firm started towards the tails of the distribution.

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142 Determinants of Business Performance in The Developing Economy Though studied in differerit context, the findings of Bowman's (1980, 1982) study on Risk-return paradox that the low profit (or troubled firms) take high risk also signify that the behaviour of an enterprise is influenced by its performance.

Thus, it can be argued that the performance is not only the outcome or result of the strategy followed by an enterprise, but it also acts as a determinant of strategy thereby the future performance of an enterprise.

OWNERSHIP:

FOREIGN VS LOCAL

In developing economies, ownership is an important variable influencing the strategy, and consequently the performance of an enterprise. Foreign controlled enterprises (FCE) share the ownership of certain unique intangible assets with parent MNC's such as brand goodwill, knowledge, organizational skills, access to marketing and information networks, etc.

Because of such ownership advantages, the asset bundles of FCEs are different from those of their local counterparts.

This may lead to differences in the mode of rivalry (competitive business strategy) of firms. The access to information on world markets and opportunities coupled with the multinational enterprise objective of . global profit maximization may result in rationalization of production on the basis of international division of labour, which may lead to the higher dependence of FCEs on international trade. Hence the degree of export orientation and raw material sourcing of their operations could be different. Their advanced organisational skills can lead to different inventory and liquidity ratio. FCE's perception may also be different because of their access to better information. The centralization of strategic decision making responding to global opportunities in MNE's may lead to a different investment and financing behaviour: possibility to undertake R&D, investment in product expansion, raw material sourcing, import-export behaviour, profit repatriation behaviour, etc. of FCE's (Newfarmer and Marsh, 1981). Hence, it may be argued that in a developing economy, the market conduct of foreign controlled firm will be measurably different than that of the domestically controlled enterprises, other things being equal. Thus, if the effect of foreign equity participation on strategy is taken separately, \t will enhance the explanatory power of the other contingency variable also.

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Kant 143 To sum up this section, it can be said that strategy is contingent on four factors-environment, organization, past performance and ownership pattern. These factors interact with each other and influence the strategy, thereby the performance of an enterprise.

EVOLUTIONARY

APPROACH

The contingency approach has emphasized the impact of various internal and external forces on strategy. However, the relationships- among these forces in most of the studies have been examined in a static environmental setting. But in real life it is not so; strategies change over a period of time (Chandler 1962). Even to manage a strategy is often to manage change-to recognize when a shift of a strategic nature is possible, desirable and/or necessary, and then to act (Quinn, Mintzberg, James, 1987).

A basic principle in the discipline of strategic management is that an enterprise must maintain a proper alignment with its environment to assure its continued success. This principle rests on two premises; first, organizations are dependent on their environments for resources, and second organizations can manage their dependency by developing and managing strategies (Thompson, 1967; Hofer and Schendel, 1978, and others).

The changes in the environment are discontinuous and inevitable (Ansoff, 1984). Thus, as environment changes so should organization's strategies (Thompson, 1967). Ansoff (1984) has, therefore, recognized the strategic management as a systematic approach for managing strategy change. Theories of strategic management increasingly reflect this focus on organizational change. Empirical research, however, appears to have become more and more preoccupied with cross-sectional design that examines the synchronic rather than dynamic aspects of organizational strategy (Galbraith and Schendel 1983). An evolutionary and longitudinal study of an enterprise is required to examine the change in strategy.

Organization theorists have also recently started examining the strategy change (a strategy innovation) while studying organizational change and transformation. It has been argued that the question why some organization succeeds or others fail can be answered by taking an evolutionary and historical view of organization. Various models of organizational evolution have been developed which answer the growth and deManagement

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cline of organizations overtime (See Tushman and Romanelli, 1985). These models have identified many forces that inhibit change and those that stimulate change.

The change in a strategy of an enterprise is a combined operation of forces for stability and forces for change. The conventional view of strategic management, nevertheless, especially in the planning literature, has been maintaining that the change must be continuous; the organisation should be adapting all the time. Yet this view proves to be ironic because the very concept of strategy is rooted in stability, not change. As the same literature makes it clear, organizations pursue strategies to set directions, to layout courses of action, and to elicit cooperation from their members around common established guidelines. By any definition, strategy imposes stability in an organisation. Indeed, the very fact of having a strategy, and especially of making it explicit, create resistance to strategic change (Pascale, 1984, Mintzberg 1987). However, the main issue, which the conventional view fails to take up, is how and when to promote change.

It is here that the findings of organizational evolution model become useful.

The shifts in strategy occur when forces creating pressure for change overcome forces that create resistance to change (Bigelow, 1982 and Lundberg, 1984). However, changes in strategy primarily reflect the decisions of general managers to respond to change in environmental threats and opportunities. These decisions may result either from the intentional rationality and learning or from mimetic processes (Singh, House and Tucker, 1986; Ginsberg, 1988).

The question of how often firms tend to undergo changes in strategy depend on the relative influence of inertia forces, environmental feedback or feed forward and strategic choice on activity pattern overtime (Romanelli and Tushman, 1986). The predominance of inertial forces in organization may explain the observation that periods of changes in magnitude tend to be interspersed with periods of discontinuous changes in patterns (Mintzberg and Waters, 1982; Tushman and Romanelli, 1985).

Nevertheless, the frequency and duration of different type of changes may vary across different external and internal conditions or environmental changes. As Mintzberg and McMugh (1985) have observed, cycles of incremental and revolutionary changes in strategy appears to be of shorter duration in some organizations and more balanced between change in magnitude and change in configuration, while in others they are of larger Management

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Kaul 145 duration with an emphasis on changes in magnitude that are interrupted by occasional, brief and disruptive changes in direction or gestalt.

The relationship between pressure for and resistance to, changes in strategy is a function of general manager's continual needs to minimize two kinds of costs - those of brief mismatch with the economic and socio political environment and those of changing to avoid the mismatch (Miller and Friesen, 1984). Hence the appropriate nature of change can only be decided with reference to a particular set of internal and external conditions that determine the outcome of decision-making processes (Friesen and Miller, 1986).

In brief, to understand why an enterprise has succeeded and the other failed requires a longitudinal investigation. The influence of various contingent factors on performance of an enterprise as discussed in the preceding section becomes clearer when an evolutionary approach is adopted.

The environmental and performance contingency factor act as a stimulation or force for change, on the other hand, organizational factors act as an inertial force that inhibit change.

MODELING

BUSINESS

PERFORMANCE

Integrating the factors discussed within the framework of contingency and evolutionary approach in the preceding sections a business performance model has been proposed. This integrated business performance model has been exhibited in Figure-I. The interactions and relationships among these various factors have been shown with the sign of arrows.

It is exhibited that the strategic decision concerning the product-market domain and the deployment of resources within those chosen domains influence the performance of an enterprise. Both these strategies in the form of product market diversity and the deployment of resources are determined by various contingency factors, namely the environmental, organizational, performance and foreign ownership. But the strategies change ov~r a period of time; and the contingency approach, however, does not help to understand why this happens.

An evolutionary approach tells as to how changes in strategy and the type of changes in strategy occur. It shows that within these various contingent factors some act as stimulators for change and others as inhibitors. The combined influence of these factors result into a change in strategy.

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Past perfurrnance

Environment

Perl'orrnance

Organisation

B2

Figure 1 Business Perl'orrnance Model

The selection of product market domain (or diversification) is a pri- _ mary strategy of an enterprise. Competing within this domain/s will depend on the way resources are deployed. Both these product-market diversity and deployment of resources are interlinked. The product market domain decides the type of resources it needs to operate. And, the way these resources are deployed ensures the competitive edge an enterprise will have over its competitors. Once an enterprise has committed itself by investing in different resources, then these resoulces in future will constrain and influence any change in the product-market diversity decision. Thus interaction depicted by B 1 shows that there will be two-way relationship between them.

Environmental factors consist of external forces influencing the strategy, namely, market structure and related variables. The selection of product market domain depends on the "objective environment." HowManagement

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Kaul 147 ever, competitive strategy within the chosen domain, to have an edge over others, depends on environment as perceived by the top managers of an enterprise. The perceived environment in itself shows the combi~d impact of organizational (i.e. top management orientation) and environmental factors on the competitive strategy. Any change in the environment will bring about a change in strategy to have an alignment between the two.

The organizational factors, representing internal forces, in the form of structure, style and system have two-way interaction with the strategies.

Internal organizational systems influence the strategy formulation process; once strategy-product market diversity has been decided, a balance between the strategy and structure is required to implement the same.

Hence A7-A8 & B2 represent the two-way interaction between the strategy and organisation.

Foreign ownership representing linkage with Multinational corporations also influences the strategic behaviour. The product market domain will be selected in which the MNE parent company has some proven strength.

The resources deployed will also be different from their local counterpart, as they possess some unique assets due to linkage with MNE's. ~ Performance is an outcome of the strategies (i.e. Product market diversity and Resource deployment). A well-formulated and implemented strategy will result into a good performance. However, the performance also influences the future strategy in terms of its product market diversity and deployment of resources.

CONCLUDING

REMARKS

The paper focuses on identifying the factors determining the performance of enterprises in a developing economy. It is found that there are four structural factors namely, environment, organization, past performance and ownership along with one strategy factor that determine the performance of an enterprise. The strategy factor has been further expanded in terms of product-market domain and resource deployment decisions.

The relationship among all these variables has been depicted in a model form. The model has shown that structural factors influence the strategy factor and that in turn influence the performance. The performance in form of success or failure is a long-term phenomenon. Hence, it has also been concluded that a longitudinal approach would be most appropriate to examine success or failure phenomenon.

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148 Determinants of Business Performance in The Developing Economy Strategy is a dynamic concept. Management thinkers find it still interesting to define strategy as it is witnessed in the recent debate on strategy in Harvard Busines$ Review (Porter, 1996 and Hame11996). As the strategy is a response of management to the challenges faced by the management at a one point of time and the environment keeps on changing, therefore, the strategy also changes. However, the integrated framework consisting of contingency approach and evolutionary approach is still important and relevant.

The factors determining performance presented in the model except the ownership factor (that the linkage with multination enterprises) are relevant for enterprises operating in all countries. The ownership factor becomes important for the enterprises operating in developing countries.

Differences in strategic behavioural patterns between foreign and domestic enterprises are likely to be greater in a developing economy than in a developed economy because the institutional circumstances in developing economy are so much different. For example, the differences in the price of labour relative to capital may be greater between developed and developing economies than among developed economies. The level of domestic technology and entrepreneurial capacity may be lower; the competitiveness of domestic enterprise may be less. The Government regulations playa stronger role in some areas (e.g. import and price control) and a weaker role in others (e.g. antitrust and restrictive business practice control).

In the developing economies, though they are undergoing structural reforms and moving towards market economy, the role of strategy is undisputed. In terms of proposed model, it suggests that environmental factor are dominating and forcing change in the strategy of the enterprises. How and what type of change in the strategy will be introduced will be determined by the organizational factor, past performance and ownership pattern. The strategic choices in terms of diversification strategy followed by large number of Indian enterprises in the pre-liberalization era (Before 1991) and the restructuring and refocusing in the post-liberalization era (After 1991) is an example to be quoted(see Kaul, 2003).

All this has a clear implication for the corporate planners. The corpOl'ate planners need to identify in each of the factors which particular aspect or variable is more important at one point of time. They should formulate and adjust their strategy accordingly to maintain and improve their performance.

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Kant 149 NOTES 1.

2.

3.

-

4.

5.

6.

7.

It may be looked at either as a prior statement to guide action or p'osterior results of actual decision behaviour. In most of the organizations, however it is difficult to find a complete prior statement of a total strategy that is followed. But one can see what its true strategy is by looking at the actual emerging pattern of enterprise's operant goals, policies, and major programs (Mintzberg, 1978, 1987; Quinn, 1980).

Market structure includes elements such as seller concentration, barriers to entry and exit, product differentiation, industry growth and economies of scale (Bain, 1956; Vernon, 1972; Caves, et.aJ., 1977; and Scherer, 1980).

The crucial assumption is that all firms are profit maximiser and because of sharing the constraints of market structure will tend to behave in the same way: "Firms in an industry are assumed to be alike in all economically important dimensions except for their size (Porter, 1979)". This assumption of homogeneity, which considers each firm's behaviour (strategy) to be alike, was the reason why firm behaviour elements were ignored in the structureconduct-performance paradigm.

Writers on strategic management, however, argue that study of a firm's conduct should be the primary focus for research (Porter, 1981). Empirical studies have shown that firm level conduct (strategy) variables contribute to the explanatory power of the structure\performance paradigm.

For example, postulated relationships regarding 'goodness of fit' considerations between organizations and environment imply that the design of an organization follows more or less automatically from the degree of variation and complexity presented by the environment. It is assumed in such theories that these "contextual" constraints are binding in their effects and dramatically reduce the range of organizational response alternative to those that will produce the proper "fit" with the independent variables in question.

The open system analogy provides a common way of thinking about the relationship between an enterprise and its environment.

One, the studies on strategic groups, especially the Purdue studies, have highlighted the need to formulate differential strategies according to the conditions stipulated by strategic groups and not the entire industry. The second set of studies related diversification strategy and market structural variables to explain performance differences. Their contention is that the relationship established between diversification strategy and performance (Rumelt, 1974) cannot be explained without relating strategy to environment (market structural variables). Others have also explored external fit. For example, Anderson and Zeithaml (1984) tested empirically the fit between the product-life-cycle stage and strategy. Also, Jauch, Osbol1l and Glueck (1980) Management

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150 Determinants of Business Performance in The Developing Economy empirically established several strategy environment relationships, both in terms of strategic decisions and in relation to short-term financial performance.

S.

9.

10.

11.

12.

Vertically integrated firms have greater centralization of the definition and impetus stages of the decision process (Ackerman, 1970) whereas conglomerate organizations have more centralized processes and use more sophisticated financial planning and control systems than related product multidivisional firms. Mintzberg, Raisinghani and Theoret (1976) identified the critical role played by decision communication routines and decision central routines in strategic decision processes. These routines are determined by the organization's learning characteristics (Shrivastava and Grant, 1985).

As per Bourgeois (1981), it is that cushion of actual or potential resources which allows on to adapt successfully to internal pressures for adjustment or to external pressures for change in policy, as well as to initiate changes in strategy vis-a-vis the external environment. For large firms, established pattern in activity may be protected and supported even as the firm adapts general changes. Moreover, slack may create a larger enough margin for error so that failure in an adaptation attempt causes no lasting detriment to effectiveness outcome. High performing firms may be high precisely because they routinely engage in alteration of activity patterns that at least seek better alignments with environments. By these arguments, we would expect more adaptation to be observed for high performing firms. Low performing firms, if they do not adapt, would be expected to fail eventually, except in so far as the environment does not change to support existing activity patterns (Romanelli and Tushman, 1986).

The FeEs' rivalry may be dominated by non-price competition based on product differentiation to maximise the revenue productivity of their asset bundles (Caves, 1974). The mode of rivalry might reflect on their scale of operation, advertising behaviour and profit margins.

The strategic decisions of the foreign subsidiary are made on the basis of international financial consideration and global strategies vis-a.-vis other transnational rivals as well as factors internal to the host country, while domestic finns must consider only local economic factors. The decision to enter, diversify and undertake R&D of MNE affiliates in Canada have been found to be less determined by the local conditions than in case of their local counterparts. The factor proportions and the employee compensation behaviour may show differences because of grooming of MNE's in an environment of capital abundance or labour scarcity. The experienced and more professional organizational ski!ls of MNEs may lead to more optimal financial and inventory management.

Mintzberg, 1973; Buzzell, Gale and Sultan, 1975; Hofer and Schendel, 1978; Wissema, Van der Pol, and Messer, 1980; Porter 1980; Hambrick, 1983 and

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Kaul 151 others Aldrich 1979, Pfeffer and Salancik 1978.

13. Galbraith and Kazanjian 1986; Lorange, Scott, Morton and Ghoshal, 1986.

14. Greenwood and Hinnings, 1987; Child and Smith, 1987; Pettigrew, 1987.

15. Starbuck, 1965; Aldrich ,and Pfeffer, 1976; Kimberly and Miles, 1980; and Child and Keiser,1981.

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Anderson, C. R. and Zeithaml, Carl P., (1984) "Stages of the Product-Life-Cycle, Business Strategy, and Business Performance," Academy of ManagementJournal, March, 1984.

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Kaul 155 Miller, D. and Friesen, P. H. (1984) Organizations: A Quantum View. Englewood Cliffs, NJ: Prerrtice-Hall.

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156 Determinants of Business Performance in The Developing Economy formance," Review of Economic and Statistics, May, 61, 214-28.

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Management

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-SUPPLY CHAIN MILLENNIUM

MANAGEMENT

IN

THE

NEW

Subrata Mitra

The evolution of Supply Chain Management in the 1990's is preceded by two phases-"physical distribution management" in the 1970's and "integrated logistic management" in the 1980's. The focus has gtadaally shifted from "internal efficiency" to "supply chain efficiency" and "customer service." In this paper, we discuss three emerging issues-advances in IT and e-commerce, globalization and environment consciousness-in the context of Supply Chain Management in the new millennium. We also discuss the rot! of Customer Relationship Management (CRM) in supply chains. A case study is presented in this context to indicate the importance of CRM in achieving long-term supply chain goals. The need to continuously reconfigure the supply chain, and align the Supply Chain Management strategy with the overall business strategy is highlighted.

INTRODUCTION

T

he evolution of Supply Chain Management (SCM) in the 1990's ••• can be attributed to increased competition and globalization (Tho mas and Griffin, 1996). SCM requires organizations to take a holistic view of their business processes, such as procurement, production and distribution, to enhance operational efficiency. The evolution of SCM can be traced back to "physical distribution management" in the 1970's when there was no coordination among the various functions of an organization, and each was committed to attain its own goal. This myopic approach then transformed into "integrated logistic management" in the 1980's that called for the integration of various functions to achieve a system-wide objective (Vrat, 1999 and Seturam, 1999). SCM further widens this scope by including the suppliers and customers into the organizational fold, and coordinating the flow of materials and information from the procurement of raw materials to the consumption of finished goods.

Management

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@ 2003 Institute

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164 Supply Chain Management in the New Millennium

should be recycled to reduce waste either by a government agency for producing energy or fertilizer, or by the manufacturer itself. If the manufacturer takes the responsibility of recycling, it has to do so either through "reverse logistics" along its distribution channel or by forming a separate supply chain of reverse intermediaries (Stern et aI., 1996). Adopting environment-friendly practices allows firms not only to project their environment consciousness, but also to reduce cost in the long run, improve financial performance and become more competitive (Jones, 1998; Handfield and Nichols Jr., 1999).

Firms have to concentrate on designing products with more recyclable materials, and efficiently manage the reverse supply chain for disposal! recycling of used products and packaging. They have to comply with the norm set by the government for a pollution-free environment, and accordingly restructure their supply chain strategy.

CRM AND SCM The goal of CRM is to retain customers by providing value to them. It _ has its roots in the relationship marketing concepts (Berry, 1983; Levitt, 1983 ; Jackson, 1985; Christopher, Payne and Ballantyne, 1991) that require organizations to lay more emphasis on retaining existing customers rather than on creating new ones (Clark and Payne, 1997). Initially perceived to be a marketing function, it has gradually turned out to be a cross-functional responsibility with the definition of customer including internal members besides final consumers. The evolution of relationship 'fransition

Figure-2 to Relationship Marketing (Source: Payne, 1997)

Emphasis on customer retention

Emphasis on customer acquisition

Relationship Marketing

Transaction Marketing Functionally based marketing

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165

marketing from the functionally based transaction marketing is shown in In the context of SCM, where alliances and partnerships are the keys to success, CRM plays an important role in building long-term relationships. Apart from the end users, it involves internal employees, channel members and other external entities such as advertising agencies and consulting organizations (Srivastava et aI., 1999). The success of relationships depends on sharing of savings from the supply chain, which may be .reinvested to further enhance its efficiency, and sustain the competitive advantage (Chen, 1997). The supply chain of tomorrow will look like a virtual organization, seamlessly integrated through sharing of data and savings as well. The bonding between the partners will be closely held by the relationship management practices, as diagrammatically shown in Figure-3.

Figure-3 Future Supply Chbain Network Integrated Database

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Savings accrued from supply chain optimization

Flow of materials Flow of information

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166 Supply Chain Management in the New Millennium

For SCM to be effective, there should be cooperation, coordination and transparency among the channel partners, which require a high degree of mutual trust and willingness to share information (Epner, 1999).

In the earlier days; manufacturers used to wield power and dictate relationships in supply chains. But over the last few years, the dynamics of relationships are changing as the power is gradually shifting from manufacturers to intermediaries and customers. Wal-Mart and Kmart are forcing their suppliers to installEDI links to monitor and manage inventories at the stores. Freight carriers like UPS and FedEx, who played a passive role in supply chains till recently, are now acting as powerful links for direct-selling manufacturers to deliver quality service at the customer's doorstep (Stem et aI., 1996). Companies selling their products through the Internet also have to take an initiative for developing customized and interactive web sites to attract and retain customers. Amazon.com is a classic case to e-marketa commodity product (i.e., books and music CDs) backed by highly personalized service (Caldwell, 2000). ~ For multinational companies doing business on a foreign land, it is necessary to maintain a good relationship with the law makers and regulators of the concerned country, apart from keeping close alliances with the international carriers and domestic partners'. Because of cultural differences, they need to develop personnel with foreign language, negotiation, and problem-solving skills, who are willing to take the challenge of developing key relationships with new supply chain members (Handfield and Nichols Jr., 1999). Maintaining a good relationship with the government is also necessary in the context of growing environment consciousness.

It is the responsibility of manufacturers to convince channel partners about the importance of recycling for a pollution-free environment.

Case Study The following case study indicates how the absence of Relationship Management can affect the performance of a company in the long run.

The company under consideration is one of the largest food products companies in India, and the case study pertains to its dairy products division. The company entered the dairy business a few years back, and has already acquired a respectable market share. Though it is able to aggressively push the products into the markets, it is doing so at the expense of its distributors, who are an unhappy lot today. The distributors feel that the company is not paying enough attention to their probManagement

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Mitra 167 lems, and this is reflected in frequent change of distributors in recent times. The future business prospects of the company will be adversely affected unless it takes initiatives to sustain long-term relationships with its distributors.

Accofding to some of the distributors surveyed, the following are the major problems that they are facing in dealing with the company. The distributors are forced to carry 5-6 weeks' of excess stock every month, and moreover they are not allowed any credit by the company while they themselves have to sell to retailers on credit for doing business. Thus, on one hand they are losing money on account of extra investment in inventory, and on the other hand they are losing money on account of market credits while they themselves do not enjoy the same facility. The company also takes a long time for settlement of claims against damaged items and items whose shelf lives are over. The distributors are required to invest in coolers and refrigerators, which are not subsidized by the company. For small distributors with inadequate sales volumes, investment in coolers and refrigerators becomes a financial burden. The distributors also have this grievance that the company neither conducts any training programme nor has any incentive scheme for the distributors' salesmen.

The above-mentioned problems, and the company's continued apathy to tackle these, have created dissatisfaction among the distributors. An initiative from the company's side need to be immediately taken to sort out these problems with the distributors, who happen to be a key link in the supply chain. Maintaining a lasting and fruitful relationship with the distributors is necessary as far as the long-term business prospects of the company are concerned. Some of the steps that the company can take to alleviate these problems are as follows. The additional 5-6 weeks' stock pumped in by the company is uneconomical from the point of view of the distributors, who feel that they can invest in at most 1-2 weeks of stock over and above the monthly requirements. Besides meeting its sales targets, the company should also ensure that there is no build-up of excess stock at the distributors. The company can think of extending credit facilities to distributors for at least one week. Also, prompt settlement of claims can boost the distributors' confidence. Finally, the company should regularly conduct training programmes and institute an incentive scheme to motivate the distributors and their sales force.

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168 Supply Chain Management in the New Millennium CONCLUSION The evolution of SCM in the 1990's can be traced back' to "physical distribution management" in the 1970's and "integrated logistic management" in the 1980's. In this paper, three emerging issues, namely advances in IT and e-commerce, globalization and environment consciousness, are discussed in the context of SCM in the new millennium. The need to continuously restructure the supply chain and align the SCM strategy with the business strategy is highlighted. The evolving role of CRM as a tool for developing competitive advantage lowed by a case study.

in supply chains is also discussed

fol-

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Berry, L. L. (1983) "Relationship Marketing," in: Berry, L. L., G. L. Shostack and G. D. Upah (eds.), Emerging Per~pectives on Services Marketing, Chicago: American Marketing Association, 25-28.

Caldwell, J. (2000) "Building a Sustainable e-business CRM Strategy," Agency Sales, 30(5): 23-27.

Chen, 1. (1997) "Achieving Maximum Supply Chain Efficiency," IIE Solutions, 29(6): 30-35.

Christopher, M., A. F. T. Payne and D. Ballantyne (1991) Relationship Marketing: Bringing Quality, Customer Service and Marketing Together. Oxford: Butterworth- Hei nemann.

Clark, M. and A. Payne (1997) Customer Retention.' Does Employee Retention Hold a Key to Success? in: Payne, A. Ced.), Advances in Relationship Marketing, London: Kogan Page, 41-52.

Evans, R. and A. Danks (1998) "Strategic Supply Chain Management: Creating Shareholder Value by Aligning Supplying Chain Strategy with Business Strategy," in: Gattorna, 1. (ed.), Strategic Supply Chain Alignment, Gower, 18-37.

Handfield, R. B. and E. L. Nichols Jr. (1999) Introduction to Supply Chain Management. New Jersey: Prentice-Hall.

Jackson, B. B. (1985) "Build Customer Relationships That Last," Harvard Business Review, November-December, 120-128.

Jones, T. (1998) "Reverse Logistics: Bringing the Product Back, Taking it into the Future," in: Gattorna, J. Ced.), Strategic Supply Chain Alignment, Gower, 619632.

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Mitra 169 Lee, H. L., C. Billington and B. Carter (1993) "Hewlett-Packard Gains Control of Inventory and Service through Design for Localization," Interfaces, 23(4): Ill. Lee, H., P. Padmanabhan and S. Whang (1997) "Information Distortion in a Supply Chain: The Bullwhip Effect," Management Science, 43(4): 546-558.

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29-40.

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93.

Sharpe, D. and R. Hill (1998) "Efficient Consumer Response: From Harmful Competition to Winning Collaboration in the Grocery Industry," in: Gattoma, J. (ed.), Strategic Supply Chain Alignment, Gower, 104-122.

Srivastava, R. K., T. A. Shervani and L. Fahey (1999) "Marketing, Business Processes, and Shareholder Value: An Organizationally Embedded View of Marketing Activities and the Discipline of Marketing," Journal of Marketing, 63: 168-179.

Stern, L. w., A. 1. EI-Ansary and A. T. Coughlan (1996) Marketing Channels' (5th ed.). New Delhi: Prentice-Hall.

Thomas, D. J. and P. M. Griffin (1996) "Coordinated Supply Chain Management," European Journal of Operations Research, 94: 1-15.

Vrat, P. (1999) "Supply Chain Management in India: Problems and Challenges," in: B. S. Sahay (ed.), Supply Chain Management for Global Competitiveness.

New Delhi: Macmillan, 10-24.

Management

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PAY SATISFACTION AS RELATED TO DISTRIBUTIVE, PROCEDURAL AND INTERACTIONAL JUSTICE

Namrata Gulati

Kanika T. Bhal

Research in compensation management has emphasized the organizational justice concept. Researchers have suggested that perceived justice at the workplace is an important determinant of pay satisfaction. We investigated the effect of workplace justice on pay satisfaction in various software organizations in India. Organizational justice was studied by means of three dimensions: distributive, procedural and interactional and Pay Satisfaction was assessed on four dimensions- level, raises, benefits and structure/administration. In a questionnaire survey, 310 executives of software organizations perceived distributive justice influenced satisfaction with pay level and benefits and distributive justice along with interactional justice influenced satisfaction with raises and structure and administration dimensions. Research results and implications for practitioners are discussed.

I ~

l I

I

INTRODUCTION

1r

he review of the pay satisfaction research shows that consider able advances have been made since the inception of the research stream. A review of literature (Heneman, 1985, Heneman and Judge, 2000) shows that pay satisfaction is one of the most popularly studied attitudinal constructs in Human Resource Management research.

Various researchers recognized the impact of equity considerations on allocations in organizations (Adams, 1965; Goodman and Friedman, 1971).

Because of its importance in the workplace, most of the early research concentrated on pay inequity and its consequences. In line with traditional equity theory research, contemporary studies have found that people tend to be less satisfied with outcomes they perceive to be unfair than those they perceive to be fair (Cropanzano and Greenberg, '1997). Such perceptions have been shown to result in poor performance (Cowherd & Levine, 1992; Pfeffer and Langton, 1993) and high rates of withdrawal behaviors, such as turnover and absenteeism (Hulin, 1991; Schwarzald, Koslowsky, and Shalit, 1992). c

t

l

c

Management & Change, Volume 7. Number I (Summer 2003) 2003 Institute for Integrated Learning in Management. All Rights Reserved.

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172 Pay Satisfaction as a Function of Distributive, Procedural

Organi~ational justice research is used to guide the development of the pay satisfactien consequences model. This construct is highly significant in understanding pay satisfaction (Folger and Konovsky, 1989; Heneman and Judge, 2000; Sweeney and McFarlin, 1993). On the development of the pay satisfact~on consequences model, Heneman and Judge (2000) remark, "both procedural and distributive justice appears to be critical factors in predicting behavioral responses to pay dissatisfaction" (p. 93). However, there has yet to be a comprehensive test of these relationships. In order to understand the application of justice to pay satisfaction research, the justice pay satisfaction relationship is delineated.

Research has found a strong relationship between justice and pay satisfaction. Also, research has shown differential effects for distributive and procedural justice in their relationships with various pay satisfaction dimensions (e.g., McFarlin and Sweeney, 1992; Sweeney and McFarlin, 1993).

For example, McFarlin and'Sweeney (1992) found that pay level satisfaction correlated more highly with distributive justice (r .62) than procedural justice (r = .51), and that, when entered into a hierarchical regression, distributive justice explained twice as much incremental variance in pay level satisfaction than procedural justice Another study, found that d~stribl1tive justice explained 26 percent of the variance in pay level satisfaction, while procedural justice did not account for any, and that procedural justice explained 24 percent of the variance in benefit satisfaction and distributive justice only 10 percent (Tremblay, Sire, and Balkin, 1999).

The close relationship between justice and pay satisfaction has led some researchers to suggest that justice and pay satisfaction may be indistinct constructs (Heneman and Judge, 2000). However, empirical work using confirmatory factor analysis has found that distributive justice and the four dimensions of pay satisfaction are distinct constructs (DeConnick et aI., 1996). Further support for the distinctiveness of justice and satisfaction comes from referent cognitions theory that suggests that people may feel that they have been fairly treated, but may still feel dissatisfied with what they receive (Folger, 1986). The reasoning behind this theory is that individuals compare what they receive against what might have been received under different circumstances (using different procedures). If what is received is achieved under the best possible circumstances (through fair procedures), they feel that they have been treated justly, despite feeling dissatisfied if they received less than they expected (Greenberg, 1990). In conclusion, pay and justice are distinct but

=

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Gulati and Bhal 173

related construct, yet the strength of this relationship shows the potential value of applying justice theory to help predict pay satisfaction.

In most studies, organizational justice is hypothesized to influence pay satisfaction (Folger and Konovsky, 1989; Scarpello and Jones, 1996). That is, perceptions of fairness regarding procedures used to determine outcomes and perceptions of fairness with the outcomes influence how satisfied an individual is with his or her pay.

According to the pay satisfaction consequences model, pay satisfaction dimensions that focus. on outcomes relate to distributive justice while the pay satisfaction dimensions that focus on processes relate to procedural justice Heneman and Judge (2000) suggest that pay level satisfaction, raise satisfaction, and benefit satisfaction relate to distributive justice and structure/administration satisfaction relates to procedural justice. Based on this suggestion we propose the following hypotheses: Hypothesis 1: The pay satisfaction dimensions related to the outcomes will have a significant relationship with distributive justice.

Hypothesis 2: The pay satisfaction dimensions related to processes will have a significant relationship with procedural justice.

METHOD Research

Site and Participants

This study was conducted in various Software organizations. Around 30 organizations participated in this study. Altogether 310 executives from 30 organizations constituted the sample for this study. Care was taken to include participants from different levels i.e. from programmer to project managers. Also care was taken to include female respondents, as the IT workforce comprises of females too. Data was collected via questionnaires that were administered in the organizations. The employees were assured of confidentiality and were informed that the information would be used for academic and research purpose solely. Some details of the sample are given in Table-I.

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174 Pay Satisfaction as a Function of Distributive, Procedural Table-l Age Gender Cross Tabulation Gender Age groups

2(}'25 26-31 32-37 38-43 4449 5(}'55

Male

Female

Total

1m

28 18

131

137

155 18

18

3 2 1

2 1 1

262

Total

310

48

MEASURES Distributive Justice: The scale for studying Distributive Justice was adopted from Price and Mueller (1986) Distributive Justice Index; these items ask employees to indicate the extent to which they have been fairly rewarded in terms of their responsibilities, experience, job stress, effort and performance. Also two items measuring external equity and one measuring internal equity was used. All these were placed on a five point Likert Scale with responses ranging from 1= Not at all fair to 5= Very fair.

Procedural Justice: This construct was studied by combining four items from the scale used by Landy, Barnes and Murphy (1978), three items from the scale of Dulebohn and Ferris (1999) and three items from the scale developed by Greenberg (1986).The respondents were asked to respond to statements related to performance appraisals in their organization. The ratings were on a five point Likert scale, with 5= Always and 1= Never.

Interactional Justice: This construct was studied using three items from the study conducted by Dulebohn and Ferris (1999) wherein they used items on interactional justice based on the interactional criteria suggested by Moorman (1991). Rour items corresponding to the interpersonal fairness in appraisals were added to this scale.

Pay Satisfaction: For our study we used the PSQ (Pay Satisfaction Questionnaire developed by Heneman and Schwab (1985) .The original Management

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scale had 20 items corresponding to various dimensions-level, raises, benefits and structure and administration. We have taken 2 dimensions from pay level satisfaction, 4 from raises dimension, 2 from benefits and 3 from structure and administration.

Table-2 Means, Standard deviations, Correlations and Scale Reliabilities Variable Mean 1 2 3 4 5 6 7

DJ2.89 PJ3.59 IJ 3.42 PS-L PS-R PS-B PS-SA

.90 .58 .59 2.97 3.00 3.00 3.07

SD

1

2

3

(0.92) .36** .38** 1.08 .84 1.06 .91

(0.81) .78** .83* .79** .77** .71**

(0.73) .26 .43* .30* .32**

.28** .49** .32** .30**

4

5

6

7

(0.88) .72** (0.82) .78** .80** (0.83) .68** .72* .64* (0.88)

Scale reliabilities (alphas) are along the diagonal **p< .01 * P < .05

RESULTS First of all we explored the relationship between the fairness perceptions in terms of distributive procedural and interactional justice, and pay satisfaction in terms of level, raises, benefits and structure/administration. The results are reported in Table-2 above.

It was evident from the results shown in Table-2 that, all the pay satisfaction dimensions constructs were significantly correlated to distributive justice, procedural as well as interactional justice. Since the justice dimensions are also correlated it was essential to study their independent effect. For this purpose a regression analysis was conducted on the pay satisfaction dimensions with distributive, procedural and interactional justice as the independent variables, to find out as to which justice dimension was the best predictor of the four pay satisfaction. constructs. For level dimension, Distributive Justice was reported as the strong predictors.

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176 Pay Satisfaction as a Function of Distributive, Procedural Table-3 Model Summary for Regression between Pay Satisfaction (Level) & Justice Dimensions Model

1 Predictors:

R

R Square

Adjusted R Square

.833

.695

.694

(Constant), Distributive Justice

Table-4 Stepwise Regression between Pay Satisfaction Justice Dimensions Standardized Coefficient

Unstandardized Coefficient Mode I I (Constant) Distributive Justice

B .163 1.002

Std. Error .120 .040

(level) and

t

Sig.

1.349 25.192

.178 .(XX)

Beta .833

Dependent Variable: Pay Satisfaction (Level) It is evident

from the results in the Table-4

that Distributive

Justice

significantly explains the relationship with satisfaction with respect to the pay level. Table-3 reports that model-l explains 69'percent variation for unit change in Pay Level Satisfaction.

Table-4 shows that distributive justice explains 100 percent variation for unit change in pay level satisfaction. The positive sign indicates a direct relationship between the two, i.e. as distributive justice (favorable rewards and outcomes increases) the satisfaction

with the level of pay also increases.

Table-S Model Summary for Regression between Pay Satisfaction (Raises) and Justice Dimensions

Adjusted R Square Model R R Square .613 1 .784 .615 .657 2 .812 .660 1. Predictors: (Constant), Distributive Justice 2. Predictors: (Constant), Distributive Justice, Interactional Justice Management

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Gulati and Bhal 177 TabIe-6 Stepwise Regression between Pay Satisfaction and Justice Dimensions Unstandardized Coefficient Mode I

2

(Constant) .896 Distri buti ve .727 Justice (Constant) 2. 195E-02 Distributive .645 Justice Interactional .325 Justice

(raises)

Standardized Coefficient

t

B

Std. Error

Beta

.105 .035

.784

8.517 20.840

.000 .000

.177 .036

.696

.124 18.133

.901 .000

.055

.229

5.963

.000

Sig.

1 Dependent Variable: Pay Satisfaction (Raises) Results reported in the Table-S reveal that Distributive and Interactional Justice significantly explain the satisfaction with raises. The TableS shows that the model-2 explains 66 percent variation for unit change in satisfaction with pay raises. It is evident from Table-6 that Distributive Justice explains 64 percent variation for unit change in raise satisfaction and Interactional Justice explains 32 percent variation for unit change for satisfaction with raises. The positive signs indicate a direct relationship between the two. When distributive and Interactional Justice increase, then the satisfaction with pay raises also increases i.e. if the rewards received by an employee are high and the interpersonal treatment in the organization is good, then the satisfaction of the employee with the raises is high.

TabIe-7 Model Summary for Regression between Pay Satisfaction (Benefits) & Justice Dimensions Model

R

R Square

Adjusted R Square

.776

.602

.601

Predictor: (Constant), Distributive Justice Management

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178 Pay Satisfaction as a Function of Distributive, Procedural Table-8 Stepwise Regression between Pay Satisfaction and Justice Dimensions

.352 .915

(Constant) Distributive Justice

Sig.

Standardized Coefficient

Unstandardized Coefficient Model

(Benefits)

B

Std. Error

Beta

.135 .045

.776

2.613 20.561

.009 .(XX)

1 Dependent Variable: Pay Satisfaction (Benefits)

The results of regression analysis for benefit satisfaction and justice dimensions reported in the Table-7 show that Distributive Justice significantly explains the relationship with satisfaction with respect to benefits.

Table-7 reports that model-l explains 60 percent variation for unit change in Benefit Satisfaction. Table-S shows that distributive justice explains 91 percent variation for unit change in benefit satisfaction. The positive sign indicates a direct relationship between the two, i.e. as distributive justice (favorable rewards and outcomes increases) the satisfaction with the benefits received also increases.

Table-9 for Regression between Pay Satisfaction Administration) & Justice Dimensions

Model Summary

Model 1 2

(Structure

R

R Square

Adjusted R Square

.716 .725

.512

.511

.525

.522

1. Predictors: (Constant), Distributive Justice 2. Predictors: (Constant), Distributive Justice, Interactional Justice

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Gulati and Bhal 179 Tabie-IO Stepwise Regression between Pay Satisfaction (Structure & Administration) and Justice Dimensions Unstandardized Coefficient B

Standardized Coefficient Std. Error

Beta

.941 .734

.131 .043

.716

7.197 17.033

.000 .000

.430 .683

.227 .047

.666

1.894 14.684

.059 .000

.193

.070

.124

2.743

.000

Mode I

2

(Constant) Distributive Justice (Constant) Distributive Justice Interactional Justice

t

Sig.

l. Dependent Variable: Pay Satisfaction with Str and Adm. Results reported in the Table-9 reveal that Distributive and Interactional Justice significantly explain the satisfaction with the pay structure and administration. The Table-IO shows that the model-2 explains 52 % variation for unit change in satisfaction with pay structure and administration. It is evident from Table-1O that Distributive Justice explains 68% variation for unit change in satisfaction with pay structure and administration and Interactional Justice explains 19 percent variation for unit change for satisfaction with pay structure and administration. The positive signs indicate a direct relationship between the two. When distributive and Interactional Justice increase, then the satisfaction with pay structure and administration also increases.i.e. if the rewards received by an employee are high and the interpersonal treatment in the organization is good, then the satisfaction of the employee with the pay structure and administration is high.

DISCUSSION This study aimed to examine the impact of perceptions of fairness on pay satisfaction. Our first hypothesis tested the relationship between outcome related dimensions (level, raises and benefits) and justice perceptions. It can be seen from Table-4,6,8 and 10 that only the Distributive Justice Management

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180 Pay Satisfaction as a Function of Distributive, Procedural

currency of Organizational Justice predicts all the four types of pay satisfaction, i.e. level, raises, benefits and structure and administration (outcome related as well as process related). Our first hypothesis received partial support from the regression analysis. Our second hypothesis related to procedural justice perceptions and structure and administration can again be seen from Table-lO that procedural justice does not predict the process dimension (structure and administration) of pay satisfaction.

It was interesting to note that for raises as well as structure and administration, Interactional justice along with distributive justice was a good predictor. Raise satisfaction is an individual's satisfaction with the changes in his or her pay (Heneman and Schwab, 1985). However, as measured by the PSQ, past studies have reported that an employees' satisfaction with how raises are determined is also important. Hence raise satisfaction will not only be influenced by distributive justice butinteractionall justice as well.

Furthermore, the raises as well as structure and administration seem to be related most strongly with distributive justice followed by interactional justice. This indicates that the distributive justice as well as interactional justice affects pay satisfaction, though distributive justice is more influential.

Coming to the objective of this study, the results indicate clearly that procedural justice dimension~ played no role in determining the pay satisfaction. These findings have important implications for HR managers and organizational justice in software organizations. Like we observed from our results, we can enhance pay satisfaction of the employees by not onl~ increasing the distributive justice (reward) but also by good interpersonal treatment to the employees which has implication for training and development of line managers in conducting appraisals. This improvement in interpersonal treatment (related to raises and structural matters) will lead to positive perceptions of pay satisfaction among employees.

To summarize, the present study provides a framework, which may provide the managers a perspective for enhancing the pay satisfaction their employees and making them more satisfied by taking care of their fairness perceptions. The research suggests that managers must incorporate the good interpersonal treatment along with good reward system in their organization to improve their employees' satisfaction with the organization's pay policies. The data in this study provides evidence to suggest that interactional justice is more important for pay satisfaction Management

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Gulati and Bhal 181 than "procedural justice." Therefore, actions to enhance pay satisfaction by managers need to center on both distributive as well as interactional dimensions.

REFERENCES Adams, 1. S. (1965) Inequity in Social Exchange. In L. Berkowitz (Ed.), Advances in experimental social psychology (Vol. 2), New York: Academic Press, 267-299.

Cropanzano, R. and Greenberg, 1. (1997) Progress in organizational justice: Tunneling through the maze. In C. L. Cooper., & 1. T. Robertson (Eds.), International Review of Industrial and Organizational Psychology, 12, 317-372.

Chichester: John Wiley & Sons.

Cowherd, D. M. and Levine. D. I. (1992) "Product Quality and Pay Equity between Lower Level Employees and Top Management: An Investigation of Distributive Justice Theory," Administrative Science Quarterly, 37, 302-320.

Dulebohn, lH. and Ferris G. R. (1999) "The Role of Influence Tactics in Perceptions of Performance Evaluation's Fairness," Academy of Management Journal, 42, (3) 288-303 Folger, R. (1986) Rethinking Equity Theory: A Referent Cognitions Model. In H. W.

Bierhoff, R. L. Cohen. and J. Greenberg (Eds.) Justice in Social Relations. 145162. New York: Plenum.

Folger, R. and Konovsky, M. A. (1989) "Effects of Procedural and Distributive Justice on Reactions to Pay Raise Decisions," Academy of Management Journal, 32- 115-130 Greenberg, 1. (1990a) "Organizational Justice: Yesterday, Today, and Tomorrow," Journal of Management, 16,(2), 399-432.

Goodman, P. S. and Friedman A. (1971) An Examination of Adams' Theory of Inequity," Administrative Science Quarterly, 16, 271-288.

Heneman, H; G. III, Schwab D. P. (1985) "A Pay Satisfaction: Its Multidimensional Nature and Measurement," International Journal of Psychology, 1985,20,. 12913!.

Heneman, H. G. III (1985) Pay Satisfaction. In M. Rowland and R. Ferris (eds) Research in Personnel and Human Resource Management (pp.115-140) Greenwich, CT: JAI Press Heneman, H. G., Judge T. A. (2000) Compensation attitudes: a review and recommendations for future research in S. L Rynes, B Gerhart (eds) Compensation in organizations; current research and practice 6 I -103 San Francisco: Josey Bass Hulin, C. L. (199 I) Adaptation, persistence, and commitment in organizations. In M. D. Dunnette & L. M. Hough (Eds.), liandbook of Industrial and OrganiManagement

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--'=_.",....

'''.,,-_! .••.••

!•••

..,....,

••••

,.,..,~

182 Pay Satisfaction as a Function of Distributive, Procedural zational Psychology, 2, 445-506. Palo Alto, CA: ConsultingPsycbologists Press.

Landy, F.1.; Barnes, 1. L. and Murphy, K. R. (1978) "Correlates of Perceived Fairness and Accuracy of performing Evaluation," Journal of Applied Psychology, 63, 751-754.

McFarlin, D. B. and Sweeney P. D. (1992) "Distributive and Procedural Justice as Predictors of Satisfaction with Personal and Organizational Outcomes," Academy of Management Journal, 35,(3), 626-637.

Moorman, R. H. (1991) "Relationship Between Organizational Justice and Organizational Citizenship Behaviors: Do Fairness Perceptions Influence Employee citizenship?" Journal of Applied Psychology, 76,(6), 845-855.

Pfeffer, J. and Langton N. (1993) "The Effects of Wage Dispersion on Satisfaction, Productivity, and Working Collaboratively: Evidence from College and University Faculty," Administrative Science Quarterly, 38, 382-407.

Price, 1. L. and Mueller C. W. (1981) "A Causal Model of Turnover for Nurses," Academy of Management Journal, 24,(3), 543-565.

Scarpello V. and Jones F. (1996) "Why Justice Matters in Compensation Decision Making," Journal of Organizational Behavior, 17, p. 285-299.

Schwarzwald, 1., Koslowsky. M. and Shalit, B. (1992) "A field Study of Employees' Attitudes and Behaviors After Promotion Decisions," Journal of Applied Psychology, 77, (4), 511-514.

Sweeney, P. D. and McFarlin D. B. (1993) Workers' Evaluations of the 'ends' and the 'means': An Examination of Four Models of Distributive and Procedural justice," Organizational Behavior and Human Decision Processes, 55, 23-40.

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BOOK REVIEWS P. Vijaya Bhaskar and B. Mahapatra, Derivatives Simplified: An Introduction to Risk Management, New Delhi, Response Books, 2003, 209 pp., Rs. 230.

Although derivatives are known to exist in India since at least 1875, introduction of most of the modern financial derivatives in this country is a relatively recent phenomenon. Various legal provisions in a number of Acts and Ordinances obstructed the introduction of derivatives for decades. The decks were cleared for the derivatives through appropriate changes in legal provisions starting in 1995.

The first financial derivatives to have been introduced in Indian markets in recent times were Interest Rate Swaps (IRS) and Forward Rate Agreements (FRAs), which were introduced in July 1999. However, both these instruments are over-the counter (OTC) derivatives.

The first exchange-traded derivative (ETD) on financial instrument in India was the stock index futures, which were introduced in June 2000. Option on stock indices was launched just a year later, followed by options on a few selected stocks in July 2001. Futures on selected individual stocks were permitted in November 2001.

During the period before introduction of ETDs, when their introduction was imminent, market participants raised steep opposition against introduction of these instruments. These participants were familiar with the intricacies of forward trading, but lacked an understanding of financial futures and options, trading techniques, risk management, etc.

Even today, there seems to be a lack of understanding among many of the market participants and among the investors at large about the financial derivatives. The derivatives markets remain a domain of the institutional investors and a few brokers. This book is an extremely important contribution towards addressing this lacuna.

The most important attribute of the book is that the basic .concepts related to most of the financial derivatives have been elucidated with very simple and easy-flowing language, appealing even the lay man on the street. It carefully avoids the complex mathematical expressions found in any standard textbook on deri vatives, and thus does not put off the reader no matter from whatever background.

The treatment of alternative classifications of derivatives in the introductory chapter is simply exquisite. Instruments like forwards and futures, FRAs, swaps, and options are treated in successive chapters.

Management & Change. Volume 7. Number I (Summer 2003) 2003 Institute for Integrated Learning in Management. All Rights Reserved.

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184 Book Reviews Although credit derivatives are not yet popular in India, their inclusion in the book as a separate chapter is a welcome decision. It may be viewed as an attempt to prepare the market for such derivatives which have become immensely popular in the developed financial markets of the West.

Above all, the book being written by two senior officers of the RBI who were involved in the training of bankers, gives the perspective appropriate to professionals in the fields of banking and finance desirous of venturing into t!1e field of derivatives.

The two appendices dealing with discounting/compounding and bootstrapping methods are also appropriately designed and written. However, given the objective of the book, the third appendix dealing with a few elementary statistical concepts is really not relevant, as this kind of introductory treatment might not help the intere.sted reader to get into the details of financial derivatives. Lastly, the only area which has been left untouched is the interest rate derivatives which have been launched in India in June 2003, especially because the book has been published in 2003 itself. The interest rate derivatives had been on the drawing board since long. We hope that at least one chapter on interest rate derivatives would be included in the following edition of the book.

NOTES I. 2.

3.

Cotton futures market which commenced operation in Mumbai in 1875 was the first futures market in India. See Pavaskar (1976), Somanathan (1998).

Saksena (2002) Kolamkar (2002)

REFERENCES Saksena, Shashank (2002) "Legal Aspects of Derivatives Trading in India," The Fourth Invest India Derivatives Forum, 6 and 7 December 2002, Mumbai.

Pavaskar (1976) Economics of Hedging. Mumbai: Popular Prakashan.

Somanathan, T. V. (1998) Derivatives. New Delhi: Tata McGraw-HilI. Kolamkar, D. S. (2002) "Regulation and Policy Issues for Commodity Derivatives in India," The Fourth Invest India Derivatives Forum, 6 and 7 December 2002, Mumbai.

T. P. Ghosh Fellow, Institute for Integrated Learning in Management, Lodhi Road, New Delhi

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Book Reviews 185 Sadhak H. (2003) Mutual Funds in India: Marketing Strategies and Invest-

ment practices (2nd edition), New Delhi, Response Books, pp. 558, price Rs. 780/-.

I!

f.

Investor's decisions to invest does not guarantee that their goals would be met. But convenience, diversification, professional approaches towards invested funds are taken care by mutual funds through logical and strategic practices. In 1924, the first open-ended mutual fund was started jointly by Massachusetts Investments Trust and State Street Investment Trust in Boston, USA. Forty years later Unit Trust of India launched the first mutual fund and after that it has progressed some times through smooth and some times through bumpy roads. Forty years later, since the birth of formal mutual fund, it has not yet been recognized properly and misunderstanding has crept into the role of mutual about the mutual funds. At the same time there is lack of awareness in the investment community.

The author, Dr. H. Sadhak has produced a book which has lacked the increasingly complex subject of mutual fund investing and marketing, the academics and professional experience.

By bridging the theoretical concepts and practices aspects of developing a mutual fund he has made the book invaluable for understanding the strategies for investment as well as marketing. The author has cut through many misguided assumptions by testing theory in the real world and reported what actually works from what does not.

The book contain six chapters, chapter I discusses basically the lessons, the Indian mutual fund industry should learn from the success stories in USA, UK and Japan. It has also discussed the emerging characteristics of the Indian financial markets in post-liberalization scenario and the role of mutual funds in savings and capital market efficiency. In chapter 2, the author has lucidly explained the various types of modern mutual funds and its prospects in the changing economic environment and market pressure. Chapter 3 and 4 have devoted in explaining the critical areas and issues in mutual fund operations because of the distinctive nature of the products and the consumers. Marketing strategy has got a special focus and constitutes a major area of attention.

How efficiency of investment management directly influences marketing operations have been discussed in these chapters. Chapter 5 deals with the need for and scope of regulation for mutual funds in a competitive and deregulated market as well as the working of the regulatory mechanism. Chapter 6 summarize the major observation indicating what are necessary for efficient functioning and healthy growth of the mutual fund industry in India.

One special feature of the books is that it contains a glossary of mutual funds terminology I must say that the author has created an intellectually stimulating book on a very difficult subject in a very lucid manner for laymen. I Management

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186 Book Reviews look forward to subsequent many editions focusing on latest developments in mutual fund industry in India and abroad. The author deserves full credit for producing such a nice and enriched book. Congratulations to Dr. H. Sadhak.

Kamal Ghosh Ray (Dr.) Professor & Dean PGDM Programme, Institute for Integrated Learning Management, Lodhi Institutional Area, Lodhi Road, New Delhi-l10003

in

R., An Introduction to Data Envelopment Analysis: A Toolfor Peifonnance Measurement. New Delhi, Sage Publications India Pvt. Ltd., 2003.

201 pp. RS.250.

Ramanathan

In the post globalization era competition and efficiency have become crucial issues all over the world. For survival and growth, organisations have to utilise their full potential at all times in all the spheres of their activities, which is only possible by paying greater attention to managing quality and efficiency.'

The book under review is an attempt to familiarise the technical and practical aspects of Data Envelopment Analysis (DEA), occasionally called frontier analysis. It is a performance measurement technique, first put forward by Charnes, Cooper and Rhodes in 1978 and is used for evaluating the relative efficiency of decision-making units (DMU's).

The book has been organised in seven chapters in total and an appendix providing solutions to selected problems at the end followed by a systematic references and index. It begins with the basics of efficiency measurement and frontier analysis. The concept of assessing relative performance of a set of firms that uses a variety of identical inputs to produce a variety of identical outputs is beautifully explained in this chapter wIth example. With a major prerequisite of basic knowledge of linear programming, the second chapter of the book is devoted to mathematical programming aspects of DEA models. This chapter provides linear programming formulations of various DEA models and also gives dual formulations in brief. An economy of scale always becomes an important issue for all approaches for performance measurement of similar DMUs. Modifications in basic DEA model to handle return to scale are discussed in chapter three of this book. To keep the researchers update on account of recent developments in DEA model in brief is given in chapter four.

The most important aspect of such model based approaches is availability of software and its application by example, are covered in chapter five and six of this book. Chapter five gives addresses of number of useful internet sites providing more information about DEA and its application, some of them even allow downloading software for academic use while chapter six begins with a brief literature review and discuss five applications of DEA models for performance measurement. These examples are author's own research work and Management

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Book Reviews 187 ,I

1

ii 1

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I

,

provide good understanding on application of these models. The last and concluding chapter of the book is mainly on behavioural aspects of the model.

It deals with choice and strengths and limitations of DEA approach.

The author has succeeded in adding real value to the book by identifying and examining the basics of efficiency measurement and frontier analysis. While putting the responsibility for being efficient to the practicing managers stress has been laid on importance of measuring relative efficiency of DMUs. The book also features extensive check lists and graphics to clarify key points. In each chapter, discussion questions have been given which will definitely stimulate reader's thinking and approaches for such efficiency estimations. Complete and detailed references given at the end of the book further enhances the value of this book. The author offered brief and methodical coverage on topics such as efficiency and its measurement, Mathematical Programmimg aspects of DEA, Economies of Scale, recent extensions of DEA, software and internet support facilities and practical issues pertaining appli.cation of DEA etc. He offered five real life applications from different industries which demonstrate concepts and model in action. These application examples from business and industries provide ease in learning and understanding which further illustrates the necessity of efficiency measurement. The book serves the dual purpose; to simplify the concept of the model and to present its application.

The value of this book could have been further enriched, had author included the original concept of "Frontier Analysis" given by M. J. Farrel in 1957, which led to "Econometric Frontier Approach" and would have discussed that DEA is an alternative non-parametric programming approach with its own merits and limitations. However the systematic approach explaining the subjects in brief is the main strength of this book. The book provides reasonable understanding of concepts and application of DEA model and is a real guide to the practitioners for estimating efficiency. In view of scarcity of genuine literature on performance measurement of DMUs, which is the need of the hour, the book is welcome contribution in the discipline of. management education

and practice.

Naseem Abidi (Dr) Assistant Professor-Quantitative Techniques Institute for Integrated Learning in Management, Lodhi Road, New Delhi-l 10003.

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Area,

2003)

I i

188 Book Reviews

N. S. Siddharthan and Y. S. Rajan, Global Business, Technology and Knowledge Sharing,

Lessons for Developing

Country

Enterprises,

New Delhi,

Macmillan India Ltd., 217 pp, RS.285.

Recent studies analyze great differences in economic growth and development between various nations. There is a consensus among economists that high investment rates alone in the absence of technological change cannot sustain high growth rates in income. The book under review is useful to all those interested in global business, since it is an interdisciplinary book written by an economist and a technologist.

The book unfolds with a chapter, titled, "Global Business Environment, Technology and Economic Development," discussing the role of technology in economic development, the international business scene & surveys the early Indian experience. The Scientific Policy Resolution (\ 958) adopted by the Indian Parliament, after independence states, "The key to national prosperity, apart from the spirit of the people, lies, in the modern age, in the effective combination of three factors, technology, raw materials and capital, of which the first is perhaps the most important, since the creation and adoption of new scientific technique can, in fact, make up for a deficiency in natural resources, and reduce the demands on capital." A very good comparison of technological status is made between India and China (a country that is similar to India in terms of size and history). It then scrutinizes the strategies of developed countries and suggests policies for countries like India in the light of the current WTO regime.

The Chapter on "Foreign Direct Investment," examines the main trends regarding FDI inflows and discusses the changing nature of location advantages in attracting FDI. Emerging issues relating to mergers and acquisitions is very well dealt with. In recent years, there has been phenomenal growth of FDI in the sphere of Research and Development. Six case studies of PDI in R&D units in India have been discussed. The conclusion drawn is that Foreign Direct Investments take place mainly among the developed countries and that the share of the Less Developed Countries is negligible. Among the LDCs, the relatively more developed ones that enjoy a higher growth rate of income and better infrastructure facilities like some East Asian countries and China, attract FDI. South Asian countries in general and India in particular, i~ not a notable destination for FDI inflows. In the late 1990s, the average Indian share of FDI inflows has been less than 0.5 percent when compared to about 10 per cent for China.

The book then focuses on the impact of the measures of liberalization in India on FDI inflows. It identifies 10 major investing countries in India and the industrial sector that receive FDI and studies the changing trends. In the years 1997 and 1998, more than 60 per cent of the investments have come from Management

& Change.

Volume 7. Number

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Book Reviews 189 two sectors- chemicals and electrical, and electronics. Most investments in chemicals were in the area of petroleum products, where as investments in the electrical sector was in the area of power generation. It deals with inter-state differences in FDI inflows and compares it with inter-state differences in domestic corporate investments. Towards the end it compares the Chinese and Indian experiences and suggests appropriate lessons, India can learn from Chinese experiences.

The next point of focus is the discussion on relationship between the import of technology and in-house R&D efforts and to analyse the "import and adapt" strategy of firms. It presents ~idence on firms which are less R&D intensive, adopting the strategy of acquiring R&D intensive firms to improve their technological capabilities. It appears that after liberalization R&D spending is much more focused and industry oriented, with a larger participation from the private sector. The authors have provided few case studies to show how some Indian firms successfully absorbed the imported technology, made modifications on the imported technology and eventually achieved designing capabilities to successfully design new products and processes.

Discussion then unfolds into dealing with the impact of technology acquisition on the performance of firms. The two performance indicators taken are growth of the enterprise and its export performance. All six chapters emphasize the importance of mutual knowledge sharing rather than unidirectional technology transfer. The pervasive presence of globalization in both small and large firms is highlighted. The increasing role of the small and medium firms in technology creation and the manufacture of high-tech goods leads to the vital role of technology intermediation in the acquisition of technology.

A full chapter is devoted towards emphasizing the need for technology intermediation, describing general elements as Technology Forecasting or Foresight and Technology Assessment.

A case study of an important Indian institution, Technology Information, Forecasting and Assessment Council (TIFAC) has been presented. A detailed discussion is carried out dealing with different cases of technology development paths adopted by different firms in different areas and product lines. The case studies majorly indicate that small firms can stand competition from big players and MNEs if there is a right mix of the firm's commitment to technology, availability of technology partners as well as good technology intermediators.

The concluding chapter gives a broad vision of global business and knowledge sharing. The book stresses the changing role of enterprises, issues involved in the area of technology and globalization, and the transformed role of the State in the era of globalization. The aspect that is missing in this book is that the case studies are entirely India based. No case studies dealing with developed countries are taken, making it difficult to draw conclusions on the

Management & Change, Volume 7, Number 1 (Summer 2003)

190 Book Reviews strategies that could be adopted by developing countries. Secondly, 'knowledge sharing' aspect of the book could be given more emphasis.

Dr. Sunita Gupta Konwar Assistant Professor, Institute for Integrated Learning in Management, Institutional Area. Lodhi Road, New Delhi-l 10003.

Lodhi

Sushi! and K. Momaya, Globalization Flexibility and Competitiveness A TechPerspective, New Delhi: Vikas Publishing House, Rs.

nology Management 750/-.

This is a book of considerable form and content. Confronted with a formidable list of contents, I must confess thatI picked up the book with some apprehension. My fears were, however, allayed once I started reading.

Quite understandably the chapters make heavy reading. But one shouldn't really expect otherwise from a book of this genre. Credit, must be given to the editors for stringing together such a'diverse set of subjects under five generic groups and finally bringing them under one umbrella. Such a wide variety of papers cannot be of the same standard. Varying quality and style notwithstanding, the articles do present a comprehensive picture of the title subject.

All the seven chapters of the first part are of reasonably high standard, both in style and content. The chapter on HCL case study, in the context of global competitiveness, with core competence, by Anjana Kak deserves particular mention.

The second part has six chapters. The chapter on collaboration on technical change in 21st century, by Richard Smith and Mohi Ahmed has raised a number of interesting issues on technology management.

The third part on management innovation and R&D also contains six chapters, and "is an attempt to bring out a generic picture of technology management so that it can be effectively related to the concern for globalization flexibility and competitiveness".

The chapter on the experience of Meraleo, the largest power distribution company in Philippines, would be helpful to students and researchers in understanding the processes of implementing business level strategy. The other chapters have also raised fundamentals questions on technology management and technology transfer.

Six chapters of part four cover the equally important area of business aspects of technology management. The first chapter "innovation in technology financing in India" is a short, but clear, account of the capital market, and makes a number of important observations, particularly with respect touching the fringes to project financing. The other chapters have also covered subjects which are important and in the context of this book.

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Book Reviews

191

The fifth part, also containing six chapters, covers the generic area of flexibility and strategy. Chapter twenty seven on flexibility in technology management by Prof Sushil deserves special mention. In a brief but pithy chapter, he has very effectively covered different facets of flexibility in technology management. The next chapter covers an equally interesting area of integrated manufacturing and technology process. The last four chapters cover subjects of evaluating technology options, process flexibility and productivity and finally application of flexible systems methodology on technology management.

One cannot fail to notice the overall quality of presentation and near complete control of the subject by most of the authors. The editors must be complemented on the quality of publication and their rational grouping. This will, no doubt be an excellent reference book for researchers and students alike.

The subject is relevant. The concerns are current, and the issues covered higHlight the multi-faceted dimensions of the subject of flexibility and competitiveness in technology management.

M. K. Moitra Professor, Institute for Integrated Learning in Management, Area. Lodhi Road, New Delhi-llOOm. .

Management

Lodhi Institutional

& Change. Volume 7, Number

1 (Summer

2003)

,Referees for Current Issue Dr. A. Venkataraman

Faculty of Management Studies, S. P. Jain Research Centre, University ot' Delhi, South Campus, New Delhi

Prof. Mirza S. Syedain

Distinguished Professor,Institute for Integrated Learning in Management, Lodhi Road, New Delhi

Dr. Debasis Sanyal

Management Development Institute, Mehrauli Road, Sukhrali, Gurgaon

Dr. K. Mamkootlam

Faculty of Management Studies, University of Delhi, Delhi

Dr. Anand Prakash

Professor, Department of Psychology, Faculty of Arts, University of Delhi, Delhi

Dr. Raj S. Dhankar

Faculty of Management Studies, University of Delhi, Delhi

Dr. Gopa Bhardwaj

Professor of Organizational Psychology, Department of Psychology, Faculty of Arts, University of Delhi, Delhi

Dr. M. Mallikarjun

Nirma Institute of Management, SarkhejGandhinagar Highway, Ahmedabad

Dr. M. Kandan

Director, Elquest, B~l/E-ll, Mohan Cooperative Industrial Estate, Mathura Road, New Delhi

Prof. G. S. Das

International Management Institute, B-10, 30&31, Qutab Institutional Area, Tara Crescent New Delhi

Prof. Vinod Kalia

Management Development Institute, Mehrauli Road, Sukhrali, Gurgaon