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Proceedings of the 10th International Conference on Business Management Resilience Amid Turbulence: Revisiting Ethics ICBM 2013

10th December 2013 Faculty of Management Studies and Commerce University of Sri Jayewardenepura Sri Lanka

Committee of the 10th ICBM Faculty of Management Studies and Commerce University of Sri Jayewardenepura Tel: +94 (0) 11 2803343, +94 (0) 112758824 Fax: +94 (0) 11 2803653

Disclaimer The responsibility for opinions expressed, in articles, studies and other contributions in this publication rests solely with their authors, and this publication does not constitute an endorsement by the ICBM or FMSC of the opinions so expressed in them.

Official Website of the Conference

Proceedings of the 10th International Conference on Business Management, ICBM 2013 Edited by ICBM Committee 2013 Faculty of Management Studies and Commerce University of Sri Jayewardenepura

Copyright Š FMSC 357 Pages All rights are reserved according to the Code of Intellectual Property Act of Sri Lanka, 2003 Published by: ICBM 2013 and Faculty of Management Studies and Commerce Tel: +94 (0) 11 2803343, +94 (0) 112758824 Fax: +94 (0) 11 2803653


Preface The Faculty of Management Studies and commerce (FMSC), University of Sri Jayewardenepura (USJ), is proud to present its 10th International Conference on Business Management (ICBM) which is a continuation of a series of successful research sessions held by FMSC since 2004. The Inaugural Session and the Technical Sessions were conducted on 10th December 2013 at Hotel Blue Water, Wadduwa, Sri Lanka. The theme of this year’s conference, “Resilience Amid Turbulence: Revisiting Ethics” is considered as perfectly fitting in an era where businesses are expected to give due attention and care to the people and planet at the expense of part of their profit. Complying with business ethics is an exigent task as it requires maintaining an optimal balance between profit, people and the planet perceived in terms of the micro environment of the business. In this context, it is imperative that business leaders and managers give early attention to this important issue before it grows to catastrophic proportions. In view of that this year’s theme makes a forum worth for the scholars, professional and practitioners to share their research findings, experiences and ideas. The conference was organized into nine tracks for which empirical, conceptual and methodological papers were received from academics, practitioners and public policy makers out of which 60% were accepted paying austere attention to the academic standards of the papers. To maintain consistency, authors were prescribed to follow the academic writing format of the Vidyodaya Journal of Management. The reviewing process was apparently transparent where papers underwent a double blinded review process by eminent subject specialists in respective areas. Thus refereed full papers selected to be presented at the conference were published here. It should be noted that the ICBM 2013 committee and FMSC do not assume any responsibility for any errors or omissions in the research papers, which rests solely with the authors. An enlightening key note address was delivered by Professor Jane Elisabeth Klobas at the Inaugural session. The organizing committee owes much to professor Klobas for dedicating her valuable time to grace ICBM 2013. A special thank goes to professor S.S.M.K. Kshanika Hirimburegama, chairperson, University Grant Commission for the immense support given by her in the tough process of financing. The organizing committee is much obliged to the Telecommunications Regulatory Commission of Sri Lanka for their generous support in sponsoring the event. The committee wishes to extend their gratitude to Professor Mangala Fonseka, Director, Postgraduate Institute of Management for the invaluable sponsorship and for the guidance provided throughout this conference. We would like to honour Dr. N. L. A. Karunaratne, the Vice Chancellor for the corporation extended in organizing the conference. The immense guidance and support given by Professor Sampath Amarathunga is noteworthy throughout the process of organizing the conference. Not for his continuous encouragement this event would not have been a reality. The committee is especially thankful to Senior Professor H.H.D.N.P Opatha for providing the iii

concluding remarks for the conference. We would like to express our sincere gratitude and heartiest thanks to Dr. Roshan Ajward for his strenuous effort in advising and finding sponsorships for the forum. A special word of thank is due to Mr. P. H. A.B. Shantha and all the staff of Information Technology Resource Centre (ITRC) for the technical services. The organizing committee specially thanks to Mr. Prathap Kaluthanthri for extending his help in formatting the proceedings and for the designing involvements. Further the support given by the Postgraduate Centre for Business Studies and all the departments of the faculty is highly appreciated for their financial assistance. The conference committee expresses deep gratitude to the panel of reviewers for the priceless service rendered. Finally the committee extends sincere thanks to the presenters and participants for the valuable contribution and active participation. Our sincere thanks also go out to our media partners ART TV, Daily Mirror and Ceylon Today.

Conference Committee ICBM 2013


ICBM Committee Dr. (Mrs) M.D Pushpakumari, Department of Business Administration Co –Chairperson Dr. (Mrs) Nilakshi W. K Galahitiyawe, Department of Decision Sciences Co –Chairperson Other Committee Members Ms. Piyumi Abeyrathne, Department of Finance Ms. Y. Alahakoon, Department of Business Administration Ms P.I. Anuradha, Department of Public Administration Mr. W.H.T. Gunawardhana, Department of Estate Management and Valuation Ms. H.M.C.P Herath, Department of Information Technology Ms. L Karunarathne, Department of Estate Management and Valuation Ms. G.A.T. Kaushalya, Department of Commerce Mr. I Kavirathne, Business Communication Unit Mr. S.D.L Koongahawatta, Department of Finance Mr. H.M.A. Lakmal, Department of Marketing Management Ms. J I Madukala, Department of Business Economics Ms. A Muthulingam, Department of Public Administration Ms. M.P. Parameswara, Department of Decision Sciences Ms. T.N.S. De Peiris, Department of Business Administration Mr. W.D.N. Prasad, Department of Information Technology Mr. R.D.T. Rathnayake, Department of Marketing Management Ms. K.M.V Sachitra, Department of Commerce Ms. S. Somasiri, Department of Marketing Management Mr. A.N. Wickramasekara, Department of Decision Sciences Ms. S. Wijayarathne, Department of Commerce Ms. Mahesha Abeykoon, Department of Public Administration Ms. U R Weerappuli, Information Technology Resource Centre


ICBM Review Panel Senior Prof. Henarath H.D.N.P Opatha, Department of Human Resource Management Prof. K H Hemantha Kumara, Department Human Resource Management Prof. Sampath Amaratunge, Dean, Faculty of Management Studies and Commerce Prof. E Dayaratne, Department of Commerce Prof. R. Lalitha S. Fernando, Department of Public Administration Prof. R.G. Ariyawansa, Department of Estate Management and Valuation Prof. D.B.P.H. Dissa Bandara, Department of Finance Prof. K.D. Gunawardene, Department of Accounting Prof. B.N.F. Warnakulasooriya, Department of Marketing Management Prof. Y.K. Weerakoon Banda, Department of Finance Prof. T.M.B. Palawatta, Department of Decision Sciences Prof. D.S.R. Samarasinghe, Department of Marketing Management Dr. H.M.A. Herath, Department of Public Administration Mrs. J Edirisinghe, Department of Estate Management and Valuation Dr. (Mrs) B.J.H. Arachchige, Department Human Resource Management Dr. U.B. Ramanayake, Department of Business Administration Dr. S. T .W Yapa, Department of Decision Sciences Dr. (Mrs) M. D Pushpakumari, Department of Business Administration Mr. Weeratunga, Department of Public Administration Mr. S.S.M. de Silva, Department of Commerce Mr. M.V.S.S. Udayanga, Department of Entrepreneurship Dr. U Anura Kumara, Department of Business Economics Dr. (Ms) R.P.C.R. Rajapakshe, Department of Finance Dr. P D Nimal, Department of Finance Dr. G.G. Aruna Shantha, Department of Human Resource Management Dr. (Mrs) S.M. Samarasinghe, Department of Information Technology Dr. (Mrs) W.S. Handapangoda, Department of Business Economics Dr. P. J Kumarasinghe, Department of Business Economics Dr. (Mrs) Nilakshi W.K. Galahitiyawe, Department of Decision Sciences Dr. (Mrs) M.A.A. Malkanthi, Department of Marketing Management Dr. (Mrs) P.G.S.A. Jayarathne, Department of Marketing Management Dr. A.R. Ajward, Department of Accounting Dr. M H A Sisira Kumara, Department of Public Administration Prof. Y.D. Jayatilleke, Department of Sociology and Anthropology, Faculty of Humanities and Social Science, University of Sri Jayewardenepura. Dr. D.P.S. Chandrakumara, Department of Economics, Faculty of Humanities and Social Sciences, University of Sri Jayewardenepura. Mr. P. Dias, Department of Statistics and Computer Sciences, Faculty of Applied Science, University of Sri Jayewardenepura. M Muzamil Naqshbandi, Faculty of Business and Accountancy, University of Malaya, Malaysia.


Table of Content Page No: 01


Organizational Citizenship Behaviour Among Employees In SMEs in Japan: An Analysis of the Link with HRM Practices Aruna S. Gamage


Day of the Week Anomaly in Colombo Stock Exchange: Is it a Result of Inappropriate Test Methods? Chandana Gunathilaka



A Fuzzy Expert System for Business Intelligence Mendis, D.S.K, Karunananda, A.S , Samaratunga, U. and Ratnayake, U.



Corporate Financial Distress Prediction in Sri Lanka: An Application of Altman’s Models Chandana Gunathilaka



An Empirical Investigation of Wagner’s Law in Sri Lanka Pelawaththage N.K. and Cooray T.M.J.A.



Does Vehicle Emission Test Improve Air Quality in Sri Lanka? Hemachandra D.W.K., Withanawasam M.P.K. And Madukala J.I



Contribution of Human Resource Management in Creating and Sustaining Ethical Climate in the Organisations Anton Arulrajah A.



Determinants of Multidimensional Poverty in Batticaloa District Jeyapraba Suresh



Innovation Versus Imitation: The Applicability of Reproducing Established Categories Ethically Weerasinghe R.N. and Jayawardane A.K.W



The Impact of GSP+ Withdrawal on Sri Lankan Economy Withanawasam M.P.K and Kumara U. A



An Entrepreneur’s Value Perspective in Making an Ethical Business Decision Under the Context of Product-Harm Crises Management: A Research Model Wattegama W.G.E.J., Feng Jiaojiao and Qing Ping



Impact of Energy Cost on Foreign Direct Investments in Sri Lanka Rathnayake T S, Amratunge S P P, and Withanawasam M P K



Ethical Impact of Infant Formula TV Advertisements on Changing Mothers’ Beliefs about Baby Feeding: With Special Reference to Alpha 1 + Local TV Advertisement Nishadi G.P.K.




Sri Lankan Corporate Voluntary Environmental Reporting Practices Rajeshwaran N. and Ranjani, R.P.C.



The Relative Importance of Packaging Design Attributes in Affecting Perceived Quality of Food Products, A Conjoint Analysis Approach: The Case of Yoghurts Samarasiri W.W.M



Ethics of Future Engineers: Does Gender Matter? Wijekoon W.M.A.K



Geo-Demographic Information Model for Location of Convenience Shops: A GIS Perspective: Case Study on A04 Trunk Road, Maharagama, Sri Lanka Sameeraa M G A and Kaluthanthri P C



Responsiveness Capability in the International Clothing Industry: Global Quick Response and Planning Postponement Capabilities Amila Jayarathnea P.G.S. and Warnakulasooriya B.N.F.



Impact of Working Capital Management Practises on Profitability: Special Reference to Footwear and Textile Industry in Sri Lanka ShanikaIshari. M.P. and Thevaruban. J.S



Is Sri Lanka Flying With Flying Geese Pattern? Analysis of Export Structure Gunasekara W.G.V.



Evaluation of Short-Run Market Performance and its Determinants Using Binary Models: Evidence From Australian IPOs Wasantha Perera and Nada Kulendran



Government as a Catalyst in Managing Business Ethics: With Special Reference to Article 19(1) (G) of Indian Constitution Sunil Khanduji Gaikwad



Corporate Governance Failures in Corporate Scandals: The Case of Alpha Credit Card Company Shehanie Widanagama



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ORGANIZATIONAL CITIZENSHIP BEHAVIOUR AMONG EMPLOYEES IN SMES IN JAPAN: AN ANALYSIS OF THE LINK WITH HRM PRACTICES Aruna S. Gamage Dept. of HRM, University of Sri Jayewardenepura, Sri Lanka ABSTRACT Small and Medium Enterprises (SMEs) in Japan have been playing a major role in area of Japanese economy. Many SMEs are key suppliers to large businesses and represent the backbone of the world third largest economy. However their role in the economy has been hindered by their weak performance during last two decades. The firm entry rate has shown downward trend while exit rate has trended upward in recent years and considerably exceeded the entry rate. One of the reasons for high rate of business failure in SMEs, as some SME advocates argue that, is due to its less attention to the human side of their business. Therefore, the broad objective of this paper is to examine Human Resource Management (HRM) practices in SMEs in Japan. Specifically, this study aims to examine the relationship between HRM practices and operational performance in terms of employees’ Organizational Citizenship Behavior (OCB) of SMEs in Japan. Moreover, this study attempts to examine the relationship between HRM practices and OCB shedding some lights on the link between HRM practices and OCB. A structured questionnaire was developed and sent to 436 SMEs in Aichi Prefecture and 144 firms responded to the questionnaire resulting in 32 percent response rate. Based on the data analysis it was found that there is strong positive correlation between HRM outcomes and OCB of employees in manufacturing SMEs in Japan. Keywords: Human Resource Management, Small and medium enterprises, HRM outcomes, organizational citizenship behavior. economy. Although their relative importance as a share of the number of enterprises and the number of employees is declining compared with the situation at the beginning of the 2000s, there is no change in the fact that the SME sector still accounts for the vast majority of enterprises and employees in Japan. Large enterprises (LEs) such as Toyota, Honda, and Sony etc. originally began as small family businesses (Sato, 2013). The majority of products of LEs are made up of parts produced by SME subcontractors, and therefore, the reliability of Japanese products is supported by the underlying

INTRODUCTION Small and Medium Enterprises (SMEs) in Japan have been a major source of employment and growth, accounting for nearly 70 percent of total employment and more than half of the value addition from manufacturing to GDP. There are 4.69 million SMEs in Japan, constituting 99.7% of all enterprises, accounting for 70 percent of all employment (Small and Medium Enterprise Agency, 2013). Although most people are familiar with large companies such as Toyota, Sony, and DoCoMo, it is the small and medium enterprises (SMEs) that drive Japanese


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strength of SMEs. Local economies are underpinned by the activities of SMEs particularly those involved in the service industry, the retail industry, and the construction industry (Sato, 2013).

growth of SMEs, which often have limited opportunities to utilize managerial resources. But, it is argued that SMEs are paying less attention to HRM practices when compared with their counter parts of large enterprises (Kok, 2003; Wong et al., 1997; Gamage, 2007). Therefore, the prime objective of this study is to examine HRM practices in manufacturing SMEs in Japan. Specifically, this study attempts to examine the relationship of HRM practices with Organizational Citizenship Behavior (OCB) of employees in SMEs in Japan. Organizational Citizenship Behavior (OCB) is one of the main topics that get practitioners and researchers attention and interests since of late (Change & Chelladurai, 2003). This is because of the positive impact that OCB has on different aspects of organizations. Although there are many studies that has identified the factors that promote or enhance the OCB in organizations, very few studies has examined the link of HRM practices with OCB where the effect of organizational commitment as a mediator is included. Therefore, this study attempts to answer two main questions. Do HRM practices enhance OCB of employees in manufacturing SMEs in Japan? Does organizational commitment mediate the relationship between HRM practices and OCB?

However, over the last two decades, SMEs have no longer been a thriving source of growth. The profitability and investment of SMEs have declined significantly and business registration of SMEs has been in the decline. The number of manufacturing establishments employing four to 299 people steadily declined from 434,754 in 1985 to 254,675 in 2007. The sharp decline in the number of establishments was caused not only by the abolishment of enterprises but also by the lower number of enterprises entering the economy. As shown in Figure 1, the entry rate has experienced a prolonged decline since the 1970s. However, the firm exit rate has trended upward in recent years, and rose by a record annual average of 6.0 percent (based on the number of enterprises) between 2001 and 2004. As a consequence, the firm exit rate has considerably exceeded the firm entry rate despite the slight upward swing in the entry rate in recent years (METI, 2006). Nevertheless, successful business management of SMEs largely depends on the quality of human resource that supports companies (JASMEC, 2001). Securing and training high quality personnel are, therefore, key factors for the


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leading causes of small business failures (McEvoy, 1984).

LITERATURE REVIEW This section presents an overview of research on HRM in SMEs and subsequently, briefly presents main conclusions of studies which have been conducted on the relationship between HRM practices and OCB of employee in SMEs in Japan.

Although no clearly articulated HRM framework exists for SMEs, they like their larger counterparts also have to recruit and select staff, achieve level of performance, and train staff. Given the prevalence of small enterprises in many economies it is surprising that relatively little is known about the extent, nature and determinants of training in small and medium-sized businesses (Johnson & Gubbins, 1992). SMEs are often limited in their ability to undertake HRM activities due to a lack of finance, knowledge and managerial skill (Gilbert & Jones, 2000). As a consequence, their HRM practices are highly informal and relatively unsophisticated (Jameson, 2000; Gilbert & Jones, 2000). The lack of information about human resource in SMEs is problematic for theory, research, and practice. Current human resource theory is often developed and tested in large organizations. As a result, little is known about the extent to which the theory extends to smaller entrepreneurial organizations.

HRM in SMEs Given the importance of SMEs employees to the national economy, it is disheartening to note that scant attention in SMEs research is given to the study of human resource management practices. No matter where you look, in surveys (e.g., Hornsby & Kuratko, 1990), in reviews of literature (e.g., Good, 1998), and in empirical studies (Heneman & Berkley, 1999), scholars are lamenting over the dearth of information about human resource management practices in SMEs. Proper management of a company’s human resources is the key to business survival in today’s world. The organizational effectiveness of the firm (Huselid, 1995; Terpstra & Rozell, 1993) and its ability to create a sustainable competitive advantage (Prahalad, 1983; Pfeffer, 1994) can hinge upon whether HRM practices are properly thought out and successfully implemented. The human potentials in a company are generally much more difficult for competitors to duplicate than the plant, equipment or even products that a company produces (Flanagan & Despanade, 1996). Consequently, the nature and well being of a company’s employees can become its main strength in carving out a profitable existence in the industry. HRM practices can be particularly important for small firms (Marlow and Patton, 1993) since they tend to be so dependent on human capital. Research indicates that inadequate and insufficient management of employees in small firms has resulted in low productivity and high turnover rates (Mathis & Jackson, 1991) and is one of the

The overall goal of human resource management is to ensure that the company will be able to achieve success through people. HRM aims to increase the effectiveness and organizational skills, which means the ability of an organization to achieve its goals using the available resources in the best way possible. Some authors in their studies have found that HRM systems can be the source of firms' organizational capabilities that allow one to learn and benefit from new opportunities. There are many studies that have linked firm’s success with behavior of their employees. Effective HRM practices generate positive HRM outcomes and this positive HRM outcome will lead to positive behavioral outcomes of


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employees. OCB has been gained much attention of researchers as one of such behavioral outcomes which leads to better performance. Although there are many studies that identified the factors that promote or enhance the OCB in organizations, very few studies has examined the linkage of HRM practices with OCB where the effect of organizational commitment as a mediator is included.

in the firm. According to Lambert (2006), OCB (a) goes beyond the basic requirements of the job, (b) is to a large extent discretionary, and (c) is of benefit to the organization. Since OCB represents an employee’s discretionary behaviors that go beyond his formal job description, it is considered as an important metric of measuring the health of a firm. Generally, the more the citizenship behavior is displayed in the workplace, the better is the firm performance. Some common traits observed in organizational citizenship behavior include good sportsmanship, active involvement in all professional and social company activities, and general acceptance of the rules and culture of the organization. An employee who practices OCB will typically be an exceptionally strong team player who maintains goodwill among co-workers and keeps the spirits of others upbeat. OCB may not always be directly and formally recognized or rewarded by the company. However, through salary increments or promotions for example, OCB may be reflected in favorable supervisor and co-worker ratings, or better performance appraisals (Organ, 1988).

HRM Practices and OCB Organizational Citizenship Behavior (OCB) is one of the main topics that get practitioners and researchers attention and interests (Change & Chelladurai, 2003). This is because of the positive impact that OCB has on different aspects of organizations. Dennis Organ, (1988) the father of OCB who coined the term, defines it as individual behavior that is discretionary, not directly or explicitly recognized by the formal reward system, and that in the aggregate promotes the effective functioning of the organization. OCB is the willingness to go above and beyond the prescribed roles that he or she has been assigned (Organ, 1990). These extra-role behaviors are considered to support the maintenance and enhancement of the social and psychological context that supports task performance in the firm (Organ, 1998). Organ’s definition of OCB includes three critical aspects that are central to this construct. First, OCBs are thought of as discretionary behaviors, which are not part of the job description, and are performed by the employee as a result of personal choice. Second, OCBs go above and beyond that which is an enforceable requirement of the job description. Finally, OCBs contribute positively to overall organizational effectiveness.

OCB has been studied since the late 1970s. Over the past three decades, interest in these behaviors has increased substantially. Organizational behavior has been linked to overall organizational effectiveness, thus these types of employee behaviors have important consequences in the workplace. An examination of the literature indicates that there is a growing interest in the relationships between OCBs and their potential consequences (Podsakoff et al, 2009). According to Organ (1988), high levels of OCB lead to high levels of organizational efficiency, effectiveness and adaptability. It is considered as one of the most important factors influencing organizational effectiveness. Walz and Niehoff (2000) found the OCB dimensions enhance organizational efficiency, performance,

Shore, Barkdale and Shore (1995) argue that a high level of OCB reflects employees’ true willingness to be involved


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and customer satisfaction. Furthermore, OCB is positively related to high job performance, productivity, efficiency, cost reduction, profitability, employees’ retention and customer satisfaction (Podsakoff, Whiting, Podsakoff, & Blume, 2009). According to Morrisson (1996) an organization’s approach to HRM is instrumental in eliciting citizenship behaviors. The key argument has been that the way an organization manages its HRM sets the tone and conditions of the employee-employer relationship. If a firm’s philosophy implicitly states that employees are short-term resources that are easily disposable, economic rather than social exchange relationships are likely to develop (Witt, 1991). In contrast, HRM practices may convey to employees that their organization promotes humanistic values, cares about their well-being, and is willing to trust them (Gupta, & Singh, 2009).

abilities, for example careful selection and high investment in training; high motivation, for example employee involvement and possibly performancerelated pay; and an appropriate role structure and role perception, for example job design and extensive communication and feedback (Guest, 1997). OPERATIONALISATION OF VARIABLES Human Resource Management Practices

Human Resource Management (HRM) is the function within an organization that focuses on recruitment of, management of, and providing direction for the people who work in the organization. It is the effective and efficient utilization of human resources to achieve organizational objectives (Opatha, 2010). HRM is the human side of the organizational management. It is mostly responsible for the attraction, selection, training, assessment, and rewarding of employees for getting maximum contribution toward the organizational success. Stone (2005) defined human resource management as productive use of people in achieving the organization’s strategic business objectives and the satisfaction of individual employees. This definition clearly indicates that the organizations’ objectives are dependent on their work force productivity. The effective use of HRM practices is able to link these practices with organization’s goals and objectives. In order to accurately measure “human resource practices”, a number of HR functions may need to be evaluated. The importance of these practices may differ from firm to firm. One of the most comprehensive and widely used measures for human resource practice was presented by Dessler (2008) and Fisher et al. (2006). In their studies, human resource management practices are characterized as multidimensional, and it has four major facets namely; staffing, training & development, employee performance

According to Organ (1990) there is a positive association between highperformance HRM practices and citizenship behaviors. He argued that extra-role behaviors are performed by employees only when a social, not an economic, exchange contract characterizes the employee-employer relationship (Pare & Tremblay, 2007). As Lee (2001) pointed out, employees must have the knowledge, capability, and opportunity to perform both their prescribed and their extra role behaviors. It is obvious that, according to AMO model, (ability-motivationopportunity to perform) ability enhancing, motivation enhancing and opportunity enhancing HRM practices lead to increasing knowledge, skills and opportunity to perform. MacDuffie’s (1995) concludes that high performance, at the individual level, depends on high motivation plus possession of the necessary skills and abilities and an appropriate role and understanding of that role. It is a short step to specify the HRM practices that encourage high skills and


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evaluation, and compensation management of employees.

success of organization as compared with none or less- trained employees.

Staffing Staffing is the process of acquiring, deploying, and retaining a workforce of sufficient quantity and quality to create positive impacts on the organization’s effectiveness. It involves recruitment, selection, hiring and induction of potential employees. Recruitment is the process of finding and attracting suitably qualified people to apply for job vacancies in the organization. It is a set of activities an organization uses to attract job candidates who have the needed abilities and attitudes. Selection is the process of making the choice of the most appropriate person from the pool of applicants recruited to fill the relevant job vacancy. Hiring is the process appointing selected candidates to the posts which are vacant. Induction is the HRM function that systematically and formally introduces the new employee to the organization, to the job, to the work group to which new employee will belong and the work environment where the new comer will work. Various tools and techniques are used by firms for the improvement of staffing process to avoid the loss in terms of time, money and potential employees.

Performance Evaluation PE is defined as the systematic process of identifying, measuring, influencing, and developing job performance of the employees in the organization in relation to the set of norms and standards for a particular period of time in order to achieve various purposes (Opatha, 2010).This aspect of human resource practices generally involves the activities of various evaluation designs, both formal and informal, and different evaluation periodicities (Shub and Stonebraker, 2009). It is a means of getting better results by understanding and managing performance within an agreed framework of planned goals, standards and competency requirements. It functions as a continuous and evolutionary process, in which performance improves over time. Moreover, it provides the basis for regular and frequent dialogues between managers and individuals about performance and development needs (Armstrong, 2006). Compensation management Compensation is the total amount of the monetary and non-monetary pay provided to an employee by an employer in return for work performed as required. It is one of the most extrinsic practices of human resource function in an organizational setting. Compensation may include payments such as bonuses, profit sharing, overtime pay, recognition rewards, and sales commissions etc. Compensation can also include non-monetary perks such as a company-paid car, stock options in certain instances, company-paid housing, and other non-monetary items. This dimension determines the level of job of an employee on the basis of their perceived knowledge and experience. Moreover, the matching of their job knowledge with the pay or compensation provided them must demonstrate the market level competitive packages. Good compensation plan would

Training and Development Training & development is another dimension of human resource practices where firms invest on development of their employees’ knowledge, skills ability and other required skills to improve the productivity of employees. Training & Development is the HRM function that formally and systematically provides new learning to increase employees’ capabilities. The primary purpose of training and development is to increase organizational performance by increasing employee performance. Training and development can transform human resource to human capital where skilled employee would better perform in the


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therefore, inevitably influence on employees’ performance. However, the extent to which an employee who is getting the good compensation package will perform well would also depend on his/her overall assessment of various factors like the compensation package in other organizations in relation to the work load and the possibility of getting better compensation packages (Purani and Sahadev, 2008).

In fact, it is expected that employees with high level of commitment to their organization are more focused on their work than employees reporting lower levels (Van, 2000). According to Meyer & Allen (1996) organizational commitment is the main construct in order to understand the relationship between the employee and the employer. Therefore, in this study, it is assumed that organizational commitment mediates the relationship between HRM practices and OCB.

Organizational Commitment as a Mediator Organizational commitment is defined as employees’ psychological state that influences the desire to remain a member of the organization (Meyer & Allen, 1991). According to Meyer & Allen (1991) organizational commitment is of three types i.e. affective, continuance and normative. Affective commitment is regarded as an employee’s attachment to acknowledgment and participation in the organization. Employees having strong affective commitment remain with the organization. Continuance commitment is one’s awareness of the outlays related to parting with the in attendance association. Employees who possess continuance commitment will remain in the organization. Normative commitment is the sentiment of responsibility of an employee to the organization on the basis of his or her personal norms and values. Employees with normative commitment remain with the organization because they believe they ought to. A relationship study has been conducted by several researchers between HRM practices and organizational commitment. According to Paul and Anantharamayan (2003) HRM practices show an eminent optimistic relationship with organizational commitment.

CONCEPTUAL FRAMEWORK For the purpose of this study, four (4) HRM practices namely; employee staffing, training & development, performance management, compensation management were selected. Then, the relationship between HRM practices and OCB was examined exploring the mediating relationship of organizational commitment. Based on the above theoretical underpinning, a conceptual frame for the study was constructed as in Figure 2. According to the model in Figure 2, HRM practices are linked with organizational commitment and organizational commitment is linked with OCB of employees. Therefore, the model proposes positive relationship of HR practices with OCB with a mediation link through organizational commitment. METHODOLOGY A structured questionnaire was developed as the main data collection instrument. Four (04) HRM practices were selected for the study. There were; employee staffing, training & development, performance management, compensation management. These four HRM practices were the most widely discussed HRM practices in the literature. In order to examine the HRM intensification, forty (40) items (employee staffing, 10; training & development, 12; and performance management, 10; and compensation management, 8) were included in the questionnaire. Organizational commitment was

The relationship between organizational commitment and OCB has been demonstrated by many studies (Organ, 1988; Van, 2000; Wagner & Rush, 2000).


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considered as the mediating variables. Four (4) items to measure organizational commitment were included in the scale. Four items (4) in the scale also used in order to measure OCB. The questionnaire was first developed in English and then translated into Japanese to make respondents better understand it.

Reliability and Validity of the Questionnaire In order to measure the reliability of instruments, Cronbach’s alpha coefficient is widely used. According to Sekaran (2005), if the alpha value is greater 0.7, the instrument is said to be acceptable. The internal consistency reliability coefficients (Cronbach’s alpha) for the scales used in this study are well above the level of 0.7. Table 1 shows coefficients for all variables. According to the table 1, each variable has got more than 0.8 alpha values which are well above the norms and thus are acceptable for the analysis purpose. Validation procedures involved initial consultations with subject matter experts about the questionnaire prepared. The experts also judged the face and content validity of the questionnaire and decided as adequate. Hence, the researcher was satisfied with the reliability and validity of the scale

Four hundred thirty six (436) questionnaires were distributed to a randomly selected sample of manufacturing SMEs in Nagoya in Aichi Prefecture. An electronic data file maintained by the Nagoya Chamber of Commerce was used to draw the sample. One hundred forty four (144), equivalents to thirty two percent (32 percent), responded to the survey. Data was analyzed by using SPSS version 16. Descriptive statistics were used to understand the characteristics of firms and Pearson product movement correlation coefficient was used to examine the relationships among variables. .


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positive and statistically significant. Among all these four variables, it is a performance evaluation practice that has the highest magnitude of the relationship with OCB while compensations accounts for the lowest magnitude.

RESULTS OF THE SURVEY HR Practices and Organizational Citizenship Behaviour Table 2 shows Pearson product movement correlation coefficients among HR practices, organizational commitment and organizational citizenship behavior of employees. According to the table 2, HR practices are highly and positively related to OCB. First, employee staffing shows positive correlation with OCB. This relationship is strong and statistically significant (r= .404, p< 0.01.). Second, the correlation of training & development with OCB is also positive and very high (r=.451, p< 0.01). The link between training & development and OCB is strong and statistically significant. Third, performance evaluation function also establishes strong correlation with OCB (r= .587, p< 0.01). This relation is also positive and statistically significant. Finally, the relationship in between compensation management and OCB is also very strong (r=336, p< 0.01). Although the magnitude of coefficient is somewhat lower when compared with three other coefficients, it also shows

HR Practices and Organizational Commitment and OCB In order to examine the mediating relationship in between HR practices and OCB, organizational commitment was studied. The links between HR practices and organizational commitment, not surprisingly with earlier studies, are positive and statistically significant (Employee staffing, r=.310, p< 0.01; Training & development, r=.296, p< 0.01; performance evaluation, r = .311, p< 0.01; and compensation management, r= .287, p< 0.01). On the other hand, the correlations of organizational commitment and OCB are also very interesting. Organizational commitment shows very high and positive correlation with OCB which is r= .424 (p< 0.01). This link is also statistically significant giving the fact that the link has in presence not by chance but worth further studying.


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examine the impact of mediating effect of organizational commitment further analysis with sophisticated statistical techniques is needed in need.

DISCUSSION OF FINDINGS HR Practices and OCB In this study four areas of HR practices have highlighted their role and their relationship with OCB. Similar to the findings of other studies in large organizations, this study also establishes very strong and statistically positive correlation of HR practices with OCB in manufacturing SMEs in Japan. According to the findings all four HR practices were highly and positively correlated with OCB. It implies the idea that four HR practices; employee staffing, training & development, performance management, and compensation management are having positive relations with OCB. This highlights the fact that an increase of the usage of above HR practices enhances OCB. As all these relations are positive, with the increase of the usage of the said HR practices, OCB will be enhanced. Therefore, the conclusion that can be drawn from this finding is that, SME owners/managers who are concerned about increasing labour productivity should be prepared to employ more HR practices effectively.


The results of this study offer several key theoretical and practical implications for SMEs owners and managers interested in improving business performance of their SMEs. Effective HR practices lead to positive behavioral outcomes of employees such as organizational commitment and these positive behavioral outcomes lead to OCB of employees which are fundamental to achieve overall success of the organizations. The effective use of HR practices; employee staffing, training & development, performance management, and compensation management represented in SMEs was shown to be related to organizational commitment. These positive behavioral outcomes in turn are translated into positive operational outcomes such as OCB of employees. This highlights the fact that employees do matter even for SMEs and are shown to have links with operational performance in their businesses. Therefore, as the study highlights, when evaluating many options that are available to SMEs, it is very important to keep in mind not to discount the importance human resource management. Effective human resource management practices lead directly to positive behavioural outcomes on employees of the firm, which in turn lead to positive operational performance for the organization.

HR Practices and Organizational Commitment Analysis of the data clearly establishes very high positive correlations of HR practices with organizational commitment and organizational commitment with OCB. Therefore, it is intuitive to assume that organizational commitment is playing a mediating relationship in between HR practices and OCB. With this correlation, it is reasonable to assume an increase of the usage of above HRM practices enhance OCB through organizational commitment. Drawing from these findings, it can be concluded that those owners/mangers in SMEs who are concerned to enhance organizational commitment of their employees should focus on effective use of HR practices prescribed above. However, in order to

This study is subject to certain limitations encountered in the research process. The study was based on the data collected only from 144 manufacturing SMEs in Aichi prefecture Japan. Therefore, generalisability could have been increased if number of sufficient manufacturing firms representing all the prefectures in


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Japan were taken. This study focused only on the relationship, not the effect or impact, between HRM practices and organizational citizenship behavior of employees. However, it is better if this study focused on the effect of HRM practices on organizational citizenship behavior of employees too. Further analysis with sophisticated statistical testing is very much sought to examine the impact of HRM practices on organizational citizenship behavior and mediating role of HR outcomes. However, future research with relatively larger samples expanding to other sectors in SMEs will be very much useful in deed in this direction.

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commitment, and citizenship behaviors on Information Technology professionals’ turnover intentions. Group & Organization Management, 32(3):326-357.

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[50.] Witt, L. A. (1991). Exchange ideology as a moderator of job attitudesâ&#x20AC;&#x201C;OCB relationship. Journal of Applied Psychology, 18: 1490-150


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DAY OF THE WEEK ANOMALY IN COLOMBO STOCKEXCHANGE: IS IT A RESULT OF INAPPROPRIATE TEST METHODS? Chandana Gunathilaka Department of Finance, University of Sri Jayewardenepura, Sri Lanka ABSTRACT This study tests the presence of Day of the Week effect of returns on All Share Price Index of Colombo Stock Exchange (CSE). It essentially examines random walk hypothesis in determining the market efficiency. The daily returns over a period of 22 years from1991 to 2012 are tested using both parametric and nonparametric statistics. The study finds strong evidence for day of the week effect, that the mean daily returns of every trading day of the week are not equal. There is no evidence for random walk hypothesis. Friday returns are positive and significantly higher than that of other week days. Monday and Tuesday returns are negative, and these results display no difference between test methods, parametric or non-parametric. The study finds no evidence to validate informational efficiency of CSE; the investor/manager strategies might outperform the market. Keywords: Day of the week, Efficiency, Stock, Colombo. make perfectly rational decisions. Recent research on EMH has focused on the hypothesis that asset price movements do not show rational economic decisions; hence it is not the weaknesses of methods but irrationality of the market.

INTRODUCTION Prior research on capital market efficiency has not been able to sustain the Efficient Market Hypothesis (EMH) which emphasizes that the asset prices fully reflect ‘available’ information. However, the limited support for EMH is argued to be the outcome of inappropriate test methods, excess volatility mean reversions, non-linearity, anomalies and bubbles in the stock markets. Chien, Lee, and Wang (2002) state that the limitations of the existing efficiency test methods contribute to conflicting outcomes. The seasonality in stock markets could be attributed to inappropriate statistical methods. This makes the evidence on seasonality an ‘invalid challenge’ for EMH. In contrast, Number of studies including French (1980), Harris (1986), Nippani & Greenhut (2011) confirm the distribution of stock returns according to the day of the week. Evidence on day-of-the-week effect also suggests that behavioral factors would be priced. It also violate the ‘Homo Economicus’ assumption that the humans

Among the calendar anomalies day of the week effect is the most widely documented, and comprehensively investigated in different markets (Rahman, 2009). The fact that the stock return volatility is not independent of the time (i.e. time variant; the presence of calendar anomalies) evidences against random walk theory. If the stock prices follow a random walk, the market is said to be efficient and the future prices are not predictable based on the past prices as the future price would be dependent upon the new information. As the information flows efficiently, investors share similar information creating no systematic way of exploiting trading opportunities. Contrary to this, an investor would outperform using unique strategies if anomalies like week day effect exist. Therefore empirical studies on seasonality are at least motivated by (1)


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appetite for evidence for EMH and (2) information for judgments of managers and investors, and the present paper examines the day of the week effect in Colombo Stock Exchange.

Some studies propose that the institutional investors are less likely to trade on Mondays narrowing width of the market and thus returns go negative (Abraham and Ikenberry, 1994). However, Mahendra and Damini (2006) find positive returns on Monday while Tuesday returns are negative in Indian capital market. Perhaps, the institutional investorsâ&#x20AC;&#x2122; role may be less active. In markets where institutional investors play a greater role more pronounced day of the week patterns in returns and volumes are present (Richard and Laura, 1995).

Basdas (2011) observes that studies generally adopt regression analysis with dummy variables, ANOVA, non-parametric tests or Generalized Auto Regressive modeling for testing seasonality effect. However, Chien, Lee, and Wang (2002) suggest non parametric tests to avoid upward biasness in test statistics derived from dummy variable models, particularly when the return volatility of a period observed is higher than the other periods. The present study uses both OLS estimator and non-parametric statistics in examining the seasonality.

Worthington and Higgs (2009) find randomwalk behavior in long term (monthly returns) than short term (weekly returns). Hence anomalies in short term may be attributed to statistical methods used; over and under reactions become marginal or disappear in the long run. Pandey (2003) and Ruchika and Datta (2012) do not find evidence for random walk in Indian equity market. Ruchika and Datta (2012) observed that the stock markets became efficient after the introduction of future trading. They also find evidence for day of the week effect in BRIC countries. Thus the integration of debt markets, derivatives and equity markets would bring the efficiency, as the market become more sensitive for full information. However, the equity market anomalies may not pertinent in debt markets, for instance, Jordan and Jordan (1991) discover no meaningful difference in mean daily returns for fixed income securities. It is also interesting to note that government securities, the so-called risk free securities, do display day of the week effect as observed by Singleton and Wingender (1994) who confirmed Weekend effect for treasury securities, by examining closing prices of treasury securities of various maturities. The Sri Lankan market does not have a meaningful derivatives market and corporate debt market, and thus the present study focuses on its equity market only.

More specifically, the objective of the present study is to test the Day of the Week effect in Colombo Stock Exchange and examine whether results are conflicting under different test methods. The paper proceeds as: related literature in section II, method of research in section III, results in section IV and conclusions in section V. RELATED LITERATURE Studies confirm negative returns on Monday and propose investor information asymmetry to be the potential reason. French (1980) shows a significant negative Monday returns in equity market on S&P 500; Jaffe and Westerfield (1985) show evidence for equity markets in Canada, Britain, Australia, and Japan. These findings have no difference in emerging markets (Aggarwal and Rivoli, 1989). Fan (2002) find that Friday returns are lower than other trading days. Agathee (2008) find that the Friday returns are higher relative to other trading days, and mean returns over the week are not different from zero. Basdas (2011) find limited day of the week effect in Istanbul under the application of stochastic dominance approach, a day cannot dominate other days of the week.


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METHOD Data: Sri Lanka’s capital market demonstrated a different episode from mid 2009 with the end of civil conflict sustained over 30 years (See Figure 1), perhaps the investors’ confidence would have reached at high with expectations on peace. Rationally, if the market was under-performed due to the war-related economic uncertainty, then appropriately adjusted market should be in place during the post war period. The Colombo Stock Exchange (CSE) reports a market capitalization weighted index, All Share Price Index (ASPI), since January 1985. The study uses ASPI from January 1991 to December 2012, covering a period of 22 years. The figure 01 displays the behavior of ASPI over the sample period.

is the continuous daily market return Rt as captured by ASPI and measured as;

D1 – D5 are Dummy variables equal to 1 if t is a tested day and 0 otherwise β1-β5 Average return of each respective day et

is the stochastic disturbance term.

In absence of any day of the week effect in returns, the variance of average return of each respective day which is the slope of D1 to D5 should not be different from zero. (H0=β1=β2=β3=β4=β5). If a common intercept is estimated in the model, to represent the average return of the observed day (where the dummy is equal to 1), the slope of the exogenous variable/s in the model should measure the difference between the average return of the observed day and other day/s, which should not be different from zero if there is no day of the week effect.

Figure 1: the movement in ASPI

The model could also be estimated with a common intercept to measure average returns of a day with a dummy of one (1) for the observed day and zero (0) for other days. Hence, the slope would measure the difference between average return in the day observed and the rest of the days. Then the model takes the following form:

The Figure displays the behavior of ASPI and its exponential trend line over the sample period. Model Specification: The dummy variable regression model has been extensively employed in previous studies to investigate seasonal behavior of stock markets (Chien, Lee and Wang, 2002). It assumes that the variances of stock returns are constant throughout the test period. The model is expressed as;

If the average return in the day of the week is the same as that of the rest then the estimate of slope (βd) should not be different from zero. In other word, the common intercept would represent the average return of the week, commonly. Unit Root: The study examines the Null Hypothesis of unit root ( = 0) in the time

Model (01)


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series of returns on the All Share Price Index using Augmented Dicky-Fuller test which takes the following specification. Hence the alternative hypothesis is < 0.

market is inefficient. The ADF test equation further explains that the constant and trend are insignificant, the series at level are mean centered and autocovariances do not depend on time. [Table 02] Dummy Variable model: The panel A of the table 3 represents the results of dummy model estimated; coefficient, t-values and their corresponding p-values. Accordingly, coefficients for Monday and Tuesday are negative and for all other days mean returns are positive. Thursday positive returns (at 5% significant level) and Friday (1% significance level) are statistically significant. Panel B shows the common intercept which is insignificant explaining the same observation that the returns are based on the day’s effect.

Where, Rt is the return at time t, and α is a constant intercept, β is the coefficient on a time trend and the lag order of the autoregressive process. Chien (2002) conclude that the widely used dummy variable regression model may wind up the results and other methods like pair-wise comparison approach would be appropriate for seasonality testing. The present study examines the seasonality of stock returns of Sri Lankan capital market with said parametric methods and suggested non parametric statistics in order to determine whether it is factual anomalies or inappropriate statistical methods.

[Table 03] The results confirm the day of the week effect, insignificant negative returns on first two days and significant positive returns on last two days of a five-day week. However, as we observed a different market episode during the period from July 2010 to December 2012, the model is re-estimated to examine the day of week effect during this period. The table 4 explains the model 01 results for the two market episodes.

RESULTS Descriptive statistics: The table 1 summarizes the descriptive statistics of the daily returns on ASPI over the period from 1991 to 2012. The highest mean return (0.2256) is reported on Friday while the lowest return (-0.0629) is on Tuesday. Mean returns for Monday and Tuesday are negative and for all other days mean returns are positive. It is a key observation that Friday returns are the highest while it has the lowest variance. The highest variance reported on Monday.

[Table 04] Accordingly, the second period has a higher return volatility. While Monday has insignificant negative returns, Friday’s positive average return is significantly higher than other days and statistically significant at 5% level. Thus, the estimations confirm the day of the week effect invalidating the random walk hypothesis in CSE. However, Chien, Lee, and Wang (2002) argue that the test statistics of the dummy variable regression model are biased upward and estimators are identical only at the maximum likelihood only (i.e. the variance of the population T should be equal

[Table 01] Random Walk: The table 2 shows the results of ADF test, where the statistic tα is less than the critical value at 1% level and is significant at 1% level. Thus the series at level show no unit root (i.e. the returns are stationary). This suggests that the CSE returns do not follow a random walk, and the


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to variances of ‘p’ observations representing a tested day where the dummy is 1, and ‘q’ observations representing other days where the dummy is zero). Therefore pair-wise comparison should be performed to investigate the difference between any two means of factor levels.

These estimated results have no difference even the market is split to different episodes; speculative or normal status. The study finds no evidence to conclude that the CSE is informational efficient; the investor/manager strategies might outperform the market. REFERENCES [1] Abraham and Ikenberry (1994), The Individual Investor and Weekend Effect, Journal of Financial and Quantitative Analysis, vol. 29, pp.263-78.

Pair-Wise comparisons: The panel A of table 5 reflects the results of independent sample t tests, under the assumption of unequal variances of the returns on Friday and other week days. The panel B shows results of non-parametric test: KruskalWallis statistic.

[2] Agathee, S (2008), Day of the week effect: Evidence from the stock exchange of Mauritius, International Research Journal of Finance and Economics, Vol. 17, pp.7-14.

[Table 05] Consistent with dummy variable model, the independent sample t test explains that the Friday returns and returns of the other days are significantly different even under the assumption of unequal variances. Even though the results are not presented here in the table, the pair-wise t test comparisons for ‘Monday and others days’ confirmed a similar result. Kruskal-Wallis test, the non parametric test for equality of medians, the pair-wise application also confirm that ‘Monday and other’, ‘Tuesday and other’ and ‘Friday and other’ median returns are not equal at 1% level. Hence, the day of the week effect is confirmed under either method; parametric or non-parametric testing.

[3] Aggarwal, R. and Rivoli, P. (1989), Seasonal and day-of-the-week effects in four emerging stock markets, Financial Review, pp. 541-50. [4] Basdas, U (2011), The day-of-the-week effect for Istanbul stock exchange: a stochastic dominance approach, Journal of Applied Finance & Banking, vol.1, no.4, 223-238. [5] Chien C., Lee C., and Wang A., (2002), A note on stock market seasonality: The impact of stock price volatility on the application of dummy variable regression model, The Quarterly Review of Economics and Finance 42, 155–162

CONCLUSION The study investigated day of the week effect on the ASPI returns of CSE over a period of 22 years. It focused on identifying the evidence on seasonality, random walk behavior and uniformity of results irrespective of the test method/s. The study finds no evidence for random walk and strong evidence of day of the week effect in CSE. The results display no difference under the parametric or non parametric tests performed. Friday returns are positive and significantly higher than other days while Monday and Tuesday returns are negative.

[6] Fama, E F (1991), Efficient Capital Markets, Journal of Finance, Vol. 46-5, pp. 1575-1617 [7] Fan T (2002), Study on weekend effect in China’s stock market, Chinese journal of management science, Vol. 10-2:pp.92-95. [8] French K. (1980), Stock returns and the weekend effect, Journal of Financial Economics, pp. 55-69.


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[9] Harris, L. (1986), A transaction data study of weekly and intra daily patterns in stock returns, Journal of Financial Economics, Vol. 16-1, pp. 99-117.

[16] Rahman, L (2009), Stock Market Anomaly: Day of the Week Effect in Dhaka Stock Exchange, International Journal of Business Management, Vol. 4, No. 5.

[10] Jaffe J. and Westerfield, R. (1985), The weekend effect in commons stock returns: the international evidence, Journal of Finance, pp. 433-555.

[17] Richard W S and Laura T S (1995), The Day-of-the-Week Anomaly: The Role of Institutional Investors, Financial Analysts Journal, Vol. 51, No. 3, pp. 58-67

[11] Jordan S. and Jordan B. (1991), Seasonality in daily bond returns, Journal of Financial and Quantitative Analysis, pp. 269-85.

[18] Ruchika Gahlot, Saroj Kumar Datta, (2012), Impact of future trading on stock market: a study of BRIC countries, Studies in Economics and Finance, Vol. 29- 2, pp. 118 â&#x20AC;&#x201C; 132

[12] Lankonishok, J. and Levi, M. (1982), Weekend effects on stock returns: a note, Journal of Financial Economics.

[19] Sardar M.N. Islam Sethapong Watanapalachaikul Colin Clark (2005) Are Emerging Financial Markets Efficient? Some Evidence from the Models of the Thai Stock Market.

[13] Mahendra R and Damini K. (2006), Day-of-the-week and other market anomalies in the Indian stock market, International Journal of Emerging Markets Vol. 1-3, pp. 235-246.

[20] Singleton, J. and Wingender, J. (1994), The nonparallel weekend effect in the stock and bond markets, Journal of Financial Research, Winter, pp. 531-8.

[14] Nippani S and Greenhut, J (2011), Reversal of the weekend effect in Canada: an empirical analysis, Managerial Finance, Vol. 37 Iss: 9 pp. 840 â&#x20AC;&#x201C; 854

21) Worthington C and Higgs H (2009), Efficiency in the Australian Stock Market: A Note on Extreme Long-Run Random Walk Behaviour, Applied Economics Letters, Vol.16, pp. 301-306

[15] Pandey, A (2003), Efficiency of Indian stock market, available at: papers.cfm? id474921.


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TABLES Table 1: Descriptive Statistics of the daily returns of the sample period Day of the week Mon. Tues. Wed. Thur. Fri.



780 -0.0373 780 -0.0629 780 0.0343 780 0.0828 780 0.2256

Std. Min. Dev. Maxi 1.21 -11.13 5.58 1.13 -6.15 6.98 1.19 -13.89 5.77 1.11 -6.26 10.28 1.07 -7.06 11.61

Table 2: Unit root test H0: unit root, Exogenous: Constant, Linear Trend Lag Length: 0 (Automatic - based on SIC, max lag=29) t-Stat. Prob.* ADF test statistic -48.0800 0.0000 Critical value: 1% level -3.9603 ADF Test Equation Method: Least Squares (n=3899 after adjustments) Coeff. Std. Error t-Stat. Prob. Lag (-1) -0.7449 0.0154 -48.0808 0.0000 Constant 0.0358 0.0357 1.0033 0.3158 @TREND (1) 1.9700 1.5900 0.0124 0.9901 Adjusted R-squared 0.3720 Durbin-Watson stat 1.9965 F-statistic 1155.8840 Prob(F-statistic) 0.0000


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Table 3: Regression Results Coeff. Std. Error T-Stat. Panel A

Monday Tuesday Wednesday Thursday Friday

-0.0373 -0.0628 0.0343 0.0827 0.2256

Intercept Slope

0.0042 0.2214


0.0411 -0.91 0.3640 0.0411 -1.53 0.1263 0.0411 0.83 0.4040 0.0411 2.01 0.0441 0.0411 5.49 0.0000 Panel B Estimated with a common intercept and the Dummy for Friday 0.0205 0.0458

0.21 4.82

0.8370 0.0000

Estimated method: Panel Least Squares; Sample (adjusted): 1/01/1991 12/30/2012; Total panel (balanced) observations: 3900

Table 4: Re-estimation of dummy variable model Splitting the sample period to capture the effects in different market episodes 1991 June to 2010 June N=3623 Variable Coeff. Std. Error T-Stat. Prob. Monday -0.0226 0.0428 -0.53 0.597 Tuesday -0.0562 0.0428 -1.31 0.189 Wednesday 0.0237 0.0428 0.56 0.578 Thursday 0.0791 0.0428 1.85 0.065 Friday 0.2183 0.0428 5.10 0.000 2010 July to 2012 December N=277 Monday -0.2318 0.1463 -1.58 0.114 Tuesday -0.1527 0.1463 -1.04 0.297 Wednesday 0.1727 0.1463 1.18 0.239 Thursday 0.1304 0.1450 0.90 0.369 Friday 0.3188 0.1450 2.20 0.029


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Table 5: pair-wise comparisons Panel A Independent sample t test: under the assumption of unequal variances of Friday & other week day returns Leveneâ&#x20AC;&#x2122;s T stat. Mean Std. Test F Stat. (Sig.) diff. Error (Sig.) Friday Vs 2.425 4.815 0.2214 0.0459 Other days (0.119) (0.0000) Panel B Kruskal-Wallis Test of equality of medians on Pair-wise Returns Pair N Median Avg.Rank Z Monday 780 -0.0572 1848.7 -2.82 other days 3120 0.0191 1976.0 2.82 Test statistic (H) 7.98 (Prob.) (0.0050)* Tuesday 780 -0.1004 1807.3 -3.97 Other week days 3120 0.0256 1986.3 3.97 Test statistic (H) 15.76 (Prob.) (0.0000)* Wednesday 780 0.0106 1945.7 -0.13 Other week days 3120 -0.0012 1951.7 0.13 Test statistic (H) 0.02 (Prob.) (0.8940) Thursday 780 0.0089 1998.4 -1.33 3120 0.0000 1938.5 1.33 Other week days Test statistic (H) 1.76 (Prob.) (0.1840) Friday 780 0.1323 2152.4 -5.60 Other week days 3120 -0.0271 1900.0 5.60 Test statistic (H) 31.36 (Prob.) (0.0000)*


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A FUZZY EXPERT SYSTEM FOR BUSINESS INTELLIGENCE Mendis, D.S.Ka, Karunananda, A.S.b , Samaratunga, U.c and Ratnayake, U.d a

Department of Information Technology, Advanced Technological Institute, Sri Lanka, b Faculty of Information Technology, University of Moratuwa, Sri Lanka, c Gampaha Wickramarchi Ayurvedic Institute, University of Kelaniya, Sri Lanka, d Department of Electrical & Computer Engineering, Open University of Sri Lanka, Sri Lanka. a,, d ABSTRACT Business Intelligence (BI) is recognized as an increasingly important support for business decision making in emerging business environment, where a huge amount of data is growing fast and scattered around. Explicit knowledge can be presented formally and capable of effective (fast and good quality) communication of data to the user where as commonsense knowledge can be represented in informal way and further modeling needed for BI. Acquiring useful Business Intelligence (BI) for decision-making is a challenging task in dynamic business environment. In this paper we present an approach for modeling commonsense knowledge in Business Intelligence. A fuzzy expert system based on principal component analysis (PCA) and statistical fuzzy inference system for modeling Business Intelligence in commonsense knowledge is introduced in, which enables holistic approach for disaster management. This paper describes one such approach using classification of human constituents in Ayurvedic medicine. Evaluation of the system has shown 77% accuracy. Key words: Business Intelligence, Statistical inference system, Commonsense knowledge, Principal component analysis and Ayurvedic medicine from many operational data sources i.e. MIS, CRM, ERP and other legacy systems [Delibasic,B. etal., 2007], by some automated procedure called ETL (Extract, Transform and Load) [Olszak C. and ziemba E., 2003]. On top of that, OLAP (Online Analytical Processing) provides analytical views of the stored data in the warehouse in the form of star or snowflake schema [Zeng L. et al., 2006]. On the other hand, Data Mining helps to find hidden patterns from the data through different algorithms (association rule mining, decision tree, and clustering etc). With fast growth of business data in both volume and variety, amalgamation of data from different sources by different autonomous

INTRODUCTION Business Intelligence (BI) supposed to provide access to data that has been cleaned and integrated so that they can be analyzed, manipulated, transformed, and combined to discover correlations, trends, and patterns that offer new insights, aid in decisionmaking. However, enterprises adopt different practices for BI by using a mix of ETL, data warehouse, OLAP, data mining and decision models [Olszak C. and ziemba E., 2003] and [Zhong W., 2008]. Data warehouse is the core of BI system, which stores aggregated, and historical data. It is loaded


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processes into the corresponding dimensions is a challenge.


linkage among the BI knowledge aspect and its dimensions for good decision-making.

Applications of fuzzy technology on real problems have been focused in business management. Two versions of fuzzy technology have been used: Fuzzy Knowledge based systems and fuzzy clustering [Meyer A. and Zimmermann H., 2011]. Adoption of a hybrid intelligent technique (fuzzy-expert system) in carrying out a cost benefit analysis of EIS investment has been proposed by [Michal F. and Uzoka E., 2009]. High cognizance of intangible variables and vagueness / imprecision in human group decisionmaking that requires a good level of consensus has been investigated. A fuzzybased system for consumer electronics to retrieve optimal products based on systemuser interactions has been introduced [Yukun C. & Yunfeng L., 2007]. Fuzzy weights of the criteria and fuzzy judgments about enterprise systems as alternatives are employed to compute evaluation scores and ranking. An application has been realized to illustrate the utilization of the model for the evaluation problems of enterprise systems [Saeed R. etal., 2012]. A fuzzy expert system for marketing decision model using knowledge based system. In this study used a decision table for representation decision rule to construct a marketing decision model. The marketing decision model has been used to determine the entrance time of a new product into market [Ghaderi D. and VafaMaihami I., 2012].

BUSINESS INTELLIGENCE (BI) BI is divided into two main parts i.e. BI dimension and BI process. BI dimension includes the concept of knowledge, functionality, technology, business and organization whereas the BI process includes the activities of operational data sources, ETL, data warehouse, OLAPS, data mining and visualization tools. BI Knowledge aspect According to [Olszak C. and ziemba E., 2003] knowledge is asserted for enterprise, which is applied in all key business processes. It also constitutes a prerequisite for the development of new products and technologies, volume of scales, reaching new customers and maintaining relations with existing customers. The originating source of knowledge in an enterprise includes: their information systems, internal documentation, media press, reports, domestic and foreign statistics, internet, corporate databases, customers, suppliers, business partners, and their employees [Claire A. 2004]. However, knowledge can be classified into following categories i.e. procedural, descriptive, semantic, episodic, explicit and implicit knowledge [Delibasic B., et al., 2007]. Commonsense knowledge is one type of in implicit knowledge. Explicit knowledge can be presented formally and capable of effective (fast and good quality) communication of data to the user where as implicit knowledge can be represented in informal way and further modeling needed As a result, it is very important for an enterprise to analyze commonsense knowledge and solution for the problem when existing data sources are unable fulfil the requirement for the BI system.

However, in these approaches membership functions in fuzzy inferencing is defined in an ad-hoc manner entirely based on expertâ&#x20AC;&#x2122;s knowledge. When domains consist of commonsense knowledge in BI, expertâ&#x20AC;&#x2122;s decisions are also not consistent. Therefore, we argue that the use of fuzzy inferencing for modelling commonsense knowledge should be extended for BI. To cope with that, we have proposed a system, which essentially provides an exploration and


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PROPOSED APPROACH FOR BUSINESS INTELLIGENCE We postulate a new approach enhancing the ability of BI using a statistical inference system for modeling commonsense knowledge.

Classification of commonsense knowledge is achieved by integrating PCA with Fuzzy logic. This is the key contribution in our approach, as PCA alone could not provide statistically significant classification for the tacit knowledge.

The framework has been designed as a three-phase knowledge modeling approach. The related design underlies the following steps [Mendis, D.S.K etal., 2007].

Reasoning The reasoning process in the proposed approach has been carried out using the expert system technology. Fuzzy expert system has been designed and implemented to emulate reasoning on the commonsense knowledge.

Removing dependencies Removing of dependencies in the questions that are constructed in qualitative approach on the basis of commonsense knowledge has been a key concern of the approach. Principal Component Analysis (PCA) is used as the first step towards the removal of dependencies.

As such the knowledge base of the expert system contains fuzzy rules about the tacit knowledge of the domain at hand. Fuzzy rules for the domain have been constructed as per the following rules. If necessary the system can also be extended to accept fuzzy rules dynamically.

The approach begins by acquiring commonsense knowledge. This can be done as an interview between domain experts and the knowledge engineer. Using the interviewing process between expert and knowledge engineer, tacit knowledge has been acquired and mapped in to a questionnaire based on Likert scale technology. We have chosen to acquire tacit knowledge into a questionnaire since it is more convenient for further analysis. On the other hand, the questionnaire can be automated to interact directly with the domain expert without involving a knowledge engineer. Once knowledge has been acquired then we should analyze the knowledge for finding dependencies. The questionnaire has been analysed using principal component analysis PC

[Chatfied C., 1996] to find dependencies.

RESULTS We have evaluated our approach using Ayurvedic medicine as a domain with tacit knowledge [Mendis, D.S.K. etal., 2007]. In doing so, classification of individuals through clinical examination in Ayurveda has been considered [Dubey G.P., 1978]. The clinical examination of Ayurveda is divided into 2 paths, namely: examination through patient and examination through disease. Prescribing drugs for a disease is depended on both 2 examinations. Classification of individual human constituents is included in examination through patient, which defined as a concept called cprakurti pariksha.c. Individual can be categorized into vata or pita or kapha based on the cprakurti pariksha.c. It was defined that one type can be dominated but in combination of all 3 types. In the exciting system, the method of analysing constituents is not consistent. Although Ayurvedic practitioners use a questionnaire but leads several problems like dependencies among the questions in the questionnaire and analysis of the constituent type. We

Knowledge classification However, PC alone could not give a statistically significant classification for the tacit knowledge gathered through the questionnaire. We have used Fuzzy logic in Artificial Intelligence to fine-tune the derived answers by principal components analysis.


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addressed these problems to solve using following stages. Extracting commonsense knowledge in Ayurveda In the first instance we mapped tacit knowledge regarding to analysis of constituents to a questionnaire with interaction of an Ayurvedic expert. It is consisted of 72 questions to analyse vata, pita and kapha. It is certainly need to measure attitudes during the practical communication work. The questionnaire can be produced very rapidly on Access database. Respondents are required to enter their answers directly at the computer.

Figure 1: constituents


1 2 .. -0.228622 0.249362 . 0.08431 0.20654 .

24 25 -0.073945 0.058179 -0.097192 -0.112795

-0.645803 -0.222147 0.012511 -0.005642

0.232312 . -0.06453 . -0.096332 . 0.268145 .

0.0067 -0.083959 -0.073514 0.084404 0.141314 0.25113 -0.179992 0.111715

0.409442 0.073812 . 0.696973 0.126679 . 0.430044 0.14608 . 0.243781 0.373485 .

-0.115118 -0.056431 0.098213 0.045471 0.023669 0.09045 -0.040468 0.149644

0.009727 0.012529 . -0.378091 0.096985 .

-0.072224 0.177827 0.158006 0.069821

For L1


>X L1...X U1 @ 25 24


1 ¦¦ a ji



A1 ( X )

X  8.510004 § · ¨ ¸ © 51.06002  8.510004 ¹


i 1 j 1

25 24

¦¦ a



i 1 j 1

x Fuzzy Rule base Fuzzy rules have been constructed for classification of each of constituent’s type. For example, Vata constitution

. K23 K24 P1 P2 . . P= P23 P24


For example, Membership function for Vata constitution

Removing Dependencies We have done a pilot survey using 100 no. of students for statistical modeling. Principal component analyzer has been used to remove dependencies. It has been identified 25 principal components using SPSS as shown below in a matrix form. Here V1, V2..V24, K1, k2..K24, P1, P2..P24 denotes question-numbering system in the questionnaire.

V1 V2 . V= . V23 V24 K1 K2 . K=


Rule 1. If X>8.510004 AND X<51.06002 Then X  8.510004 § · A1 ( X ) ¨ ¸ © 51.06002  8.510004 ¹ x Defuzzification Defuzzification process has been computed using Sugne – style inference technique: Here K1 , K 2 , K 3 are defined as singleton fuzzy sets For example, Vata constitution

Classification and reasoning of Human Constituents Human constituents can be computed in to vata, pita and kapha in percentages as shown in Figure 1. Membership functions for vata, pita and kapha have been constructed using the out puts of principal component analyzer.


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K1 = 42.550016 / (55.5856 + 107.53602 + 42.550016) = 20.68833 For example, Vata constitution Rule 1. If X  8.510004 § ¡ A1 ( X ) ¨ ¸ 51.06002 8.510004  Š š Then K1=20.68833 This computation will defuzzify the output of defuzzification process as 25.08375. Further K1 , K 2 , K 3 are defined as singleton fuzzy sets For, Vata constitution

Possible list of diseases per dominated constituent type using knowledge base.

Possible diseases can be occurred due to dominated constituent type. It is illustrated as shown in Figure 2, which has been implemented through FLEX expert system shell.

K1 = 42.550016 / (55.5856 + 107.53602 + 42.550016) = 20.68833 For Pitta constitution k2 = 107.53602 / (55.5856 + 107.53602 + 42.550016) = 27.02638 For Kapha constitution K3 = 55.5856 / (55.5856 + 107.53602 + 42.550016) = 52.2853 Figure 2: Analysis and Reasoning window Z

in Ayurvedic domain constructed using A1 ( X ) * K1  A2 ( X ) * K 3  . A3 ( X ) * K 2 *100 FLEX A1 ( X )  A2 ( X )  A3 ( X ) DISCUSSION AND CONCLUSION The statistical fuzzy inference system developed using this approach was tested with a group of 35 persons of Ayurvedic experts and Ayurvedic medical students. The evaluation was conducted to see far the answers generated by the system matches with the identification by Ayurvedic experts and the students. Further, the systemâ&#x20AC;&#x2122;s ability to fine-tune the answers was also tested. It is investigated that 77% of conclusions matches with the system and expert using descriptive statistics.

Z=out put =25.08375 So body constitution is concluded as value between vata and pitta. By clicking explanation button in Fig. 2 will show an output analysis and window (Figure 3) of completed evaluation. This has been implemented using FLEX Expert system shell. This evaluation is consisted with: - Vata, Kapha, Pita are in a combination (%). - Determination of dominated constituent type

The system facilitated to derive constituents types in percentages while Ayurvedic experts obtain only the constituent type. As recommendation given by the Ayurvedic experts, determining constituentâ&#x20AC;&#x2122;s types in


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Engineering Systems. Brighton, UK, pages 141-144.

percentages is an important criterion for prescribing drugs for a disease. Further, our system provide as an option to find out possible diseases. In generally, the system can be used as a self-assessment for finding constituents. According to Ayurvedic medicine, regiments can be done easily by knowing the constituent type. The human constituents can be computed as a combination. So it would help to find the effectiveness of minimum type in a diagnosis.

[6] Dubey, G.P, (1978) The Physiological concepts in Indian medicine, Science and Philosophy of Indian medicine, Shree Beldyanath Ayurved Bhawan Ltd. [7] Evangelos, P, 1998 Mastering Visual Basic 6, BPP Publications, New Delhi [8] Faith, M. & Michael, E. (2009) Fuzzy- expert system for cost benefit analysis of enterprise information. Systems: a framework. . International Journal on Computer Science and Engineering Vol.1 (3), 2009, pp.254-262.

In this research we linked BI dimension with BI knowledge aspect, which is a primary source of BI solution creation in any organization. We have devised a statistical Inference system for the BI system and made it more useful with this mapping of BI. Furthermore, the proposed system along with its components such as filtering commonsense knowledge, classification and reasoning are discussed, It is in exploratory phase of how these technologies contribute the BI system for increasing its performance. The ultimate goal is to develop a better business decision-making environment.

[9] Ghader, D. & VafaMaihami, I. (2012) Fuzzy Expert System for Marketing Decision Model using knowledge based systems. International Conference on Soft[ware and Computer Applications (ICSCA 2012) IPCSIT vol. 41, IACSIT Press, Singapore [10] George, J. (1997) Fuzzy sets and Fuzzy Logic, Prentice Hall of India.

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[11] George, J.K., & Yuan, B. 1995

Fuzzy sets and Fuzzy logic, prentice hall of India, pp. 280–300.

[2] Chatfied, C. (1996) Introduction to Multivariate Analysis, Chapman and Hall.

[12] Grany, R. (1996) Toward a knowledge-based theory of the firm, Strategic Management Journal, Vol. 17 (Winter Special Issue), 109-122.

[3] Coppin, G. & Skrzyniarz, A. (2003) Humancentered processes  Individual and distributed decision support. IEEE Intelligent systems, pages 2733.

[13] Hayashi, Y. et al (1988) Medical diagnosis using simplified multidimensional fuzzy reasoning. In: Proceedings of IEEE 1988 International Conference on Systems, Man and Cybernetics, Beijing, China, 1988. p. 58– 62.

[4] Dave, W. (2000) Flex reference guide, LPA, U.K [5] Dzbor, C. (2000) Explication of Design Requirements through Reflection on Solutions. In Proc. of 4th IEEE Conference on Knowledge-based Intelligent

[14] Ilcckcrman, D.G. (1975) Motivating managers to make investment decisions. Journal of Financial Economics 2, no. 3, 273-292.


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[15] Jonson, L. (1988) Expert system Architectures, Kopan Page Limited.

[24] Mendis, D.S.K., Karunananda, A.S., & Samaratunga, U. (2003) Tacit knowledge modeling. Sri Lanka Association for Artificial Intelligence Annual Session and Annual General Meeting, Colombo.

[16] Karl, B. et al (2004) Knowledge acquisition in the fuzzy knowledge representation framework of a medical consultation system. International Journal of Artificial Intelligence in medicine, pages 126.

[25] Mendis, D. S. K., Karunananda A.S, Samarathunga, U., & Ratnayaka, U. (2007) Tacit Knowledge modeling in Intelligent Hybrid systems. In proceeding of Second International Conference on Industrial and Information Systems (ICIIS 2007), Peradeniya, 9-11 Aug. 2007 Page(s): 279 – 284

[17] Karunananda, A.S. (2000) How To Do Research, Author Publication [18] Kolousek, G. (1997) The system architecture of an integrated medical consultation system and its implementation based on fuzzy technology. Doctoral thesis, Technical University of Vienna, Austria.

[26] Mendis, D. S. K., Karunananda A.S., & Samarathunga U, (2008) A fuzzy logic system for widening scope of principal Component Analysis. 2008 IEEE Region 10 Colloquium and the Third International Conference on Industrial and Information Systems, Kharagpur, INDIA December 8 -10, 2008, Accepted.

[19] Matei. C, 1997 SPSS for windows, release 8.0.0, DSV KTHe SU, Sweden. [20] Mendis, D. S. K., Karunananda,,A. S., & Samarathunga, U. (2004) An Expert system for analysing Aurvedic human constituents. Shamisha – Journal of Aurveda

[27] Mendis, D. S. K., Karunananda A.S., Samarathunga, U., & Ratnayake, U. (2007) An approach to the development of commonsense knowledge modeling systems for disaster management. Artificial Intelligence Review, Vol 28, pp.179-196.

[21] Mendis, D. S. K., Karunananda, A. S., & Samarathunga U. (2004) Multi-Techniques Integrated tacit knowledge modelling system. International Journal of Information Technology, Vol 9, pp 265-271.

[28] Meyer, A. & Zimmermann, H.(2011) Applications of Fuzzy Technology in Business Intelligence. Int. J. of Computers, Communications & Control, Vol. VI (2011), No. 3 (September), pp. 428441.

[22] Mendis, D. S. K., Karunananda, A.S., & Samarathunga U. (2003) Framework for modelling of tacit knowledge – Case study using Ayurvedic domain. In proceeding of the International Information Technology Conference,, pp 76-82, Colombo, Sri Lanka.

[29] Morrison, D.F. (1990) Multivariate Statistical Methods, Mc GrawHill, Inc. PP. 312 – 357. [30] Olszak, C. & Ziemba, E. (2003) Business Intelligence as a key to Management of an Enterprise. Proceedings of Information Science and IT Education Conference, pp. 855-863.

[23] Mendis, D.S.K., Karunananda, A.S., & Samaratunga. U. (2003) Reasoning with Uncertainty. Health Informatics Conference, Colombo.


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[31] Olszak, C. & Ziemba, E. (2007) Approach to Building and Implementing Business Intelligence Systems. Interdisciplinary Journal of Information, Knowledge and Management, Vol. 2, pp. 135-148.

[42] Yukun, C. & Yunfeng, L. (2007) Experimental results show the system is feasible and elective. Intelligent fuzzybased recommendation system for consumer electronic products Expert Systems with Applications 33 (2007) 230– 240.

[32] Peter, J. 1995 Introduction to expert systems, Pearson education Asia, and pp. 182–199.

[43] Zadeh, L. A. 1988 Fuzzy Logic, Computer IEEE, pp. 83-93.

[33] Rajeev, K. (1995) Integrating knowledge bases in expert system shells an open system approach. International Journal of computer application in technology, pages 7889.

[44] Zeng, L. et al, (2006) Techniques, Process and Enterprise Solutions of Business Intelligence. IEEE Conference on System, Man, and Cybernetics, pp. 47224726.

[34] Richards, D. and Bush P., (2003) Measuring, Formalizing and Modeling Tacit Knowledge. IEEE/Web Intelligence Conference, Bejing.

[45] Zimmerman, H.J. 1985 Fuzzy set theory and its applications, Kluwer– Nijhoff, Boston. [46] Zhong, W. et al. (2008) A Framework of Applying BI to Social Security Systems. Proceeding of the International Conference on Intelligent Computation Technology and Automation, pp. 189-193.

[37] Ross, A. (I974) The economic theory of agency and the principle of similarity, in: M.D. Balch et al., eds., Essays on economic behavior under uncertainty (North-Holland, Amsterdam). [38] Saeed,R. etal., (2012) Evaluation model of business intelligence for enterprise systems using fuzzy TOPSIS. Expert Systems with Applications, Volume 39, Issue 3, 15 February 2012, Pages 3764– 3771. [39] Simmers, C. (2004) A Stakeholder Model of Business Intelligence. Proceedings of the 37th Hawaii International Conference on System Sciences, pp. 1-9. [40] Tripathi, S.N. (1978) Clinical Diagnosis. Science and Philosophy of Indian medicine. [41] Wilson, R. (1968) On the theory of syndicates, Economctrica 36, Jan,. II9 132.


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CORPORATE FINANCIAL DISTRESS PREDICTION IN SRI LANKA: AN APPLICATION OF ALTMAN’S MODELS Chandana Gunathilaka Department of Finance, University of Sri Jayewardenepura, Sri Lanka ABSTRACT This paper discusses the discriminating power of a prominent credit scoring technique, Altman’s Z-Score model, in predicting corporate financial distress in Sri Lanka. The study examines a sample of 67 firms including 16 exposed-to-distress firms, in Colombo Stock Exchange over the period from 2008 to 2012. It analyses company financial information using Altman’s Z Scores, Independent Sample t tests and Multiple Discriminant Analysis. The results are consistent with prior findings in Sri Lanka, that Altman’s Z model shows a higher degree of discriminant power in identifying financially distressed firms, at least one year prior to distress. The market value and book value contributes similarly between Altman’s Z models. The study indicates the efficiency of the Z models in distress predictions and the level of care required in solvency based decisions. Keywords: Corporate, Distress, Altman, Sri Lanka. the solvency test of the Company Act of Sri Lanka has a similar motive.

INTRODUCTION Understanding the solvency status and prediction has also critical influence on investors’ decision-making process. The firms that have poorly performed and exposed to financial distress justifies a ‘Distress Risk Premium’ in the hand of the investor. Hence, the ability of prediction is priced in the current context where announcements of corporate collapses, takeovers and liquidations are not rare even though the companies are being watched by legislation.

Bankruptcy prediction has been of interest for researchers over decades. Developing parametric models for financial distress prediction has been the focus of early studies including that of Beaver (1966) and Altman (1968). These studies showed that the financially distressed firms have some accounting characteristics different than those of other firms. Thus carefully selected financial variables in the form of ratios have the ability of prediction of distress.

The significance of corporate default prediction is felt in the present context as sudden corporate collapses like General Motors-US, Satyam India, and Golden Key Sri Lanka are frequently reported around the globe. Controls have been enforced by legislations for the protection of creditors, shareholders and other stakeholders;

The theorists seem to downgrade the arbitrary decisions based on ratio analysis and comparisons (Altman, 2002) but rely on sophisticated models. However, ratio comparisons are widely used by practitioners as rule of thumb, perhaps due to its ease applications. The Z score models of Altman (1968, 1993) bridge this gap fairly. However,


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some of the recent studies have focused on different methodologies to lower the error in predictions. Chi Xie, Luo and Yu (2010) develop a Support Vector Machine (SVM) model and find that SVM model outperforms the Multi Discriminant Analysis (MDA) used in early studies. Ying Sai, Zhong and Lehong (2011) apply genetic algorithm based optimization, executing on the neural networks, and show a better predictive power relative to Z models.

predictive power of Z-Scores in Sri Lanka. RELATED LITERATURE The efficiency of a distress prediction model is also decided on possibility of early predictions, early prediction has more value than later. Nikolaos and Christopoulos (2001) investigate whether Z-score models can predict bankruptcies for a period up to three years earlier, and show that Altman model performs well in predicting failures. Some models perform in particular business sectors than others. According to John and Robert (2001) overall accuracy of Altman Z model is significantly higher in case of manufacturing firms. Multivariate Discriminant Analysis (MDA) has been widely used to predict financial distress of firms. Xie, Luo & Yu (2011) define predicted factors and sets the base to examine the validity of multivariate models. Some studies use large number of financial ratios to maintain the accuracy, for instance, Lam (2004) uses sixteen ratios1 to predict bankruptcy. However, some of these ratios might display comovement; for instance, Lam (2004) uses net income to sales and pre-tax net income to net sales. Hence, insertion of more variables or ratios may not correct the error. Platt and Platt (1991) explain that industryrelative ratios produce improved prediction accuracy relative to a model that included only unadjusted ratios. Altman and Sabato (2006) develop a model to be used in the context of

Despite these developments of prediction models, Altman’s Z values have been continuously adopted by practitioners and researchers. Dichev (1998) applies Altman Z values as a proxy for firm distress risk in his study on the size and book-to-market effects. Leary and Roberts (2005) use Altman’s Z values as proxies for adjustment costs in debt issues, in testing the role of adjustment costs in explaining changes in the capital structure. According to John and Robet (2001) Altman’s Z model developed in 1968 from the 1950s and 1960s data, remains a commonly used tool for evaluating the financial health of companies. Holder and Wilkins (2000) measures financial distress by Altman’s model. Moyer (2005) proposes that Altman’s Z model is one of the best statistically derived predictive model. Hence the reliability of the Altman’s Z Scores remains valid as the predictive power has been established in large number of markets across the globe. Furthermore, the simplicity of Z scores calculation would benefit the practitioners if the models show a remarkable predictive power in Sri Lanka. Thus, the present study aims achieving this objective; it examines the relative effectiveness of Z-score models of Altman (1968, 1993) testing the discriminating and


i.e. 1.current ratio, sales to total assets, income to sales, debt to total assets, sources of fund to total uses of fund, 6.research expense, 7. pre-tax income to net sales, 8.current assets to common shareholders’ equity, 9.common shares traded, expenditure, 11.earnings per share (EPS), 12.dividend per share, 13.depreciation expense, deferral and investment credit, capitalization and 16.relative strength index


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small and medium sized enterprises, where the firms might have no market values as the shares are not traded.

independent sample t tests. The predictions of corporate bankruptcy using Z-Score models are being analyzed using Discriminant Analysis in order to identify classification errors. The Altman (1968, 1993) Zscore model may be used to predict the probability that a firm will go into bankruptcy within near future. The model in its original version is:

Samarakoon and Hasan (2003) find that Altman’s z-score is an appropriate distress prediction model in Sri Lanka. They conclude that the model has a remarkable degree of accuracy in predicting distress using financial ratios. Sectoral studies in Sri Lanka also confirm that Z models are appropriate. Balasundaram (2009) applies Altman Z model in Sri Lanka and predicts corporate failures in manufacturing firms listed in Colombo Stock Exchange. Some studies find conditional accuracy in Z models, the conditions include consistence of financial reporting standards. Perhaps, the changes in financial reporting might have influenced the predictive ability over the time, for instance, Begley (1996) examines the Altman zmodel and concludes that the model performs better in 1980s than 1990s. This paper therefore, examines the accuracy of z-score models in a period where a new set of financial reporting standards are practiced in Sri Lanka. The results may give directions to application of the z models in decision making.

Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5 (Model 01) Where; X =

Working Capital/ Total Assets,

X =

Retained Earnings/ Total Assets,

X =

Earnings Before Interest and

X =

Taxes/ Total Assets, Market Value Equity/Total

1 2 3


Liabilities, X = Sales/ Total Assets 5

In the Altman’s Emerging Market Model, a constant term of 3.25 is added so as to standardize the scores with a score of zero (0) equated to a default (see. Altman, 2002) and this model is more appropriate for manufacturers than others. The model in its emerging market context drops X5 while Book Value of equity is inserted instead of Market Value in its original model. The model then becomes:

Wang and Campbell (2010) use data from Chinese public companies for the period 2000 to 2008, they find Altman’s model with higher prediction accuracy for predicting failed firms. METHODOLOGY The study applies the Z-Score models of Altman (1968, 1993) for estimations of the solvency/distress status of the firms. The estimated results are then used to identify the level of error in classification of firms in to groups; failed firms, safe firms and firms in the gray area. The significance of group differences are tested through

Z’’ = 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4* (Model 02) Where X is Book Value Equity/ Total 4*



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The table 1 describes the interpretation of estimated Z score of each firm.

and capital structure, the common variables included in the Z models are not appropriate for banks, finance companies and other similar firms.

Table 1: Interpretation of Z Scores. Model 01 Z Z < 1.81 1.81 < Z < 2.99

Model 02 Z’’ Z < 1.1 1.1 < Z < 2.6


RESULTS Descriptive statistics of the variables (i.e. the financial ratios of model 1 & 2) are presented in the table 2. The mean, deviations and error are grouped according to the classification of the model: failed, gray area and safe firms. On average, working capital, retained earnings and current earnings relative to total assets (X1, X2 & X3) are negative in failed firms, discriminating the other two groups. The safe firms’ market value of equity compared to total liabilities (X4) significantly higher, perhaps due to the market confidence. However, it fetches a higher deviation from the mean.

Failed firms Uncertain (Gray Area) 2.99 < Z 2.6 < Z Safe firms This table gives the classification guide based on the z score of individual firm.

Sample: John (2001) state that even though developed in 1968 using a small sample of firms (33 insolvent companies) from the 1950s and 1960s, Altman’s Z-score model remains a commonly used tool for evaluating the financial health of companies. The present study examines 67 public companies in Sri Lanka, those listed in Colombo Stock Exchange during the period 2008 to 2012 in order to identify financially distressed firms. Accordingly, the study identified 16 companies whose auditors have modified their report on going concern appropriateness based on continuous losses and liquidity conditions and the firms with negative net assets that indicate financial distress (see: table 6). The study also used a further sample of 51 public companies to pair with the distressed firms, considering the similarity in sector, size and operations. This exercise resulted in a total sample of 67 companies covering the sectors; manufacturing, food & beverage, hotels, service, diversified, health, chemical and property. The firm identity is not disclosed due to unavailability of permissions. The study has excluded companies that were listed for less than four years in view of several factors that affect to the performance of the firms other than operational activities. Banks and other financial institutions were not included in the sample due to comparability difficulties with differences in asset

[Table 02] The Z-score of the safe firms display a significant difference from other two groups. Hence it is interesting to observe the statistical significance between group means. The table 3 depicts the results of application of independent sample t tests in achieving this objective. The panel A gives the mean differences and their significance, the two samples being the failed firms and the firms in the gray area. Similarly, the panel B gives the mean differences between the safe firms and the firms in the gray area. The variables X1, X2 and X3 display significant mean differences at 1% level while X5 at 5% level. Market value (X4) do not show a significant difference as it has a higher deviation from the mean. [Table 03] The final outcome in this test is that the Z-score is highly significant in


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discriminating the failed firms from the gray area firms, and obviously from safe firms then. Thus, it is a stimulating fact to know the level of error in application of the model, which draws the attention to table 4 which describes the results of Multiple Discriminant Analysis (MDA) based on cut off suggested by the model 01. The table 4 indicates the classification errors, for the purpose of MDA, the true groups are the identified failed firms in the sample (based on the auditors’ observations, continuous losses and liquidity conditions). Accordingly, the Z scores predict the ‘Gray firms’ with no error; the possibility that a firm is classified as failed when it is actually in ‘not-failed’ group is zero. Similarly, the possibility of classifying a failed firm as notfailed is zero. Eight not-failed firms (n=8) have been misclassified as failed. The study assumes that the clear opinions of auditors do reflect the true going concern status of the firm, and therefore the errors are true errors of the model; this might be affected by manipulations in financial reporting where the possibility is that the failed firms are creatively reported as safe firms. The analysis suggests that the Type-I error is zero; the model never predicts a failed firm as a ‘safe’. The Type I error has a higher cost relative to Type II, as it involves the costs of decisions assuming a firm is financially good while it is a bankrupt company. Type II error has relatively low cost, where a firm is classified as failed when the firm is actually is not failed. The MDA results show a type II error of about 11% of the sample.

Table 2 Summary of Classifications: Discriminant Analysis Predicted group True Group Failed Grey Safe Failed 16 0 8 Grey 0 12 0 Safe 0 0 31 Total N 16 12 39 N Correct 16 12 31 Proportion 100% 100% 79% Type I Error 0 0 Type II Error 0 8 N = 67 N Correct =59 Proportion Correct = 88% The table shows the results of DA of predictions by Model 1. The true group is financially unsound firms as viewed by auditors.

The MDA results were presented here based on the suggested cut offs of the model 1, however, a re-estimated MDA analysis using the current sample and classifying the firms in gray area and safe firms in to one group, produced an error of 8% only. This suggests that a different Linear Discriminant Function for Groups would be more efficient (A direction) in Sri Lankan market. Hence the scores at the lower boundary would be market specific. The above MDA also stimulate the interest of analyzing the parametric statistics of groups, presented in table 5. [Table 05] The table 5 gives the mean differences between the two groups; ‘identified failed firms’ (i.e. the firms identified as financially distressed by the auditors) and other firms in the sample. The test results show that Z-Scores of the two groups are significantly different (1% level). This suggests that the Z-Score strongly discriminates the two groups; failed and not-failed. Z models used in this study avoid the drawbacks of notional fair value adjustments followed by firms, by using data at


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time t-1 for predictions. Further, the Z models use total assets which include revaluation adjustments, thereby it reduces Z value; it has a propensity to classify the solvent firms as insolvents. Hence the tendency is that Z model predict more prudently in such revaluation adjustments.

considered to be costly, the employment of Z model in Sri Lanka would be more prudent. The ability of generating earnings is more weighted in (3.3 times in Model 1 and 6.7 times in Model 2) Z models. Hence, insolvency under the models considers trading solvency than balance sheet solvency. These observations suggest that the employment of Z models might produce better inputs for decisions. However, an estimation of the model with an objective of redefining the cut off levels that match the small market like Sri Lanka is still open for discussion. Further, timevaried and sector sensitive re-estimated models may produce different results. Further, testing non-proportionate samples of failed and safe firms could lead to under (over) estimated type I (II) error.

The model estimations are given in table 6. The firms have been ranked first according to the auditors view, the failed firms. The Z-Scores consider the financials at time t-1. Hence it conveys the ability of the Z-Score models in predicting at least a year ahead. Altman’s both models display a consistency in classifying 26 firms as failed. There are 8 cases where the two Altman’s Z & Z’ models results are inconsistent. Z-Score classify 34 firms as either failed or doubtful. CONCLUDING REMARKS The study examined the appropriateness of Z-Score models in assessing corporate distress using the financials published by the firms. These models have been found with higher accuracy in number of markets including Chinese, Greece, US, Canadian, Norwegian and Sri Lankan. Ability of distress prediction using Altman’s Z score has also been found to produce lower results in financial crises state in the economy.

REFERENCES [1]. Altman, E I (1968), Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy, Journal of Finance, Vol.23, pp. 589609. [2]. Altman, E I (1982), Accounting Implications of Failure Prediction Models. Journal of Accounting, Auditing, and Finance, 4-31. [3]. Altman, E I (1993), Corporate Financial Distress and Bankruptcy, 2nd Edition, John Wiley & Sons, New York.

The present study tested a sample over the period 2008 to 2012, consistent with prior findings in Sri Lanka (see: Samarakoon, 2003) the study finds that the Altman’s Z and Z’’ models show a higher degree of accuracy in predicting the financial distress in Sri Lankan context. In particular, it has the potentiality of minimizing the error of classifying a firm as safe when the firm is not safe (i.e. Type I error). If the type I error is

[4]. Altman, E I (2002), Defaults and Returns in the High Yield Bond Market, Journal of Applied Finance, Spring-Summer, pp 98-112. [5]. Altman, E I and Sabato, G (2006), Modeling credit risk for SMEs: Evidence from the US market, Abacus, 19-6, 716-723.


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[6]. Balasundaram, N (2009), An Investigation of Financial Soundness of Listed Manufacturing Companies in Sri Lanka: an Application of Altman’s Model, Vol. LXI: 4.

Fundamental and Technical Analysis, Decision Support Systems, Vol. 37:4, pp. 567–581. [15]. Leary, M and Roberts M (2005), Do Firms Rebalance Their Capital Structures? The Journal of Finance 60:6, 2575-2619.

[7]. Beaver, W (1966), Financial Ratios as Predictors of Failures, Journal of Accounting Research, vol.4:1, pp.71-127. [8]. Begley, J; Ming (1996), Bankruptcy errors in the 1980s: analysis of Altman’s models. 267– 84.

[16]. Moyer, G (2005), Distressed debt analysis: Strategies for speculative investors, Fort Lauderdale, Ross Publishing.

J and Watts S classification an empirical and Ohlson’s

[17]. Platt, H D and Platt M B (1991), A note on the use of industryrelative ratios in bankruptcy prediction. Journal of Banking Finance,15, 1183– 94.

[9]. Dichev, I D (1998), Is the Risk of Bankruptcy a Systematic Risk? The Journal of Finance 53 (3): 1131- 1147.

[18]. Samarakoon, L P and Hasan T (2003), Altman’s Z-Score Models of Predicting Corporate Distress: Evidence from the Emerging Sri Lankan Stock Market, The Journal of the Academy of Finance, 1, pp. 119125.

[10]. Hansen, J V and Messier (1991), Artificial neural networks: foundations and application to a decision problem. Expert Systems with Applications, Vol. 3: 135-141. [11]. Hill, N T; Perry and Andes (1996), Evaluating firms in financial distress: an event history analysis. Journal of Applied Business Research (Summer): 60-71.

[19]. Springate, G L (1978), Predicting the Possibility of Failure in a Canadian Firms. [20]. Wang, Y and Campbell, M (2010) Business failure prediction for publicly listed companies in China, Journal of Business and Management, 16:1.

[12]. Holder, W; Lori M and Wilkins M (2000), The Incremental Information Content of SAS No. 59 Going-Concern Opinions. Journal of Accounting Research 38 (1): 209-219.

[21]. Xie C, Luo C and Yu X (2011), Financial distress prediction based on SVM and MDA methods: the case of Chinese listed companies, Qual Quant, 45, 671–686.

[13]. John, S G and Robert W (2001), Tests of the generalizability of Altman’s bankruptcy prediction model, Journal of Business Research, 54, pp53– 61. [14]. Lam, M (2004), Neural Network Techniques for Financial Performance Prediction: Integrating


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TABLES Table 3 : Descriptive statistics

Variable X1



Mean Std.


23 -0.0625

1.81<Z< 2.99 13 X2


Z Score











23 -0.4544












23 -0.0366

1.81< Z< 2.99 13 X4

Std. Error Mean


1.81<Z< 2.99 13 X3

















1.81<Z< 2.99 13





31 18.3186








1.81<Z< 2.99 13














1.81<Z< 2.99 13




31 12.2173




The table shows the statistics of grouped variables in Z-Score model 1. Table 4: Independent Sample t test results


Mean Difference


Sig. (2-tailed)

Panel A: Failed group & Grey Area group

Sample 1: Z<1.81 Sample 2: 1.81<Z<2.99


-0.0909 -1.295



-0.6987 -4.452 0.000*


-0.1479 -6.305 0.000*


-0.0622 -0.194


-0.3705 -2.274 0.029**

Z Score

-2.0073 -6.493 0.000*


Panel B: Grey Area group & Safe firms group X1 Sample1: 1.81<Z<2.99 Sample2: 2.99< Z

-0.2162 -3.798 0.000*






-0.0684 -1.432



-17.1434 -1.074



-0.2526 -1.016


Z Score

-9.7952 -1.151


The table describes the significance of the mean differences of variables in groups as used in model 01. Symbols * & ** indicates significance at 1% and 5% respectively. Data are being presented after considering Leveneâ&#x20AC;&#x2122;s F-statistic, and its significance for equality of variances.


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Table 5: Independent sample t tests. Mean T Diff.


Altmanâ&#x20AC;&#x2122;s Z-Score 7.85 4.22 0.000 (Model 1)

95% Confidence Interval of the Difference Lower




The table shows the mean differences and significance of the failed and safe firms.

Table 6: Results of model estimations and the actual status of the firms



Z'â&#x20AC;&#x2122; Score [Fin Info. (t-1)]

Z Score [Fin Info (t-1)]





Continuous losses, and Negative reserves.






3 4 5 6 7 8

Manufac Health Hotel Diversif Manufac Manufac

1.37** 1.74 ** (3.72)* (0.82)* (3.95)* (4.00)*

1.73* 1.84** (0.84)* 0.27 * (0.72)* 0.95*

Modified Continuous Losses Modified Modified Modified Modified

9 10 11 12

Property Property Hotel Hotel

(60.55)* (45.92)* (7.69)* (0.99)*

(11.23)* (22.01)* (2.36)* 0.69 *

13 14 15 16 17

Manufac Property Manufac Manufac Health

(3.43)* 1.01 * 2.09 ** 1.03 * 6.4

(0.17)* 1.24* 1.25 * 1.54 * 7.54

Modified Modified Modified Trading suspended: Ref. Underutilized Assets Act Modified Modified Modified Declared Liquidation -

18 19 20 21 22 23

Manufac Food/Be Manufac Hotel Manufac Food/Be

7.52 1.07 * 0.75 * 6.24 (2.35)* 5.42

9.2 1.94 ** 1.04 * 5.63 1.68 * 5.58


24 25 26 27 28 29

Manufac Food/Be Manufac Manufac Manufac Manufac

0.71 * 4.42 4.83 2.28 ** 1.09 * 71.23

2.71 ** 3.2 3.43 1.70 * 1.33 * 28.57








Actual Status: Going Concern Ability (time-t)

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31 32 33

Manufac Food/Be Manufac

3.45 2.21 ** 10.31

7.17 1.60 * 5.8


34 35 36 37 38 39

Manufac Manufac Manufac Manufac Hotel Manufac

2.77 7.3 (3.53)* 6.78 26.96 10.29

6.35 3.63 0.04 * 2.99 16.14 5.36


40 41 42 43 44 45

Manufac Manufac Manufac Hotel Manufac Health

8.53 (0.57)* 6.05 3.09 4.6 6.49

5.41 1.27 * 3.56 4.26 3.46 3.75


46 47 48 49 50 51

Chemical Cemical Hotel Manufac Hotel health

6.85 2.57 ** 2.98 7.83 2.20 ** 6.27

3.71 2.19** 2.02 ** 7.17 2.34 ** 3.27


52 53 54 55 56 57

Hotel Manufac Manufac Manufac Diversified Manufac

6.96 7.95 2.11 ** 3.78 5.22 2.29 **

13.85 4.19 2.49 ** 3.05 3.68 1.84 **


58 59 60 61 62 63

Hotels Food/Be Trading Manufac Hotels Food/Be

4.87 (0.52)* 2.6 1.10* 16.87 4.82

3.9 2.05 ** 2.83 ** 1.62 * 3.32 6.15


64 65 66 67

Diversified Property Diversified Manufac

4.31 2.50 ** 1.13 * 2.042**

3.54 2.10 ** 2.39 ** 2.34 **


The table shows Z, Z’’ Scores of sample firms, and the actual status of identified firms. ‘Modified’ represents the firms whose auditors have modified their opinion on going concern ability based on the liquidity and leverage conditions. * represent the firms classified as ‘failed firms’ according to the classification criteria of model and ** represent the firms in the ‘gray area’.


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AN EMPIRICAL INVESTIGATION OF WAGNER’S LAW IN SRI LANKA Pelawaththage N.K.1 and Cooray T.M.J.A.2 Department of Mathematics, Faculty of Engineering, University of Moratuwa 1, ABSTRACT The relationship between economic growth and public expenditure has been debated in the literature of Macro Economics and Public Finance over the decades. When a country achieves a higher economic growth through the liberalization, modernization of economic policies it is crucial to understand the behavior of the relevant government activities. Therefore, the relationship between economic growth and public expenditure is analyzed through this study with respect to the Wagner’s Law (1883) using annual real and nominal terms of public expenditure and GDP (Gross Domestic Product) data from the period of 1960 – 2011 in the Sri Lankan context. Series are tested for co-integration using the Engle Granger method (EG Method). With the evidence of the long run relationship between GDP and various definitions of public expenditure, the Error Correction Method (ECM) is employed in order to check for short run dynamics of the relationship. Furthermore, Granger causality test is applied to check for the direction of causal relationship. The Granger causality test results of real terms of series show that there is no existence of Wagner’s Law becoming consistent with earlier findings while results of nominal terms of series provide that out of six versions of Wagner’s law four of them are showing a causal relationship from GDP to public expenditure which is an evidence of existence of Wagner’s Law in Sri Lanka. The evidence of the study with the aggregate data in real terms from the period 1960 -2011 is proved that, although country leads to economic growth, government activities are not stimulated by the economic growth in Sri Lanka. Further, there is no validity of Wagner’s Law which is positive causal relationship from GDP to public expenditure. However, the evidence of the study with the usage of nominal terms of series shows a positive causal relationship from GDP to public expenditure for the period of 1960 – 2011 showing that the scope of government activities are stimulated by economic growth of country. Keywords: GDP, ECM, Wagner’s law scope of government to increase with higher levels of economic development. As suggested by Wagner, the role of government in the economy tends to grow as countries become richer. The need for regulatory and protective functions and the demand of some public goods such as education and cultural services are high with economic development.

INTRODUCTION Economic growth and scope of government are crucial factors of a country in achieving development. The relationship between country’s economic growth and public expenditure is analyzed over the decades for the policy implications. As Wagner (1883) shows that there is a long run propensity for the


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and Ratio of Public Expenditure to GDP are the series used in the study respectively. Nominal terms of series are considered as national accounts calculations with market prices while those series are deflated by GDP deflator (1996=100) are considered as real terms of series.

When a country leads to economic growth, the expenditure on social and economic activities increases which in turn increases public expenditure. The validity of the law has been assessed empirically for a large number of developing and developed countries using both time series and cross sectional data sets with real and nominal terms of data. The studies cover countryspecific analyses (Nurudeen and Usman (2010), Richter (2010), Sideris(2007) ) as well as analyses of groups of countries (Husnain(2010), Magazzino(2010), Lamartina and Zaghini(2008)).

Using the statistics on real and nominal GDP an implicit index of the price level can be calculated which is known as GDP deflator. For that calculation the following formula is used. Nominal GDP GDP deflator x100 (1) Real GDP

However, studies related to the Wagner’s Law in Sri Lankan economy are very few (Dilrukshini(2002), Kesavarajah (2012)).

The GDP deflator can be used as a conversion factor that transforms real GDP into nominal GDP and vice versa. According to the national accounts standards of Sri Lanka, the nominal GDP of 1996 is equal to the real GDP implying that the GDP deflator in 1996 is 100.

The applicability of Wagner’s Law is checked in this study with the use of annual aggregate GDP and public expenditure data with the use of nominal as well as real terms of each series from the period of 1960 – 2011. Moreover, during this period Sri Lankan economy faced increased economic growth, expanded public activities, and included the phase of industrialization and urbanization of the economy and the increased population, which are the assumptions of original Wagnerian hypothesis. With the use of modern econometric techniques like co-integration technique, Error correction Mechanism and Granger causality test the positive causal relationship from GDP to Public Expenditure is investigated in this study. Real and Nominal GDP, Percapita GDP and Real and Nominal Expenditure EXP, PEXP, CEXP, and GDPEXP the Total Public Expenditure, Percapita Public Expenditure, Consumption Expenditure

Objectives of the Research The main objective of the study is to check the applicability of positive causal relationship from GDP to public expenditure in Sri Lanka for the period of 1960 – 2011. To investigate the long run equilibrium relationship between GDP and public expenditure. To determine the short run dynamics of the relationship. To determine the direction of causality between GDP and public expenditure.


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seen in the literature. The most important six versions of Wagner’s Law have been presented in the Table 1.These different interpretations include different measures of spending (Real and Nominal Government Spending, Real and Nominal Government Consumption Spending or Government Spending Per Capita) or national income.

Six Alternative Versions of Wagner’s Law According to various researchers, Kesavarajah (2012), Wagner did not present any mathematical form in order to examine his hypothesis and he also was not explicit in the formulation of his hypothesis. Therefore, there are several versions that tested Wagner’s Law can be

Version 1 2 3 4 5 6

. Table: 1 Six Alternative versions of Wagner’s Law Author Function Peacok and Wiseman (1967) LEXP = f (LGDP) Gupta (1967 L (PEXP) = f (L (PGDP Goff man (1968) L (EXP) = f (L (PGDP) Pryol (1968) Version L (CEXP) = f (LGDP) Musgrave (1969) L (EXP/GDP) = f (L (PGDP) Mann (1967) L (EXP/GDP) = f (L (GDP

public consumption and Gross National product (GNP).

Evidence from Sri Lanka. Checking the validity of the Wagner’s law by using modern econometric methods is very rare in the Sri Lankan context. Dilrukshini (2002) and Kesavarajah (2012) are the studies can be seen in the literature for this time period.

Definitions of Variables and Data Sources Time series data for the period of 1960 to 2011 are taken from various issues of annual reports of Central Bank of Sri Lanka. First, all the variables are taken in the nominal form as published in the annual reports itself. In order to make variables to real, all the variables are deflated with respect to relevant years by GDP Deflator which is (1996 = 100).The level form of all variables are described in detail as below. All the variables are in natural log forms.

Dilrukshini (2002) tests the relationship between public expenditure and economic growth in Sri Lanka during 1952-2002. The study tests the validity of Wagner’s Law that there is a long-run relationship between public expenditure and national income. Unit root test, Johansen test of cointegration and Granger causality test are used in analyzing data of the study. The study finds no empirical support either for the Wagner’s Law or the Keynesian hypothesis, in the case of Sri Lanka. The six versions of the Wagner’s law are interpreted in the study using the aggregate data which are the total public expenditure,

Variables are taken in nominal terms as well as real terms. EXP: Total Government Expenditure which consists of Government Current


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Expenditure and Capital and net Lending Expenditure. LEXP = ln(EXP) further ln(EXP) = Loge (EXP)

economy came into practice in 1978, put one for 1978. Cointegration Test Yt and Xt are co-integrated if there is some parameter, beta, such that this linear combination y t  Ex t is stationary. This

PEXP: Government Per capita Expenditure. This is obtained by dividing total public expenditure from the population of relevant years. LPEXP = ln(PEXP) further ln(PEXP) = Loge (PEXP)

bivariate co integration approach is known as the Engle-Granger method. It assumes that one variable is endogenous and the other is exogenous.

CEXP: Government Consumption Expenditure (Current Expenditure) which consists of thirteen components1 of final consumption expenditure of the Economy. LCEXP = ln(CEXP) further ln(CEXP) = Loge (CEXP)

The Engle-Grangerâ&#x20AC;&#x2122;s (1987) co-integration test is employed to determine if the variables in the system are co-integrated. The Engle-Granger procedure needs an estimation of the co-integrating regression equation. Thus, if there are n series, Yt1 . . . Ytn, the co-integrating regression is given by: Yt1 = β0 Yt + et (2)

EXP/GDP: Share of Government Expenditure to GDP where the total public expenditure is divided by GDP. L (EXP/GDP) = ln(EXP/GDP) further ln(EXP/GDP) = Loge (EXP/GDP) GDP: Gross Domestic Product. LGDP = ln(GDP) further ln(GDP) = Loge (GDP) PGDP: Per Capita Gross Domestic Product where the GDP of the economy is divided by the population. LPGDP = ln(PGDP) further ln(PGDP) = Loge (PGDP) D01: A dummy variable called D01 is introduced to capture policy change during the study period. Sri Lankan economy became an open economy in 1977. So, the dummy variable is designed by adding zero for every year except 1978.Since, real change due to liberalization of the

Residuals from the regression are tested for the presence of a unit root using the ADF test. If the residuals, et from the regression is stationary (or I(0)), then variables are said to be co-integrated and hence interrelated with each other in the long-run. Error Correction Model Engle and Granger (1987) provide a more comprehensive procedure known as errorcorrection model (ECM) for co integration. The information from the cointegrating regression in the form of residuals term lagged once is incorporated in this model. The variables after made stationary by differencing them are included to the model. The ECM is formulated to test causality as follow:


1. General Public Services,2.Defence, 3.Public Affairs & Safety Affairs, 4.Education, 5.Health, 6.Social Security & welfare Affairs & Services, 7.Housing and Community Amenity Affairs and Services, 8.Recreational, Cultural and Religious Affairs & Services, 9.Fuel and Energy Affairs and Services, 10.Agriculture, Forestry, Fishing and Hunting Affairs and Services, 11.Mining and Mineral Resources Affairs and Services, 12.Transportation and Communication Affairs and Services, 12.1 Less: Public Trading Enterprises, 13.Other Economic Affairs and Services.


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∆Xt = a0 + a1i ∆Xt-i + a2i∆Yt-j – a3 ECTt-1 + et (3) ∆Yt = b0+ b1i ∆Xt-i+ b2i ∆Yt-j – b3 ECTt-1 + μt (4)

structural sense. It starts with the premise that ‘the future cannot cause the past’; if event A occurs after event B, then A cannot cause B (Granger, 1969). To explain the Granger causality test, main variables used in the study are used. Two main questions can be raised.

Where, ECTt-1 is the error-correction term lagged one period. The ∆Xt and ∆Yt are differenced time-series of X and Y respectively. The white noise error terms are et and μt in the models. The independent variable is said to cause the dependent variable if the error term (ECTt1 ) is significant, or the coefficients

01. GDP causes EXP (GDP EXPt-i + GDP = U1t


02. EXP causes GDP (GDP EXP = GDPt-i +

of the lagged independent variable are jointly significant.


Y and X can wander away from its longrun (equilibrium) path in the short run, but will be pulled back to it by the ECM over the longer term.

EXP) GDPt-i +

EXP) EXPt-i +


Where, two disturbance terms U1t and U2t are uncorrelated. Equation (5) postulates that current GDP is related to past values of itself as well as that of EXP and (6) postulates a similar behavior of EXP. Four patterns of causality can be identified as:

Test for Causality Although regression analysis deals with the dependence of one variable on other variables it does not imply the causation. Therefore, determining the direction of causality in estimated variables is possible after introducing a framework by Granger (1969) in Economics. With the basic idea of “the past and present may cause the future but the future cannot cause the past “the framework is known as Granger Causality Test.

1. Unidirectional causality from EXP to GDP Unidirectional causality from EXP to GDP is indicated if the estimated coefficients on the lagged EXP coefficients in (5) are not statistically different from as a group ≠0) and the set of estimated ( coefficients on the GDP in (6) is not different from ( = 0)

Granger Causality Test The concept of Granger causality, put forward in Granger (1969), which can be used to draw inference on the dynamic impact of one variable on another. Such inference can be given an economically meaningful interpretation. Granger causality implies causality in the prediction (forecast) sense rather than in a

2. unidirectional causality from GDP to EXP Causality from GDP to EXP exists if the set of lagged GDP coefficients in (5) is not statistically different from zero ( i = 0) and the set of the lagged GDP


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coefficients in (6) is statistically different â&#x2030; 0). from zero (

with the figure 1, all the variables except RGDPEXP and GDPEXP show an upward trend while RGDPEXP and GDPEXP show no trend over the time period of the study. Since, RGDPEXP and GDPEXP are the ratio of total government expenditure to GDP in the real terms and nominal terms respectively; those two series have no clear trend over the time period of study. All the variables are not stationary at their levels because plots are not moved around the mean of the series. But, this is not a clear indication of unit root. Therefore, it is very important to check the variables for stationarity with regard of formal hypothesis testing.

1) Bidirectional causality Bilateral causality is suggested when the set of EXP and GDP coefficients are statistically different from zero in regressions. 2) Independence Independence is suggested when the sets of EXP and GDP coefficients are not statistically significant in both regressions.

ANALYSIS Stationarity Test In finding the long run cointegration relationship among the variables the first step is checking the variables for stationarity that determines the order of integration of series. One informal test and two formal tests are employed in this case. Under the informal test graphical analysis of series is presented. Before proceeding to any formal test looking at visual plots of series put the user in the easiness. That means the graphical representation gives more information of the data set which is more useful for further clarifications such as the detection of any data capturing errors, and structural breaks and gives an idea of the trends and stationarity of the data set. The preliminary examination of twelve variables used in the study is presented as below. As the first impression

The null hypothesis of both tests is unit root while the alternative is stationarity. Then, the rejection of null hypothesis indicates that the series is stationary. According to the results gained from both tests, none of the series is stationary at their levels as MacKinnon (1996) one sided P value indicates. When the tests are applied to the first difference of each series, they become stationary suggesting that series are integrated of order 1.That means series are I (1). The preliminary examination of first difference of series shows that clearly as depicted by figure 2 below.


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Figure 1: Visual plots of level forms of all twelve variables used in the study. Variables

ADF Test 1st Difference 1.028 -7.564*** 2.565 -7.151*** -0.92 -11.406*** -0.6 -11.459*** -0.573 -9.746*** -1.205 -11.233*** 2.283 -4.327*** 2.714 -4.275*** 0.462 -8.203*** 0.727 -8.044*** 0.462 -8.203*** -1.205 -11.233*** Level


PP Test Level

1st Difference

1.104 2.85 -1.141 -0.718 -0.986 -2.173 1.465 1.743 0.405 0.651 0.405 -2.173

-7.555*** -7.205*** -11.873*** -12.057*** -18.801*** -12.3*** -4.327*** -4.191*** -8.109*** -7.975*** -8.109*** -12.3****

Order of Integration I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1) I(1)

Table 2: Unit root test results (intercept only) Note: *** indicates rejection of null hypothesis at 1% level of significance. All variables are in natural log form. there is a long run relationship between national income and public expenditure in Sri Lanka while Dilrukshini(2002) shows with the Johansen method of estimation there is no long run relationship between the said variables.

Co integration Test In order to see the long run equilibrium in the national income and government expenditure the Engle Granger Test is employed. As Kesavarajah (2012) shows with the use of Engle Granger estimation,


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Table 2: EG Method Results (1st step) – Real Terms Se. Version Cointegration Equation no and EXP = 6.732 + 0.447 D01 + 0.692GDP 01. Peacok wiseman

















Adj. R2 0.99

DW stat 1.5






















PEXP = 2.714 + 0.422 D01 + 0.588 PGDP (0.000) (0.000) (0.000) EXP = 15. 986 + 0.527 D01 + 0.899 PGDP (0.000) (0.000) (0.000) CEXP = 0.956 + 0.0877 D01 + 0.902 GDP ( 0.227) (0.07) (0.000) GDPEXP = 2.714 + 0.421 D01 + - 0.412 PGDP (0.000) (0.000) (0.000) GDPEXP = 6.732 + 0.447 D01 + - 0.308 GDP (0.000) (0.000) (0.000)

Note: Respective probability values are presented in the parentheses. Table.3: Co-integration Results (1st step) – Nominal Terms

Se. no 01.

Version Peacok and wiseman













EXP = 1.317+ 0.476 D01 + 0.888GDP (0.000) (0.000) (0.000)


PEXP = -0.436 + 0.47D01 + 0.876PGDP (0.000) (0.000) (0.000) EXP = 15.225 + 0.545 D01 + 0.968 PGDP (0.000) (0.000) (0.000) CEXP = - 0.825 + 0.087 D01 + 0.967 GDP ( 0.001) (0.086) (0.000) GDPEXP = - 0436+ 0.47 D01 - 0.123PGDP (0.000) (0.000) (0.000) GDPEXP = 1.316+ 0.476D01 - 1.112 GDP (0.000) (0.000) (0.000)

Cointegration Equation


Adj. R2 0.99

DW stat 1.77





















Note: Respective probability values are presented in the parentheses. Table 4: Residual test of EG test (2nd step) Se. Version ADF Test Statistic

Real Terms

Nominal Terms

Order of Integration

-5.996*** -6.518*** I(0) 01. Peacok and wiseman -6.531*** -6.739*** I(0) 02. Gupta -4.719*** -4.698*** I(0) 03. Goffman -3.395*** -3.291*** I(0) 04. Pryol -6.531*** -6.739*** I(0) 05. Musgrave Mann -5.996*** -6.518*** I(0) 06. Note: *** indicates rejection of null hypothesis at 5% level of significance.


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Results of table 4 suggest that the nullhypothesis of no cointegration between various definitions of public Expenditure and GDP can be rejected, since all the models show the stationary residuals of the model. According to Gujarati (2003) if the residuals of OLS regression estimation are stationary, the equation is not a spurious regression. In considering the MacKinnon (1996) one sided critical value that is 2.921 for the 5% significant level is less than the all the ADF test statistics of each

model. D01 is presented to each model to capture the policy change during the regime of the study. Error Correction Model Results Since, there is evidence of cointegration among the variables, to see the short run dynamics an error correction procedure can be applied. Then, the results of the error correction procedure are presented in the table 5 below.

Table 5 Error Correction Results â&#x20AC;&#x201C; Real terms Se. Version Intercept Short run ECM N R2 Adj. DW Income Term R2 stat elasticity Peacok and -0.009 1.09 -0.81*** 51 0.29 0.24 2.1 01. wiseman (0.7777) (0.0679) (0.0007) Gupta -0.004 0.973 -0.989*** 51 0.33 0.29 2 (0.8915) (0.1051) (0.0001) 02. 0.008 1.159 -0.456*** 51 0.16 0.11 2.4 03. Goffman (0.7851) (0.0868) (0.0202) 0.029 0.1888 -0.467*** 51 0.23 0.18 2.1 04. pryol (0.3202) (0.6948) (0.0008) -0.003 -0.027 -0.989*** 51 0.29 0.24 2 05. Musgrave (0.8915) (0.9636) (0.0001) -0.009 0.089 -0.81*** 51 0.22 0.17 2 06. Mann (0.7777) (0.8785) (0.0007) Note: *** indicates rejection of null hypothesis the level 5% significance. The respective P values are presented in the parenthesis. and Wiseman, Gupta, Goff man, Musgrave As table 5 shows, all the error correction and Mann versions respectively. 81 % of terms are highly significant with the sign the deviation from long run equilibrium is of negative suggesting response variable corrected every year according to the moving downward towards to the long run Peacock and Wiseman version. In the equilibrium path. Further it indicates that same way 98%, 45%, 46% 98% and 81% there is a co integration relationship of the deviations from long run between GDP and various definitions of equilibrium is corrected every year public expenditure in real terms. The according to Peacock and Wiseman, adjustment speeds are 0.81, 0.98, 0.45, Gupta, Goff man, Musgrave and Mann 0.46, 0.98 and 81 of each model, Peacock versions respectively.


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Table 6. Error Correction Results â&#x20AC;&#x201C; Nominal terms Se. Version Intercept Short run ECM Term Income elasticity 0.013 0.81 -0.90*** 01. Peacok and wiseman (0.7213) (0.0034) (0.0013) Gupta 0.011 0.783 -0.96*** (0.7120) (0.0033) (0.0008) 02. 0.038 0.676 -0.331*** 03. Goffman (0.2921) (0.0334) (0.1432) 0.063 0.297 -0.433*** 04. pryol (0.0181) (0.1179) (0.0005) 0.011 -0.217 -0.96*** 05. Musgrave (0.7120) (0.3956) (0.0001) 0.013 -0.191 -0.90*** 06. Mann (0.7213) (0.4726) (0.0013) Note: *** indicates rejection of null hypothesis the level 5% values are presented in the parenthesis. As table 6 shows, all the error correction terms are highly significant with the sign of negative except Goff man version. The error correction term of Goff man version is not significant at the level of 5% although it carries a negative sign. But, other versions suggest that response variable is moving downward towards to the long run equilibrium path since the coefficient of error terms of these versions are significant at 5% level of significance with a negative sign. Further, 90 % of the deviation from long run equilibrium is corrected every year according to the Precook and Wiseman version. In the same way 96%, 43%, 96% and 90% of the deviations from long run equilibrium is corrected every year according to Peacock and Wiseman, Gupta, Musgrave and Mann versions respectively. Out of six relationships, five of them suggest that there is a long run relationship between



























Adj. R2

DW stat

significance. The respective P

GDP and various definitions of public expenditure in the nominal terms also. Causality Test Furthermore, it is possible to continue the model to check short-run dynamics by applying Granger causality test to measure for possible causal relationships between variables .The direction of the relationship is checked by running the Granger causality test. Granger Causality test results Table 7 presents Granger Causality test results. Causality is checked from GDP or Percapita GDP to the dependent variable which takes four different forms such as EXP, PEXP, CEXP, and GDPEXP the total public expenditure, percapita public expenditure, consumption expenditure and ratio of expenditure to GDP respectively. Since the series become stationary


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at their first difference, the test is carried out with regard of first difference of each


Table 7: Granger Causality Test Results. (Real Terms)


01. 02. 03. 04.


Null hypothesis

Peacok and RGDP does not Granger Cause REXP wiseman REXP does not Granger Cause RGDP Gupta RPGDP does not Granger Cause RPEXP PEXP does not Granger Cause PGDP Goffman RPGDP does not Granger Cause REXP REXP does not Granger Cause RPGDP pryol RGDP does not Granger Cause RCEXP RCEXP does not Granger Cause RGDP





RPGDP does not Granger Cause RGDPEXP RGDPEXP does not Granger Cause RPGDP RGDP does not Granger Cause RGDPEXP RGDPEXP does not Granger Cause R GDP

Lag 1 0.89513 0.63981 0.77765 0.70063 0.68004 0.65170 0.55240 0.44238 0.31593 0.70063 0.44704 0.63981

P value of “F” statistics Lag 2 Lag 3 0.50132 0.69983 0.91674 0.97923 0.53485 0.74441 0.91566 0.98520 0.61093 0.80977 0.85707 0.97549 0.19727 0.21642 0.75561 0.56272 0.46926 0.91566 0.41643 0.91674

0.64885 0.98520 0.62489 0.97923

Note: All the variables are in first difference of their natural logarithms. Table 7 presents the P values of “F” statistics with regard to corresponding lag lengths. For each versions lag 1, lag2 are lag3 selected according to LR: Sequential modified LR

are greater than 20% suggesting a no causal relationship between GDP and various definitions of public expenditure with the real terms of series in Sri Lanka for the period of study. Then, it is firmly proved that there is no causality running from GDP to public expenditure in Sri Lanka in the real terms of series for the period of 1960-2011.

test statistic, FPE: Final Prediction Error, AIC: Akaike Information Criterion, SC: Schwarz information criterion and HQ: Hannan-Quinn information criterion. Examining the results of the Granger causality test, P value of all the versions



Null hypothesis


Peacok and GDP does not Granger Cause NEXP wiseman NEXP does not Granger Cause GDP





PGDP does not Granger Cause PNEXP PNEXP does not Granger Cause PGDP PGDP does not Granger Cause NEXP NEXP does not Granger Cause PGDP


P value of “F” statistics Lag 1 Lag 2 Lag 3 0.00042* 0.02506* 0.10259 0.12553 0.06740 0.12191 0.00034* 0.09416 0.00061* 0.10152

0.02532* 0.06806 0.03385* 0.08228

0.11602 0.11178 0.13636 0.14187

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GDP does not Granger Cause NCEXP NCEXP does not Granger Cause GDP PGDP does not Granger Cause GDPEXP 05. Musgrave GDPEXP does not Granger Cause PGDP GDP does not Granger Cause GDPEXP 06. Mann GDPEXP does not Granger Cause GDP Table 8: Granger Causality Test Results. (Nominal Terms) 04.


0.00047* 0.23611 0.85767 0.09416 0.78000 0.12553

0.00285* 0.11201 0.93300 0.06806 0.89187 0.06740

0.00947 0.24802 0.57694 0.11178 0.58283 0.12191

Note: All the variables are in first difference of their natural logarithms. *Indicates the rejection of

null hypothesis at the 5% level of significance. Table 8 presents the Granger causality test results with regard to nominal terms of series. The results show that there is a causality running from GDP to various definitions of public expenditure with regard to Peacock and

expenditure in real and nominal terms, Percapita Public Expenditure in real and nominal terms, Government Consumption Expenditure in real and nominal terms are incorporated in this study. In order to determine the causal relationship from GDP to Public Expenditure the Engle Granger co integration technique, error correction methodology and Granger Causality test are preferred to the other techniques, because of its several advantages over those alternative techniques. In the application of this methodology, the time series properties of the data employing both informal and formal tests for stationarity are analyzed first. The all twelve variables are found to be integrated of the same order, as they all are first differenced stationary. Since all the variables are I(1), the Engle Granger Co integration method is applied to determine the long run relationship between GDD and public expenditure with regard to six versions of Wagner’s law in the real terms of series as well as nominal terms of series. co integration tests on alternative six versions of Wagner’s Law provide evidence that there is co integration between GDP and Public expenditure in real terms as well as nominal terms. The Evidence of co integration allows the estimation of Error Correction model

Wiseman, Gupta and Goff man versions of Wagner’s law suggesting the existence of Wagner’s Law with the use of nominal terms of series in Sri Lanka for the period of 1960 – 2011.

CONCLUSIONS This study analyzed the relationship between GDP and Public expenditure in Sri Lanka for the period of 1960 – 2011. The literature that is in line with the relationship from GDP to public expenditure which is called Wagner’s Law is well documented in the study with respect to time series and cross section data. Based on an extensive review of the literature, the Wagner’s Law in different countries all over the world with respect to different time period of study with the use of different techniques of estimation on data availability and empirical models that link to the Wagner’s law is specified. The variables included in these models as showing the relationship between GDP and public expenditure include Gross Domestic Product in Real and Nominal terms, Percapita Gross Domestic Product in real and nominal terms, Total public


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which simultaneously provide the parameter estimates for both the long and short run relationships. ECM estimation further confirms the co integration relationship between GDP and public expenditure in nominal and real terms with the highly significant error terms.

Wiseman, Gupta, Goff man, pryol versions of Wagner’s law. According to that finding, public expenditure in Sri Lanka is stimulated by the economic growth which is the Wagner’s Law. Although, the study period, the geographical location and the method of estimation are the same; the way of adjusting data is different. In real data, the effect of price shocks is cancelled out. But, in the nominal calculations the price effects are included .Therefore, over valuation of national accounts can be seen in the results of nominal series.

Another interesting parameter in Error Correction Model is the speed of adjustment coefficient in this study. The estimate of this parameter found in this study indicates that about 81,98, 45, 46,98 and 81 per cent of the variation in the real GDP and real percapita GDP from its equilibrium level is corrected within a year in the versions of Wagner’s Law Peacock and Wiseman, Gupta, Goff man, pryol Musgrave and Mann respectively. In the same way 96%, 43%, 96% and 90% of the deviations from long run equilibrium is corrected every year according to Peacock and Wiseman, Gupta, Musgrave and Mann versions respectively in the use of nominal terms of series.

There are number of policy implications based on the overall results of the study. First, the presence of long run comovements between the GDP and various definitions of public expenditure found in this study implies the effectiveness of targeting economic growth in influencing the long run behavior of public expenditure. Economic growth of a country is the main indicator that measuring country’s development status. In measuring development of a country the living standard of community is the main concerned factor. In establishing a sound living standard, government should create an efficient and effective redistributing system in the economy by managing its income and expenditure properly which in turn increases the public expenditure of the economy. As, monetary authority tries to expedite the economic growth of the country, it is able to establish an efficient favorable redistribution system by understanding the positive long run correlation between GDP and public expenditure.

Furthermore, the Granger causality test for determining the direction of causality suggest that none of the variable in the six versions of Wagner’s law is showing a significant granger causality test statistic with the use of lag one to lag three at the 5% level of significance in the real terms of series. That finding suggests that government expenditure is not stimulated by economic growth of Sri Lanka for the period of 1960 – 2011.However, Granger causality test results with the use of nominal terms of series is showing somewhat different results. Out of six versions of Wagner’s Law four of them are showing a significant causal relationship from GDP to public expenditure at the one and two lags situation namely peacock and

Second, although there is a long run relationship between GDP and Public expenditure there in no any causal


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relationship between those two as considering the real terms of data. Further, this finding shows that although the country is in a sound economic status the public expenditure of the country is decided by some hidden factors. If policy

implication authority can understand these invisible factors which are the determinants of the public expenditure it is very easy to establish a favorable redistributing system to achieve development status of the country.


Causality Testing. Central Bank of Sri Lanka, Staff Studies, 34(1&2): 51-68.

[1.] Afzal,M. and Abbas. Q. (2010) Wagner’s law in Pakistan: Another look. Journal of Economics and International Finance Vol. 2(1) pp. 012-019, January, 2010

[7.] Engle, R.F. & Granger, C.W.J. (1987), "Co-integration and error correction: representation, estimation and testing", Econometrica, vol. 55, no. 2, pp. 251-276 [8.] Goffman, I.J. (1968), "On the Empirical Testing of Wagner's Law: A Technical Note", Public Finance, vol. 23, pp. 359-364.

[2.] Akitoby B., Clement B., Gupta S., Inchauste G. (2006), public spending, voracity, and Wagner’s Law in developing countries, European Journal of Political Economy, 22, 4, December, 908-924.

[9.] Granger, C.W.J.( 1969), "Investigating causal relations by econometric models and cross-spectral methods", Econometrica, vol. 37, pp. 424-438.

[3.] rpaia, A., Turrini, A., (2008), Government expenditure and economic growth in the EU: long-run tendencies and short-term adjustment, Economic Papers, 300, February Bağdigen

[10.] Henrekson, M. (1993), "Wagner's Law -A spurious relationship", Public Finance, vol. 48, pp. 406-415.

[4.] M. and Çetintaş.H. (2000), Causality between Public Expenditure and Economic Growth: The Turkish Case. Journal of Economic and Social Research 6 (1), 5372 Central Bank of Sri Lanka, Annual Reports, Various Years

[12.] Kesavarajah M. (2012), Wagner’s Law in Sri Lanka: An Econometric Analysis, Department of Economics, and University of Colombo

[5.] Dickey, D.A. & Fuller, W.A. (1979), "Distribution of the estimators fro autoregressive series with a unit root", Journal of American Statistical Association, vol. 74, pp. 427-431

[13.] Kumar.S. Webber.D. And Fargher.S. (2010). Wagner’s Law Revisited: Co integration and Causality tests for New Zealand. Department of Business Economics, Auckland University of Technology, New Zealand

[6.] Dilrukshini, W.A. (2004). Public Expenditure and Economic Growth in Sri Lanka: Co integration Analysis and

[14.] Lakshman, W. D., & Tisdell, C. A. (2000). Introduction to Sri Lanka's


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Development since Independence. In Sri Lanka's Development since Independence: Socio-Economic Perspectives and Analyses (pp. 1-39). Huntington, New York: Nova Science Publishers

[21.] Phillips, P.C. and Perron, P. (1988), "Testing for a unit root in time series regression", Biometrika, vol. 75, pp. 335346.

[15.] Lamartina, S., Zaghini, A., (2008), Increasing Public Expenditures: Wagner’s Law in OECD Countries, Center for Financial Studies Working Papers, 13

[22.] Pryor, F.L. (1969), Public Expenditures in Communist and Capitalist Nations, George Allen and Unwin, London.

[16.] Magazzino, C., (2010b), Wagner’s Law and Augmented Wagner’s Law in EU-27, C.R.E.I. Working Papers, 05/2010. [17.] Mann, A.J. 1980, "Wagner’s law: an econometric test for Mexico 1926-1976", National Tax Journal, vol. 33, pp. 189-201.

[23.] Rehman, H.U. and Ahmed, I. (2007). Testing Wagner's Law for Pakistan: 1972-2004. Pakistan Economic and Social Review, 45(2): 155-166. [24.] Sideris, D., (2007), Wagner’s Law in 19th Century Greece: A Co integration and Causality Analysis, Bank of Greece Working Papers, 64, December

[18.] Nurudeen, A. and Usman A. (2010). Government Expenditure and Economic Growth in Nigeria, 1970-2008: A Disaggregated Analysis. Business and Economic Journal, 4: 1-11. [19.] Peacock, A.T. and Wiseman, J. (1961), The growth of public expenditure in the United Kingdom, Princeton University Press, Princeton.

[25.] Ul Husain M.I.(2011). Keynes versus Wagner: Aggregated and Disaggregated Analysis of Public Expenditure in Selected South Asian Countries. International Research Journal of Finance and Economics. ISSN 1450-2887 Issue 67(2011).

[20.] Peters.A.C. (1997).An application of Wagner’s Law of expanding state activity to totally diverse countries. Monetary policy Unit. Eastern Caribbean Central Bank.

[26.] Wagner, A. (1883) ‘Three extracts on public finance”, in R. A. Musgrave and A. T. Peacock (1958), Classics in the Theory of Public Finance. London: Macmillan


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DOES VEHICLE EMISSION TEST IMPROVE AIR QUALITY IN SRI LANKA? Hemachandra , D.W.K.a , Withanawasam , M.P.K.b and Madukala , J.Ic a, b, c University of Sri Jayewardenepura, Sri Lanka a,, ABSTRACT Polluted air is a dangerous for human health and natural environment. The Vehicle Emission Test (VET) programme was introduced in Sri Lanka following the Supreme Court decision to increase air quality level. So this paper attempted to identify the VET programme as an essential programme for Sri Lanka and evaluate its performance and issues. According to the findings of the paper the VET is an essential programme for Sri Lanka because emissions from transportation are a significant factor in total emission in Sri Lanka. However the paper failed to evaluate performance of the programme statistically due to lack of required information. But the study found that there are some positive outcomes as well as further developments areas. Hence the paper recommanded that the VET programme need sufficient capital and human resources investments for further development in air quality level in Sri Lanka. In addition to that the programme should combine with national development process to achieve sustainable development in Sri Lanka. Key Words: VET, Emission, Environment , Sustainability and Air Quality

Ozone (O3), Carbon Monoxide (CO), Sulfur Dioxide (SO2) and Volatile Organic Compounds (VOC). The effects of air pollution to peopleâ&#x20AC;&#x2122;s health are numerous. These include asthma, lung ailment and heart attacks. Children and elderly groups are most vulnerable. It affects the households by increasing the health expenses. The effects of air pollution on the environment include unclear air to breath, climate change, polluted surrounding and withered plants and trees.

INTRODUCTION Environmental pollution can take place in many forms all the pollution can cause harmful effects to health that will lead to lower the healthiness of an individual. Among the forms of environmental pollution, air pollution is a serious environmental problem in many countries. . Normally there are three types of air pollution. Those are out door air pollution, indoor air pollution and trans-boundary air pollution. In accordance with Air Resource Management Centre (AIRMAC) there are five sources of air pollution and transportation sector can be identified as the major source.

There is a high incidence of respiratory disease caused by air pollution in Sri Lanka. As a result of this increasing risk, the government of Sri Lanka (based on Supreme Court Application 569/98 â&#x20AC;&#x201C; by a citizen of Sri Lanka requesting to take measures to mitigate urban air pollution by vehicle and to

According to the air quality report of Sri Lanka 2012 Air pollutants associated with vehicle emissions include Particulate Matter (PM), Lead Aerosol, Oxides of Nitrogen (NOX),


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introduce vehicle emission standards) has decided to initiate a vehicle emission testing program to monitor and help maintain the air quality at an acceptable level. Therefore Air Resource Management Center (AirMAC) was established with all the key stake holders. The AirMAC conducted a survey and they found out those existing standards of the in use vehicles were far below the published standards. In October 2003, the government of Sri Lanka, through the Department of Motor Traffic (DMT) has called request for proposals for the Sri Lanka Vehicle Emissions Test (SLVET) program. As a strategy of improving the quality of ambient air in Sri Lanka, vehicle emission testing program was officially commenced on 17th of November, 2008 as a pilot project in Western Province. Central Environmental Authority has issued Environmental Clearance Certificates for 200 vehicle emission testing Centers Island wide after joint inspections with a representative from Department of Motor Traffic. The government has awarded the task to two private companies â&#x20AC;&#x201C; Clean Co Lanka (Pvt) Ltd and Laughs Eco (Pvt) Ltd to test and issue emission certificates at the initiative of the Ministry of Environment and Natural Resource. However it is uncertain that whether the emission test was able to reduce the level of air pollution in Sri Lanka. Thus it is important to identify the impact of emission test on level of air pollution and issues related with the implementing agencies.

Lanka. Department of Motor traffic has also defined the vehicle emission testing as checking vehicle emission to ascertain whether they are within the defined limits is done through the program. In the vehicle emission testing process they have established several vehicle emission standards. But there is a problem whether that is the only objective of vehicle emission test towards improving air quality and whether is it actually successful to reduce the level of air pollution in Sri Lanka? Hence the objectives of the research study are, x

To identify emission test as an important programme to Sri Lanka.


To evaluate strength and weakness of the VET programme

LITERATURE REVIEW There have been quite a number of experimental studies regarding vehicle emissions. This review presents some theoretical background and related article findings on the topic in hand. Scientific Review Supnithadnaporn (2007) has carried out a study to find out whether vehicle passing emission test pollute less or not. The objective of this study was to examine the effect of passing the emission test in achieving the reduction of individual vehicular emission, particularly Carbon Monoxide (CO), Hydrocarbon (HC), and Nitrogen Oxide (NOX). The main question of this study was that, do vehicle passing the emission test as required by the inspection and maintenance program pollute less than non- tested vehicle registered out of the inspection and maintenance program. According to the research question, the hypothesis was that the

The main problem of this study is, whether the emission test was able to reduce the level of air pollution in Sri Lanka? According to the Central Environmental Authority, vehicle emission testing program has officially commenced as a strategy of improving the air quality of ambient air in Sri


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tailpipe emission of vehicles registered inside 13 counties, subject to the emission test, and pass the test are more likely to be lower than the tailpipe emissions of vehicles registered elsewhere and do not have the emission test, controlling for all other relevant factors. This study utilized the framework of program treatment effect, specifically the complier effect to the two subgroups of vehicles in the sample. The emission test which is mandatory for all eligible vehicles registered in 13 counties of Atlanta is considered as a treatment intervention of emission control for each individual vehicle. Passing emission test means that an owner complies with the Inspection & Maintenance (I/M) program regulation. There were three measurement of outcomes, including carbon monoxide (CO), hydrocarbon (HC), and nitrogen oxide (NOX) from the tailpipe emission by each vehicle driven on road. To account for the issue, the study generated two groups of vehicles. The first group was the treatment group, which compose of two subgroups: the treated and none treated. The second group is the placebo group, which comprises of two subgroups of the treated and non-treated. The study used the ordinary least square (OLS) and fixed effect (FE) at the zip code level to estimate the effect of passing the emission test. There were five main cross sectional data sources used in this study. The dependant variable of the study was vehicle tailpipe emission of an individual vehicle. The Independent variables were vehicle passed the emission test, age of vehicle, mile driven per year, technology, vehicle type and owner of vehicle. Finally it showed that on average, vehicle passing the emission test tend to pollute less for all outcomes: CO, HC and NOX. Moreover

emission test has even stranger effect on the high polluters. Kahn (1994) has attempted to examine the trend in aggregate vehicle emissions. There were three objectives of that study. The first one was to estimating the evolution of vehicle emissions over time. Then it endeavored to identify how vehicle emissions testing regulation works and how it affects driver incentives and identify effectiveness of regulations. To study aggregate trends in vehicle emissions, Khan examined an equation and the dependant variable was total emissions at any point in time. Independent variables were total number of drivers in the US, time t vehicle model year distribution, vehicle type iâ&#x20AC;&#x2122;s emissions per mile and vehicle mileage. This study used new micro data sets on vehicle emissions to quantify emissions by model year. This data set contains information on vehicles built in model year 1981 â&#x20AC;&#x201C; 1989. For each model year study presented the median and the 99th percentile for hydrocarbons, carbon monoxide and nitrogen oxide. To asses the impact of vehicle emission testing regulations the study focused on air quality measures, carbon monoxide and ozone that are expected to be affected by emissions testing program. For Illinois, it had 378 observations for ozone and 144 for carbon monoxide monitoring sites between 1980 and 1989. The Florida data consists of 181 observations for ozone and 166 observations for carbon monoxide. This data set covered years 1980-1992. For countries that eventually emissions test, the researcher studied weather air quality improved when emission testing began. To control for spurious causation, it used the counties that did not start emissions testing as a control group. If air quality improved in both sets of countries, then conclude that the


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emissions testing regulation cannot be a cause of the improvement. For each pollutant this study partitioned counties in to two groups; those who eventually implement vehicle maintenance inspection program (vmi=1) and those that do not (vmi=0) for each group. Vehicle emission testing regulation entered as a simple dummy variable. Then it calculated the average pollution level for each calendar year. According to the results there was an impressive downward trend in aggregate vehicle emissions. But there was an indication that they now have “enough” air quality. Researcher has mentioned that no obvious evidence that the emissions testing program has had an impact on local air quality. According to the findings Florida’s emissions testing program has reduced median yearly ozone by 6% and reduced the 99th percentile of the yearly ozone distribution by 8%. Then the researcher estimated that emission testing has reduced Illinois ozone by 3% but those estimates were statistically insignificant. For both Florida and Illinois, study found large but statistically insignificant impact of emission testing on median carbon monoxide levels but for Illinois no evidence that the program has reduced the 99th percentile of the yearly distribution. Finally researcher has viewed that states have not voluntarily started vehicle emissions testing and when forced to start them the states have not implement stringent emissions testing. And also some states are decentralized. Centralized testing programs are less likely to suffer from bribing problem than decentralized repair shop testing.

study was estimates the impact of the Illinois vehicles emissions testing program on ambient air quality. For Illinois, this study has had 389 counties year observations for ozone, 135 for carbon monoxide. This data set covered all Illinois ozone and carbon monoxide monitoring sites between 1980 and 1989. The empirical strategy was to create a panel data set relating a county’s air quality measure to weather and regulation variables. Given air quality data for counties that never implement an emission testing program, and pre – and post – intervention data for countries that do implement programs, this study estimated how the presence of the program affected county air quality. To quantify the aggregate impact of the emission test regulation, researcher modeled per capita pollution level as a function of weather, regulation and a time trend. This model included a time trend to control for changes in the fleet composition over time. In the estimated equation, regulation entered as a dummy variable. The study focused on carbon monoxide and ozone. Three measures of a county’s yearly air quality were used: the median, the 99th percentile and the second highest yearly reading. According to the equation the dependant variable is pollution per capita. Independent variables were county i’s time t weather variables and county i’s time t regulatory dummy. The researcher has found that the emissions program has reduced ozone pollution but not had a significant impact on carbon monoxide emissions. And also study pointed out that the estimates of the program’s impact are smaller than the Environmental Protection Agency has claimed. The researcher considered this as an important finding because the current emissions testing regulation is costly in terms of time and advertisement cost.

Kahn (n.d) has carried out a study to find answer the question of do vehicle emissions testing program improve air quality. The main objective of the


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According to the above literature some discovered that emission testing program tend to pollute less while others mentioned that emission testing regulation had not a significant impact on air quality. They used carbon monoxide, hydro carbon, nitrogen oxide and ozone as measurements of air quality and all of them used some model to observe their findings. However this study is focused on how emission test tend to reduce air pollution in Sri Lanka.

emission test can be identified as a solution to negative externality. Vehicle emission testing program provide almost a natural experiment to evaluate regulationâ&#x20AC;&#x2122;s impact on air quality. In this test vehicles that fail the test are expected to be repaired and retested. METHOD This research paper analyzes the data and information both quantitatively and qualitatively. According to the conceptual framework of the research paper first proved that vehicle emission test is a significant factor in Sri Lankan emission. For this the paper has applied econometric model.

Economic Review The Air Quality report of Sri Lanka 2012 said that Gasoline vehicles are the main source of hydrocarbon and carbon monoxide, while diesel vehicles are a major source of particulate matter. Two stroke motorcycles and three wheelers are also major contributors to emissions of particulate matter. Hence it is necessary to introduce strong strategies to reduce and control of vehicular emissions and lots of nations already introduced several preventive measures such as taxes, emission test etc.

Method of Data Collection Primary sources The paper did not use any primary data sources because if the paper attempts to do that the scope and objectives of the paper will be deviated as measuring air emission is not a management or economic policy matter. It is highly scientific and technological matter and as economists, the researchers of this paper used essence of the scientific information and converted into useful information that can be applied for economic policy debates. However this study was conducted interviews from one of emission test Company. Also researchers have observed practices of people in vehicle emission.

Several empirical studies have shown that taxes and other incentives can attain pollution reduction at lower cost. Pollution taxes also generate revenue that can be used to fund government projects or to reduce taxes on labor or investment. Emission test is another policy of control and reduce vehicular emissions. In reference with Salvatore (2012) tax is solution which can be used to control negative externalities. When there are negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over consumption of the product. In relation to that explanation it is suitable to define emissive pollution as a negative externality and vehicle

Secondary sources United Nation Environment Programme (UNEP) and Carbon Dioxide Information Analysis Center (CDIAC) are main secondary data sources of this paper. Data in world development indicators (world Bank Data Base â&#x20AC;&#x201C; Climate change) has also being used for this study. In addition to


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that data and information published by the Air Management Resource Center (AirMAC) used as a main local data source.

Time range of this analysis is 1950 â&#x20AC;&#x201C; 2008. In addition to that the important other variables are explained by descriptively. As above mentioned above the research study did not attempt to explain those using technological methods due to limitations in the scope.

Method of Data Analysis This research study uses both quantitative and qualitative methods to analyze the data. Quantitative analysis

Qualitative analysis

The study uses regression analysis to identify whether there is a significant relationship between air quality and vehicle emissions of Sri Lanka. Dependent variable is Growth rate of Total Fossil-Fuel Emissions. Independent variables are Growth rate of Emissions from Liquid Fuels, Growth rate of Emissions from Solid Fuels, Growth rate of Emissions from Cement Production and Growth rate of Emissions from Bunker Fuels. Hypothesis of the study as follows, x


Qualitative analysis of this study mainly focuses on data and information derived from interviews and observations. DATA ANALYSIS Data analysis of this research paper is divided in to two parts: They are, 1. Identify importance of the emission test 2. Evaluation of the VET Programme First part of the study based on statistical analysis and the second part is based on pilot interviews, the reports, documents and other related resources.

H0 = 0, there is no significant relationship between Growth rate of Total Fossil-Fuel Emissions and Independent variables are Growth rate of Emissions from Liquid Fuels, Growth rate of Emissions from Solid Fuels, Growth rate of Emissions from Cement Production and Growth rate of Emissions from Bunker Fuels H1 â&#x2030; 0, there is a significant relationship between Growth rate of Total Fossil-Fuel Emissions and Independent variables are Growth rate of Emissions from Liquid Fuels, Growth rate of Emissions from Solid Fuels, Growth rate of Emissions from Cement Production and Growth rate of Emissions from Bunker Fuels.

1. Identify importance of the emission test According to the upper panel of annex 01, there is a significant relationship between growth rate of total emissions and growth rate of emissions from liquid fuels at 95% level confident level. R2 value is 67%, means that variation in the growth rate in total emissions explains 67% of the variation in the growth rate of liquid emissions. This is indicated that the model is good fitted. F value (117.2178) also ratified the goodness of the model. Then bottom panel of the annex 01 also confirmed the findings derived from upper panel. According to the bottom panel of the annex 01, there is a significant relationship between growth rate of

In addition to that study has conducted Unit Root Test to check whether time series data are non-stationary or not.


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total emissions and growth rate of emissions from liquid fuels at 95% level confident level. All other variables in this model do not have significant relationship between growth rate of total emissions and growth rate of other emission variables at 95 % confidence level. These results are not significantly change at 99% and 90% confident levels.

relationship between total emissions and other emission variables at 95 % confident level. These results are not significantly change at 99% and 90% confident levels. According to the bottom panel R2 value is 97%, means that variation in the total emissions explains 97% of the variation in the liquid , solid , cement production and bunker fuels. This is indicated that the model is good fitted. F value (502.4278) also ratified the goodness of the model. Further Adjusted R2 is 97%, indicating validity of the model. Also R2 and Adjusted R2 values of annex 02 is greater than models in the annex 01.

According to the bottom panel R2 value is 80%, means that variation in the growth rate in total emissions explains 80% of the variation in the growth rate of liquid emissions and other emissions. This is indicated that the model is good fitted. F value (50.74338) also ratified the goodness of the model. Further Adjusted R2 is 78.65%, indicating validity of the model. Also R2 and Adjusted R2 values of the bottom panel model is greater than models in the upper panel.

Log Linear Regression equation for the total emissions of Sri Lanka can be formulated as follows, TE = 1.9644LFE 0.838857 SFE 0.041324 CPE 0.041664 BFE 0.055959

Regression equation for Growth rate of the total emissions of Sri Lanka can be formulated as follows,

Where , TE is Total Emissions , LFE is Emissions from Liquid Fuels , SFE is Emissions from Solid Fuels , CPE is Emissions from Cement Production and BFE is Emissions from Bunker Fuels.

GRTE = -0.008790 + 0.91899 GRLFE + 0.000831 GRSFE + 0.023531 GRCPE + 0.05558 GRBFE Where , GRTE is Growth Rate In Total Emissions , GRLFE is Growth rate of Emissions from Liquid Fuels , GRSFE is Growth rate of Emissions from Solid Fuels , GRCPE is Growth rate of Emissions from Cement Production and GRBFE is Growth rate of Emissions from Bunker Fuels.

The annex 03 indicated that emissions level of Sri Lanka 1950 to 2010 graphically. 2. Evaluation of the VET Programme The following time line shows important steps of the implementation programme of VET.

Annex 02 indicated that log linear multiple regression model for total emissions of Sri Lanka. According to the annex, there is a significant relationship between total emissions and emissions from liquid fuels and emissions from solid fuels at 95% confident level. All other variables in this model do not have significant

According to the annex 04 there are mainly two stages of the VET programme. First stage is programme initiation stage and programme implementation stage. Analysis of this part is based on interviews which were conducted for pilot survey of the research.


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According to the interview conducted with Eco Sri, the vehicle emission is identified as the main air polluter. So as the main objective of the vehicle emission testing program is to reduce the air pollution level of vehicle. But the level of reduction is depended on the seasonal measurement, time, dilution and geographical area. However there is a significant impact of vehicle emission testing program on air pollution.

i) It has become a practice to clean the systems and tune up the engine prior to the emission test j) Successfully implemented through the provincial council in the process of issuing the revenue license.

Laughs Eco (Pvt) Ltd has 70 fixed centers and 25 mobile centers for test vehicle emission. Normally the failure rate is ranged between 12%-15%. Price of this test is decided by government in accordance with a formula of Central Bank. Importing expensive materials from Italy is the main problem they have to face when implementing this program. However this program can be identified as environmentally friendly business because it directly affects on air quality and also indirectly affect on health level of the country. But this program is not able to reduce the vehicle emission level up to zero because the aim of the program is to control the emission level of Sri Lanka.

a) Extra ordinary Gazette Number 1533/17 on 2008.01.25 under the Motor Traffic Act – Vehicle Emission monitoring and Certification. b) Motor Traffic Act section 29 – need emission certificate for the purpose of obtaining a revenue license. c) MTA section 195 and 196 – provisions for VET centers , certifying officers and issue VET certificates. d) MTA Section 196 B- Fraudulent issue of certificate of fitness and emission certificate penalty Rs.20,000 – Rs.25,000 e) MTA section 194 provisions for commissioner general to inspect any vehicle f) MTA section 198 provisions for inspections – Road side g) MTA section 218A – Driving without Insurance , Emission and Fitness certifications. Penalty Rs. 5,000 – Rs. 20,000 or imprisonment or both and cancellation of driving license.

And also the government has tighten the legal provisions related to the emission test programme in the implantation stage. They are,

Government officials also have positive attitudes about the emission test. According to the initial background survey and official documents, they have identified the following achievements so far, a) b) c) d) e)

Introduction of the culture Implementation in seven provinces Interest of the public Awareness of public Increase of fuel efficiency and Saving to the vehicle owner – saving of foreign exchange f) Monitoring of the total vehicle fleet g) Ensure liability of the vehicle h) Increase the life time of the vehicle through maintenance

In addition to above positive points the following problems encountered by the government during the programme , a) New programme to every one b) Difficulties due to inexperience c) No trained officers at the early stage


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d) Error due to software – two different machine e) Identify of the vehicle differs to certificate of registration f) Malpractices – bribery – formation of circle – links g) Human errors in testing h) Complains regarding the inconsistency i) Damages during the process of testing- paying insurance claims j) Various complains k) Peoples are free to comment- false information l) Lack of awareness – health , personal benefit and common benefit – smoke emissions. m) Common problems related present practices. n) Busy life styles- tendency to follow short cuts o) Always find faults p) Doesn’t consider as a social responsibility q) Incorrect procedures – to overcome the resistance from vehicle owners.

According to the main fiscal policy documents in Sri Lanka “The Emerging Wonder of Asia” and “Mahinda Chinthana” (Economic Development Policy of Sri Lanka) the air quality level in Colombo city target as follows , (please refer annex 05). In addition to that Mahinda Chinthana mentioned that , “My aim is to promote sustainable development in close liaison with the land, fauna and flora and to bestow our natural heritage to our future generation. (Mahinda Chintana – 2005 p 61)” Also “The Emerging Wonder of Asia” emphasized following air quality management proposals to implement in Sri Lanka by year 2016, “Public transport and related infrastructure systems will be improved using green technologies. Cleaner fuels will be promoted to reduce health hazards. An environmentally friendly transport system will be established throughout the country with the improvement of vehicle emission standards.” However it is a question how far above policies practically applied in Sri Lanka, as an example the government started new coal power plant and this project is preceding without a proper environmental impact assessment (EIA) and the EIA was not kept for the public to view and make their observations.

According to the customers’ views of point, they have not considered the VET programme as a social responsibility. Most of the people think this is a another income source for the government. Also the study had to face serious issues to find data and information related to VET programme. The government authorities mentioned that measurement equipments have broken down since year 2008. Therefore based on literature, the paper could not develop model or analyze statistically performance of the VET programme of Sri Lanka. In addition to that buses which belong to the Ceylon Transportation Board (CTB) are except from the VET programme. According to the observations, emissions of some CTB buses are higher than the standards.

DISCUSSION AND CONCLUSION The Vehicle Emission Testing (VET) programme has been launched with the objective of increase air quality level in Sri Lanka because emission from liquid fuel (emission from transportation) is a significant factor in total emission of Sri Lanka. Also growth rate in emission from liquid


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fuel has significant influence over growth rate of total emission of Sri Lanka. The paper proved this conclusion statistically and with the findings of stakeholders of the VET programme.

However to become part of the national development process , performance evaluation of the VET programme is necessary. Therefore the programme must occupy with essential capital equipments and human resources. Otherwise there is no process to upgrade the improvement of the VET programme in Sri Lanka.

However the study failed to conduct a statistical analysis to evaluate VET programme because lack of required information in the programme. Systems failures, instrument failures and calibration failures in air quality measurements in VET programme were caused for this condition. However based on the qualitative data analysis, the study has identified positive and negative features of the VET programme.

Further developments of this research paper are , the researchers expect to evaluate positive and negative features of the VET programme in detail , specially focus on the impact of the VET programme on social and economic suitability. Also it is planned to conduct consumer awareness and preference for the VET programme and to find why they are not considered the VET programme as a social responsibility? Finally the researchers expect to make a model which can lead to green customers, green business and green fiscal policies for sustainable development.

Therefore the research paper concluded that , the VET programme is essential programme to ensure basic needs and basic human rights ( right to live) of Sri Lankans. Also the VET programme also should combine with national development process of Sri Lanka. Because Sri Lanka needs to achieve sustainable development not only economic development. Sustainable development has three pillars. They are, economic sustainability, social suitability and environment sustainability. So the VET programme can be considered as programme launched under the environment suitability (Environment suitability is also one of the goal in the Millennium Development Goals). However the study couldnâ&#x20AC;&#x2122;t find any linkage between the VET programme and other two pillars in the sustainable development. It means even there is a link between these concepts, the VET programme only considered as a source of income in the government level, corporate and customer level. The vehicle emission testing programme should be considered as a social responsibility in Sri Lankans.

REFERENCES [1.] Air Quality Report (2012). Central Environmental Authority Sri Lanka. [2.] Department of National Planning. (2010). Sri Lanka The Emerging Wonder of Asia Mahinda Chinthana Vision for the Future. Sri Lanka: The Department of National Planning. [3.] Kahn, M. E. (1994). Trends in Aggregate Vehicle Emissions: Do we need to Emissions Test Used Cars? 124. [4.] Kahn, M. E. (n.d). Do vehicle Emissions Testing Program Improve Air Quality? 1-21. [5.] Salvotore,D. (2012) , Managerail Economics , 7th Edition [6.] Supnithadnaporn, A. (2007). Do Vehicle Passing Emission Test Pollute Less? 1-31.


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Annex 01 - Upper Panel : Simple Regression Analysis for each Individual Variables

Variable Co-efficient T-cal Relationship with dependent variable R2 F

Growth rate of Emissions from Liquid Fuels 0.791286 10.82672

Growth rate of Emissions from Solid Fuels -0.000366 -0.184068

Growth rate of Emissions from Cement Production 0.018811 0.275036

Growth rate of Emissions from Bunker Fuels -0.054442 -0.664328





0.676708 117.2178

0.000627 0.033881

0.001373 0.075645

0.007819 0.441332

Annex 01 â&#x20AC;&#x201C; Bottom Panel : Multiple Regression Analysis Co-efficient T-cal Relationship with dependent variable R2 : 0.802351

0.91899 14.12522

0.000831 0.901862

0.023531 0.696249

0.05558 1.346303





Adjusted R2: 0.786539

F-statistic: 50.74338

Prob(Fstatistic): 0.0000

Sample: 58

Source : Calculated by authors


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Annex 02 â&#x20AC;&#x201C; Log linear Multiple Regression Analysis

Variable Co-efficient T-cal Relationship with dependent variable

R2 : 0.975251

Emissions from Liquid Fuels 0.838857 12.56186

Emissions from Solid Fuels 0.041324 4.821432



Adjusted R2: 0.973310

F-statistic: 502.4278

Emissions from Cement Production 0.041664 1.003591

Emissions from Bunker Fuels 0.055959 0.769145



Prob(Fstatistic): 0.0000

Sample: 59

Source : Calculated by authors Annex 03: Emissions Level of Sri Lanka 1950 to 2010 3,500 3,000 2,500 2,000 1,500 1,000 500 0 50










Total Fossil-Fuel Emissions Emissions from Liquid Fuels Emissions from Solid Fuels Emissions from Cement Production Emissions from Bunker Fuels

Source: Carbon Dioxide Information Analysis Center (CDIAC)




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Annex 04: VET Programme

Programme Initiation Stage 1999

Decision of Supreme Court

Programme Implementation Stage





Survey carried out AirMAC

Implementatio n of vehicle Standards

EcoSri and Cleaneco

Commenceme nt of VET Programme

Source : Compiled by Authors

Annex 05 : Air Quality Targets in Sri Lanka 1999



67 (μg/m3)

64 (μg/m3)

40 (μg/m3)

Source : The Emerging Wonder of Asia


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ABSTRACT This paper reviews the literature on creating and sustaining ethical culture and climate through human resource management (HRM) by discussing the major issues and objectives of managing ethical culture and climate and examining the state of human resource management in the same context. This review indicates that different forms of ethical issues that still widely exist in the organisations and also reveals limited literature that examines how ethical culture and climate can be managed in organizations through effective HRM. The findings of this review present the contribution of functional dimensions of HRM in creating and sustaining ethical culture and climate at all levels in the organisations. This review also discusses the implications for practice and further research in relation to creating HRM-based ethical climate in organizations. Keywords: ethics, ethical culture, ethical climate, human resource management

1987). According to Olson (1995) and Schluter et al (2008), organisation ethical climate represents the organization’s policies, procedures and practices on ethical issues, and it influences employees’ attitudes and behaviour and serves as a reference for employee behaviour. In 1998, Olson defined ethical climate as individuals’ perception of how ethical issues in their work environment are handled. According to Johnson (2008), ethical climate means how an organization responds to ethical issues. He also stated that ethical climate determines right or wrong of what members believe and shapes their ethical decision making and behavior.

INTRODUCTION There has been increasing concern about the prevalence of unethical behaviors within business organizations. Increased media attention has exposed numerous instances of abuses, scandals, fraud and corruption (Bartels et al, 1998). Hence, it is the main concern of all professionals and disciplines to explore all possible ways of creating and sustaining ethical behaviour and activities within the business organizations. Changing the unethical behavior of organisational members through ethical culture and climate may have significant effect on organizational performance and reputation. Ethical climate has been defined as the shared perceptions of what ethically correct behavior is and how ethical issues should be handled (Victor and Cullen

According to Victor and Cullen (1987), ethical climate has three primary dimensions: egoism, benevolence (utilitarianism) and principle (deontology) in terms of


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theories or ethical criterion. Similarly, with respect to every primary dimension, they also identified another three dimensions in terms of locus of analysis (levels of analysis). They are individual level, local level (organisation itself) and cosmopolitan level (community or society at large). Alternatively, they defined the sets of primary dimensions and locus of analysis dimensions as two intersecting dimensions of ethical climate. Based on Victor and Cullen (1987), Arnaud (2010) has developed four dimensions of ethical climate of work: (1) “collective moral sensitivity” (moral awareness and empathetic concern), (2) “collective moral judgment” (focus on self and focus on others), (3) “collective moral motivation” and (4) “collective moral character”. However, these two approaches by Victor and Cullen (1987) and Arnaud (2010) do not have significant differences or contradictions. Notably, Victor and Cullen (1987) framework has gained most popularity among the researchers.

Therefore, the main objective of this review is to fill this gap in, and attempt to add knowledge to, the existing literature. In 1991, Society for Human Resource Management (SHRM) conducted a survey on “Ethical Issues in Human Resources Management”. As an extension, another survey conducted with 847 employment professionals and managers by Wiley (1993) has revealed five most serious unethical events: (1) hiring, training or promotion based on favoritism, (2) sexual harassment, (3) using discipline for managerial and non-managerial personnel inconsistently, (4) nonperformance factors used in appraisals, and (5) allowing differences in pay, discipline, promotion, etc. due to friendships with top management. On the other hand, research by Vuuren and Eiselen (2006) showed that human resource (HR) practitioners on average believe that they indeed have an ethics management competence and should involve in ethics management. Progressively, HR managers take the lead in recognizing the need for the programs of ethics and making them happened (Driscoll and Hoffman, 1998). The reasons they pointed out that those who are in the leadership positions in HRM are highly respected within their organizations for integrity. All and above, they have the capacity to solve complex ethical dilemmas, understand the organization’s culture and communicate it at all levels in the organisation.

Many scholars have stressed over time the importance of HRM in creating and sustaining ethical culture and climate in organisations (Smith and Carroll, 1984; Hosmer, 1987; Raelin, 1987; Koys, 1988; Lawler, 1988; Pocock, 1989; Johns, 1995; Flynn, 1995; Pickard, 1995; Arkin, 1996; Wehrmeyer, 1996; Caudron, 1997; Losey, 1997; Greengard, 1997; Compton, 1997; Bartels, Harrick, Martell and Strickland, 1998; Driscoll and Hoffman, 1998; Wiley, 1998; Grensing-Pophal, 1998; Hatcher, 2002; Shultz and Brender-Ilan, 2004; Wright and Snell, 2005; Vuuren and Eiselen, 2006; Sloan and Gavin, 2010; Thite, 2013; Parboteeaha, et al, 2013). However, the clarity is needed in how functional dimensions of HRM can play an active role in this process.

HR is increasingly seen more as a strategic business partner than ethical steward in the strategic HRM (Sloan and Gavin 2010). The role of HRM in promoting ethics and ethical behaviors in organizations is undeniable (Caldwell, Truong, Linh and Tuan


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2011). Parboteeaha et al (2013) indicate that from the HRM perspective, ethical climates represent an important window to understand the ethical orientation in an organisation. Understanding the existence of ethical climate in an organization can therefore be very much helpful as a basis for developing HRM practices to foster an ethical culture.

HR functions can play a vital role in embedding ethics into HR philosophy, policies and procedures (Thite, 2013). By reviewing literature relating to HRM and ethics in the organizations, this review concludes that HRM can contribute to create and sustain ethics, ethical culture and ethical climate by embedding ethical orientation in each and every functional dimensions of HRM in organizations, since ethical climate has an impact on the extent to which the organization experiences serious ethical problems. This review also indicatively explores that attention should be focused on changing the organizationâ&#x20AC;&#x2122;s ethical climate through recruitment and selection, training and development, performance appraisal, pay and reward management, and employee relations. The rest of this paper is organized with methodology, major issues and objective of ethics in organizations, HRM and organizational climate, and conclusion.

Thite (2013) shows that how the human resource development (HRD) or HRM can play a pro-active role in embedding ethics and values throughout the organizational and HR architecture. Wright and Snell (2005) noted that the ethical climate raises a real challenge for HR in balancing business and ethical values. According to Thite (2013), studies on ethics in HRM and HRD are still limited, thus urging for further empirical investigations. Many scholars agree that HRM plays a critical role in promoting ethics. The HRM functions can play an instrumental role in creating an ethical culture and climate in the organisations (Parboteeaha et al, 2013).

METHODOLOGY As this paper explores the contribution of Human Resource Management in creating and sustaining ethical culture and climate in the organizations, this paper uses Tranfield et al. (2003) for reviewing literature with an archival method, which enables the reviewer to structure research and build a reliable knowledge base in this field. The analysis of the review process includes classifying the literature in a functional model of HRM and using collected publications from the relevant books, journal articles, edited works, and other research papers. This review considers the works on the ethical aspects of HRM appeared in the literature.

It is specifically and clearly notable that HRM has a signification contribution in creating and sustaining ethical culture and climate in an organisation. Ethical status is nowadays seen as one of the key determinants of an organizationâ&#x20AC;&#x2122;s ability to attract and retain talents; and HR professionals play a key role in institutionalizing ethical culture and climate into the organizational systems in terms of ethics-related decisionmaking processes, audits, training, whistle-blowing mechanisms and disciplinary procedures (Foote and Ruona, 2008). Winstanely and Woodall (2000) emphasized that all areas of HRM policies and practices must have an ethical perspective. The


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This study urges that extended studies should widely investigate the relationship between organizational performance and employees’ ethics, since Brooks and Selley (2008) argue that creating and sustaining an ethical climate is a key determinant of stakeholder support and success. It also emphasizes that such studies should crucially consider HRM functions as the tools for their investigations. The objective and purpose of creating and sustaining good ethical culture and climate are to be a good business or good organisation in the society. If an organization can successfully inculcate an ethical culture and climate into the way it does business, it is highly likely that the organisation will be more successful than an unethical counterpart (Brooks and Selley, 2008). Hence, this paper critically argues that the successful creation of ethical culture and climate is highly possible through HRM functions and practices, since HRM mostly concern with employees’ behaviour, individually.

MAJOR ISSUE AND OBJECTIVE OF ETHICS IN THE ORGANISATIONS Ethical organisational culture and climate are necessary to guide employees to behave ethically to achieve organizational goals and objectives. Generally, the fundamental issues in ethics in organizations are: creating and sustaining positive ethical culture and climate against discrimination, favoritism or inequality. Shen et al (2009), with a comprehensive review of literature with empirical investigation, show that inequality and discrimination still widely exist in the organisations. There are many scholars have emphasized the same view in the literature (e.g. Rynes and Rosen, 1995). These are fundamental issues in ethics in an organization. As a result, ethics has increasingly become a ‘burning issue’ in political, legal, corporate and educational arenas. In an organizational context, creating and sustaining a strong ethical culture and climate are highly ever challenging task for organizations.

HRM AND ORGANISATIONAL ETHICAL CLIMATE HRM is a set of unique activities, functions and processes that are aimed attracting, directing and maintaining an organization’s human resources (Lado and Wilson, 1994). Opatha (2009) indicates: “HRM is the efficient and effective utilization of human resources to achieve goals of an organization”. Greenwood (2002) argues HRM involves the effective management of people to achieve organizational goals, thus implying managing of employees’ behaviour in consistent with organizational policies, norms, regulations and procedures and such employee behaviour is subject to ethical concern.

Organization ethical culture and climate include broader values and normative patterns that guide employee behavior. An organisation culture is the set of beliefs, norms and practices that are shared by an organization’s members. In general, positive organisational climate encourages and enforces the employee to have appropriate ethical behaviour in the organization. Ethical behaviour of the employee is crucial to achieve optimum organisational goals and performance. As performance management and ethics have intimate relationship (Winstanley and Hartog, 2002; Brown and Stilwell, 2005), it is not clear whether existing achievement of an organization is reached with ethical behaviour of its employees.

The HR function has grown substantially over the past few decades


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and now covers the whole gamut of people management processes. There are different views about the nature of HRM and the existing variety of HR practices adopted by various organizations (Boselie, Dietz and Boon, 2005). Nevertheless, it is widely recognized that the key practices of HRM include recruitment and selection, training and development, performance management, pay and reward management and employee relations (Shen and Edwards, 2006). The ability of HRM to influence ethical behaviour is highly dependent on the status of the functions within the organisation (Foote, 2001). HR professionals’ competence in resolving ethical dilemmas is critical to the success of a business (Wiley, 1993). Some primary functions or activities of HRM (e.g. staffing, performance evaluation, compensating, and training) have a direct impact on society (a sense of social responsibility or directly affects the quality of life of people in a country). Each of these primary activities influences people in ways that are outside their control (Hosmer, 1987). Particularly, within the discipline of HRM, it has been argued ‘raising ethical awareness and sensitivity is the main task for both HR academics and professionals’ (Winstanley and Woodall, 2000). The role of HRM with regards to ethics owes more to cloudiness than clarity. Its role can be considered in two dimensions: the ethics of the function of HRM itself and the ethics of HRM activities (Maxwell and Beattie, 2004).

(b) positive relationship between an organization’s ethical climate and success in responding to ethical issues. As a result, interventions that strengthen an organization’s ethical climate may help managing ethical behavior within the organizations. Hence, this re-emphasizes creating and sustaining ethical climate through HRM functions and practices. Recruitment and Selection According to Opatha (2009), “recruitment is the process of finding and attracting suitably qualified people to apply for employment”. In the HRM literature, “selection is the process of making the choice of the most appropriate person from the pool of applicants recruited to fill the relevant job vacancy(Opatha, 2009)”. Empirical evidence suggests that recruitment and selection functions of HRM have chances to hire highly ethical concern people to the organization. By recruiting and selecting high caliber as well as ethical concerned people, an organisation can develop positive organisational ethical climate within the organisation. Organization’s HR department must ensure that employment policies and practices provide more priority to hire highly ethical centered people to the organization, while blocking unethical people to enter into the organisations. HR managers usually tend to bring ethical concerned people into, and promote ethical employee behaviour within, the organisations. Human resource professionals and line managers who recruit and interview job seekers must consider the ethical concern of the candidate as one of the major criteria in the employee selection process.

The study by Bartels et al. (1998) with 1078 HR managers (members of Society for Human Resource Management-SHRM) explores statistically significant (a) negative relationship between the strength of an organization’s ethical climate and the seriousness of ethical violations and

However, despite several decades of equality legislation and declared


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commitment to equal opportunities, there still exists a systematic discrimination in the recruitment and selection process (Shen et al. 2009). A study conducted by Bennington and Wein (2000) in the Australian context found that there is widespread discrimination in employment. The Equal Opportunities Review (1995) and Holly (1998) presented the evidence of discrimination in recruitment and selection processes in the public sector of UK, thus appealing for ethical concern in recruitment and selection process.

development are very important within the organisation. Organisation must design specific training programmes to cater all segments of the employees. With the intention of improving the ethical responses of organizational members, attention should be focused on changing the organizationâ&#x20AC;&#x2122;s ethical climate through training and development (Delaney and Sockell, 1992). High quality ethical training is one of the HR training functions that enhances the effective integration of ethical behaviour and actions among the employees. Awareness training related to ethics builds a common understanding of the value of ethics and assists in creating ethical behaviour for improving individual and organizational outcomes. Roberson, Kulik and Pepper (2003) recommended that companies must clarify training objectives and systematically conduct a training needs assessment. Hence, participants in the training programme related to ethics should know whether the training programme can improve ethical awareness and develop skills related to create and sustain ethical climate within organizations.

Therefore, recruitment and selection functions of HRM in the organisations can address ethics in the same process. HRM must ensure active and energetic practice of equal employment opportunities, generally in recruitment and selection, and more specifically in employment interviewing and psychometric testing (Spence, 2000; and Baker and Cooper, 2000). In this context, this paper argues that less attention has been paid to valuing, creating and sustaining ethical culture and climate in the recruitment and selection functions of HRM, This implies exploring the importance of HRM functions and practices to bring sustainable ethical culture and climate in organizations.

In creating and sustaining ethical climate, a top down training strategy may be important for providing awareness training to top level managers first and then to others. Education and training should be tailored to the specific needs of the organization, division, level, team or individuals. Vuuren and Eiselen (2006) argue that HRM can develop ethics management competence among the organisational members through training and development, thus exploring the need for considering training and development to create and sustain ethical climate in organizations. Consistently, Brown (1995) also

Training and Development Opatha (2009) indicates â&#x20AC;&#x153;Training and development is a formal process of changing employee behaviour and motivation in the way that will enhance employee job performance and then organisational overall performanceâ&#x20AC;?. There is anecdotal evidence showing that ethical training and managing ethics are receiving considerable attention from organizational management. To sustain positive ethical climate, training and


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indicates that on-the-job training is playing a significant contribution in creating and sustaining ethical culture and climate in an organization. He cited an example that an experienced employee can help or support a new employee to resolve an ethical problem in the organisation.

job performance of the employees in the organisation in relation to the set norms and standards for a particular period of time in order to achieve various purposes”. Ethics can permeate through employee performance evaluation and management (Winstanley and Hartog, 2002).

HRM can ensure that members of an organization, including leaders, throughout the organization have the knowledge and skills to make ethical decisions through continuous education, learning, training and development. Ethics education and training must be part of employees’ professional developments (Paine, 1996). Incorporating ethics into HRD through appropriate organizational interventions and developing more humanitarian ways of organizing task, duties and responsibilities are seen as new approaches in leading responsible organizations, beyond considering organizational earnings (Hatcher 2002).

Many organizations take account of ethical actions and behaviour in their performance appraisal systems. Performance evaluation processes must reflect the balance between means and ends. That means how people in the organisation achieve organisational goals and objectives. By monitoring both how and whether goals are achieved ethically must be incorporated within the performance evaluation system. Ethically insensitive monitoring processes fail to detect illegal and immoral behavior and may actually make such practices more likely (Useem, 1998). Thus, this review indicates that organizations can create and sustain ethical climate through performance evaluation function of HRM by developing and implementing ethically oriented performance evaluation policy, procedures and practices. HR professionals must design and develop performance evaluation system with ethical concern. They also ensure the proper implementation of performance evaluation system in an ethical manner.

In this context, this paper highlights many avenues for valuing, creating and sustaining ethical culture and climate through different training and development programms in HRM. Therefore, organisations and HR professionals must take energetic and active steps to create and sustain ethical culture and climate through training and development functions of HRM. This study also emphasizes that a systematic and continuous ethical training is needed at all levels to ensure the positive ethical culture and climate in organisations.

Pay and Reward Management According to Opatha (2009) ‘reward (pay) management is the HRM function that deals with development, implementation and maintenance of a base pay system that is fair’. In an organisation, reward management is concerned with the formulation and implementation of strategies and policies, the purposes of which are to

Performance Appraisal In accordance with Opatha (2009), “performance evaluation is defined as a systematic process of identifying, measuring, influencing and developing


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reward people fairly, equitably and consistently in accordance with their value to the organisation and thus help the organisation to achieve its strategic goals (Armstrong, 2006). These two definitions emphasize the importance of ethics in pay and reward management functions of HRM.

Employee Relations Arthur (1992) defined â&#x20AC;&#x153;employee relations as commitment-maximizing systems that enhance employee participation and involvement in decision-making processesâ&#x20AC;?. Good employee relations also contribute to an environment that enhances competitive advantages through positive employee attitudes and commitment (Judge et al, 2001) and increased customer satisfaction (Koys, 2001). Employee relations refer to systematical organizational governance that provides fair and consistent treatment of employees (Gomez-Mejia et al, 2001). Good employee relations provide employees with opportunities to voice their reactions to management decisions and policies (Gomez-Mejia et al, 2001) which lead to motivated, loyal, and performing employees (Daniel, 2003). By creating and maintaining good employee relations through HRM, organisation can poster the positive ethical culture and climate in the organisations. According to Erdlen (1979), ethics in employee relations is very much important to the organizational success. Based on these evidences, it is clear that employee relations function of HRM is another basis to create and sustain ethical climate in organisations. Thus, this paper argues that organisations can develop and practice ethical oriented employee relations practices to create and sustain ethical climate in the organisations.

Inadequate rewards and pay inequality are main causes of job dissatisfaction and demotivation among the employees. In this context, pay management can play a critical role in creating and sustaining positive ethical culture and climate in organisations. Organizations must encourage ethical behavior by rewarding it monetary and non-monetary ways. At the same time, pay and reward system of an organisation must eliminate unethical behaviour and activities by punishing them (James, 2002). Fair pay based on concepts of equity distributive justice, autonomy and respect (Rowan, 2000) is important to ensure the ethical concern and climate in the organisations. In order to improve the ethical concerns of organizational members, attention should be focused on changing the organizationâ&#x20AC;&#x2122;s ethical climate through reward systems (Jansen and VonGlinow, 1985). Thus, there may be incentives and rewards for members of the organisations who try to better manage ethical behavior in the organisations. Hence, this review indicates that many avenues for creating and sustaining ethical climate through pay and reward management functions of HRM. HR professionals must design, develop and implement innovative best practices which should reflect ethical orientation in pay and reward management functions of HRM.

Implementation of Ethical Policies and Code of Ethics Empirical evidence also suggests that managers, employees and different sub-groups within an organization often have different perceptions of ethical management. Therefore, every organisation must design appropriate


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ethical polices and implement those policies into the HRM functions and practices with the help of HR department. The HRM department often provides the means by which ethical practices are implemented to build an organization with an ethical culture (Miceli et al, 2009).

generating a work-life balance. If HR practices do not effectively reflect workplace ethics and justice, employees will develop a poor impression or perception of the whole process (Richard and Kirby 1999). A study conducted by BergstrĂśm and Diedrich (2011) is really a good example to show, how HR can work in a highly ethical manner even in the downsizing context of Swedish HighTech Company, without affecting the ethical and social responsibility image and reputation of the organization.

It is specifically and clearly notable that above discussed functions of HRM have many avenues for valuing, creating and sustaining ethical climate in an organization. To materialize the functional potentials and in-built nature of HRM in creating and sustaining ethical climate, HR professionals must also work with top management of their organizations. Top management commitment to ethical behaviour should be reflected in the organizational vision, mission and business strategy in order to remove psychological and operational barriers to managing ethics within the organizations.

CONCLUSION Embedding ethics into HRM functional dimensions through suitable organizational interventions and developing more benevolent ways of organizing work is seen as a new approach to the responsible organizations. Through this process, HRM can contribute to create and sustain ethics, ethical culture and ethical climate in the organisations. Embedding ethical orientation in each and every functional dimension of HRM is very much important to every organization.

If such commitment is inconsistent with the current organizational culture, then a significant ethical climate change may be necessary in order to create an ethical climate within the organisation. At all levels, a range of ethical policies through HRM can be formulated in order to support the ethical management philosophy. Measuring the employeesâ&#x20AC;&#x2122; perception of the existing organisational ethical climate and culture and their expectations may be conducted to facilitate policy development.

Ethical climate has an impact on the extent to which the organization experiences serious ethical problems. In order to improve the ethical responses of organizational members, attention should be focused on changing the organizationâ&#x20AC;&#x2122;s ethical climate through recruitment and selection (Bennington and Wein, 2000; Spence, 2000; and Baker and Cooper, 2000; Shen et al., 2009), training and development (Delaney and Sockell, 1992; Brown, 1995; Paine, 1996; Hatcher 2002; Roberson, Kulik and Pepper, 2003; Vuuren and Eiselen, 2006), performance appraisal (Useem, 1998; Winstanley and Hartog, 2002; Brown and Stilwell, 2005), pay and reward management, (Jansen and

Ethical policies at the operational level are implemented at the workplace, involving mainly educating employees, identity-based networking groups, targeting communications to different affinity group members, flexible employment and support for


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VonGlinow, 1985; Rowan, 2000; James, 2002), and employee relations (Erdlen,1979). These studies imply that changing the unethical behavior through ethical climate may have a significant effect on organizational performance and reputation.

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The existing literature does not indicate how ethics, ethical culture and climate have actually been managed through functional dimensions of HRM. As this study considers various HRM functions and attempt to explore the linkages of improving the ethical climate in organizations through HRM functions and practices, it perceives that there is a meaningful contribution to the literature as additions to the existing literature. In this context, this study can be a base for forthcoming research contextually and empirically in the same context, and the significance of this study can be taken into account to that extent.

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Further, future research can examine ethics, ethical culture and climate from multiple perspectives. Moreover, previous studies seem more or less usually prescriptive in exploring the link between HR and ethics. As a result, there is, so far, no study statistically examining the contribution of functional dimensions of HRM in creating and sustaining ethics, ethical culture and climate within organisations and its impact on organizational performance. Empirical research can be extended to explore the contributions of HRM in creating and sustaining ethics, ethical culture and climate in organizations.

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Acknowledgement The author wishes to thank Dr. S.Senthilnathan for his valuable and constructive comments on earlier version of this paper.

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DETERMINANTS OF MULTIDIMENSIONAL POVERTY IN BATTICALOA DISTRICT Jeyapraba Suresh Eastern University, Sri Lanka ABSTRACT It is widely accepted that poverty is multidimensional and not only defined by income or consumption but includes poor health, lack of education, inadequate living standard, lack of income, disempowerment, poor quality of work and threat from violence. Money-based measures are obviously important, but deprivations in other dimensions also need to be considered. Multidimensional Poverty Index (MPI) is a new measure designed to capture the several deprivations that people face at the same time. This paper investigates the determinants of multidimensional poverty in Batticaloa District. Household Income and Expenditure Survey (HIES) 2009/10 data were used for this analysis. The analysis focuses on the followings: MPI calculation, cross tabulation and binary logistic regression. Study found 38.8 per cent of the population are multidimensional poor in Batticaloa District, contrast to 20.3 per cent consumption poor. The model of the determination of multidimensional poverty reveals that household size, age, marital status, and ownership of the dwelling are significantly contributing to the level of poverty. Keywords: Multidimensional poverty index (MPI), deprivation, poor.

poverty as well as the economic factors that derive this outcome. Hence, this study will focus on multidimensional approach to poverty measurement and analysis.

INTRODUCTION The prime objective of this study is to analyse multidimensional poverty and the factors associated with it in Batticaloa District. Conventionally, the magnitude of poverty has been measured using per capita consumption, but over the time the emphasis has changed to incorporating multiple indicators to capture the impacts of poverty, with the UNDP Multidimensional Poverty Index of 2010 being the latest effort. Taking this wider approach to poverty would allow the study to reflect on living conditions at household level such as education, health, environment, water supply, sanitation and employment status that could be affecting

Unlike the traditional definition to poverty, it is widely accepted that poverty is multidimensional consists of many factors including income and consumption. There is no consensus about which dimension to include, what indicators to use, or which method of aggregation is to be adopted. The non- monetary multi dimensional poverty defined based on other three approaches. Capability approach pioneered by Sen(1987) emphasizes well-being comes from a capability to function in a


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society. So the poor often lack adequate food and shelter, education and health, insecurity, powerlessness, etc. Social Exclusion approach defines well- being is to take part all the activities in the society they live. Thus, poor become unacceptably distant from the norms of their community (Gunawardena, 2004). In participatory approach, people themselves involve in a society and assess their own status of poverty ( Ruggeri et al., 2003). Therefore the world bank(2002) defined poverty is multi dimensional quoted:

HDI and HPI have same dimensions, conceptually HDI measures the achievement and fulfillment of human needs while HPI measures deprivation and shortfall. Another multi dimensional deprivation measure developed in 2000 was MDGs. It has eight goals with many indicators. The first goal is about eradicating income poverty and the rests included into multi dimensional poverty. In 2010, UNDP released the MDGs assessment and addressed the need to develop an index to show all deprivations that trap people into poverty ( Alkire and Santos, 2010). The outcome is MPI, currently using measure of multidimensional poverty.

â&#x20AC;&#x153;Poverty is hunger. Poverty is lack of shelter. Poverty is being sick and not being able to see a doctor. Poverty is not being able to go to school and not knowing how to read. Poverty is not having a job, is fear of the future, living one day at a time. Poverty is losing a child to illness brought about by unclean water. Poverty is powerlessness, means lack of representation and freedomâ&#x20AC;?.

MPI complements the income poverty measures by reflecting the acute deprivations that people face at the same time. It identifies people who confront with multiple deprivations across three dimensions such as health, education and standard of living and use ten indicators which largely reflect the MDGs. A household is identified as multidimensional poor if he is deprived in some combination of indicators whose weighted sum is 30 percent or more of the indicators( Alkire and Santos, 2010). Several studies namely Ellis(1984), Bourguignin(2002), Dewilde(2004), Aassve and Arpine(2007) Kupi et al.(2007) Alkire and Foster(2008) Alkire and Seth(2009) sivakumar et al.(2010) Hussain and Menka(2010) Azpitarte(2010) and Paul et al.,(2011) have analysed multidimensional poverty based on different measures. But to my knowledge none of the study focused the MPI.

Multidimensional aspects in the measures of poverty has been developed over the period of time by different names; such as Human Development Index(HDI), Human Poverty Index(HPI), Millennium Development Goals(MDGs) and Multidimensional Poverty Index(MPI). HDI is a tool for measuring and ranking countriesâ&#x20AC;&#x2122; levels of social and economic development based on four criteria: life expectancy at birth, mean years of schooling, expected years of schooling and gross national income per capita. To capture the human poverty HPI uses the dimensions are deprivation: in Survival, in knowledge, in access to safe drinking water, access to safe sanitation, access to adequate basic health care, and access to electric power and energy. Even though

According to the recent statistics, the highest incidence of consumption poverty


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is recorded in the Batticaloa District (20.3 per cent in Head Count Index) which is more than double compared with the national average (8.9 per cent in Head Count Index). However, it is rare to find a study has been conducted by using Batticaloa data to calculate the prevalence of multidimensional poverty. It is extremely important in the current period to identify what is the level of multidimensional poverty and which factors have the greatest impact on determining multidimensional poor and to address these in order to maximize the benefits of current policy.

3. CONCEPTUAL FRAME WORK Based on the objectives, the study used the following conceptual framework shown in figure 1 which was already developed by the Oxford Poverty and Human Development Initiative (OPHI) and the United National Development Programme Human Development Report (UNDP HDR). The framework includes three dimensions and ten indicators which largely reflect the Millennium Development Goals (MDGs) and thus international standards of poverty (Alkire and Santos, 2010). Each of the three dimensions is equally weighted at one third and each indicator within each dimension is equally weighted. The dimensions and represented indicators given in the figure 1.


To identify the determinants of multi dimensional poverty in Batticaloa District.

To calculate Multidimensional poverty index (MPI) for Batticaloa District. To develop the profile of the multidimensional poor in Batticaloa District.

Figure: 1 Conceptual Framework-Multidimensional Poverty Index(MPI)

(Source: Alkire and Santos, 2010)


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Based on the figure 1, this study uses following indicators listed in the table 1(see the annexure). Each indicator has a separate cut-off to determine the person whether who is deprived or not. The weights for each indicator are also given in the table 1.

indicators) household divided by the number of total household. A is calculated by sum of the each multidimensional poor weights divided by the number of total multi dimensional poor household. The MPI represents the share of the population that is multidimensional poor.

METHODOLOGY The study used the secondary data from Household Income and Expenditure Survey(HIES) 2009/10 including 778 household samples with 3049 individuals. The data for the ten indicators described in table 1 were selected for the study objectives of one. The following exogenous variables have been taken into account in the objectives two and three: the size of the household, age, gender, marital status, educational status, current activity, consumption expenditure, ownership, and whether affected by disasters or not.

Descriptive statistics including frequency and cross tabulation were used to show the profile of multi dimensional poor. Binary logistic regression model was used to identify the determinants of multi dimensional poor. The dependent variable of the model is the probability of the household considered as multidimensional poor(variable equal to 1 if household is poor, to 0 non-poor). Sub sample included 310 poor and 468 non-poor. Independent variables in this model are: the size of the household, age, consumption expenditure, being female, current activity (reference:employed), marital status (reference:married), and ownership (reference:constructed/ purchased by an occupant). The expected co- efficient of the model explains the odd ratios (the probability being poor relatively to not being poor).

Multidimensional poverty index(MPI) and the percentage of multi dimensional poor are calculated based on the Multidimensional Poverty Index (MPI) developed by Oxford Poverty & Human Development Initiative and the United Nations Development Programme in 2010. The formula used for the calculation of MPI is:

RESULTS AND DISCUSSION There are 38. 8 per cent of the population of the Batticaloa is multidimensional poor(survey weight has been used to get population). It is 39.8 for the selected sample. The average intensity of the multidimensional poor is 46.4 per cent. Based on these two figures, MPI of 0.18 was calculated as follows:

MPI=H*A H is incidence of multi dimensional poverty and A is the percentage average intensity of MPI poverty among the poor. H is calculated by the sum of deprived (weighted sum is 30 percent or more of the MPI=0.398*0.464

developing countries in 2010. They found 0.021 for Sri Lanka. It is very much less when compared with Batticaloa Index.

Oxford Poverty and Human Development Initiative calculated MPI for103


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Figure 2 shows ten indicatorsâ&#x20AC;&#x2122; contribution to being the household as multidimensional poor. The education is contributing more and health is next. This

findings deviates from what UNDP(Sri Lanka Human Development Report,2012) found, that health is contributing more.

Figure: 2 Contribution to multidimensional poverty

(Source: Authors calculation based on HIES 2009/10) The socio-economic and demographic profile of the multidimensional poor is described in the table 2(see the annexture). It is widely believed that the gender of the household head significantly influences household poverty, especially poverty among female headed household tends to be higher than male headed household (Bein and mugarura, 2006; Ranathunga, 2007; de silva, 2008). This study also incorporates with their findings, i.e 45 per cent of the female headed household are poor compare to maleâ&#x20AC;&#x2122;s 38 per cent.

Many scholars found there is a negative correlation between poverty and education, as education has a positive impact on productivity and wage (Dekkers, 2008; Knight and Quheng, 2009; Hyder and Sadiq, 2010; Archi et al., 2010; Akarro and Mtwene, 2011). Seventy one per cent of the household who passed only primary education are being poor. But only 7 per cent is poor who have high education. Household size has a same trend towards poverty. When numbers of member increases, the level poverty increases too. Fifty seven per cent of the poor households have more than 9 members. Consumption expenditure has a negative relationship towards poverty. When expenditure increases the level of poverty is reduced (see the table 2). The household having a compensated house is poorer than others.

Marital status is another demographic factor with a significant association with household poverty (Akarro and Mtwene, 20 widowed is poorer than being married (Dâ&#x20AC;&#x2122; Ambrosio, 2009; Hyder and Sadiq, 2010). According to this study 53 per cent of widows and 61% of single or separated are being poor.

In conclusion, the household head is female, single/separated, passed primary


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education only, and unable/ too old to work being more poor. In addition, the household is having less consumption expenditure, more members in the family, living compensated dwelling and affected by natural disaster is poorer than others.

ownership of the dwelling are the significant determinants of multidimensional poverty in Batticaloa district. It is impossible to reduce poverty without the improvement in the demographic factors since its input is high towards poverty. The availability of health and education facilities should be improved in Batticaloa District as these are contributing more on multi dimensional poverty. Therefore the policy implication of this study is to focus on the improvement of living condition of the district.

According to the binary logistic model household size, consumption expenditure, age of the HHH, owning compensated house and being divorced/separated have significant positive relationship with multi dimensional poor, while being household worker and owing inherited house had established significant negative relationship(see table 3). Multi dimensional poverty among female HHH is 1.114 times higher the male HHH. This finding is fit to the findings of Ranathunga(2007) and de silva(2008). The multi dimensional poverty is 2.138 times higher among household having compensated dwelling than the household having a house purchased/constructed by the occupant. The odds ratio is 2.864 for the head of the household being divorced/separated relative to married. This finding supported by the findings of Dâ&#x20AC;&#x2122; Ambrosio(2009), and Hyder & Sadiq(2010).

ACKNOWLEDGEMENT I would extend my sincere gratitude to Department of Census and Statistics for giving me the micro level data of HIES 2009/10. REFERENCES [1.] Alkire, S. & Foster, J. (2010) Acute Multidimensional Poverty: A New Index for Developing Countries, OPHI working paper series No. 38. [2.] Aassve, & Arpine, (2007) Dynamic multi-level analysis of householdsâ&#x20AC;&#x2122; living standards and poverty: Evidence from Vietnam, ISER Working Paper 2007-10.


[3.] Sabina, A. & Suman, S.(2008) Measuring Multidimensional Poverty in India: A New Proposal, OPHI Working Paper No. 15

Multi dimensional poverty (38.8 per cent) is higher than the consumption poverty(20.3) in Batticaloa District. So, the living condition in Batticaloa district should be improved to achieve national average while the contribution of educational factors is high in the multidimensional poverty in Batticaloa District. The study also found the size of the household, age, sex and marital status of the head of the household and

[4.] Bourguignin, F (2002) Multidimensional poverty orderings, DELTA working Paper No. 2002-22.


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[5.] Bokosi, & Fanwell, K. (2006) Household Poverty Dynamics in Malawi, MPRA paper No.1222.

[11.] Kupi, A K., Ampomah, E A. & Ahortor, C. ( 2007) Multi- Dimensional Analysis of Poverty in Ghana Using Fuzzy Sets Theory, PMMA Working paper.

[6.] Bruck, T.(2001) Determinants of Rural Poverty in Post-War Mozambique: Evidence from a Household Survey and Implications for Government and Donor Policy, QEH Working Paper Series – QEHWPS67, Queen Elizabeth House, University of Oxford.

[12.] Mok, T.Y., Gan, C. & Sanyal, A. (2007) The determinants of Urban Household poverty in Malaysia, Journal of Social Sciences, Vol. 3, No. 4 pp 190-196. [13.] Sri Lanka Human Development Report (2012)- Published by United Nations Development Programme Sri Lanka. [on line] thepacific/srilanka/Sri%20Lanka%20Hum an%20Development%20Report%202012.p df(accessed 15.09.2013)

[7.] De Silva, I. (2008) Micro-Level Determinants of Poverty reduction in Sri Lanka: a multivariate approach, International Journal of Social Economics, Vol. 3, No. 3 [8.] D’ Ambrosio, C. Deutsch, J and Silber, J.(2011) Multidimensional approaches to poverty measurement: An empirical analysis of poverty in Belgium, France, Germany, Italy and Spain, based on the European panel, Applied Economics, volume 43, issue 8, pp 951961, Routledge Publisher.

[14.] Ruggeri C.L., Ruhi, S. & Frances, S.2003), Does it matter that we don't agree on the definition of poverty? A comparison of four approaches, QEH Working Paper Series –107 [15.] Ranathunga, S.(2010) The determinants of Household poverty in Sri Lanka; 2006/07, MPRA paper No. 34174.

[9.] Gunewardena, D. (2004) Poverty Measurement: Meanings, Methods and requirements, study series No.1-2004, working paper series No.16-2007, Centre for Poverty Analysis.

[16.] Sen, A.(1987), Commodities and Capabilities, New Delhi: Oxford University Press

[10.] Hussain, N. and Menka. (2010) Dimensions of Poverty and its determinants: A case study of Malda District of West Bengal (India), AsiaPasific Journal of Social Science, Vol. 2, pp 67-81.

[17.] World Bank. (2000) World Development Report 2000/2001: Attacking Poverty. Washington, DC: World Bank


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Annexure Table: 1 Composite of Multidimensional Poverty Index(MPI) Dimensions Education

Indicators Years of Education

School Attendance Visit to the medical center


Standard Living

Chronic illness/ Disability of Cooking fuel

Sanitation Water Electricity Floor Ownership of the assets

Cut-off deprived if the head of the household has not been completed five years of schooling deprived if any school- aged( 5-19)child not attending school . deprived if the head of the household visits health centre for the medical treatment during the last month deprived if the head of the household suffers from Chronic illness/ Disability deprived if the household cooks with fire wood, saw dust/ paddy husk deprived if their toilet is shared deprived if the household does not have clean drinking water within the premises deprived if the household has no electricity deprived if the household has a dirt, sand floor deprived if the household does not own more than one of: radio, TV, bike, telephone, motorbike, or refrigerator

weight 1/6

1/6 1/6

1/6 1/18

1/18 1/18 1/18 1/18 1/18

Table: 2 Profile of multidimensional poor Variable Gender of the HHH

Marital Status of HHH Educational level of HHH

Number of Observation 560

Multidimensional poor(%) 38




Married Widowed Divorced/separated Passed Primary(Grade1Grade5)

609 133 36 310

36 53 61 71

Passed Secondary (Grade 6Grade10)



Passed O/L Passed A/L and Got Degree No Schooling

72 89 55

19 7 33



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Current Activity of HHH

Household size of the family

Consumption Expenditure (Rs.)

Ownership of housing

Affected by Natural disaster

Employed Unemployed Household work Unable/Too old to work 1-3

562 44 93 79 334

39 34 32 56 44

4-5 6-8 >=9 2000-5000 5001-10000 10001-20000 20001-35000 >=35001 Constructed/Purchased by an occupant Inherited Freely /as a gift received Compensated Rent/relief payment Yes No

309 128 7 18 94 270 292 104 362

33 44 57 89 68 41 32 25 40

190 75 120 31 104 674

30 35 60 32 66 36

(Source: Authors calculation based on HIES 2009/10)


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Table 3: Results of the Binary Logit Regression

Explanatory Variables

Coefficients(B) .180 .000 .032 .050 -.530 -.593 -.110 -.406 -.288


Household size 4.034 Consumption expenditure 18.489 Age of the HHH 19.752 Being female HHH .025 Being unemployed 2.046 Being household worker 3.224 Being Unable/ too old to work .119 Owning inherited house 3.911 Owning Freely /as a gift received 1.046 house Owing compensated house .760 10.917 Owing rent/relief payment house -.154 .130 Being widowed .363 1.312 Being divorced/separated 1.052 5.955 constant -1.666 16.038 -2 log likelihood Cox & Snell R square 755.231 0.301 (Source: Authors calculation based on HIES 2009/10) Note: HHH=Head of the Household



Odds ratio

.045 .000 .000 .874 .153 .073 .730 .048 .307

1.114 1.000 1.033 1.051 .588 .552 .895 .667 .750

.001 2.138 .719 .858 .252 1.438 .015 2.864 .000 .189 Nagelkerke R square 0.407

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Weerasinghe, R.N. and Jayawardane, A.K.W


University of Si Jayewardenepura, bUniversity of Moratuwa, a

ABSTRACT This conceptual paper aims to further clarify the idea of innovation paying attention to the innovation in developing countries where the results of innovation are still needed to be accelerated. Different approaches to describe the process of innovation have been employed herewith to justify that the ‘new to the world’ scientific or technological exploration led innovations is not the only source of innovation, but that there are many others. Organizations with their own interest and capacity can access different sources of innovations to be competitive globally. Further, the paper emphasizes that learning from others is also considered a successful competitive strategy towards excellence in performance. Finally, the paper emphasizes that it is not unethical learning from others and applying the knowledge created elsewhere for the purpose of development and better performance. . Keywords: Imitation, Innovation, Developing countries, Process of innovation, Learning illustrated remarkable economic improvements through introduction of innovation systematically. This paper aims to understand the different meanings of innovation enabling to identify the best applicable types of innovations for the resource constrained developing countries. Further, the process of innovation will be examined to understand that there are alternative sources of innovation rather than just science and technology led sophisticated innovations which have emerged through a linear model as in developed countries. In conclusion we emphasize herewith the importance of imitation as a strategy for innovation and justify it is one of the most suitable approaches for developing countries and it cannot be simply categorized as an unethical practice.

INTRODUCTION The importance of innovation in the context of economic development and competitive advantages has been emphasized by many scholars, policy makers and practitioners worldwide. Hence, it can be observed that there are different initiations by different organizations and different nations at micro as well as macro levels to promote innovations in their territories. However, in the developing context innovation has become serious a puzzle that making it difficult to understand ‘what it is’ and ‘how can innovations be promoted?’. It has been evident with the limited outcomes of innovation in developing countries and still many have failed in finding the right track to promote innovation while some countries, categorized as newly industrialized countries (NICs), have


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of developed countries. However, at present, there are attempts towards exploring some unsolved problems of innovation capability, sources and strategies of innovation in developing countries as well. The prior orientation of innovation studies relied on “pull factors”, which are based on the introduction of new science and technological solutions mainly led by basic research and applied research conducted in well-equipped and resource enabled laboratories of private and public sector institutions in developed countries. In the sphere of the resource constrained context, the “push factors” are being activated to find out cost effective and resourceless solutions for their sufferings (Berdegué, 2005). More than 4 billion people of the world population are extremely poor and fall at the bottom of the economic pyramid (BoP) where they could spend less than 2$ per day according to the purchasing power parity prices in 2005 (Prahalad, 2010). Organizations in developing countries have to play the main role in innovating low cost solutions to satisfy the requirements of local poor markets instead of looking at science based ‘new to the world’ innovation. There are some studies under different titles such as ‘Frugal innovation’ (Woolridge, 2010: Zeschky et al., 2011), ‘Jugaad innovation’ (Birtchnell, 2011), ‘Bricolage innovations’ (Baker and Nelson, 2005:Andersen, 2008), ‘Pro-Poor innovations’ (Berdegué, 2005), and ‘innovation at the bottom (base) of the economic pyramid (BoP)’ (Anderson and Markides, 2007: Anderson and Billou, 2007) which address innovation

INNOVATION IN DEVELOPING ECONOMIES From the past to date the economic prosperity of a nation and innovation has been linked by several scholars in the fields of economics, entrepreneurship and innovation. Even though there are different outcomes of innovation (Hoffman, 2011) the final end result should lead to economic development and high living standards of the people. The prosperity, economic strength and ability to compete in the global economy of any country depend on the way of valuing innovation, harnessing its potential and putting it to work for the benefit of a nation (Lundvall, 1992; Freeman, 1987; Edquist, 1997). Further it is argued that innovation and technological progresses are widely acknowledged as drivers of economic growth and sources of competitive advantage to firms (Abernathy and Utterback, 1978; Abernathy and Clark, 1985; Damanpour, Szabat and Evan, 1989; Drucker, 1999; Nonaka and Takeuchi, 1995; Schumpeter, 1934). Governments and government representatives such as government of Australia, UK Office of Science and Technology and Government of Manitoba (Canada) have understood and emphasized the importance of innovation and recognized it as a top national priority for the development of nations along with the prosperity of businesses (Bessant and Tidd, 2007). A review of the literature on innovation in the last three decades shows that the attention paid by developing countries to this crucial area of research is much less than that


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needs in developing economies. The ideas presented wherein always suggest giving low cost solutions to the local communities by adapting or adopting the knowledge produced somewhere else in the world or by large organization in the same country. This can be considered as ‘learning by watching’ (Bolton, 1993) or simply imitating others’ knowledge directly or with some adjustments to address local needs. Thus, the present paper aims to understand the ethical considerations of imitation as an alternative strategy for introducing new solutions to the problems of developing economies where resources are constrained when compared with the countries that play in the scientific frontier.

INNOVATIONS IN DIFFERENT MEANINGS The terms ‘invention’ and ‘innovation’ have been rooted in the early stages of human civilization and it is as old as mankind itself. Inventing is the tendency to think about new and better ways of doing things in day to day life and the term innovation simply talks about transferring the invention to real world applications. It can be recognized that from early civilization to the present, mankind has experienced an uncounted number of innovations and some of them added value to human life to make living easy and comfortable (West and Farr, 1990), while some of the innovations; for example weapons, drugs, computer viruses, etc cause to endanger human life (Goffin and Mitchell, 2006).

Table: Different meanings of innovation

Author Oxford dictionary Schumpeter and Fels (1939) Amabile (1996)

Hoffman (2011) Damanpour et al. (1989)

OECD (1981)

Porter (1990)

Definition ‘introducing something new’ ‘innovation is a process of setting up a new production function’ ‘innovation is the development and /or exploitation of new ideas or behaviors and adaptation for the betterment of the society’ ‘innovation might be counted as an idea, practice, or object perceived as new by an individual or other unit of adoption’ ‘innovation is the adoption of an idea of behavior which is pertaining to a device, system, process, policy, program, product, or service and it is new to the adopting organization’ ‘innovation consists of all those scientific, technical, commercial and financial stances necessary for the successful development and marketing of new or improved manufactured products, and the commercial use of new or improved processes or equipment, or the introduction of a new approach to a social service’ ‘innovation is a similar process which involved in product


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West and Farr (1990)

changes, process changes, new approaches to marketing, new forms of distribution, and new concepts of scope obtained through organizational learning as from formal research and development’ ‘innovation is a social process which focuses on intentional introduction and application of ideas, processes, products or procedures within an individual, a group, or a firm, designed to significantly benefit the individual, the group, organization or wider society and it should be new to the relevant unit of adoption’

Source: Author

Even though, the concept of innovation has been a part of human life from its conception to date it is difficult to find a unique meaning due to its complex construction and different uses in different contexts (Goffin and Michell, 2006). Authors point out that it is mainly because of its social and psychological nature and its closer ties to people. Instead of one unique definition, a set of definitions can be presented here which have been formulated by academics and industry specialists as in the Table 1. It requires understanding the concept of innovation as part of a more complex social process and looking at the way in which people interpret, act, and ascribe meaning to the world. The etymology of the term says innovation is revealed by its Latin root, ‘nova’, which means ‘new’, and specifies innovation as the process of embodiment, combination, or synthesis of knowledge in original, relevant, valued new products, processes or services (Luecke and Katz, 2003).

ideas to generate different outcomes which have not been experienced earlier. These new outcomes have been understood as new products, new processes, new methods or tools and equipment, a new market or market approach, new organization, etc. In the definition of Hoffman (2011), innovation is ascribed to a particular entity. If the entity is considered as an organization it results in organizational innovations. Similarly sectoral innovations, country innovations, regional or global innovation can be found in units defined as a sector, a country, a region and global respectively. ‘New to the world’ innovations will bring a new experience to the entire world; most probably they might be break-through innovations which may create a radical change in the whole society. The cell (mobile) phone by Martin Cooper in 1973, he World Wide Web invented by Sir Timothy John Berners-Lee in 1989 and invention of Apple’s iPhone in 2007 are some examples for modern breakthrough innovations. Nonetheless, it is worth to mention that breakthrough innovation introduced by great

Accordingly, many definitions have tried to attribute to innovation a social process of applying new knowledge or


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inventors in the history named a few, Thomas Alva Edison, James Watt, Marie Curie. Innovations bring something new to a particular entity providing many advantages like wealth or profit, cost reductions, convenience, comfort, or many more, and sometimes a combination of these.

accepted by Porter (1990) with the introduction of the R&D component. He has emphasized that the formality and intentionality of the innovation process and this has been acknowledged by West and Farr (1990) as well. Even though some authors emphasize the technical aspect of innovations, the dominance of technical innovation has not necessarily been accepted by modern innovation studies (Klin and Rosenberg, 1986; Chesbrough, 2003; Berkhout et al., 2007). Instead, they discuss different typologies pointing out other types and sources of innovation apart from technological innovation, including technological innovation as one of them. In order to implement a technological innovation successfully the need for innovations in other areas such as administrative, marketing, distribution and maintenance has been recognized consequently.

Although the definition of Damanpour et al. (1989) has only focused on organizational innovations, it can be identified that innovation is a cognitive or knowledge creation behavioral process for changing whatever organizational elements available in the present. It has been accepted that innovation is not necessarily only new to the world. Even the knowledge used somewhere else can be applied by an organization in order to introduce new solutions to their stakeholders. Garcia and Calantone (2002) mentioned two important distinctions in innovation: first, the innovation process comprises the technological development of an invention combined with the market introduction of that innovation to endusers through adoption and diffusion and second, the innovation process is iterative in nature and thus, automatically includes the first introduction of a new innovation and the reintroduction of an improved innovation. Here our argument too relies on the same idea that scientific discoveries are not necessarily predecessors of innovation; instead organizations have a lot of avenues to access different sources of innovation.

TYPES OF INNOVATIONS According to Lundvall (1992), in modern capitalism or the modern business world, innovation has been considered a fundamental and inherent phenomenon, in which organizations and nations should be continuously and consciously involved in. This innovative capability is reflected through long term competiveness of firms, and of national economies, when it comes to the national level. In this study it is believed that innovation is a ubiquitous phenomenon which will require the on-going process of learning, searching and exploring, leading to new products, new techniques, new forms of organization

Another aspect is that the need for engagement in the formal processes consciously and continuously has been


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and new markets. In some countries these activities might be slow, gradual and incremental, but innovation is there and can be observed with a closer look. These kinds of innovations are considered continuous or incremental innovations by the strategists that will result in small changes to existing products, services or processes.

economic changes would be expected in such attempts. In contrast, incremental innovations are minor improvements or simple adjustments in current systems, products, processes or technologies (Munson and Pelz, 1979) and these were neglected in the old ideas on innovation. Discontinuous or radical innovations sweep away much of a firm's existing investment in technical skills and knowledge, designs, production techniques, plant and equipment. This will happen at the firm level or in the industry and at national level. Continuous or incremental innovations allow standardization and maintain status quo within the firm or industry (Utterback, 1996). Fagerberg et al (2005) have also supported this notation of innovation ‘…by its nature a systematic phenomenon, and it results from continuous interaction of different organizations and individuals’. The literature discussed above supports the conclusion that there are two major branches of innovation as ‘radical’ innovation or ‘incremental’ innovation. Especially these incremental innovations were given high prominence and recognized as the major tool with the emergence of Japanese organizations in their early development stages over radical changes. They were very good in ‘learning by watching’ and being the second mover through catching-up compared with American and some European companies who were highly concerned with developing new knowledge through investing a lot on basic research (Bolton, 1993). Schumpeter (1942) has also accepted the importance of routine and

Further, Lundvall (1992) has argued that traditional standard economics did not pay attention to studying continuous innovation and considered innovation as an extraordinary event. Apparently, traditional standard economics were highly concerned with a stable economic equilibrium over time. Hence it was believed that innovation was a result of a change in the external environment, which temporarily disturbed the market equilibrium. After adjusting to the new innovation a new point of equilibrium would be established and would be stable until the next innovation or change happened in the future. However, this idea of long term economic stability is valid for only those innovations which are rare and exogenous events (Lundvall, 1992). These kinds of innovations were explained as ‘creative destruction’ by Shumpeter (1934) in those early studies of innovation. It has been explained as a discontinuous or radical change which creates a breakthrough in present patterns of the industry enabling extraordinary results to win in market competitiveness. However such innovations happened rarely because they are ‘really new’ or ‘new to the world’ in most cases with big risks involved and revolutionary social and


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incremental innovations in his Shumpeterian II approach as it plays a considerable role in large established organizations to improve their performance through their more applied research and development programs. In addition to two main branches, some authors attempt to categorize innovations as in the Table 2. Garcia and Calantone (2002) have discussed about ‘imitative innovations’ which are seen in less industrialized countries at their initial stage of development but later will come up with real innovations, as examples, countries like Japan, China, Taiwan, and Indonesia followed this way initially (Edquest and Homman, 2008). Dosi (1988) have also accepted this imitation approach for innovations by defining innovation as might being a discovery, experimentation, development, ‘imitation or adaptation’ of new products, new production process, and new organizational set up.

which is elaborated by Rothwell and Gardiner (1988), explains innovations as not only radically new inventions but also establish landmarks for new products. Re-innovation can be observed in much of the contemporary real industrial world such as improving existing product designs (incremental), new technology improving existing products (generational), existing technology, creating new products (new mark products), improved materials improving existing products (improvements), and new technology improving subsystems of an existing products’ minor details (Rothwell and Gardiner, 1988). Most of the day to day innovations, at the firm level can be closely seen by the customers are considered as re-innovations. Less developed countries bring the innovations introduced elsewhere in the world, mainly by developed countries, into the local practice under the concepts of this re-innovation and imitative innovation explained by Garcia and Calantone (2002).

The concept of re-innovation (improvements on existing categories),

Apart from the gravity of the change or its impact, there are other criteria to

Table 2: Some categorization of Innovations Garcia and Calantone (2002):

Kleinschemid and Cooper (1991)

radical innovations

high level of innovationsnew to the world

incremental innovations really new innovations discontinuous innovations imitative innovations

moderate level of innovations - new to the company low level of innovations new to the market


Abernathy and Clark (1985): focus on marketing and competitive significance niche creation architectural regular revolutionary

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categorize innovation. Some researchers have studied innovation based on its outcome. For example there is a bulk of academic literature on product innovations, management innovations and process innovation etc. In the history of innovation research, Schumpeter (1934) has attempted to reveal such different faces of innovation as ‘the introduction of new goods, new methods of production, the opening of new markets, the conquest of new sources of supply and the carrying out of a new organization of any industry or (as in Goffin and Mitchell, 2005) new forms of competition that lead to the restructuring of an industry. Innovation has been recognized by authors as the process of shaping and reshaping lifestyles of the people continuously and constantly by introducing new products, services, processes, ideas, and many more things. It can be noted that the term ‘new’ has been used to denote innovations. Most importantly, it should not be forgotten that many commercial innovations are not totally original (Goffin and Mitchell, 2005) it may be imitation or adaptation as explained in Dosi (1988). Ideas originating in other organizations, industries, countries can be used to introduce something new to our fields.

PROCESS OF INNOVATION This section attempts to present alternative ideas for the systematic process of innovation. The importance of reviewing variant conceptual models for innovation has been emphasized by Guta (2011) in his study as it enables to see different aspects of innovations for comprehensive empirical work. It is evident that recent studies have been attempted to impose some sort of conceptual order, called models. These models help to give a better understanding of the emergence of innovation which could be used for a more secure basis for policy formation (Klin and Rosenberg, 1986). Linear Innovation Model The oldest model to describe the innovation process is the ‘linear model of innovation’ introduced by Bush (1945) with his publication ‘Science: The Endless Frontier’. This is considered as initiation for the discussion on innovation models. This model described a simplified perspective about the innovation process based on linear relationships among different steps in the innovation emergence or creation process. The linear model (Figure 1) starts with basic research and ends with sales or diffusion of the outcome generated by

Figure 1: The Linear Model of Innovation Basic Research

Applied Research




Sales (Diffusion)

Sources: Balconi et al. (2010); Godin (2006)


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the new scientific knowledge generated through basic research after following six linear steps as described by Godin (2006) and Balconi (2010).

reasons just stated concerning the need for several types of feedbacks. Science is dependent on innovation which embarks on science as well as the demand of innovation often forces the creation of science. Even though there is a strong interaction between science and technology as understood by the world Klin and Rosenberg (1986) have not agreed with ‘technology as merely applied science’ as it acts as a constraint to understand the process of innovation realistically. The ‘market pull’ approaches to innovation where basic research does not involve significantly and users develop product ideas, instead of just defining their needs, have been notoriously neglected by the linear model. Another important valid argument is, for countries engaged in less scientific explorations and basic research is problematic, this linear model is not applicable and need to foster alternative strategies for harnessing innovation for development (Viotti, 2002). Even though this model was criticized as it is embedded in the linear conceptualization of innovation it has enabled the understanding of factors that promote and constrain innovation, therefore it has been hugely influential especially in resource allocation for innovation projects (Metcalfe, 2003). Paradoxically though it was criticized for inadequacy, this linear model has contributed to the better understanding of the innovation process in the early stages of innovation discourse (Balconi et al., 2010).

This model was accepted by early researchers as there is a justification for the linear model in that it has focused on financial and institutional support for basic research for the exploration of new sciences towards economic development (Balconi et al., 2010). It encourages the fund allocation from the budgets of the firms and government and to be invested in basic research projects which focused on exploration of scientific knowledge (Godin, 2006). Consequently, investments in science and technology in a competitive atmosphere raised expectations of wealth creation and improved quality of life (Metcalfe, 1998). However, this linear model is criticized due to its unidirectional nature of relationships in which there is absence of interactions and feedback (Klin and Rosenberg, 1986) and representation of sequential steps required for innovations (Balconi et al., 2010). The consideration of scientific exploration through basic research has been described as the only contribution to innovation. But there are many sources of new knowledge. Hence, this linear model was considered as an inadequate model to review the process of innovation (Vincenti, 1984). Klin and Rosenberg (1986) argue that the central process of innovation is not science, but design in which some form is essential to initiate technical innovations and redesigns are essential to ultimate success, for the


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process (Guta, 2011). Feedback loops are inherent parts of development process and are essential to evaluate performance, to formulate the next steps forward, and to assess competitive position.

Chain-linked Model for Innovation As noted, the weakness of the simplified unidirectional linear model for innovation has identified the need for more interactive models which can locate sources of innovation in a wider setting. Alternatively, interactive models are adopted as a development of market-pull approaches appearing over the technologyâ&#x20AC;&#x201C;push linear models and with the interaction of both basic and applied sciences (Rosenberg,

There is little chance to introduce workable and optimum innovation outputs the first time as it is restricted by the real world of inadequate information, high uncertainty, and with

Figure 2: Chain Linked Model Research R



Knowledge K


Invent aand/or produce analytic design

PPotential otential Market Market



Redesign R and produce

Detailed D design and test



Distribute and market


Source: Kline and Rosenberg (1986) 1976). The Chain-Linked model (Figure 2) introduced by Klin and Rosenberg (1986) has been embedded in this interactive approach to understand how innovation emerges unlike in the linear model. This chainlink model will account for uncertainty in the process since the multiple feedback paths indicate how firms cope with uncertainty in the innovation

people who are not always perfect. As a result, effective innovation demands rapid and accurate feedback with appropriate follow-on actions to rectify and re-correct unavoidable shortfalls and failures in the innovation process. Irrespective of the type of innovation, either radical or incremental, feedback at each point is essential as it serves multiple sources


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of information input and it provides iterative fitting and trimming of the many necessary criteria and requirements of the innovation (Klin and Rosenberg, 1986).

plays an important role in interactive innovation models and exemplifies how collaboration can reduce uncertainty embedded in innovation processes (Guta, 2011). Hence, characterizing an interactive nature with the feedback in each and every point, the chain-linked model provides empirical evidence that new firms can emerge with new product ideas that individuals and firms identify from the market even though they do not engage in investment based basic research (Drejer and Jorgensen, 2004). Organizations can use the market as a source of empirical knowledge and transform market ideas into commercial products motivating entrepreneurs to seek existing latent knowledge (Metcalfe and Ramlogan, 2005).

The chain-linked model enables conception of the complexity entailed in innovation thus, underpinning the importance of public and private collaboration. It shows the prominence given to universities and public research organizations as important sources of knowledge for firms and shows the impact on innovation through publications (Bekkers and Freitas, 2008). The role of universities and research organizations in developing prototype technologies and then searching appropriate firms to develop and produce products has been recognized in the Danish economy (Drejer and Jorgensen, 2004).

Another important indication of the innovation process described in chainlinked model is the ability to understand the uncertainty underpinning in the process and the importance of developing national institutional infrastructure to promote economic experimentation (Rosenberg, 1992) towards innovations. Rosenberg (ibid) suggests that there should be a national institutional infrastructure including laws and legislation towards; 1. limited liability of investors in particular enterprises, 2. provisions for easy transferring of ownership shares, 3. enabling ease of marketing of shares notably stock markets, 4. enabling hedging against risk through insurance, and 5. defining the relationship between principle and agents as enabling economic experimentation. It is proved that the success of capitalist

There are essential requirements for the emergence of innovations through fruitful linkages between firms and universities in problem-solving activities through contract research (Lee and Win, 2003), facilitating students to acquire practical experience (Klevorick et al., 1995) and sharing university infrastructure with industry for developing innovations (Galli and Teubal, 1997). A study conducted in Uganda provides an example for knowledge transfer from a local university enabling producers to solve problems that led to increases the quality and price of fish industry in a developing economy (Farley, 2007). There is a vital acceptance of knowledge generated by universities and public research organizations as it


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Figure 3: Key Elements of Cyclic Innovation Model Image of the Future Internal Ambitions Strategy

External Trends


Open Leadership


Transition Paths

Process Model

Innovation Projects

Source: Berkhout et al. (2007) relative to socialist economies caused the elements of institutional infrastructure that eased the acceptance of failure needed to sustain and stimulate innovation (Rosenberg, 1992). Hence, it is accepted that national instructional infrastructure will foster innovation beyond the traditional policies based on just science and technology (Edquist, 2001).

underestimates the need for the outputs of basic and applied research to meet the requirements for economic viability and social acceptability (Metcalfe, 2003). With the aim of addressing the weaknesses of the latent models, the Cyclic Innovation model (CIM) attempts to provide insights for creating and exploiting innovation especially in developing countries (Chesbrough, 2003). The central element of the CIM is the open leadership (Figure 3) connected with; 1. setting clear images for the future, 2. determining a transition path to achieve a set vision, and 3. understanding the backward and forward linkages needed for success of the cyclic processes (Chesbrough, 2003).

Cyclic Innovation Model As an extension of the discussion on innovation models, Berkhout et al. (2007) have suggested the cyclic innovation model as an alternative to the chain-linked model. Even though the chain-linked model provides us good understanding about recursive and autocatalytic factors (Metcalfe, 2003) which promote, or discourage in their absence innovations, still its linear relationship is inherent (Berkhout et al., 2007). Further, it

The CIM model lays on two systems to be changed for development namely:


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technical systems and social systems (Nelson and Sampat, 2001). This technical change system can be fostered by scientific explorations and technological research enabling creation of innovations with hard sciences linking the two modes of knowledge creation i.e. scientific exploration and technological research (Guta, 2011). However, those innovations through hard sciences need the economic validity and social acceptability to convert these scientific explorations to market transition.

regarding consumer preferences on new product development has been substituted in the social change system (Metcalfe and Ramlogan, 2008). Hence, total dependency on the technological and scientific explorations is not appreciated too much. There is a requirement of understanding the value a customer places on innovation which leads to success of both firms and economies (Christensen, 1997). Further, the cyclical model recognizes the crucial role played by entrepreneurs (Figure 5) who can integrate both technological change systems and social change systems together in order to introduce economically viable and socially accepted innovations and through this running their businesses competitively (Berkhout et al., 2007).

The CIM model suggests the way of linking hard sciences with soft sciences as in Figure 4. Instead of integrated engineering capabilities which link technological research with new product creations in the technological change system, the differentiated valorization which addresses the capabilities of generation knowledge

Figure 4: Technical Change System and Social Change System Technological Change Cycle Hard Science Cycle

Technological Research

Integrated Engineering Cycle

Product Creation

Scientific Exploration Soft Science Cycle

Market Transition

Social Change Cycle

Source: Berkhout et al. (2007)


Differentiated Valorization


Product Creation

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Figure 5: Cyclical Innovation Model

Hard Sciences Cycle

Scientific Exploration Soft Sciences Cycle

Technological Research


Market Transitions

Integrated Eng. Cycle

Product Creations Differentiated Valorization Cycle

Source: Berkhout et al. (2007) and Guta (2011) The idea presented in the CIM is also important to developing countries as they do not want to necessarily depend only on scientific explorations which they are not good at, but can foster innovations underpinned by soft sciences (Chesbrough, 2003). Based on the scientific explorations that happened elsewhere in the world, especially in the countries at the scientific frontier, developing countries should be able to produce commercially successful products through integrated engineering capabilities and, differentiated valorization as explained in the CIM. The understanding of the development in Newly Industrialized Countries (NICs) through their role of learning, innovation and entrepreneurship, is better explained by CIM. Based on this understanding CIM can be applied as a useful technique to understand development requirements in the developing countries with highlighting the role of leadership and entrepreneurship linked with a clear

vision of the future (Guta, 2011). Further, it provides an overarching framework for an innovation system and a better conceptualization of innovation (Guta, 2011) considering it as a process embedded in the market which determines and creates value for innovation (Metcalfe and Ramlogan, 2008). Thus, CIM is a better approach to define attributes of innovation systems emphasizing linkages among innovative actors than the previous approaches (Guta, 2011), especially in the developing economies. Open innovation model Chesbrough (2003) argues that modern innovation processes are called open innovation and old innovation paradigm are named as closed innovation models characterized by the need for internal control and ability to control innovative activities internally for the success of innovations. Firms are responsible for generating ideas, develop those inside, build them into products and services, market them,


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distribute them, service them and finance them, and support them on their own as self reliant entity (ibid) in this closed innovation paradigm. It is obvious that closed innovation systems are no longer sustainable in the modern society as organizational systems are no more closed as happened in the past mainly because of the diversity and dynamicity of the environment. Addressing the weakness of the closed innovation models characterized by internally focused logic constrained by number of implicit rules (Chesbrough, 2003), the open innovation model has emerged focusing on outward orientation of the firm. It is actually not a completely new but the idea from the chain-linked model (Klin and Rosenberg, 1986), in which the feedback loops in different stages of the innovation process is emphasized,

and the cyclical innovation model (Berkhout et al, 2007), which has focused on more open leadership characteristics, is somewhat close to the foundation of the open innovation model. The open innovation paradigm is considered an alternative or complementary way to knowledge management processes in its various stages and this model accepts that the ideas for the innovation might emerge internally as well as externally, directing the need of architectural and systematic structures to combine internal and external ideas as required in the business models (Chesbrough, 2003). Therefore, contrasting the linear type closed innovation models, complex and various two way linkages can be seen in an open innovation

Figure 6: The Open Innovation Paradigm Research

Development New Market

Boundary of the firm

Internal research projects

Current Market

External research projects

Source: Chesbrough (2003)


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model as in Figure 6.

part which is included in the process of innovation; instead the application might be new as the imitator can apply his or her own knowledge and experience to adjust the original ideas as required. ‘….the company that generates the idea, produces it, and applies it for the first time anywhere (the innovator) from another (an imitator) that later applies and markets that same idea’ (Guellec, 1999). Innovation is conceptualized as a “learning-by-doing” strategy which involves primarily experiential learning within the firm as in the USA while, imitation is characterized as “learning-by watching” which is common in Japanese companies, and this approach has emphasized the external development of new knowledge, importing ideas and technology across organizational boundaries (Bolton, 1993). Further Bolton (1993) has mentioned that this ‘learning by watching’ approach is a multidimensional process which needs competitor intelligence, rapid data collection, and strong work relations among different work groups. He added ‘Imitation as learning-bywatching requires company-wide development of external linkages and substantial investments in formal and informal strategic information systems. In contrast, innovation or “learningby-doing” strategies generally necessitate far greater firm-specific investment to develop internal competencies’.

This open innovation model suggests that research projects and development activities can be carried out internally as well as externally. Firms need to develop their own structures in order to blend both together and strive for successful development and introduction of innovation for both existing and newly created markets. However there is a danger in understanding or misunderstanding the valuable internal and external research projects in the early stages of the process. As pointed out by Chesbrough (2003) some projects might initially seem almost worthless, but they can turn out surprisingly to be valuable. However this open innovation model is promoting the knowledge spill in and spill over for successful innovations, hence encourages firms to maintain successful linkages with the innovation actors of the economy. IMITATION AS A STRATEGY FOR INNOVATION This paper stands on the preposition that innovation is not only ‘new to the world’ but it ranges from the ‘new to the world’ to ‘new to the firm’ as explained in section 3. Representing a clear link between innovation and imitation the meanings can be understood as - innovation is the process of generating new ideas and applying those for the first time anywhere. Imitation is characterized by the application of the ideas generated elsewhere to the firm ‘…the adoption of an idea that is only new for the organization adopting it’ (Damanpour, 1991). This is missing the generating

According to the broader definitions of innovation, imitation lies directly in the ‘new to the firm’ category. Hence, it is not rejected from innovation


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studies as there are good examples in the world of the success stories through the process of imitation or late application of the new knowledge. However, the strategic management literature has not paid sufficient attention for imitation that can also generate sustainable competitive advantages (Perez-Luno, 2007) though many innovation and macroeconomic studies point out the importance of importing knowledge for development. Further, in the same article, different authors have stated that the way innovators can act to discourage imitation for the protection of new ideas introduced for the first time for sustainable competitive advantages is by giving high prominence for protecting from imitators. Anyway, there are very rare cases in the world to prove that it is possible to protect new ideas totally and for a long time as they are not totally untraceable products or processes. In the social reality it is proved that human beings are very good at learning by watching others especially it is very common in the present environment which is connected though technology hence, open to learn from different sources. Westney (1987) argues that ‘Copying is less estimable than inventing: imitation is less honorable than innovation.” We pejoratively label imitators as “borrowers” at best and “copycats,” “counterfeits,” “clones,” “knockoffs,” “pirates,” and “bandits” at worst. Managers are quick to excoriate illegal imitation of U.S. goods by Asian manufacturers. Unfortunately, in the same breath, they also deride legal imitation involving

neither patent infringement nor wrongful usurpation of trade secrets and proprietary know-how. Actually, imitation can be an astute competitive strategy in its own right, involving substantial investment, creativity, and expertise’. Accordingly it has been accepted that there are two kinds of imitations as imitations through violation of intellectual properties where the quest of unethical behaviors are involved and the other forms that do not harm the legal rights of the first introducer. Further it is valued as an improvement of the original idea with its own investment, creativity and expertise as it doesn’t fall under pure imitation, but instead fall in the category of reinvention, which is needed for the continuous development of societies. As in the literature, there are different imitative strategies for organizations who fail in producing their own knowledge through science and technology explorations. Some organizations can directly follow the innovator in the same market as a pure imitator and others can adopt an innovation so as to launch it in a different or new market segment or territory (Perez-Luno, 2007). Bolton (1993) suggests two imitative strategies to win the competitive advantage as ‘strategic followership’ and ‘learning by watching (benchmarking)’. He explains strategic followership illustrating the case of Matsushita and refers to strategic followership to deliberate delay in adopting a new product or practice enabling the learning responses of the market as well as adopting and


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Figure 7: Industry, Competitive Strategy and Company Performance Industries With: 1. Weak intellectual property protection 2. Technologically interdependent 3. High market and technical uncertainty 4. Rapid technological change

Competitive Strategy


Company Performance


Source: Bolton (1993) adapting to it successfully. Accordingly success of Matsushitaâ&#x20AC;&#x2122;s low-cost strategy in the diverse consumer electronics business is predicated upon being a second-mover. Similar successful catching-up cases can be found even in Korea, Taiwan, and nowadays in China. Learning-bywatching as suggested by Bolton (1993) refers to activities directed toward external knowledge sharing and acquisition and this has attracted attention as benchmarking is an example. However benchmarking is only one dimension of learning-by watching because it involves searching for existing best industry practices to improve performance and ignores entirely new practices. Bolton (1993) explains that taking the example from Hitachiâ&#x20AC;&#x2122;s 64 MB chips, how learningby-watching can occurr through another channel that is linking and sharing information and resources through partnerships and strategic alliances. Therefore, this results in the acquisition of new knowledge through observation and assimilation of external information, sometimes, through formal linkages. Bolton (1993) suggests five industries where the

organizations can take competitive advantages, in his model â&#x20AC;&#x2DC;Industry, Competitive Strategy and Company Performance (Figure 7). This shows that industries characterized by weak intellectual property, technological interdependence, high market and technical uncertainty, rapid technological change and rapid information flow create a conducive environment for the firm to apply imitation as a strategic approach for innovations to secure high performance. Hence, it can be concluded that imitation is considered as a strategic weapon in modern firms sometimes not only to secure their presence in the market place but also override the existing firms in the industry with conscious application of different channels of information, investment, own creativity and expertise.


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in modern businesses which enable to outperform established first movers who introduced the knowledge for the first time. Imitators have the time to learn by watching and with their information capacity, industry experience, and own creativity there is good opportunity for catching-up the market and technology for excellence in performance.


Throughout this paper we have tried to construct three different prepositions. First, it is emphasized that the idea of innovation is not only ’new to the world’ introduction but also there are different forms of innovation which can be applied and we mainly paid our attention to the definition of ‘anything new to the firm is considered an innovation’. As a result innovation can happen in any organization everywhere in the world irrespective of their science and technology capacities. Second, we want to emphasize that the innovation process is a complex construction with different information, knowledge and feedback channels that lead to introduction of new solutions. Hence, this is not a linear model as introduced by Bush (1945), instead its shape is well presented by the chain-link model (Klin and Rosenberg, 1986), cyclical model (Berkhout et al., 2007), and open model (Chesbrough, 2003) of innovation. This proposition urges organizations to access different sources of innovation such as leaders in the industry, competitors, suppliers, customers, research centers, government institutes and universities. The need for big investment on R&D to generate knowledge inside the organization is not considered as the one and only way for innovations. As a result, even organizations and countries which have limited capability in knowledge creation can enjoy the benefits of innovation. Third, we emphasized herewith that imitation is also considered a competitive strategy

Finally, we suggest here that imitation cannot be downgraded as an unethical practice excluding intellectual property right violations. As Bolton (1993) clearly mentions ‘It’s time to stop badmouthing imitation as a corporate strategy, there are the industry conditions that can make imitation (rather than innovation) the force that drives success’. This is highly applicable to the developing economies where resources are limited and they cannot employ resources, due to other national priorities, to create new knowledge compared with countries playing in the scientific frontier. Hence, the studies on National Innovation Systems (NIS) in developing countries have now turned to discuss the absorptive capacity (Cohen and Levinthal, 1989) of those countries rather than their capability in knowledge creation. Absorptive capacity is characterized by the ability which is closely related to skills, which enables to recognize and evaluate the potential of knowledge and assimilate it within the organization for the purpose of translating into commercial purpose (Minguela-Rata et al., 2012). It promotes organizations and countries to absorb knowledge through different skills rather than the creating


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knowledge in resource constrained environments.

[3.] Aghion, P., David, P.A., Foray, D. (2009) ‘Science, Technology and Innovation for Economic Growth: Linking Policy Research and Practice in ‘STIG Systems’. Research Policy, Volume 38, Issue 4, pp.681-693.

However we have not paid our attention to the linkages among actors or stakeholders of innovation processes, and especially the policy requirements towards promoting learning-by-watching. Catching-up studies conducted in NICs have sufficiently paid attention to policy requirements and roles of actors towards promoting knowledge importing from where it is produced. We accept the need for this policy support in order to successfully commercialize learned knowledge for local use instead of promoting the firms to import final products and final technologies produced by large organizations in developed countries. The best practices for this encouragement can be easily understood through the development process of Asian countries such as, Japan, Korea, Taiwan, and most recently China and India. It is recommended herewith to focus on studying policy requirements needed for promoting innovations through learning from others in future studies.

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[61.] Simmie, J. (2002) ‘Knowledge Spillovers and Reasons for the Concentration of Innovative SMEs’, Urban Studies, Vol. 39; Nos 5–6, pp.885–902.

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University Press, 1961.) as in Enkel, E, Gassmann, O. and Chesbrough, H. (2009) ‘Open R&D and open innovation: exploring the phenomenon’, R&D Management 39 (4) 2009, pp. 311-316

Western Organizational Patterns to Meiji Japan’, Cambridge: Harvard University Press. As in Bolton, M. K. (1993), “Imitation Versus Innovation: Lessons to Be Learned from the Japanese,” Organizational Dynamics, 21 (3), 30–45.

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THE IMPACT OF GSP+ WITHDRAWAL ON SRI LANKAN ECONOMY Withanawasam, M.P.Ka and Kumara, U. Ab University of Sri Jayewardenepura, Sri Lanka a, a, b

ABSTRACT General System Preference - plus (GSP+) is a non-reciprocal trade agreement which focuses to enhance exports to its beneficiaries. Under GSP+, European Union (EU) became the major exporter of Sri Lanka in 2008 making a continuous trade surplus between EU and Sri Lanka. However, in 2010, EU has withdrawn GSP+ facility reducing Sri Lanka’s GSP level. The major objective of this study was to identify the European Union as an important trade partner to Sri Lanka under the GSP+ scheme and to evaluate performance of GSP+ in the different stages of the EU GSP programme in Sri Lanka. Primary data was used to analyze export environment of Sri Lanka without GSP + facility while the secondary data was used to analyze comparative performance of GSP+ within the pre and post GSP+ periods. According to the finding of paper live animals, footwear and stone products highly affected compared to textiles and garments due to GSP+ withdrawal. Keywords: General System Preference Plus, European Union and Trade surplus obtain Special incentive arrangements for the protection of labour rights (refer annex 01). Based on the guidelines drawn up in 2004, a third EC GSP scheme, adopted on 27 June 2005, under Council Regulation (EC) No. 980/2005, covering the period from 1 January 2006 to 31 December 2008, simplified the scheme by reducing the number of arrangements from five to three, namely: General arrangements; Special incentive arrangements for sustainable development and good governance (“GSP Plus”) and Special arrangements for least developed countries: the “Everything but Arms” initiative. Sri Lanka managed obtain GSP + under this revision. Even though the EU started this facility for other countries since 1st January 2006, due to tsunami disaster, EU provided this facility starting from August 2005 to Sri Lanka. Therefore for this paper the period 1971- 2005 is recognized as the 1st cycle of the EU GSP in Sri Lanka. From 2005 onwards (with

INTRODUCTION European Union General System of Preference (EU GSP) scheme is the trade agreement that Sri Lanka utilizes to enhance market accessibility in the European Union (EU) market and it is a non-reciprocal trade agreement. The phrase ‘Non – reciprocal agreements’ means that there is no liability of beneficiary country to pay in return for benefits it derives from the agreement directly. For the period from 1 January 2002 to 31 December 2005, the European Union put in place the third phase of the scheme by adopting Council Regulation (EC) No. 2501/2001. Arrangements under this phase of the scheme included, Special incentive arrangements for the protection of labour rights, Special incentive arrangements for the protection of the environment, Special arrangements to combat drug production and trafficking and special arrangements for LDCs and the “Everything but Arms” initiative. In this period Sri Lanka was able to


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granting GSP+), the period is recognized as 2nd cycle of EU GSP in Sri Lanka (refer annex 01).

Sri Lanka. In February 2010 they announced that they temporally withdraw GSP+. The Sri Lankan government negotiated with the EU about this matter several times. After a few discussions the EU sent a diplomatic request to the Sri Lankan government for resolve this issue. But the government rejected the request and in turn the EU decided to withdraw GSP+ from Sri Lanka after 15th August 2010. Therefore, now Sri Lanka uses GSP facility to enter EU market.

The 2006 EC GSP scheme introduced special incentive arrangements focusing on sustainable development and good governance, known as "GSP Plus.” Under the scheme, more favorable tariff treatment was granted to a range of products produced in the countries that meet certain conditions pertaining to economic vulnerability and the sustainable development criteria as provided by the 27 international conventions on human rights, the environment, and internationally agreed labour standards to the regulation. Fourteen developing countries benefited from the provisions during 2006–2008. The scheme was maintained broadly, without changes under the 2009–2011 schemes except for changes pertaining to the eligibility criteria and the timing for the application to the scheme.

Kelegama (2010) stated that even though Sri Lanka was not an important trading partner to the EU, more than 50% of garments of Sri Lanka are exported to the EU market. Therefore, the EU is a very important trading partner to Sri Lanka. Sri Lankan readymade garments (RMG) exporters have to accept high tax burdens from loss of GSP+. In addition to that, they had to lose their market share in the EU and it may be grabbed by trade competitors of Sri Lanka in EU market, like India and China. However CBSLR (2009) emphasized that GSP+ withdrawal did not have a significant impact on Sri Lankan economy. Because, the benefits that were received from free trade concessions may gradually diminish over time. In addition to that, the exporters should use these concessions to build up relationships with buyers and in the mean time they also have to address issues related to export to overcome their long standing weakness that decreases competitive advantage for Sri Lanka. Furthermore, CBSL believed that Sri Lankan textiles and garment sectors could overcome this because they had already launched some projects to expand the market share.

European Union (EU) has become the major trading partner of Sri Lanka since 2006, with the opportunity to access GSP+ scheme. Also, the trade relationship between the two parties has broadened while strengthening a positive trade balance to Sri Lanka. However, in 2008 EU brought GSP+ under supervision. Later, the supervision report emphasized that Sri Lanka was liable to human rights violations during the humanitarian operations from 2006 – 2009. The report also indicated that there are shortcomings in relation to of Sri Lanka's implementation of three UN human rights conventions – the International Covenant on Civil and Political Rights (ICCPR), the Convention against Torture (CAT) and the Convention on the Rights of the Child (CRC). Then, the EU focused their attention to withdraw GSP+ from

The current study attempts to explore whether GSP scheme had a significant impact on Sri Lankan Economy or not.


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According to the above mentioned objectives of GSP scheme if Sri Lanka has implemented or utilized GSP in a satisfactory level it becomes a significant player in Sri Lankan Economy.

LITERATURE REVIEW Literature review of this paper broadly divided into international and local reviews.In the international context, Baldwin and Murray (1977), Promfret (1986) , Kungpanidchakul (2007) supports positive impacts of GSP on beneficiary and also the fact that it leads to significant impact over national economy while others Ozden and Reinhardt (2003) and Panagariya (2002) highlighted negative impacts to the beneficiary. Therefore the impact of GSP program on welfare of a country has two sides.

Different views of GSP+ withdrawal establishes the basis of this research paper. It is clear that EU was playing a key role in development of Sri Lankan export sector. Also, GSP+ concession was a catalyst to absorb greater trade benefits to Sri Lanka. It should be noted that that there were unwarranted focus on the impact of textile and apparel sector from GSP+ withdrawal. The textile and apparel sector was not the only sector which was negatively affected by GSP+ withdrawal. Other exports products that received higher benefits under GSP+ were also affected by this. Hence, it was a social and economic necessity to evaluate the impact of GSP+ withdrawal on Sri Lankan economy. In addition to that the EU is the largest export market in the world. GSP+ provided accessibility to enter it. Without GSP+ how would have Sri Lanka implement their market strategies? or whether Sri Lanka wants alternative strategies or alliance to overcome this? To find answers for these questions, a proper evaluation of the impact of GSP+ withdrawal is needed. Therefore, research problem of this paper is, â&#x20AC;&#x153;whether GSP+ withdrawal negatively impacted the Sri Lankan export sector or not?â&#x20AC;? The major objective of this study is to identify European Union as an important trade partner to Sri Lanka under the GSP+ scheme and evaluate performance of GSP+ in different stages of the EU GSP programme. In addition to that the research paper also analyzes the impact of GSP+ withdrawal for top ten exports to the EU from Sri Lanka.

Baldwin and Murray (1977) highlighted the positive side of GSP program without considering negative impacts. They used a partial equilibrium framework to calculate the trade benefits of the US, EU and Japan GSP program, with and without MFN (most favorable nations) tariff cuts. This study highlighted that developing nations obtain benefits from GSP more than MFN tariff cuts. Introducing product differentiation export supply to partial equilibrium, Promfret (1986) states that, GSP beneficiaries gain more from the GSP without MFN tariff cuts. Kungpanidchakul (2007) studied the effect of the GSP program on the welfare of small countries. This study finds that small countries benefit from the GSP program when political pressure is low. Otherwise, they are differences between MFN tariff and the GSP program. Also the GSP granting country gains from the GSP programme and the total welfare of the beneficiary country improves. Aiello and Demaria (2010) have done research regarding the impact of EU GSP on developing countries that are eligible for this preferential treatment. According to the findings, the EU GSP has a positive and significant impact


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on the agricultural exports of preferred counties. Further, they argued that the entire system of EU trade preferences is beneficial to countries which are eligible for GSP preferential treatment. Although the evidence at sectoral level is much more mixed than the data which were obtained when pooling the data, the impact of the ordinary GSP is positive for many agricultural sectors, suggesting that the EU trade preferences actually help beneficiary countries to increase their exports.

preference regime. Within the GSP, this is accomplished by graduating countries from products in which they achieve success also by invoking side conditions. Then, another point is, side conditions. Pabagariya also highlighted the fact that side conditions introduced a certain element of uncertainty for exporters: the benefit may be withdrawn any time on the pretext that a specific standard is not being fulfilled. Finally in the international context, Cooper (2006) emphasized both positive and negative impacts from GSP to beneficiary countries. He pointed out that, one of the positive impacts of GSP programmes, low cost, means providing economic assistance to developing countries and encouraging trade by private sector which in turn stimulates economic development more efficiently than government aid. In addition to that some empirical studies show that GSP positively impacts the increase of exports creating new trade opportunities. However the Rule of Origin (ROO) has a negative impact on the above mentioned benefits. Also GSP shifts trade more efficient products (more competitive advantage) to less efficient products (less competitive advantage) in beneficiary countries. Therefore according to Cooper, tariff preferences could encourage exports of goods for which a country does not have a comparative advantage, thus distorting the domestic allocation of resources. By diverting resources away from potentially efficient producers, preferences could, over time, result in reduced exports and growth. Also, the lack of reciprocity in the GSP program may also result in long term costs to the beneficiary country. But avoiding reciprocal tariff reductions under GSP, sometimes tended to keep in place the protectionist, import â&#x20AC;&#x201C; substitution

Ozden and Reinhardt (2003) argued that the GSP program does not benefit its beneficiaries. They studied the best ways to integrate the developing countries into the world trading system and to lower their trade barriers. According to the study there is an adverse impact on the trade liberalization of beneficiary country. They explained, that remaining eligible for GSP makes a country less likely to liberalize its own trade policy and the GSP "dose" matters as well, i.e., greater export dependence on US GSP preferences boosts a country's resistance to liberalization. Panagariya (2002) explains that negative impacts of GSP programme goes beyond the impact on liberalization of beneficiary. He argues under the original conception; GSP preferences were to cover all products, be non-discriminatory across developing countries except if the discrimination was in favor of the Least Developed Countries, and preclude reciprocal concessions from developing countries. But sometimes GSP has been limited to some products which developing countries have a comparative advantage of, especially, in textiles and clothing. In addition, discrimination across developing countries other than those favoring the Least Developed Countries has also become a feature of the current


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trade policies that have impeded their long term growth. Cooper further stated that, preferential tariffs under GSP can lead to inefficient production and trade patterns, most economists prefer multilateral, nondiscriminatory tariff cuts. When tariffs are reduced in a nondiscriminatory manner, countries tend to produce and export on the basis of their comparative advantage. That is, countries export products that they produce relatively efficiently and import products that others produce relatively efficiently. Some exporters benefit because they face reduced tariffs in the industrial countries, while others are hurt because the margin of preference under GSP is reduced.

improve the ROO. In addition to that, the paper pointed out that these preferences will give greater contribution in the long run rather than in the short run and provide a good basis to address issues of weaknesses of Sri Lankan export industry to face competitiveness in the world market. Kelegama ( 2010) pointed out that the withdrawal of GSP+ from Sri Lanka created a significant impact on Sri Lankan economy because within the last 5 years EU export share is becoming a more significant contribution to Sri Lankan economy. As an example; ready â&#x20AC;&#x201C; made garment exports have benefited from the duty free access to the EU market and now has become excessively dependent on that market for its survival. Also, EU buyers give more priority to the reliability of supply and the personal rapport with seller without solely depending on the prices.

In the Sri Lankan context, first we should review related literature before granting GSP+. Weerarathne (2005) explains importance of granting GSP+ for Sri Lanka. She identified reputation, quality and complains with international labour regulations, relatively disciplined and skilled labour and a trainable labour force, reputed international customer base as strengths of Sri Lankan T & A industry. However she also emphasized the weaknesses of the T & A industry - the geographical location of the country, lack of diversity in markets, increasing cost of labour, limited access to technology, non existence of product design and new product development , inadequate focus on developing backward integration linkages to support the industry and relatively high cost of utilities. Therefore, weaknesses of the export industry of Sri Lanka led to a reduction in the competitiveness of products in the world market. GSP+ is a very good opportunity. She also t highlighted that this is a very good opportunity to develop backward linkages, domestic value addition and to make international agreements to

Aneez (2010) also expressed that the value of the benefits has been estimated at 100 million Euros. Losing GSP+ means EU buyers will have to pay more for Sri Lankan exports, thus the exporters lose price competitiveness and market share. Also he further highlighted this withdrawal of EU GSP+ would tend to the closure of small and medium scale garment firms , job losses, mainly among the rural poor women and a decline in global investor confidence would be among the consequences, including a decline in post â&#x20AC;&#x201C; war foreign investments. In addition, based on some economists views, withdrawal of GSP+ directed to higher pressure on fiscal and trade balances due to significant decline in export revenue. Sri Lanka Apparel Association (2009) also highlighted GSP+ has helped grow exports to the EU even at times of global downturn. The Chairman of the Sri Lanka Apparel Exporters


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Association, Kumar Mirchandani, speaking at the AGM, mentioned that this growth may not happen without the GSP+ behind Sri Lankan exports. Sri Lankan exports to the EU have seen a steady growth over the last several years, not least due to the GSP and GSP+.

Method of Data Analysis Time definition There are three stages of GSP in Sri Lanka. In the analysis, due to lack of some information, the research study had to be limited to different years with the following time periods. Pre GSP+ period was recognized as from 2002 to 2005. GSP+ was granted since 2005 August. Therefore a significant portion of exports were from August 2005 to December 2005. But in reality, we could not expect a sudden significant impact within the first few months. Also, statistics obtained from data sources provide only annual figures. Therefore 2005 August to December was not considered as under GSP+. GSP+ period were from 2006 to 2010. Post GSP+ period was from 2011 to 2012.

In summary, GSP schemes have both negative impacts as well as positive impacts. However, in global world most countries make some trade agreements to improve their trade. As an example India and China were also granted GSP even they have better economic background compared to Sri Lanka. Therefore, based on these reviews it could be concluded that GSP+ plays a significant role in the Sri Lankan economy and its drive improves export trade in Sri Lanka. METHOD


Method of Data Collection

The variables of this paper are in line with the objectives of the paper. Therefore to identify European Union as an important trade partner to Sri Lanka under the GSP+ scheme and evaluate performance of GSP+ in different stages of the EU GSP program, this paper used Export Growth Rate, Preferential exports, Utilization rate and GDP Contribution. Export Growth rate compares overall exports to the EU from Sri Lanka. Also the rank in trade partner list and its contribution to the EU was also considered. Preferential exports are actual amount of GSP and GSP+ granted in Sri Lanka for its exports. Utilization rate is defined as the ratio between imports that actually receive preferential treatment and those that are covered by the scheme. GDP contribution means the EU exports of a particular year / GDP of the year.

Primary sources Primary data has been gathered through a preliminary survey to earn background knowledge about the EU GSP+ withdrawal in Sri Lanka. In this preliminary stage, the research study focused mainly on three stakeholders. They are Government, the EU and Exporters. Results of the study have been based on the results of the preliminary survey. Secondary sources There are three major sources utilized as secondary data in the current study. They are, the EU export help desk, Central Bank reports of Sri Lanka and statistics of Department of Commerce of Sri Lanka.


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balance and 16% positive growth rate in comparison to 2005. Furthermore, in 2007, EU contribution to Sri Lankan exports was 37.6% with US $ 1,479 million trade balances and 13.2% growth rate. Especially at the end of 2009, EU share of Sri Lankan exports were 38.5 % with US $ 1,444 million trade balance to Sri Lanka. These facts emphasized the significant role of the EU in Sri Lankan exports sector.

Then to analyze the impact of GSP+ withdrawal for top ten sectors exports to EU from Sri Lanka the paper has used Growth Rates (Growth rates means the average export value or export quantity improved with in GSP+ period.) Weighted Average, Tariff rate and Marginal Tariff benefit means the impact of decrease 1% tariff rate to import value. DATA ANALYSIS Bilateral Trade between EU and Sri Lanka.

Comparison to the other regions, EU was the major trade partner of the Sri Lanka. Especially with the GSP+, Sri Lanka has obtained significant positive trade balance. According to the annex 02, except commonwealth independent states (C.I.S) and EU, trade balance of all other regions were negative and average trade loss is more than US $ 1,000 mn for the last seven years. In addition to that the average trade gain of EU was more than the average trade loss of other regions in last seven years. Even C.I.S. had a positive trade balance (Average), it was less than US $ 300 mn and EU trade balance was 3 times greater when compared to C.I.S.

In 2009, European Union has become the main exporter of Sri Lanka. Its average contribution to Sri Lankan exports is 35% from total exports of Sri Lanka in last seven years. Therefore under GSP+, Sri Lanka has greater opportunity to expand its trade more competitively than others. This part of the paper focuses on historical performance evaluation of trade between EU and Sri Lanka and it is divided into two sub categories. First part focuses on the importance of EU as trade partner to Sri Lanka under GSP+ and the next part evaluates performance of the top 10 sections under GSP+ and GSP.

However, Sri Lanka continuously records an overall negative trade balance and it is a very important factor to Sri Lanka to expand more market in European regime under GSP+ because it is a non reciprocal agreement which Sri Lanka enjoyed.

European Union is the biggest market in the world. Also, consumer preferences are different from other regions. Within last seven years Sri Lanka has recorded positive trade balance with the EU. Highest trade balance occurred in 2011. With the implement of GSP+ scheme there was a 16% improvement in the exports in Sri Lanka. In comparison to pre GSP= level, average growth of 2004, 2005 and after 2006 has a significant improvement in EU exports in Sri Lanka under GSP+.

Sri Lanka is also ranked as 59th Major importer to EU, importing 2,376,8 mn Euros in 2011 and it is 0.1% out of total imports of EU. In Sri Lankan side, today, the EU is the major exporter of Sri Lanka accounting for 33.8% from total exports as well as major trade partner of Sri Lanka accounting for 20.1% from total trade volume of Sri Lanka.

According to the annex 02, in 2006, EU share of Sri Lankan exports were 33.7% with US $ 912 million trade

In SITC Section wise, miscellaneous manufactured articles ranked highest


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amount of contribution and its share in EU market is 0.7%. Itâ&#x20AC;&#x2122;s a 3rd major import SITC Section in EU imports. According to this comparison between EU and Sri Lanka imports it is very clear that Sri Lanka has more room to expand their trade under GSP+ scheme.

and also have improving it.



According to annex 04, textile sector has scored potential growth rate under GSP+ scheme. Earlier (before GSP+/under GSP) it has (Chapter 61 and 62) 37.8% and 15.6% utilization rate. However under GSP+ scheme it improved 83.43% and 51.93%. Therefore there is significant improvement in textile sector improvement under GSP+ scheme.

All product categories except the miscellaneous ones have positive trade balance with EU. Only Clothing products were among top 10 list rank of EU imports. In addition to that, industrial imports are highly established in EU market than agricultural products. It shows that export diversification program of Sri Lanka well fits with EU Market.

Some other products also improved their utilization rate under GSP+ Scheme. They are Rubber and articles thereof, electrical machinery equip parts thereof; sound recorder and the like and fish & crustacean, mollusk & other aquatic invertebrate. In addition to that, remarkable change was observed on overall utilization of GSP. In 2004 Overall utilization is 42% and it increased to 72.2% by 2008.

Sri Lanka still doesnâ&#x20AC;&#x2122;t have a good position in EU market. It means, Sri Lanka has more opportunities to expand its trade with proper management of trade utilizing, especially GSP+. Because increasing 0.1% contribution in their import portfolio is a significant growth in Sri Lankan Exports.

According to annex 05, EU total exports contribute to more than 7% (except 2009), each year for Sri Lankan gross domestic products. Especially in GSP+ period preferential exports has recorded more than 4% of GDP in Sri Lanka. In GSP period there is an average contribution of GSP is 2.94% to GDP. But in GSP+ period it increased to 4.46 %. Then due to GSP+ scheme there is 1.52% increase in EU exports contribution to Sri Lanka. However after 2007 there is a declining trend in all three variables.

Eligible imports mean imports covered by the GSP scheme. It is observed that, with the increase of total imports to EU eligible imports are also increased at a greater rate than total imports. Preferential Imports are actual amount of GSP and GSP+ granted for Sri Lanka for its exports. According to the annex 03, in 2006 there is a significant increase in Preferential Imports under GSP+ scheme. Trend line also shows that there is an accelerating increase rate after granting GSP+ scheme.

According to the annex 06, in 2008, out of total agricultural sector production, Sri Lanka has exported 8% to the EU. In preferential exports terms that amount is 4% of total agricultural sector production. Sri Lankan Industry also has a significant dependency on EU market. In 2008, out of industry production total exports and

Utilization rate is defined as the ratio between imports that actually receive preferential treatment and those that are covered by the scheme. In GSP+ period Sri Lankan exporters have maintained their Utilization above 50%


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preferential exports are 23% and 13% respectively.

Then, under GSP 2, Sri Lanka has 11.01% average tariff burden for top 10 sector products. However under GSP+ Sri Lanka is only liable to pay 0.36% average tariff burden. Hence, Sri Lanka has 10.65% average tariff benefit from granting GSP+ scheme.

Analysis of top 10 sectors Macro level findings of this paper pointed out how important the EU is as trade partner under the GSP+ scheme. This section of the paper focuses on in depth analysis of historical trade performance of the EU and Sri Lanka based on top 10 sectors.

Under GSP+, Sri Lanka has obtained â&#x201A;Ź 6686.55 as average marginal tariff benefit than GSP scheme for top 10 sectors. Highest marginal tariff benefit is obtained by textile sector and Machinery and mechanical appliances; electrical equipment; parts thereof sector and Articles of stone, plaster, cement, asbestos, mica or similar materials; ceramic products; glass and glassware sectors have recorded marginal tariff losses under GSP+.

The analysis is carried out under two bases. That is, Total Import (TI) to EU from Sri Lanka basis and Preferential Import (PI) basis. Both textiles and plastic and rubber sections have recorded highest ranks in both bases. However due to low preferential imports level Pearls and precious metals are not listed in PI basis but due to significant preferential eligibility, Articles of stone, glass and ceramic products are included in PI basis.

Compared to GSP + Marginal Tax Benefit under GSP 2 is -9089.04. All top ten sectors except Footwear, headgear, umbrellas, sun umbrellas, walking-sticks, seat-sticks, whips, riding-crops and parts there of sector has recorded marginal losses compared to GSP+. Under GSP 2 export quantity has reduced by -0.22 % and Export value increased by 15.82%. However Compared to GSP + growth rates are significantly reduced under GSP 2.

According to annex 07, Under GSP +, highest growth rate is obtained by live animal section (Export value 259.94% and Export quantity 185.68%). However largest preferential amount belonged to the textile section, which obtained 40.34% growth in Export values and 29.52% in Export quantity. But Articles of stone, plaster, cement, asbestos, mica or similar materials; ceramic products; glass and glassware section showed a negative growth under GSP+ in both values (- 15.63%) and quantity (18.95 %). Miscellaneous manufactured articles section and Footwear, headgear, umbrellas, sun umbrellas, walkingsticks, seat-sticks, whips, riding-crops and parts thereof section also recorded a negative growth in exports while a positive growth in export values. Overall average growth rate of top ten sections in export values is 53.66% and export quantity growth is 38.66% under GSP+.

DISCUSSION AND CONCLUSION European Union is a potential trade partner to Sri Lanka. Especially under GSP+, bilateral trade between both these nations expanded, providing more benefit to Sri Lanka. In 2008, EU becomes the major trade partner of the Sri Lanka, contributing to a 38% Sri Lankan export. In addition to that EU exports made a 7% - 9% contribution to GDP of Sri Lanka. In terms of preferential exports this amount is 2% - 4%. Therefore withdrawal of GSP+ significantly affected trade share and trade surplus between EU and Sri Lanka.


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Under GSP+ top ten export sectors to the EU have achieved significant growth. In comparison to GSP, GSP+ Sri Lanka has obtained 54% growth in export value and 39% in export quantity. The highest growth rate has been achieved by live animal section. However, articles of stone sector have recorded a negative growth rate. According to the findings of this paper GSP + withdrawal significantly affected the export of Live animals; animal products and Machinery and mechanical appliances; electrical equipment. In addition to that policy makers need to focus their attention on not only textiles and apparel sector but also other products in the top ten list.

[5.] Interviews related to GSP + withdrawal ,Available from: <> [Last access 9th August 2013] [6.] Interviews related to GSP + withdrawal Available from: < ex.asp> [Last access 10th August 2013] [7.] Kungpanidchakul,K., (2007) ,Do Developing Countries benefit from GSP? [8.] Muhammad,A., & Ngeleza, G.,(September 2009),The role of the Generalized System of Preferences (GSP) in determining carnation demand in the United Kingdom: implications for Colombian and Kenyan exports. Agrekon , Vol 48, No 3.

According to the findings of the paper it is verified that European Union is an important trade partner to Sri Lanka under GSP+ scheme and performance of the GSP+ has significant impact on EU-Sri Lanka bilateral trade compared to the different stages of the EU GSP programme Therefore this paper concluded that GSP+ withdrawal negatively impacted on Sri Lankan export sector.

[9.] Nica,M., Swaidan,M.Z., & Grayson,M.M.,(2006),The impact of NAFTA on Mexican- American trade., IJCM Vol 16 ( 3 & 4) [10.] Ozden,C., & Reinhardt,E.,(2003),The Generalized System of Preferences and Developing Country Trade Policies, 1976-2000, Policy Research Working Paper 2955 .

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[13.] Porter,M.,(1980),Competitive strategy:Techniques for analyzing industries and competitors , Free Press , 1980 , page 05

[4.] European Commission ,(2003), The European Communityâ&#x20AC;&#x2122;s Rule of origin for the Generalized System of Preferences â&#x20AC;&#x201C; A Guide for trades.

[14.] Salvatore,D., International Economics,8th ,Wiley


(2004), Edition

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[15.] Strutt,A., & Rae,A.N.,(2008),Assessing the impacts of preferential trade agreements in the Asian and Pacific region. [16.] Trade Information and Sri Lankan Trade strategies, Available from: < > [Last access 12th August 2013.] [17.] Trade Information, Available from: <> [Last access 14th August 2013] [18.] Trade Information, Available from: <> [Last access 6th August 2013] [19.] Trade Information, Available from: < dex.htm> [Last access 7th August 2013] [20.] Trade Information, Available from: <> [Last access 9th August 2013] [21.] Trade Information, Available from: <> [Last access 12th August 2013] [22.] Trade Information,Available from: < > [Last access 5th August 2013] [23.] Trade Information,Available from: <> [Last access 29th July 2013] [24.] United Nations,(2008),Generalized System of Preferences handbook on the scheme of the European community [25.] Weerarathne,B.,( July 2005 ),Labour Standards and International Trade: The Case of EU GSP


Concessions to Sri Lanka, IPS , Working Paper No 8. [26.] Wijayasiri,J.,(January 2007),Utilization of Preferential Trade Arrangements : Sri Lankaâ&#x20AC;&#x2122;s Experience with the EU and US GSP Schemes, IPS , International Economics Series No 8.

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Annex 01: Different Stages of EU GSP in Sri Lanka

19951999 1st phase

1999 2002 2nd phase

2002 -2005 AUG

2005 AUG2010

Special incentive arrangements for the protection of labour rights;

Special incentive arrangements for sustainable development and good governance (â&#x20AC;&#x153;GSP Plusâ&#x20AC;?)

1st Cycle of the EU GSP Source: Constructed by Authors


After 2010 , GSP Level

2nd Cycle of the EU GSP

Criteria Trade Balance - Value $ mn European Union Trade Balance Growth Rate Export Share % Trade Balance - Value $ mn Asian Clearing Union Trade Balance Growth Rate Export Share % Trade Balance - Value $ mn SAARC/SAFTA Trade Balance Growth Rate Export Share % Trade Balance - Value $ mn Middle East Trade Balance Growth Rate Export Share % Trade Balance - Value $ mn APTA Trade Balance Growth Rate Export Share % Trade Balance - Value $ mn BIMST-EC Trade Balance Growth Rate Export Share % Trade Balance - Value $ mn C.I.S. Trade Balance Growth Rate Export Share % Source : Constructed by Authors

Regional Trade Partner

Annex 02 : Regional Trade Balance of Sri Lanka 2005 680 11% 30.9 -1,785 21% 11.1 -1,328 24% 10.3 -429 2% 4.7 -2,050 20% 10 -1,405 19% 9.6 187 -4% 3.2

2006 912 34% 33.7 -2,435 36% 9.5 -1,751 32% 8.7 -670 56% 5.4 -2,588 26% 8.1 -1,836 31% 8 193 3% 3.4

2007 1,479 62% 37.6 -2,938 21% 9.3 -2,169 24% 8.5 -885 32% 8.4 -3,126 21% 7.9 -2,273 24% 7.7 237 23% 3.4

2008 1,274 -14% 37.4 -4,185 42% 8.2 -3,106 43% 6.9 -1,147 30% 10.4 -4,263 36% 6.4 -3,248 43% 6.4 248 5% 4

2009 1,444 13% 38.5 -2,387 -43% 7.8 -1,614 -48% 6.2 -785 -32% 10.9 -2,629 -38% 6.2 -1,699 -48% 5.8 260 5% 3.8

2010 1,404 -3% 33.3 -3,008 26% 9.1 -2,260 40% 7.2 -841 7% 12.4 -3,480 32% 7.1 -2,323 37% 6.7 342 32% 4.3

2011 1,720 23% 33.8 -5,543 84% 8.3 -4,110 82% 6.6 -1,782 112% 10.7 -6,197 78% 6.8 -4,298 85% 6.1 329 -4% 4.1

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Annex 03 : Overall Analysis : Eligible , Preferential and Utilization Tot al

Eligible Percenta Export ge sX€ Change 1,000

Preferent ial Exports X € 1,000

Percenta ge Change

200 1.340.6 923.908 3 92 200 1.528.5 14% 1.163.132 4 54 200 1.577.9 3% 1.199.242 5 47 200 1.871.1 19% 1.461.796 6 26 200 2.079.5 7 28 11% 1.624.821 200 2.130.6 8 06 2% 1.713.349 200 2.001.4 9 34 -6% 1.675.062 Source : Constructed by Authors

Utilizati on Exports X€ 1,000

Percenta ge Change


Utilizati on Rate 42%










939.451 1.118.08 1 1.237.66 3 1.198.61 3









11% 5% -2%

Annex 04 : Top Ten Products to the EU, Chapter wise ( at HS 2 digit level), 2004 and 2008 HS Code


Utilization Rate 2004



Art of apparel & clothing access, knitted or crocheted




Art of Apparel & clothing access, not knitted / crocheted 15.6%



Natural /cultured pearls , prec stones & metals , coin etc

77.3% Not available


Rubber and articles thereof



Coffee, tea , mati and spices

66.3% Not available


Electrical mchy equip parts thereof; sound recorder etc




Tobacco and manufactured tobacco substitutes


Not available


Fish & crustacean , mollusk & other aquatic invertebrate




Toys, games & sports requisites; parts & access thereof

87.5% Not available


Ceramic products

87.7% Not available



Source: Constructed by Authors




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Annex 05 : EU Exports as % of GDP of Sri Lanka Year

Total Exports

Eligible Exports

Preferential Exports





























Source: Constructed by Authors

Annex 06 : Total Exports Sector wise - 2008



Total Exports

Eligible Exports

Preferential Exports

8% 23%

5% 19%

4% 13%

Source: Constructed by Authors



Vehicles, aircraft, vessels and associated transport equipment

Machinery and mechanical appliances; electrical equipment; parts thereof; Miscellaneous manufactured articles Prepared foodstuffs; Vegetable products

Footwear, headgear, umbrellas, sun umbrellas, walking-sticks, seat-sticks, whips, riding-crops and parts thereof;


5 6 7 8


Source: Constructed by Authors


Plastics and articles thereof; rubber and articles thereof Live animals; animal products

2 3

Articles of stone, plaster, cement, asbestos, mica or similar materials; ceramic products; glass and glassware Average Values for Top 10 Sectors

Textiles and textile articles

Section Name


Top ten Rank

Annex 07 : Top Ten Sector Summary


-15.63% 38.66%



-2.76% 48.69% 8.72%

5.67% 14.27% 24.31% 19.72%





259.94% 158.86%



Under GSP+ Export Export Value Qty 40.34% 29.52%




123.20% 13.14% 30.76%








89.01% 5.99% 7.98%





Under GSP 2 Export Export Value Qty 16.38% 3.57%

Growth Rate




0.90% 39.53% 9.00%







0.00% 0.00% 0.00%






9.51% 2.23%

Under GSP+

Under GSP




0.90% 39.53% 9.00%






Under GSP 2

Weight Average Tax Rate




2098.53 134.65 2482.76






Marginal Tax Benefit Under GSP+




-48189.93 -141.67 -3905.57






Marginal Tax Benefit Under GSP 2

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10th International Conference on Business Management - 2013

AN ENTREPRENEUR’S VALUE PERSPECTIVE IN MAKING AN ETHICAL BUSINESS DECISION UNDER THE CONTEXT OF PRODUCT-HARM CRISES MANAGEMENT: A RESEARCH MODEL Wattegama, W.G.E.J.a, Feng JiaoJiaob and Qing Pingc a,b,c Collage of Economics and Management, Huazhong Agricultural University, Wuhan, P.R. China. a b, c

ABSTRACT An entrepreneur fatally experiences a restoration period after the occurrence of a product-harm crisis as it generates harmful effects on the business with widespread negative publicity among the society. From the present study, the effect of entrepreneur values on ethical production decision-making was revealed. Though the previous studies have proved that managers’ personal values play an important role in the ethical decision making, its consequences have not been revealed yet. Therefore, the study proposes that entrepreneur’s personal values influence the ethical production decision-making (behavior) through the firm’s advances for corporate social responsibility (attitude) based on value - attitude behaviour hierarchy model. The firm’s recent financial performance and the social opinion on consumer safety among the firm’s community groups have been considered as moderating variables for discussing this causal relationship. Keywords: Corporate Social Responsibility, Business Ethics, Entrepreneur, Product-harm Crisis because such crises can result in serious damages and losses both to the affected firms and their consumers (Siomkos et al., 2010). In year 2000, the recall of 6.5 million tires after a news broke that more than 100 people have died from accidents because of defective Bridgestone-Firestone tires; in year 1999, the withdrawal of 30 million number of contaminated Coca-cola cans and bottles in Europe (Heerde et al., 2007); in year 2008, the contaminated infant milk power scandal in China and it has been revealed after the news broke that six babies have died and the occurrence of food positioning diseases for approximately 300,000 infants (Custance et al., 2012); in year 1982, Johnson and Johnson’s cyanide-laced Tylenol poisoning in the pharmaceutical industry

INTRODUCTION The perception of the recurrence of negative effects by firms’ practices on the lives of their stakeholders may cause changes in the individual and household consumption patterns increasingly not only in developing countries but also in developed countries (Sheikh and BeiseZee, 2011). Further, the growing massmedia coverage, aggressive consumer advocacy groups, increasing number of anti-corporate websites and social networks, etc., have also revealed that current firms’ practices are appeared to be socially irresponsible (Wagner et al., November 2009). Among such socially irresponsible practices, the emergence of product related harm crises are more critical and significant in all aspects


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(Priporas and Vangelions, 2008), etc., are examples for such irresponsible practices by the firms during last few decades. Moreover, the non-product related harm crises that have occurred both in profit and non-profit organizations, for examples, the explosion in Union Carbide-Bhopal, sex abuse in the US Catholic Church, and the bribery issues with the International Olympic Committee have also provided public proven experiences for severe reputation damages in organizations (Greyser, 2009).

topics were devoted to discuss about the consumer attributions and their reactions, firms’ characteristics and their responses, competitor reactions, evaluations of the measures adopted by the firms to debate the negative consequences of the crises (Standop and Grunwald, 2009) and so on. Further, many of studies have focused from the consumer perspective and under the domains of consumer relationship and psychology, marketing communication and strategies and brand management. However, the entrepreneur’s role is very much important aspect to study as he has his own responsibility to manage such product-harm crises. As a result the variable of “entrepreneur’s personal values” is a good start-up for studying in this regard. Because values guide the desirable states that a social actor conducts, and evaluates events and people (Weng and de Run, 2013). Further, values often offer prevailing justifications of human action as they are unwavering over time (Kamakura and Mazzon, 1991), tend to be restricted in volume (Rokeach, 1979) and serve as a criterion of behavior (Williams, 1968).

As a result, it is suggested that the practice of corporate social responsibility (CSR) and business ethics make some important implications for the performance and the sustainability of firms (Niehm et al., 2008). Further, it is also highlighted that entrepreneurs have to consider the concept of CSR and the code of ethics when they are crafting strategies in the eyes of their customers and the society at large (Sheikh and Beise-Zee, 2011). However, irrespective of the type of crisis that have been mentioned above, the occurrence of a crisis and its impacts create fatal experiences for the affected firm to re-enter the market and win back their customers.

Research Objective The main objective of the present study is to identify an appropriate strategy from the entrepreneur’s perspective to build up an ethical business climate for the firm to avoid the occurrence of such product-harm crises and to produce a socially desirable outcome from the business process. Further, as it has been mentioned before, though there are growing number of studies under the area of product-harm crisis management, most of those studies have focused to study from the consumer’s perspective. Therefore, still there is a void in literature to be fulfilled from the

Research Problem As in the market economy, the gradual increase in the frequency of the overall enormous harms and a very high degree of concern into the product-harm crises, a need has arisen to discuss about the consequences and crisis management techniques utilizing a series of useful inquiry into this matter. Accordingly, the reviewed literature has confirmed that product-harm crises management studies have been carried out and most of the


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entrepreneur’s perspective in managing such crises. As a result, this paper attempts to contribute some new knowledge to the existing knowledge under this area of study.

product recalls have made product-harm crises as a more frequent occurrence in the business world. The post-crisis period is more critical for the affected firm and more efforts have to be made to bring the products into the market while adopting an effective promotional strategy to win back their consumers (Heerde et al., 2007). However, the selection of appropriate promotional strategies, the effectiveness of such adopted strategies, the ways to achieve the effects of low promotional costs, etc., are the obvious and real business issues (Heerde et al., 2007) that must be considered in this regard. Further, though the crisis product brings harm to the enterprise’s financial resources, the seriousness of the crisis in the face of market failures lead to greater losses which may also cause many enterprises to experience a collapse during the post crisis period (Siomkos et al., 2010).

LITERATURE REVIEW The literature review of the study explores the theoretical and empirical investigations on how an entrepreneur’s personal values will advances for CSR and thereby how he is making an ethical production decision in order to manage product-harm crises. Product-harm Crises and Its Consequences on a Business The term, ‘crisis’ is a general word for a brief, perhaps violent or stunning incident, but that is rarely the case. However, a ‘crisis’ indicates not only an event that happens but also a situation in which a firm subsequently finds itself the follow up can be as threatening to a business and its constituent as the cause. Among different types of crises, product related harm crisis is an occasional and widely publicized about a product defect or harmful event to consumers. According to Siomkos and Kurzbard (1994); Dawar and Pillutla, (2000) Product-harm crises are “discrete, well publicized occurrences wherein products are found to be defective or dangerous”. This type of incidents brings serious impacts to consumers and firms because such events create negative consequences such as de-listing consumer products, changing attitude towards the brand, rapid declining of purchase intentions and so on. Further, according to Dawar and Pillutla (1997), the situations such as the increasing complexity of products, introducing more rigid product safety legislations and increasing willingness of firms to undertake voluntary

Ethical Behaviour of a Firm There is a widespread feeling in the society that many people in businesses are not very ‘ethical’. In general, the term ethics refers to “how people try to live their lives according to a standard of ‘right or wrong behavior’ in both how we think and behave toward others and how we would like them to think and behave towards us” (Ghillyer, 2008, p. 5). Ethics can be further defined following the Theory of utilitarianism. According to that theory, when a person is maximizing his utility, the central moral requirement in this regard is stated as “always act so as to bring about greatest net good for all of those affected by your actions” (Adams & Maine, 1998, p. 14). In other words, this means to recognize that we may on some occasions that are forced to choose between alternatives which have both good


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and bad consequences. The term, business refers to all aspects of the world of work in contemporary society (Adams and Maine, 1998, p. 1). Accordingly, the business ethics involves the application of standards of moral behavior to business situations (Ghillyer, 2008, p.21).

are connected with an unethical situation. For example, who should bear the burden of the costs those accidents or inquiries incur?, who is or ought to be responsible for paying for the costs of defective merchandise or products?, is it fair to leave these costs with whoever is unlucky enough to incur them?, is there a morally defensible basis for shifting the costs over to the producer?, etc. The consumer protection laws and the strict product liability provide criteria and conditions for those questions of public policy and ethics. Also, the formal code of ethics that has been established by the firm is one of the key indicators for evaluating the extent of the firm’s responsibility in relation to such situations.

In a firm level, the functional areas such as sales and customer service, finance, information technology and management have operational policies that reflect the overall ethical culture on that firm’s particular business process concerned. The crisis events of a firm are characterized as the most important and unexpected ethical situations (Hagan and Jo Long, 2005) that are under the firm’s existence (Muller, 1985).

Firm’s Advances for CSR At present, many of the firms are under the increasing pressure from multiple stakeholders that they have to be socially and environmentally responsible. Further, irresponsibility, CSR, and corruption are also encountering an increased scrutiny by consumers, government, and academia (Putrevu et al., 2011). Armstrong (1977) as cited by (Putrevu et al., 2011) has described that there is a tendency of managers to overlook irresponsible and dishonest practices and he has suggested some techniques for directing managerial attention to social issues. According to Jim Roberts, the Professor of Marketing in Hankamer School of Business as cited by Ghillyer, (2008, p. 62) the CSR simply means that “doing well by doing good”. Further, Ghillyer (2008, p. 59) has defined CSR as “the actions of an organization that are targeted toward the achievement of a social benefit over and above maximizing profits for its shareholders and meeting all its legal obligations”. Further, he has

However, all types of crises are not involved the ethical responsibility of a particular agent (Pauchant et al., 2007) and the scrutiny of the public (Seeger and Ulmer, 2001). According to Vassilikopoulou et al. (2011) and Collins (1989), amongst type of crises, the product-harm crises can be recognized as business issues that can cause physical harm to human beings, occur in the output stage of the transformation process, are likely to be highly scrutinized by stakeholders and entail a great likelihood that the firms will be regarded as highly responsible. Hence, product-harm crises can be regarded as unethical situations because not only they can impose harm to individuals (Härtel et al., 1998), but also it can happen due to the involvement of a technological failure, malevolence, distorted values and dishonesty (Lerbinger, 1997; Vassilikopoulou et al., 2011). As a result, it may raise several moral questions about the responsibility and fairness that


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explained that such obligations include the payment of all taxes related to the profitable operations of the business, the payment of all employer contributions to its workforce and compliance with all legal industry standards in the operation of a safe work environment for its employees and the delivery of safe products to its customers.

obligation to society over and above the expectation of its shareholders. Based on the above mentioned arguments, there are two theoretical perspectives on CSR in theorists’ study. That is in favor of the formation of CSR and against it. Therefore those who adhere to against the tradition of social responsibility, CSR theory claims that the historical mission and foundation of corporate existence are to obtain operating profit. If enterprises take on too much social responsibility, the operational costs get increased. This is contrary to profit maximization business objectives as well as it violates the principles of market economy (Friedman, 1970; Levitt, 1958). However, those who support CSR admit that the firm is the basic organic unit to constitute in the market economy as a ‘social man’, firms must also consider the interests of society and the long-term development, and consciously assume the corresponding social responsibilities (Carroll, 1991; Herridge, 2003).

However, according to Dahlsrud (2006), the dilemma that is faced by the businesses is less about what definition to follow, but finding a definition that can be universally applied. Therefore the researchers mainly focus on the definition of CSR, whether firms should consider social responsibility, what responsibility should be taken, and other issues in a fierce debate. However, the understanding of CSR is not uniform to everybody not only because of the different perspectives of CSR but also the definitions are varied widely. Bowen (1953) defined CSR as “Entrepreneur’s goals and values are closer to the relevant policies, obligations to make the appropriate decisions and to take concrete actions reasonable”. McGuire (1963) and Davis (1973) believe that CSR is more than narrow economic, technical and legal requirements of the firm. The firm needs to consider and respond to other matters. Therefore CSR is also defined as ‘‘actions that appear to further some social good, beyond the interests of the firm and which is required by law’’ (McWilliams and Siegel, 2001). However, Friedman (1970) argues that it would be unethical for a firm to do anything other than delivering profits for its shareholders and also he has specified that those profits should be earned “without deception or fraud”. However, the social contract perspective has suggested that the firm has an

According to Ghillyer, (2008, p. 67), there are triple perspectives on CSR: ethical, altruistic and strategic and that can be applied by the firms in an opportunistic way for their own purposes. Ethical CSR represents that the firms pursue a clearly defined sense of social conscience in managing their financial responsibilities to shareholders, their legal responsibilities to the local community and society as a whole. Therefore the firms’ ethical responsibilities are to “do the right thing” for all their stakeholders. Altruistic CSR takes a philanthropic approach by underwriting specific initiatives to “give back” to the firm’s local community or to designated national or international


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programs. That means, under this perspective the firms are merely doing the “greatest good for the greatest number”. As a result, it is argued that this approach violates the shareholders’ rights and does not concern for the firm’s overall profitability. In contrast to that, Strategic CSR is targeted toward programs that will generate the most positive publicity or goodwill for the firm. Therefore this approach is ethically commendable as it makes benefits to stakeholders while meeting the shareholders’ expectations.

team who rated themselves with having a strong commitment to ethics was likely to engage in CSR activities. Carroll (1979) presented CSR as a hierarchical model which later widely adopted by academics. According to him, CSR includes economic responsibility, legal responsibility, ethical responsibility and the freedom to decide the responsibility. Gallo (2004) obtained dimensional model of CSR: internal and external. The internal social responsibility includes the community to provide satisfactory products or services, to create economic wealth, comprehensive development of internal staff, and to ensure sustainable development of enterprises. The external social responsibility is embodied in the efforts of correcting or hindering good social affairs sabotage. Reinhardt (1998) suggested that the firms which use CSR can prevent its competitors to imitate, which can often obtain abnormal returns over the opponent.

However, to understand the theoretical approaches for CSR, one such approach from the perspective of entrepreneurs is the enlightened self-interest model (Aram 1989; Arlow and Gannon 1982) which says that advances for CSR will help to share of the economic benefits of CSR with the stakeholders as CSR will cultivate loyalty among the firm’s stakeholders. According to Ghillyer (2008), though the firm is leveraging its maximum possible publicity out of their efforts through CSR, they will attract the customers. But if the products of the firm do not live up to the customers’ expectations, they will not be retained. Therefore the products of the firm must meet and exceed the expectations of the customers and if it happens in the long term, then the needs of all stakeholders should be well taken care of.

Values of an Entrepreneur and Ethical Decision-Making Practice A successful entrepreneur is not only profit-oriented but also he has his own values and beliefs that he cares about and stands for. He uses these as guides when dealing with his employees, customers and when he is making decisions. This kind of entrepreneur is known to give great value not only to his customers but his colleagues and employees as well. Further, the people who work for and with him can feel this and are apt to radiate the similar in their work and thereby produce excellent results. Furthermore, the customers appreciate this characteristic and they are more likely to trust someone who values them than someone who does not. They also know that this entrepreneur is someone that they can trust to do the

Some scholars have confirmed through their studies that entrepreneurs play an important role in the management decision making (Waldman et al. 2006) and have proved that there are influences of transformational leadership qualities on a firm trend to engage in CSR. Muller and Kolk (2010) explored that management


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right thing all the time. As a result, the practice of business ethics and CSR could be materialized effectively with the entrepreneur’s value orientation in his business. Theoretically, the term ‘value’ has been defined by Robins (2005) as “a specific mode of conduct or end state of existence is personally or socially preferable to an opposite or converse mode of conduct or end-state of existence”. In recent studies which were based on the value construct have used Rokeach Value System (RVS) to describe the value structure of a population or group of individuals (Weng and de Run, 2013) and which consists of two sets of values; terminal and instrumental. Value is also arranged by certain hierarchy weight (Schwartz, 1992) and where it is conceived as personality (Rokeach, 1973). Further, Robins, (2005) has mentioned that several studies have confirmed that these RVS values vary among groups and people in the same occupations or categories that tend to hold similar values. According to him, Hoftstede’s Framework for Assessing cultures in terms of values has been identified that managers and employees vary on five dimensions of national culture such as power distance, individualism versus collectivism, achievement versus nurturing, uncertainty avoidance and longterm versus short-term orientation.

abstract cognitions (values) to mid-range cognitions (attitudes) and to specific behaviours (Weng and de Run, 2013; Homer and Kahle, 1988). The term ‘personal value’ is described as the learned beliefs that serve as the guiding ethics in an individual (Rokeach, 1973; Schwartz, 1999). Further, according to Kropp et al. (2005), the personal values are beliefs or concepts that guide assessment and choice of particular events and behavior to an enviable end state. Most of the previous studies in personal value were done to predict and explain attitudes and behaviours (Kahle, 1984; Kropp et al., 2005). Also, it is mainly used in situations where it provides a theoretical set of behavioural guiding codes (Williams, 1979) as well as reflect the basic adaptation of characteristics apart from guidelines to shape and guide attitudes and behaviours (Kropp et al., 2005). Weng and de Run (2013) have considered three components of personal values namely internal, external and interpersonal to study how the consumer makes a choice among three different products based on the sales promotion preferences’ effect. However, their findings have revealed that there is no significant impact in consumers’ purchase satisfaction and behavioural intention by personal values for all the product type that they were investigated in their study.

The present study follows the valuesattitude-behaviour hierarchy model and there is a causal relationship in this model (Homer and Kahle, 1988, Lotz et al, 2003). Further, this model indicates that value influence behavior directly and indirectly through attitude (Homer and Kahle, 1988). Accordingly, this would imply that the hierarchy of cognitions from the valueattitude-behaviour flows from a more

However, in the firm level studies which were based on the Theory of upper echelons have found that the firm’s CEOs’ experiences, values, and personalities are greatly influenced their interpretations of the situations that they face and in turn, affect their choices (Hambrick, 2007). According to Chin et al. (2013), among the


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many empirical tests that have been carried out under the theory of upper echelons, the vast majority have examined the effects of CEOs’ experiences (e.g., Miller and Shamsie, 2001), a few have explored the effects of CEOs’ personalities (e.g., Peterson et al., 2003) and even fewer have considered the role of CEOs’ values in decision making (e.g., Agle et al., 1999; Simsek et al., 2005). Hambrick and Mason (1984) have emphasized the role of values and moreover the previous studies on executive leadership prominently have proposed that values enter into managerial actions (e.g., Barnard, 1938; Selznick, 1957; Andrews, 1971). Perhaps the limited empirical attention to CEOs’ values can be understood as the usefulness of focusing on personal preferences is often limited. Preferences are generally not observable, and virtually anything can be explained as a matter of tastes (Brickley et al., 1997 p. 27).

have highlighted that it is especially noteworthy to a study reflection of the entrepreneur’s personal values in decision making because values are typically thought of as relatively opaque and out of view compared with the other attributes. METHODOLOGY In order to achieve the purpose of developing a research model in determining an ethical production decision-making behaviour from an entrepreneur’s personal value point of view, the present study has used the scholarly work that has been published in reputed journals and textbooks. The propositions that have been made under the proposed research model will subject to future empirical testing and validation using an appropriate analysis tool. RESEARCH MODEL Maio and Olson (1994) have tested the value - attitude - behaviour relations especially with the moderating role of attitude functions. The findings of the study have illustrated that the direct measure of attitude functions can be used to predict the strength of these relations. Further, this model has been applied to investigate the roles of personal values in e-shopping consumer behavior (Jayawardhena, 2004). Based on this value - attitude -behaviour hierarchy, the model of the present study was established. Figure 1 shows the proposed model.

However, Chin et al., (2013) have considered the construct of ‘political ideology’ (political conservatism vs. liberalism) as a reflection of CEOs’ values and its influence on decision making in an arena of CSR with the moderating variables of the CEO’s relative power and the recent financial performance of the firm. The finding of their study shows that politically liberal CEOs, tend to be relatively unresponsive to their firm’s recent financial performance levels when advancing for CSR in line with their personal values and such CEOs emphasized CSR even when company financial performance was poor. Conservative CEOs, by contrast, were more sensitive to current performance levels, especially curtails CSR initiatives when times were poor. Further, the authors


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Figure 1: Research Model

entrepreneur’s personal value is the ‘learned beliefs’ that serve as the guiding ethics in an individual (Rokeach, 1973, Schwartz, 1999) who is occupied under the category of ‘entrepreneur’ with regard to the attitude towards CSR.

Recent Financial Performance

Entrepreneur’s Personal Values


Production Decision

Proposition 01: There is a relationship between the entrepreneur’s personal values and the firm’s advances for CSR.

x Ethical x Self-benefit

Social Opinion on Consumer Safety

Moderating Role of Firm’s Recent Financial Performance A prior research has reported that there is a positive relationship between a firm’s recent financial performance and subsequent CSR initiatives (Orlitzky et al., 2003), and have suggested that firms tend to emphasize CSR to the extent that they can financially afford to do so.

Source: Author constructed Values of an Entrepreneur and CSR There is a substantial body of empirical literature which has examined values and business ethics. Such studies include values held by managers (Lincoln et al., 1982; Posner and Schmidt, 1984), comparisons of values (Frederick and Weber, 1987; Nystrom, 1990), a comparison of individual and organizational value systems (Liedtka, 1989), and corporate ethical values and organizational commitment (Hunt et al., 1989). The proposed model was established based on this conceptual framework of the value - attitude behaviour hierarchy and following the theory of upper echelons.

Proposition 02: The interaction between an entrepreneur’s personal values and the advances for CSR will moderate by the firm’s recent financial performance. CSR and Business Ethics From marketing literature perspective, the firm’s economic benefits of CSR have been linked to consumers’ positive product and brand evaluations, brand choice, and brand recommendations (Brown & Dacin, 1997; Handelman & Arnold, 1999; Sen & Bhattacharya, 2001; Klen & Dawar, 2004). Further, some studies have suggested that consumers are reporting an increasing interest in ethical and socially conscious products (Cotte and Trudel (2009) but Luchs et al. (2010) have indicated that the market share of products positioned using ethical attributes is relatively small over the products positioned on self benefitoriented attributes such as performance and price as cited by Peloza et al., (2013).

Further, many scholars have suggested that behavior is a result of values and attitudes. Both Connor and Becker (1979) and Homer and Kahle (1988) propose that values provide the basis for the development of individual attitudes that lead to specific decision making behavior. Williams (1968) has stated that a person's values serve as criteria or standards for identifying his preference. The working definition of the construct of the


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Proposition 03: When the advances for CSR are high, the entrepreneur makes the decision to provide a product with ethical attributes than self-benefit attributes to the market.

selected as the moderating variables to this main relationship. Then, the identified relationships have been hypothesized to proceed with future empirical testing and validations.

Moderating Role of Social Opinion on Consumer Safety According to the Enlightened Self-Interest Model, the socially responsible actions by a firm will be mutually benefited over time with the support of loyal customers, employees, suppliers, and other stakeholders (Galaskiewicz 1985; Keim 1978). However, this economic exchange is influenced by the existing social norms, values, and expectations held by the community groups (Uzzi 1996; Nehm et al., 2008).

Some implications could be derived from this model when it would empirically validate for the Human Resource (HR) Managers and Crisis Managers of a firm. The specific values or value structures associated with ethical behavior and the values or value structures associated with unethical behavior have not been specified (Fritzsche and Oz, 2007). Therefore the HR Managers can prepare HR development (HRD) programs to change the entrepreneur’s values for enhancing their CSR strengths or decreasing their CSR weaknesses and thereby enhance the decision making skill which will endure an ethical beahviour in the firm. The Crisis Managers of firms may also get implications from the finding of this empirically tested model as the responsible crisis planning and ethics is a learning process in which the firms learn from thoughtful evaluation of all aspects of their environment, including customers, suppliers, competitors, and the society at large while taking both short and long term organizational goals into consideration. Therefore finding an appropriate form of strategic flexibility is reactive as the extent, nature, and timing of a crisis are difficult to predict and proactive offensive action to manage the crisis is also unlikely to be occurred.

Proposition 04: When the advances for CSR are high, the firm’s decision for providing the products with ethical attributes over the products with selfbenefit attributes is moderated by the social opinion on consumer safety among the firm’s community groups. DISCUSSION AND CONCLUSION Although a growing number of scholars are enthusiastically do inquiring on the discussions of consequences of product related harm crises in different research domains, still there is a void in acknowledging the entrepreneurial perspective in managing such a crisis. As a result, the present study has focused to propose a research model based the available literature. The selection of the constructs of this model was based on the value – attitude - behaviour hierarchy model and the theory of upper echelons. The firm’s recent financial performance and the perception of the consumer safety among the firm’s community groups were


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IMPACT OF ENERGY COST ON FOREIGN DIRECT INVESTMENTS IN SRI LANKA Rathnayake T S a, Amratunge S P Pb, and Withanawasam M P Kc a, b and c a

Department of Business Economics, University of Sri Jayewardenepura, Sri Lanka ,b and

ABSTRACT Foreign Direct Investments (FDI) play a key role in the development process of a country. To attract potential FDI, Energy cost is a highly competitive determinant among the developing countries. This research study analyzed the impact of energy cost on Foreign Direct Investments in Sri Lanka. This argument is presented through suggesting that energy intensity causes FDI inflows, and that therefore, energy cost has a significant impact on FDI. The analysis was carried out in three aspects. The statistical relationship was analyzed by way of a regression analysis through a model designed to identify determinants of FDI. Energy use came up as a statistically significant variable to determine FDI. The Granger Causality test also suggested that energy use caused FDI inflows. The number of BOI projects approved is a measure that can be used to approximate the number of foreign direct investments made. This number was analyzed sectorwise to identify which sectors have attracted more investments during the past 10 years. Apparel and Other Manufacturing industries were identified as the sector with the most number of investments, as well as higher energy consumers when compared to other sectors. The regional comparison pointed out that in terms of electricity prices, Sri Lanka is among the highest in the region. However, close competitors of FDI for Sri Lanka such as India, Bangladesh, Pakistan, Taiwan and Indonesia charge much lower rates for electricity.

Keywords: FDI, Energy and Development studies are carried out based on developing countries, for example, Tang (2009) in Malaysia.

INTRODUCTION Previous studies on determinants of FDI have identified energy use as a significant variable that has a positive impact. This is in the sense that the more energy intensive a country is, the more industrialized that country will be. Nonnemberg and Mendonca (2004), among other authors, have suggested that energy intensity is a driving factor for FDI. Many of these

This study analyses the effect made by energy cost upon FDI inflows of Sri Lanka as a developing country. When energy intensity attracts more FDI, it is in the sense that the cost of energy in the host


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country is lower than that of the nation from which the investment comes.

importance when it comes to operating production plants.

For the energy cost to be low in the host country, the country must produce energy using cheap resources and must have efficient production facilities. This means that even though the economy is still developing, the country needs to have sufficient infrastructure facilities to support industrial productions and export manufacturing.

Since FDI inflows are mostly seen in industries of mass scale production, energy plays a more important role in FDI than in domestic production. Therefore, energy infrastructure and the cost of energy are significant factors for attracting FDI. But the energy cost in Sri Lanka has seen a continuous and rapid increase through the past years. This is depicted in figures 1.1 and 1.2, which indicate the past records of electricity prices and fuel prices of Sri Lanka.

Many studies carried out in BRICS countries (Brazil, Russian Federation, India, China and South Africa), which are in the category of fast growing developing nations, also suggest that improved infrastructure facilities and energy intensity is a significant determinant of FDI.

The FDI inflows to Sri Lanka in the past years have manifested drastic fluctuations. Figure 1.3 exhibits this trend. The present study tests whether the increasing energy cost is a reason, among others, for this behaviour of FDI. 14 12 10 8 Average Electricity price (Rs/kWh)

6 4 2 2010




0 1980

Average Electricity Prices (Rs/Kwh)

It is intended by this study to find out whether this theory holds in Sri Lanka as well and if it does not, to identify the reasons for it. As a developing country, Sri Lanka needs FDI inflows for economic growth as domestic investments are at a very low level. However, the competition posed by other developing countries, especially by those that are of similar economic and cultural conditions such as South Asian and South-East Asian countries, is severe.


To outrun such competition and attract more FDI, Sri Lankan economy should be more business friendly and cost efficient than those other countries. Low wage rates and availability of cheap raw materials are the basic reasons for FDI inflows into developing countries. But together with those inputs, energy is of utmost

Figure 1. Average Electricity Prices (Rs/Kwh) 1980-2010 Source: Based on Annual report of Ceylon Electricity Board


800 700 600 500 400 300 200 100 0

inflows in Sri Lanka? What is the competitive state of Sri Lanka among other Asia Pacific countries? What strategies can be used by the Sri Lankan government to overcome the competition?




FDI net inflows BOP (current US$) 1990

FDI net inflows BOP (Current USD)

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These research questions are modelled into research objectives to define the scope and boundaries of the study as well as to act as a guide for the study.


180 160 140 120 100 80 60 40 20 0

The main objective is to find out the type of relationship between energy cost and FDI inflows in Sri Lanka and its significance, and to recommend better management tools to attract more FDI. Another is to compare Sri Lanka’s energy cost with that of other regional countries to identify the position of Sri Lanka in terms of energy cost.

Petrol (90 oct.) Auto Diesel Kerosene

1990 1995 2002 2007 2012

Average Fuel Prices (Rs/l)

Figure 2. Fuel Prices (Rs/l) 1990-2012 Source: Based on Marketing and Sales reports of Ceylon Petroleum Corporation

Furnace oil (800)

A further objective of the study is to analyze the composition of FDI inflows sector-wise to identify which sectors attract more FDI. Through a analysis, it is expected to identify possible strategies that Sri Lanka can adopt to reduce energy cost and encourage FDI inflows. The following are the specific objectives of the study.


Figure 3. FDI net inflows BOP (Current USD Source: World Development Indicators, World Data Bank

x The main research problem of the study can be stated as “Is there a significant impact from the increasing energy cost for the determination of Foreign Direct Investment inflow in Sri Lanka?”



This main problem is broken down into three research questions in order to perform the analysis. These questions are as follows: Is there empirical evidence to suggest that energy use is a driver of FDI



To test whether there is any significant relationship between energy cost of Sri Lanka and foreign direct investments To compare Sri Lankan energy cost with that of other Asia Pacific countries To analyze the FDI inflows according to different investment sectors To identify alternative strategies to minimize energy cost of Sri Lanka and to encourage FDI inflows.

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The ability to attract foreign capital can bring numerous advantages to a country. It will increase the rate of capital accumulation since domestic savings are at a low level, and consequently will speed up the development process to longer term growth prospects and increase the wealth of the population. The growth of an economy is thought of not only as an increase in productive capacity but also as an improvement in the quality of life for the people of that economy (Nonnemberg and Mendonca, 2004).

role in determining the competitive production prices that Sri Lanka can offer to foreign investors. The significance of energy cost in this aspect is the major focus of this study. Among other determinants of FDI, energy usage and cost have been selected for the analysis because the production costs of Sri Lanka are directly and indirectly affected by energy costs. The hypothesis of the study is “Energy intensity induces FDI inflow.” Therefore the null hypothesis will be “Energy intensity does not induce FDI inflow.” This hypothesis is developed based on previous works of He, Gao and Wang (2012).

Economic growth is usually associated with technological changes. Developing countries also depend on foreign investors to bring in these technological changes into the country along with their capital investments.

The study is carried out in three aspects. One aspect will be the study about the relationship between FDI and energy use. OLS method is used in this analysis to find out whether energy use is a significant determinant of FDI, among other determinants.

The investor- since it is he who bears the risk- expects positive returns. This return is expected through the difference in prices of the factors of production and the size of the national market. Foreign investors show special interest in developing countries because of the availability of cheap labour. Therefore, there is competition among the developing countries to attract foreign investors. As a developing country, Sri Lanka also faces this competition. The competitiveness of the country can be improved by providing low cost production facilities to the foreign investors.

As the second aspect, a analysis will be carried out on the number of investments each year for different sectors of foreign investment in Sri Lanka. It is expected to find out whether high energy consuming industries attract a higher number of FDI projects. The third aspect will be a comparison of the different categories of energy costs between Asia Pacific countries and Sri Lanka. The objective of this analysis is to identify Sri Lanka’s close competitors, in terms of low energy cost, in attracting FDI.

Energy cost in Sri Lanka can affect most of the factor prices in production. For example, if transportation costs are high owing to high fuel prices, labour will demand higher wages to compensate for their travelling expenses to and from work. Therefore, energy cost plays an important

1) Energy Use as a Determinant of FDI: As the literature suggests, there is a wide


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variety of determinants that affect FDI. Accordingly, the following variables are selected in order to carry out an econometric analysis on the determinants of FDI. This analysis will incorporate as many determinants as possible to stress the idea that there are other significant variables that affect the FDI inflow.

GDP growth (GDP): Literature suggests GDP growth as an important determinant of FDI. This is based on the argument that developing countries attract more FDI in the sense that their developing markets will offer greater profitability to investors. Hence annual GDP growth rate is included in the study. GDP growth is assumed to have a positive relationship with FDI, based on the argument of rapidly developing countries getting larger flows of FDI (Vijayakumar and Sridharan, 2010).

Labour cost (LAB): It is a fact acknowledged among authors that a low cost labour force attracts more FDI. Real Wage Rates Index for Workers in Industry and Commerce is used to incorporate this value. The relevant data is collected from the Annual reports of Central Bank of Sri Lanka. This variable is assumed to have a negative relationship with FDI (Vijayakumar and Sridharan, 2010).

Inflation rate (INFL): Inflation rate is used to incorporate economic stability into the model, according to the classical argument of stable economies attracting more investments due to lower uncertainty. Inflation is expected to have a negative relationship with FDI. Therefore the annual inflation rate (GDP deflator) is used in the analysis (Nonnemberg and Mendonca).

Openness of the economy (OPN): This variable is included in the model to study the readiness of an economy to gain FDI. The level of trade openness is a good proxy to measure this and it is expected to have a positive relationship with FDI. The openness index is used for this purpose, and it is calculated as (Imports + Exports)/GDP*100. (Vijayakumar and Sridharan, 2010)

Capital accumulation (CAP): In a transition economy, improvements in the investment climate help to attract higher FDI inflows. It translates into higher Gross capital formation which in turn leads to greater economic growth (Ranjan, 2011). Capital formation as a % of GDP is used as the measure.

Energy use of the host country (ENG): This variable is included in consideration of the development of the industrial structure. As suggested by Dunning, a developed industrial structure is more efficient and attracts FDI from MNFs. Energy use (kt of oil equivalent) as a % of GDP is used as a measure of this variable. The hypothesis is that the energy cost has a negative relationship with FDI, because an efficient market is assumed to be less costly (Nonnemberg and Mendonca).

Foreign direct investment, net inflows (BOP, current US$) are used to measure FDI value, which is the dependent variable in the analysis. The econometric model can be specified as follows: (Vijayakumar and Sridharan, 2010)


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FDI = β0 + β1 ENG + β2 OPN + β3 CAP + β4 GDP + β5 INF + β6 LAB

services, agriculture, fisheries and forestry, education and tourism. Data from year 2000 to 2010 is plotted for the analysis.

Estimators for the parameters can be obtained by a multiple regression analysis. After identifying the relevant variables, the required data is collected from the World Data Bank – World Development Indicators and Global Development Finance and the Annual reports of the Central Bank of Sri Lanka. Secondary data relating to Sri Lankan FDI and other variables is gathered for 20 years from 1990 to 2010 as time series data.

3) Comparison among Asia Pacific Countries: Comparison of energy prices between Asia Pacific countries and Sri Lanka is carried out using data of five years (2007-2011) published in survey reports of Japan External Trade Organization (JETRO). This data table is also given in the appendix. The average price is used whenever a price range or several prices were given for the ease of comparison. The prices are given for main cities in Asia Pacific countries. FDI inflows to each country and energy use are also considered in the analysis along with energy prices to identify possible relationships between the variables.

The Granger causality test as suggested by He, Gao and Wang (2012) is undertaken to empirically test whether energy intensity causes FDI inflows of a country. 2) A Sector-Wise Analysis of FDI: The hypothesis of energy intensity driving FDI inflows to the country can be tested in another method. This method requires a sector wise analysis of FDI inflows to identify the pattern of FDI inflows to energy intensive industries and industries that do not use much energy.

Impact of Energy Cost on FDI

Relationship between Energy Intencity and FDI

The number of Foreign Investment projects initiated in the country each year in different sectors of investment is analyzed to test the hypothesis. These data were obtained from BOI, Sri Lanka through a special request. The data set used for the analysis is given in the appendix.

A sector-wise analysis of FDI projects innitiated

Comparative Study Among Asia Pacific Region

Regression Analysis

Figure 4. Composition of the study The scope of the research study will revolve round the relationship between energy cost and FDI. Energy intensity is also an important variable in the study.

The sectors of investment are identified as apparel, regional programs and export oriented services, other manufacturing, infrastructure, utilities, knowledge

There are several limitations to the study. The study is entirely based on secondary


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data. Because the data is obtained through reports of responsible authorities, the analysis has to be limited based on the availability of reliable data. The number of years taken into the analysis, as well as the number of variables considered, is limited due to the same reason.

energy use was a main determinant of FDI and that 1% increase in energy use could increase FDI by 0.45%. BRIC countries represent the worldâ&#x20AC;&#x2122;s fastest growing economies; Brazil, Russia Federation, India and China. 35 years of data pertaining to these countries on FDI determinants have been studied by Ranjan and Agrawal in 2011.These economies had been selected for the said study specially because a large amount of FDI inflows have been detected from these countries in the recent past. The study in question identifies market size, trade openness, labour cost, infrastructure facilities and macroeconomic stability and growth prospects as potential determinants of FDI. Infrastructure facilities were measured through an Infrastructure Index where Electricity use, Energy use and Telephone use were the data used to calculate the Index. This variable has been identified as a significant variable with a slight positive impact that accounts for 0.008% growth in FDI.

Applying theoretical concepts into a practical and real state of affairs is rather complicated and therefore will pose certain restraints. Further, comparisons across various study designs and conceptual theories may limit the scope of the study.

LITERATURE REVIEW According to Ohlin (1993), FDI is mainly determined by the high potential to earn profits in developing countries and the possibility of financing those investments at a low cost from the same country. A study by Nonnemberg and Mendonca (2004) used panel data of 38 developing countries including transition economies for the period of 1975 to 2000. The major determinants identified there were level of schooling, degree of openness of the economy, risk, energy consumption and macroeconomic variables such as inflation and economic growth. It is also mentioned in the study that FDI is closely related to stock market performance. Finally, the argument of causality between economic growth and FDI is presented. Causality was found to exist in the sense of GDP leading to FDI, but not vice versa. In a study based on 32 developing countries by Khachoo and Khan (2012), FDI inflows were modelled as a function of the market size, total reserves, infrastructure, labour cost and degree of openness for the host countries. It was identified there that

Vijayakumar, Sridharan and Rao (2010) have used data on BRICS countries (including South Africa along with other BRIC countries) on determinants of FDI. Market size, Labour cost, Infrastructure, Currency value and Gross Capital formation are the determinants identified. Energy use has again been used as a determinant of infrastructure. He, Gao and Wang (2012), through an analysis of economic data of Shanghai, have recognized that GDP causes energy consumption and FDI. Their work also suggests that energy consumption causes FDI. Data from 1985 to 2010 is used in the analysis. Another of their findings is that


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an increase in FDI has good energy saving effects.

A report compiled by the Energy Information Administration identifies that foreign affiliated companies (FDI) have the ownership or control of 10 percent or more of a U.S. business (or asset) by a foreign entity. The report titled “Foreign Direct Investments in US Energy in 1999” presents an analysis of the role of FDI in US energy resources and companies for the year in question. It explains how the energy sector of United States has benefited by the investments, mergers and acquisitions of foreign affiliates. When considering the composition of FDI in Sri Lanka and data collection on the matter, various issues arise. Samarapulli and Tharanga (2009)‘s investigation on “Compilation of Foreign Direct Investments in Sri Lanka” has identified that the statistics and data collected about FDI in Sri Lanka are not comprehensive and can be improved. The said report points out ways to improve and the need to comply with IMF standards when reporting FDI information.

As the literature suggests, Energy use induces FDI, and at the same time, many countries invite FDI for energy production industries as well. China is one such country which has a fast growing economy with a GDP growth rate of 9%-10%. Ogutcu (2002)’s study, titled “Foreign Direct Investments and Importance of the ‘Go West’ Strategy in China’s Energy Sector”, has investigated how Chinese economy expects to meet its growing energy demand through new investments in the energy sector. Special attention is given in this report to the enhancement of the use of renewable energy sources in energy generation. FDI inflows to a country can also bring in new technology through which energy can be saved. There are studies carried out on developing countries’ acquiring energy saving technologies in production via FDI inflows. A study titled “Energy Saving Technology Diffusion via FDI and Trade: A CGE model of China” by Hubler (2009) identifies the importance of technology to produce energy with less carbon emission. It introduces inter and intra-sectorial technology diffusion through imports and FDI.

A. Key Terms Used in the Study The research study is conducted under the topic “The Impact of Energy Cost on Foreign Direct Investments.” The topic and other key variables are defined in this section.

A study by Hubbler and Keller (2009), titled “Energy Saving via FDI? Empirical evidence from Developing Countries,” tests a similar hypothesis. It is intended to study the impact of FDI on energy intensities of developing countries using panel data of 60 countries for 30 years. However, the paper concludes that, rather than FDI, Foreign aid is the reason for energy intensity reductions.

1) Foreign Direct Investments (FDI): According to the Central Bank of Sri Lanka, Foreign Direct investment refers to an international investment made by a resident entity in one economy (Direct Investor) with the objective of establishing a lasting interest in an enterprise (the direct investment enterprise) resident in another economy, as given in their report on


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“Compilation Investments.”




energy use intensity. “Commercial energy (petroleum and electricity) intensity is an indicator of a country’s energy utilization with respect to the national output (measured in terms of Gross Domestic Product- GDP). Low commercial energy intensity would suggest stringent use of energy for economic activities.” (Sri Lanka Energy Balance, 2007)

Merger, acquiring the shares of the offshore company, setting up a foreign subsidiary or associate company of the investment company or through a joint venture are the different ways in which foreign direct investments can be made. As per OECD, the foreign investor must own at least 10% or more of the voting stock or ordinary shares of the investee company for the investment to be considered as FDI (OECD).

DATA ANALYSIS This section of the paper contains the analysis of the relationship between FDI and energy use in a regression model developed based on previous literature. The causality is tested between FDI and energy use through the Granger causality test. A sector-wise analysis is presented to identify whether energy intensive industries attract more FDI. A comparative analysis of energy costs across Asia Pacific and their apparent effect on FDI are also included in this section.

FDI is a two-way flow consistent of inflows and outflows. Inflows are the investment flows received by a country and outflows are the investments made by the residents of that country. This research study is concerned with FDI inflows, its determinants and its relationship with energy use and energy cost.

A. Energy Use as a Determinant of FDI

2) Energy Cost: Energy cost is considered in four components for the analysis. Those four components are electricity cost, gas cost, Petrol (Gasoline) cost and Diesel cost. However, the major concern of the study is on electricity cost, since electricity is the major energy source for many business activities.

This section analyses the determinants of FDI using an econometric model developed based on previous literature. OLS method is used in analyzing the impact from the potential determinants. The original data set used for the regression analysis is given in the appendix.

3) Energy Intensity: Energy intensity is another key term used frequently in the study. This can be viewed in two angles; energy cost intensity and energy use intensity. “Energy cost intensity is a measure of the energy efficiency of a nation's economy. It is calculated as units of energy per unit of GDP” (OECD).

1) Linear Regression Analysis: To identify the effect of each variable to FDI determination, linear models were run for each variable separately as a simple regression analysis. Table 3.1 shows the output of the regression models.

However, in the context of the present research study, energy intensity refers to


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with more than 20% R2 value. OPN and ENG showed negative relationships with FDI (the dependent variable) while others showed positive relationships.

When Regression was run separately for each variable, LAB, OPN, ENG and CAP turned out to be statistically significant variables at 95% confidence level each Variable Coefficient P value T stat R2 Adjusted R2

LAB 5.33 0.00 5.1 57% 55%

OPN -20 0.03 -2.39 23% 19.%

ENG -12 0.00 -6.69 70% 60%

GDP 34 0.11 1.66 12% 8%

INF 7 0.58 0.55 2% -4%

CAP 45 0.02 2.62 26% 23%

Table 3.1 Simple Linear Regression Analysis Source: Compiled by Author When all the variables were put through a multiple regression analysis, the following regression formula could be derived with the regression results. But in this case, the results varied from the simple regression analysis. Table 3.2 exhibits the regression output statistics of the analysis.

With the output of multiple regression analysis, ENG turned out to be the only statistically significant variable at 95% level of confidence. LAB and ENG showed negative relationships with FDI while other variables show positive relationships.

FDI = 480.74 â&#x20AC;&#x201C; 0.28 LAB + 1.81 OPN â&#x20AC;&#x201C; 12.66 ENG + 15.78 GDP + 15.48 INF + 1.66 CAP

The overall model turned out to be statistically significant at 95% level of confidence with a R2 value of more than 80% and an adjusted R2 value of more than 70%.

Variable Coefficient P value T stat R2 Adjusted R2 F stat P value

LAB -0.3 0.90 -0.13

OPN 1.8 0.83 0.22

ENG -12.6 0.00 -3.63

GDP 15.8 0.30 1.07

INF CAP 15.5 1.7 0.06 0.91 2.04 0.10 80.18% 71.69% 9.44 0.0003 Table 3.2 Multiple Linear Regression Analysis (Model 01) Source: Compiled by Author

The overall significance of the model increased through this model. The

A second model was tested by removing the variables which had a R2 value of less than 15% in simple regression analysis.


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regression output of presented in table 3.3.




model, ENG is the only variable that became statistically significant at 95% confidence level. The overall model is statistically significant at the same level of confidence while explaining 67% of change in FDI.

However, in this second model, LAB shows a positive relationship, leaving ENG as the only variable that shows a negative relationship. Even in this second

Variable Coefficient P value T stat R2 Adjusted R2 F stat P value

LAB 1.98 0.3354 0.99

OPN 1.19 0.8956 0.13

ENG -8.39 0.0163 -2.68

CAP 6.39 0.6691 0.44 73.43% 66.79% 11.05 0.00

Table 3.3 Multiple Linear Regression Analysis (Model 02) Source: Compiled by Author effects in determining FDI. A natural logarithmic function was estimated for this purpose.

2) Non-Linear Regression Analysis: After analyzing the variables in a linear regression model, they were then analyzed using a non-linear model as well. All the variables are transformed into natural logarithms so that heteroscedasticity that may exist in the data series will be eliminated. As before, each variable was first run through separate simple regressions to identify their individual

Variable Coefficient P value T stat R2 Adjusted R2

LNLAB 2.54 0.0026 3.46 38.66% 35.43

In the simple non-linear models, LNLAB, LNENG and LNCAP show statistically significant relationships with LNFDI. LNENG has the highest R2 value indicating that more than 60% of the changes in FDI are explained by ENG.

LNOPN -1.29 0.1878 -1.37 8.95% 4.15%


LNENG -1.76 0.0000 -5.66 62.81% 60.85%

LNGDP 1.11 0.1630 1.45 10.52% 5.54%

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Variable Coefficient P value T stat R2 Adjusted R2

LNINF LNCAP -0.23 4.37 0.6298 0.0235 -0.49 2.46 1.25% 24.21% 3.95% 20.22% Table 3.4 Simple Non-Linear Regression Analysis Source: Compiled by Author FDI = 311.06 LAB0.78 OPN2.09 ENG-2.19 GDP0.53 INF0.13 CAP1.10

A multiple regression analysis was also carried out using a nonlinear regression formula. The multiple non-linear regression model estimated the following equation. Table 3.5 exhibits the summary results of the analysis.

With the multiple regression analysis, only LNENG turned out to be statistically significant at 95% confidence level. However, the overall model became statistically significant at the same confidence level, explaining more than 60% of the change in FDI.

LNFDI = 5.74 + 0.78 LNLAB + 2.09 LNOPN – 2.19 LNENG + 0.53 LNGDP – 0.13 LNINF – 1.10 LNCAP

Variable Coefficient P value T stat R2 Adjusted R2 F stat P value

LNLAB 0.78 0.59 0.57

LNOPN 2.09 0.07 1.95

LNENG -2.19 0.00 -3.17

LNGDP 0.53 0.38 0.90 74.63% 62.92% 6.37 0.0026

LNINF Variable -0.13 Coefficient 0.7408 P value -0.34 T stat Table 3.5 Multiple Non-Linear Regression Analysis (Model 01) Source: Compiled by Author

A second model was developed excluding the least significant variables to obtain a better estimation of FDI determination.

LNCAP -1.10 0.5736 -0.58

Table 3.6 displays the summary results of this analysis.


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Model 02 explained 58% of the change in FDI while LNENG still remained the only statistically significant variable at 95% confidence level. The overall model

Variable Coefficient P value T stat R2 Adjusted R2 F stat P value

continued to be statistically significant at the same confidence level. The statistical significance showed an increase with model 02.




-0.24 0.8126 -0.24

-1.73 0.0080 -3.00

1.13 0.4586 0.76 64.12% 57.79% 10.13 0.0004

Table 3.6 Multiple Non-Linear Regression Analysis (Model02) Sourc e: Compiled by Author

consumption causes the growth of FDI. This theory is tested with Sri Lankan data in this section. Table 3.7 presents the test results for Granger Causality test.

3) Granger Causality Test: According to the works of He, Gao and Wang, energy

Null Hypothesis df F stat P value ENG does not Granger 2 6.25 0.0115 cause FDI FDI does not Granger 2 1.41 0.2776 cause ENG Table 3.7: Granger Causality Test Source: Compiled by Author B. A Sector-Wise Analysis of FDI The data used for this test was first transformed into natural logarithms before conducting the test. According to the Granger Causality test, ENG has a causality effect on FDI while FDI does not cause ENG.

The Board of Investments of Sri Lanka has categorized FDI inflows to the country into nine categories as apparel, regional programs and exports oriented services, other manufacturing, infrastructure, utilities, knowledge services, agriculture, fisheries and forestry, education and tourism. (Please refer appendix 1 for figures for this section)


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that China is a highly energy consuming country. India and Japan also use a large amount of energy. The high degree of energy consumption of these countries can be explained by their being highly industrialized and holding large populations. Availability of welldeveloped infrastructure is another reason for high energy use.

Data for 10 years is plotted in figure 3.1. First, all sectors were plotted together to identify which sectors attract more FDI and then each sector was separately plotted to identify fluctuations in individual sectors. As the figure presents, more FDI projects were initiated in sectors such as apparel, and manufacturing. These sectors can also be identified as sectors of high energy usage. Both these sectors have experienced a rapid increase in the number of investments in the period from 2000 to 2002, followed by a decline thereafter. All sectors indicate an upward trend despite huge fluctuations, except education and apparel. The number of investments in apparel displays a negative trend since 2002, and the number of investments in education has never been a significant figure in the past. Regional programs and export-oriented services, infrastructure and knowledge services are other sectors that attract a high number of FDI projects.

Thailand, Australia, Pakistan, Indonesia and Malaysia are other countries that use a high amount of energy. Energy usage of Sri Lanka and Cambodia are at a minimal level when compared to other countries. The top ten countries in the world for energy use are China, USA, India, Russia, Japan, Germany, France, Canada, Korea and Brazil. Sri Lanka holds the 88th position in the ranking. (Factfish Survey data) The concept of high energy intensity attracting more FDI is proven when figures 3.2 and 3.3 are compared. High FDI inflows are seen in China, India and Japan along with their high usage of energy.

C. A Regional Comparison This section compares energy cost of 19 Asia Pacific countries with that of Sri Lanka. These countries are Korea, China, Taiwan, Singapore, Malaysia, Indonesia, Philippines, Vietnam, Myanmar, Cambodia, Lao PDR, India, Bangladesh, Pakistan, Australia, New Zealand, Thailand and Japan. The energy cost is considered under four variables: electricity rate, gas rate, gasoline (petroleum) price and diesel price. The data set used for the analysis is given in the appendix.

However, Singapore also shows a significant amount of FDI inflows, second only to China from the region, although Singaporeâ&#x20AC;&#x2122;s energy consumption is at a low level. This is due to the role of Singaporean economy as a distribution hub to the region. Thailand, Vietnam, Indonesia and Malaysia are other countries that show a high amount of FDI inflows. Australia too has a large amount of FDI inflows to the country but those inflows display large

Figure 3.2 depicts the energy usage patterns of the selected Asia Pacific countries for the past five years. It shows


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fluctuations. It even indicates an outflow in 2010.

After establishing the relationship between FDI and energy use and comparing them across Asia, it is also important to compare the energy cost as well. Energy cost is divided into four components for better analysis. These four components are Electricity prices, Gas rates, Gasoline (Petroleum) prices and Diesel prices.

According to the UNCTAD world investment report of 2012, China is the worldâ&#x20AC;&#x2122;s number one FDI attracting country in 2011 and shows prospects of retaining that position in future as well. India is placed third, while Indonesia comes at the sixth. Indonesia is expected to climb to the fourth place while Australia and Thailand are expected to climb up the rankings as well.

1) Electricity Prices: Electricity is the main energy source for a business. Therefore, the electricity bill has a considerable impact on the profitability of a business. Electricity is also very costly to produce. Electricity generation is done through huge projects that require a large amount of initial capital. In this context, electricity prices are of constant debate in all countries.

Out of the total FDI inflow of the world, South Asia receives 2.6% while East and South East Asia gets 22%. Further, out of the total inflow to South Asia, India accounts for about four fifths. Increased mergers and acquisitions in extractive industries were stated as the reason for the boost in FDI in the region after the declining trend in 2009-2010. (UNCTAD, 2012)

As shown in figures 3.4 and 3.5, every country in the region has experienced a rise in electricity prices from 2007 to 2011, except India. While Indiaâ&#x20AC;&#x2122;s average rate per kWh and monthly charges are lower than that of most other countries, India has shown a decline in electricity prices.

South East Asia has displayed a faster growth in FDI than East Asia in 2011. But East Asia still remains ahead in the total value of FDI inflows. This is mainly accounted for by the fact that China has reached a record level of FDI flow of $124 billion. (UNCTAD, 2010)

Among countries with high average rates of electricity are Sri Lanka, Philippines, Australia and New Zealand. These countries have both a high average rate per kWh as well as high monthly charges. Singapore and Cambodia have very high average rates per kWh, but do not have monthly charges. Malaysia, on the other hand, with a slightly lower average rate per kWh, charges a very high monthly rental.

FDI flows to Asia has seen a 10% increase from 2010 (UNCTAD, 2012). Although Sri Lanka has seen a drastic increase of 100% in FDI inflows from 2010 to 2011, the actual amount of FDI inflow is quite low when compared to most other regional countries. According to the UNCTAD report, when considering the whole world, FDI flows to primary production, manufacturing and services have risen simultaneously.

In the case of Sri Lanka, electricity costs have crept up every year although the


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3) Fuel Prices: Fuel prices include Petrol, diesel, Kerosene oil, Furnace oil and other types of fuel refined from crude oil. But this discussion only focuses on Petroleum (Gasoline) and Diesel prices. These fuels are mostly used in transportation and occasionally in electricity generation. They are also sometimes used to power up production facilities and machinery.

average rate per kWh is seen to have reduced. The cost structure has become more complicated by the year 2011. The more electricity used, the higher the rate will be. The rates vary from Rs. 7.25 to 16.90. These rates also vary by the business type and electricity usage in peak and off-peak hours. The electricity bill also carries a maximum fixed charge of Rs. 3,000.00 and a maximum demand charge that varies with the number of units consumed. The tariff structure for electricity is just as complicated, and varies around 15%-25%. (Ceylon Electricity Board)

Gasoline comes in different qualities; 90 octane, 92 octane and 95 octane. But for the analysis, only the regular gasoline (90 octane) prices were used. Although there were enormous differences between the prices of electricity and gas of various countries, there does not seem to be much variation in fuel prices.

2) Gas Prices: Although gas is mostly used as a household energy source in Sri Lanka, it is more often used for business purposes in some countries. Figures 3.6 and 3.7 depict the gas prices across Asia, both the rate per cubic meter and monthly charge.

When analyzing the fuel prices of Asia Pacific countries for the last five years, Figures 3.8 and 3.9 show that Malaysia and Indonesia have the lowest gasoline and diesel prices in the region, while Korea, Hong Kong, Australia, New Zealand and Japan have the highest prices.

Only six countries have monthly charges for gas, and among them Malaysia, Pakistan and Japan charge high rates. The rate per cu.m in those three countries is also significantly high, though in the other three countries (i.e. Taiwan, Australia and New Zealand) a very low rate per cu.m is charged. Indonesia and Thailand also have a very high rate per cu.m, but only in the absence of a monthly charge.

The fuel prices across the region seem to be mostly in the range of USD 0.50 to 2.00. The diesel prices are slightly lower than Gasoline prices in many countries. But mostly, both fuels manifest prices of the same range, in all the countries. DISCUSSION AND CONCLUSION The findings of the regression analysis show that there is a significant relationship between the pattern of FDI inflows to Sri Lanka and the pattern of energy use. These results, however, show a negative relationship whereas the previous literature suggests a positive relationship.

Hong Kong, India, Bangladesh, Australia, New Zealand and Singapore are among the countries with the lowest gas prices. Sri Lankaâ&#x20AC;&#x2122;s gas prices are among the average rates for the region. Gas prices for both domestic use and business use stand at Rs. 163.68 per kg in Sri Lanka. (JETRO report, 2012)


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This negative relationship identified in Sri Lanka can be due to several reasons. The increase in energy use can be from the consumption sector and not from the production sector. Even though a large increase is shown in energy consumption in the country, a correspondingly significant growth has not happened in FDI. The domestic consumption of energy has in fact gone up during the past few years due to various projects undertaken by the government and non-government organizations for rural development. Electricity facilities were provided to many rural areas, especially during postwar development projects in war-stricken areas.

FDI, the main focus was given to energy use. Literature suggests several other variables as determinants of FDI, but they were not considered in this model due to various reasons. Market size is one such variable omitted because Sri Lanka does not offer its domestic market to foreign investors. Rather, Sri Lanka offers its resources to foreign investors to produce in Sri Lanka at a low cost and export to other large markets. The quality of the work force is another variable not considered due to difficulties in obtaining data. A well-developed stock market is also identified as a booster of FDI though it is not incorporated in the regression model due to the difficulty in measurement.

Energy consumption leads to economic growth as well as FDI (He, Gao and Wang, 2012). If the increase in energy consumption is due to increase in domestic industries, then that too might hinder the availability of energy for foreign investors. This may also be a reason for the negative relationship displayed in the regression analysis.

The historical data for 21 years is regressed because of unavailability of data for some variables beyond that period. However, this must be considered when drawing conclusions because further accuracy can be expected with more data.

The high energy cost in Sri Lanka can be identified as another important reason. The high cost of energy may lead the energy intensive investments out of the country, because the cost of energy of many close competitors of Sri Lanka is much lower. Since most other features such as labour cost are similar in most South Asian and South-East Asian countries, foreign investors may turn towards other countries instead of Sri Lanka for their investments.

The Granger Causality Test has identified that energy use causes FDI to increase and FDI in turn does not cause energy use to increase. This phenomenon is something already proven in many studies and is the foundation for this present research. Since energy use encourages FDI inflows, it can be safely assumed that energy intensity is a driving factor for FDI inflows in Sri Lanka. Hence, the null hypothesis of the study can be rejected.

Among other variables that determine FDI, labour cost and capital formation were significant variables. But since the discussion is mainly on energy cost and

In order to discuss this hypothesis further, a sector-wise analysis is done in Sri Lanka to check whether highly energy intensive


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industries get more FDI inflows. This fact is proven true in the analysis, with apparel and other manufacturing industries being the categories with the most number of BOI approved projects over the years. Japan, India, Indonesia, China and Korea are the countries which use a high amount of energy in the Asia Pacific region. These countries are also those that attract the most amount of FDI in the region with the exception of Singapore. This again proves the hypothesis of energy intensity inducing FDI inflows to a country. Because energy use is a significant determinant of FDI, energy cost can be considered a significant determinant of the competitive position of Sri Lanka for FDI attraction.

higher use of energy is important to attract a higher amount of FDI. Among the many competitors of Sri Lanka for attracting FDI, India, Bangladesh, Pakistan, Taiwan, Indonesia and Vietnam have electricity rates lower than that of Sri Lanka, and less complicated payment structures as well. This can be disadvantageous to the country, because they all compete on similar grounds such as cheap labour and natural resources. A lower energy cost on their side can be an added advantage to them and may discourage FDI inflows to Sri Lanka. This is because investors are cost sensitive. Gas prices in Sri Lanka are within the lower range in the region. But gas is not used widely as an energy source for businesses in Sri Lanka. However, gas prices of Sri Lanka are at a competitive level with other FDI competing countries in the region.

To analyze by how much the Sri Lankan energy cost is higher than that of other competitive countries, a cost comparison between Asia Pacific countries was undertaken. According to this analysis, the electricity cost in Sri Lanka is among the highest in the region. Although the rate per kWh has marginally reduced, the monthly charge has increased drastically.

Fuel prices in Sri Lanka, on the other hand, are on a marginally higher range. The lowest rates of fuel are seen in Malaysia and Indonesia. The latter can in fact be identified as a key competitor not only to Sri Lanka but also to the entire Asian region, in terms of low energy cost, because Indonesia has the lowest costs in all four categories of energy.

Apart from these two charges, Sri Lankaâ&#x20AC;&#x2122;s electricity cost includes a maximum demand charge as well. This complex cost structure is designed in a way that when the consumption level of electricity increases, the average rate charged per kWh would also increase. The electricity tariff structure is also designed in the same manner.

Although Malaysiaâ&#x20AC;&#x2122;s cost of fuel is very low, other energy costs are very high. In countries such as Korea and China, electricity rates are very low but fuel prices are high. In countries such as Australia, New Zealand, Japan and Thailand, all energy prices are high. This identification is important to figure out the countries posing competition. Lower

This will discourage electricity consumption and producers will try to move towards less energy consuming production methods to increase profitability. This can be disadvantageous in the context of FDI attraction because


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electricity prices are more important than lower fuel prices because electricity is the more widely used energy source in energy intensive industries.

and Commerce, University of Western Australia. [2.] Main Determinants and Impacts of Foreign Direct Investments on China’s Economy (2000) . People’s Republic of China: OECD, OCDE, Directorate for Financial, Fiscal and Enterprise Affairs.

Although large variances are seen in electricity and gas prices, there is not much variance in fuel prices. This is because electricity and gas production methods vary vastly among countries. Low cost production capabilities will enable the charging of lower prices. The resources from which electricity and gas are generated also vary from country to country. However, fuel is, for the most part, imported as crude oil and refined domestically. The slight changes in prices are due to the productivity differences in the refinery processes of each country.

[3.] Sri Lanka Energy Balance. Colombo: Sri Lanka Sustainable Energy Authority. (2007). [4.] South Korea Energy Efficiency Report. (2011). [5.] World Investment Report . (2012). New York and Geneva: United nations ConferenCe on trade and development (UNCTAD). [6.] Survey of Investment Related Costs in Asia and Oceania . Overseas Research Department(2012-2008). , Japan External Trade Organisation (JETRO).

Thus it can be concluded that the hypothesis tested, which was regarding energy intensity being a driving factor for FDI, is valid and proven through various analyses. The major competitors for Sri Lanka to attract FDI in terms of energy cost are India, Bangladesh, Pakistan, Taiwan, Indonesia and Vietnam, due to their low electricity cost.

[7.] Assunção, S., Forte, R., & Teixeira, A. A. (October, 2011). Determinants of FDI: a Literature Review. FEP WORKING PAPERS. Faculdade de Economia, Universidade do Porto.

Electricity costs in each country depend on their efficiency in energy generation and technology used, unlike fuel costs which are mostly the same across the region. This is an important conclusion of the present research. The cost structure for electricity in Sri Lanka is yet another concern.

[8.] Blonigen, B. A., & Piger, J. (2011). Determinants of Foreign Direct Investments. Working Paper 16704. National bureau of Economic Research, Cambridge. [9.] Botrić, V., & Škuflić, L. (2005). Main Determinants of Foriegn Direct Investment in the South East European Countries. Paper prepared for the 2nd Euroframe Conference on Economic Policy Issues in the European Union. Vienna, Austria.

REFERENCES [1.] Ho, O. C. (n.d.). Determinants Of Foreign Direct Investment In China: A Sectoral Analysis. School of Economics


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[10.] Energy use. (n.d.). Retrieved from factfish: %20use

[18.] Vijayakumar, N., & Sridharan, P. a. (2010). Determinants of FDI in BRICS Countries: A panel analysis. Int. Journal of Business Science and Applied Management, Volume 5, Issue 3.

[11.] Foriegn Direct Investments. (n.d.). Retrieved from Investopedia: nomicgrowth.asp#ixzz2BGWeBbYC

[19.] Walsh, J. P., & Yu, J. (2010). Determinants of Foreign Direct Investment: A Sectoral and Institutional Approach. working paper, WP/10/187. IMF.

[12.] He, W., Gao, G., & Wang, Y. (2012). The relationship of energy consumption, economic growth and foreign direct investment in Shanghai. Shanghai: World Science Publisher, United States.

[20.] Wikipedia - Free Encyclopedia. (n.d.). Retrieved from sity

[13.] Khachoo, A. Q., & Khan, M. I. (February 2012). Determinants of FDI in developing countries: a panel data analysis. MPRA Paper No. 37278.

[21.] World development indicators and Global Development Finances. (n.d.). Retrieved from World Data Bank: do

[14.] Knowledge Center. (n.d.). Retrieved from Ceylon Electricity Board: ulation.html

[22.] TANG. C. F. (2009) , Multivariate granger causality between electricity consumption, economic growth, financial development, population, and foreign trade in Portugal, available from

[15.] Nonnemberg, M. B., & Mendon莽a, D. M. (n.d.). The Determinants of Foreign Direct Investments in Developing Countries. IPEA: Instituto de Pesquisa Econ么mica Aplicada. [16.] Ranjan, V., & Dr.Agrawal, G. (2011, October). FDI Inflow Determinants in BRIC countries: A Panel Data Analysis. International Business Research Vol. 4, No. 4; Published by Canadian Center of Science and Education. [17.] Samarapulli, N., & Tharanga, G. C. (2009). Compilation of Foreign Direct Investments in Sri Lanka. Central Bank of Sri Lanka.



















Tourism 2007 2008



Agriculture, Fisheries & Foresting



Knowledge Services


Other Manufacturing



Regional Programmes & Export Oriented Services




Appendixes 01

Figure 3.1 Number of BOI Approved Projects (Sector-Wise)

Number of BOI Approved Projects


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1500000 2000000 Energy use (kt of oil equivalent)

Figure 3.2: Energy use (kt of oil equivalent) Source: Compiled based on data from World Data Bank (World Development Indicators)

Japan Thailand New Zealand Australia Pakistan Bangladesh India Cambodia Myanmar Vietnam Philippines Indonesia Sri Lanka Malaysia Singapore China Korea, Rep.

Source: Compiled by author based on MIS BOI (2010)








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Korea, Rep.




Sri Lanka








Foreign direct investment, net inflows (BoP, current US$)
















New Zealand

Figure 3.3: Foreign direct investment, net inflows (BOP, current US$) Source: Compiled based on data from World Data Bank (World Development Indicators)




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Figure 3.4: Electricity rate for business use (Rate per kWh) Source: Survey reports of Japan External Trade Organization (JETRO) from 2012 to 2008













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Electricity rate for business use (Rate per kWh)


Figure 3.5: Electricity rate for business use (Monthly charge) Source: Survey reports of Japan External Trade Organization (JETRO) from 2012 to 2008












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Electricity rate for business use (Monthly charge)









Figure 3.6: Gas rate for business use (Rate per cu.m) Source: Survey reports of Japan External Trade Organization (JETRO) from 2012 to 2008

Gas rate for business use (Rate per cu.m)







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Kuala Lumpur (Malaysia)

Karachi (Pakistan)

Sydney (Australia)

Figure 3.7: Gas rate for business use (Monthly charge) Source: Survey reports of Japan External Trade Organization (JETRO) from 2012 to 2008

Gas rate for business use (Monthly charge)


Auckland (New Zealand)

Yokohama (Japan)






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Figure 3.8: Regular gasoline price (Rate per 1 liter) Source: Survey reports of Japan External Trade Organization (JETRO) from 2012 to 2008

Regular gasoline price (Rate per 1 liter)







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Figure 3.9: Diesel oil price (Rate per 1 liter) Source: Survey reports of Japan External Trade Organization (JETRO) from 2012 to 2008

Diesel oil price (Rate per 1 liter)







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Nishadi G.P.K. University of Ruhuna ABSTRACT Feeding a baby with mother’s milk is a well accepted and well praised nutritional practice in Sri Lankan culture. Most of the Sri Lankan mothers who have breast fed, have continued their habit of feeding babies even after the first six months. So, promoting a milk powder for children more than 06 months is unethical according to Sri Lankan culture. At present, infant milk powder producers have been accused of promoting unhealthy products. So, this study was conducted to measure is there an ethical impact of infant milk powder advertisements on changin mother’s beliefs about baby feeding . To narrow down the discussion, the attention has been paid to one of the Alpha 1+ Sri Lankan advertisement. Primary data were collected from Galle and Matara districts by using a survey based questionnaire. Here, 200 mothers were selected as the sample, on the basis of criterion that they are feeding or have already fed, their babies. Additionally, four Pediatricians were interviewed to verify the facts. Basically, it was attempted to understand is there any impact of Alpha 1+ six advertising claims on changing mothers’ behavior of selecting an alternative baby feeding item. Results indicated that the impact from advertisements on changing mothers’ beliefs is lesser because priority has been given to medical professionals’ ideas. Since mothers have a negative attitude and do not believe company’s wrong claims, they are not deceived by the advertisements and no advertising deception occurs at all. Keywords: Baby feeding, Infant Formula, Ethical impact, Advertising Deception, Consumer Beliefs


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order to increase their profit (Emory University’s Centre of Ethics, 2001).

INTRODUCTION TO THE STUDY Feeding a baby with mother’s milk is a well accepted and well praised nutritional practice in Sri Lankan culture. According to available national data, the breastfeeding initiation rate in Sri Lanka is almost 100% and 54% of mothers practice exclusive breastfeeding up to four months (Sri Lanka Demographic and Health Survey, 2000). But data on exclusive breast feeding up to six months is scarce (Bandusena, 2003).

The story of the Alpha Company’s Baby Formula Controversy began almost three decades ago with the publication of a pamphlet called ‘the baby killer’ in 1974 by Mike Muller and “War on Want”, a London-based activist group concerned with problems of the Third World (Akhter, 1994). According to Mike Muller, Third World babies were dying because their mothers were feeding themwith infant formula that was being marketed by multinationals such as Alpha of Switzerland.

As far as infant formula industry is concerned, the target customer group is most probably the young women . In Sri Lanka, this target group can be identified in two different backgrounds as urban women and rural women. Since Sri Lanka is a highly collectivistic country, women’s tendency to breastfeed their babies is influenced by several parties such as; Sri Lankan traditions of motherhood, the husband’s views, the elder’s views regarding breast feeding, the local community views, the friend’s and the family’s views, the education institutions’ views and finally the government views. In addition to the above parties, information from commercial communication also plays a major role when shaping the behavior of young mothers.

Alpha controls 40% of the worldwide infant formula market and is at present the target of a boycott because of its “unethical and irresponsible marketing of breast milk substitutes” (Emory Universities Centre of Ethics, 2001). The controversy of infant formula can even be seen in Sri Lanka. According to the findings of Baby Milk Action in 1998, it is said that Alpha was attempting to undermine the implementation of the government measures of the International Code, which was adopted under a Resolution of the World Health Assembly in 1981 as a “minimum requirement” to be implemented in its “entirety”.

In developing nations, it is said that the arena of breast feeding is a very sad, uneducated one. The large powerful multinationals that control the world’s infant formula market take every advantage of the poor and uneducated in

Objectives of the study The objectives of the study can be identified in two ways as follows.


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So, the research problems are related to the study can be identified as follows.

Basic objective – the basic objective of this study is to analyze the Ethical Impact of Infant Formula Advertisements on Changing Mothers’ beliefs about baby feeding.

Major Research Problem Is there any Ethical Impact ofAlpha 1+ Infant Milk Powder Advertisement on Changing Mothers’ Beliefs about Baby Feeding?

Secondary objectives In addition to the basic objective, the study was aimed to achieve following goals.

Other problems 1. What are the sources that mothersgiven information relating to the baby feeding? 2. What is the most credible source believed by mothers? 3. What is the role of Health Clinics, when communicating messages about baby feeding?

1. Analyze the sources of information that mothers are given information 2. Identify the importance of breast feeding 3. Analyze the drawbacks of formula feeding Problem Identification ‘Alpha ’ is one of the largest multinational companies operating in Sri Lanka and its products are world famous especially from dairy industry. In Sri Lanka, they have introduced their milk powder products under several brand names and this study focuses on one of them named “Alpha 1+”. For the purpose of marketing this product, Alpha has applied several marketing strategies and advertising is one of them. In this study, the attention has been paid to one ofthe Alpha 1+ advertisements which was telecasted during 2008 – 2011. Basically, it was attempted to understand is there any ethical impact of Alpha 1+six advertising claims on changing mothers’ beliefs about selecting a baby feeding item.

LITERATURE REVIEW Advertising Deception Advertising Deception can be defined as “Any advertising or promotion that misrepresents the nature, characteristics, qualities or geographic origin of goods, services or commercial activities” (Kotler, 1997). Another definition explains the above term as advertisements that make false claims or misleading statements, as well as advertising that creates a false impression(Federal Trade Commission, 1998). Disguised Advertising Because disguised advertising is not perceived as being sponsored, the perceptual process generates an impression that is deceptive because the message may be misinterpreted or a


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disclaimer may not pass through the attention filter. (Aaker and Myers, 1978).

(New Zealand Qualifications Authority, 2003). A person begins to do ethics when he or she turns to look at the moral standards that have been absorbed from family, church, friends and the overall society. One begins asking whether these standards are reasonable or unreasonable and what these standards mean for different situations and issues. (Manual V. 2002)

Concept of Ethics Ethics refers to the intellectual discipline that deals with the rightness and wrongness of human actions. It includes the moral principles and values that govern the actions of an individual or group, and methods for applying them

Figure 01. Ethical dimensions of Advertising Executions Obstructiveness High

Low High Disguise

????????? ?????????

Most severe situation ??????????

Low Source: Israel D. Nebenzahl & Eugene D. Jaffe, 1998. Application of the model as shown in Figure 3 suggests that communications located in quadrants 2,3 and 4 are of questionable ethics. Relatively, the problem of ethics is less severe in quadrants 2 and 3, and most severe in quadrant 4. (Israel D. Nebenzahl & Eugene D. Jaffe (1998).

that thing (Krench and Crutchfield, 2001). Prior Beliefs Prior beliefs are general opinions that are formed from experience and used to reduce complex judgments to simpler cognitive operations. One characteristic of prior beliefs is that they vary in their specificity and the manner in which they are employed. Thus Tversky and Kahneman (1973, 1974) have identified a relatively small number of broad-based prior beliefs, in the form of judgmental principles or heuristics, which are applicable across a wide range of decision settings. Decision makers, for

Concept of Beliefs A generic term that encompasses knowledge, opinion, and faith an enduring organization of perceptions and cognition about some aspect of the individual's world. It is the pattern of the meanings of a thing, the cognition about


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example, may reveal a belief in local representativeness: they rely on results from small samples to be valid indicators of entire populations (Tversky and Kahneman 1971).

thing in the world and I’m bringing the best thing for my child”(Interview, MMCM 1, 1998). Even in the Alpha 1+ advertisement, the mother declares that she has selected Alpha 1+ as the best alternative for her baby.

Other prior beliefs operate at a more detailed level. In contrast to the general purpose heuristics identified by Tversky and Kahneman, more context-specific beliefs are applied in particular decision environments. Thus, a baseball manager relies on the strategy, "When behind in the ninth inning, it's best to go for the tie at home and the win on the road." Similarly, a business employer may believe that a job applicant's professionalism is indicated by the neatness of her attire. Even the student, when confronted with a multiple choice exam question resorts to the rule that "Statements containing extreme words such as 'always' or 'never' should be marked false" (Sherman and Corty 1984).

Changing beliefs about Content of the mixture People hold demonstrations against multinational companies saying that multinational companies cheat the customers through false and unethical advertisements. (Daily News, 28th September, 2008). In their advertisement, Alpha claims that consumers can have Prebio which is essential and one of the important nutrition for the baby’s health. Changing beliefs about Motherhood For motherhood to be sustainable, breast – feeding must be there. If not motherhood is not there (Interview, MMCM 3, 1998). By saying “Alpha 1+ as good as mother’s love”, the company is trying to convey a message that infant milk powder is of the same value as mother’s milk.

Variable selection & Hypothesis Development Through extensive search of literature, following six dimensions (six aspects of changing existing beliefs), were identified to measure the Ethical Impact (Changes of existing beliefs) of Infant Milk Powder Advertisement.

Changing beliefs about Professional recommendation of the product Alpha Company is being accused by demonstrators who claim that it is communicating their products through health professionals, hospital workers and clinical workers. ( the above mentioned advertisement, there is a

Changing beliefs about Baby feeding In one of the Anchor advertisements, the mother says that she trust Anchor milk because the New Zealand Dairy Board guarantees it. The background song says, “I have been searching for the best


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person dressed in white so as to appear as ‘knowledgeable’ medical personnel.

Independent Variable – Arguments given by the Alpha 1+ Advertisement

Changing beliefs about Company Marketing Practices In almost all the infant milk powder advertisements, the advertisers use healthy and beautiful model mothers and kids and telling that those children have become healthy because of the particular milk powder. Advertisers select these models from modeling agencies while some of them who are appearing on these tvc’s are not even mothers. They are just fashionmodels who work on year basis contract for ad agencies.(Interview with Art Director, Vision Works Pvt. Ltd.). Even in Alpha 1+ advertisement, we can find the same issue.

Dependent Variable – Changing Mothers’ Existing Beliefs about Infant Milk Powder as a result of Company’s Advertisement F = (ARguments Vs. Changes of Existing Beliefs)

Changing beliefs about the child appearing in this advertisement Alpha sued for libel and although it eventually won its case, it did not escape criticism from the trial judge, who called for the company to rethink its advertising practices specially use of infants in their advertisements. (Alision G. and Richard L.H.2001). In Alpha 1+ advertisement, the company has deployed an infant who is less than two years, to convince mothers that this child became healthier as a result of Alpha 1+ milk powder.

As far as the Figure 02 is concerned, Mothers’ existing knowledge about baby feeding is influenced by company’s six advertising claims. Here, the Independent variable (Arguments given by the Alpha 1+ Advertisement) has been measured by using six dimensions (six advertising claims), while the Dependent Variable (Changing beliefs about Infant Milk Powder) was measured again based on six aspects of changing existing beliefs as a result of advertising claims.

Further, the hypotheses which are going to be tested in this study are, H0 – There is no Ethical Impact from Advertising Claims to Change Mothers’ Beliefs about Infant Milk Powder H1 –There is an Ethical Impact from Advertising Claims to Change Mothers’ Beliefs about Infant Milk Powder

Based on the existing literature, the independent and the dependant variables and the hypotheses that are relevant to the study can be explained as follows.


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Conceptual Framework Figure 02 Conceptual framework Independent Variable

Dependant Variable

Alpha ’s Advertising Claims x x x x x x

Ethical Impact (Changes of existing Beliefs about the Product as a result of the advertisement) x Changing beliefs about baby feeding x Changing beliefs about content of the mixture x Changing beliefs about motherhood x Changing beliefs about Professional recommendation of the product x Changing beliefs about company marketing practices x Changing beliefs about the Child appeared in the advertisement

Alpha “As good as mother’s love” Alpha infant formula is the only product which has Prebio Medical professionals assure the nutrition of Nespray1+ Children prefer formula feeding Alpha 1+ feeding is necessary for child’s health Alpha promotes safe bottle feeding in Sri Lanka

Figure 02 Matrixes of Beliefs and Ethics Advertising Arguments

Customer Beliefs regarding the product

Correct Good Lack of education

Positive Negative

According to the above matrix, depending on the behavior of two variables, we can identify four situations of ethical impact. If the advertising arguments are correct and the customer has a positive feeling, it is a good behavior. On the other hand, if the message is wrong and customers do not believe it, there is no harm to the society. When the message given by the company is correct but the customers do

Wrong Unethical No harm to the society

not believe, it is better to give the necessary awareness to them. Finally, if customers are believing a wrong argument, it is “unethical”. This type of customers are called as “Gullible” customers.


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demographic variables such as motherâ&#x20AC;&#x2122;s age, their level of education, type of employment (if they work), level of income, religion, area of living and number of children they have fed or are feeding at the moment.

METHODOLOGY AND STUDY DESIGN Basic Methodology As far as the methodology is concerned, both qualitative and quantitative approaches have been used in this study. This is called Triangular Research Method. It can be defined as combined use of qualitative and quantitative methods in the study of the same phenomenon (Hollensen S. 2004).

On the otherhand, to measure Changing Beliefs as a result ofAdvertising Claims, a seven point negatively ranked lickert scale was used by giving the value 1 = Strongly disagree to value 7 = Strongly agree.

Study Approach Before entering into thisstudy, information was gathered from extensive searching of internet sites, published articles, and informal talking with mothers. Specially, information from secondary data sources is facilitated by search engines such as Google scholar, Ebsco host and J-stor articles.

Interview method In addition to the questionnaire method, interviews were conducted to get information from Medical Professionals. For the purpose of verifying the technical terms, four Pediatricians from Galle district was interviewed to collect data. Additionally, information relating to the role of health clinics, importance of breast feeding, and other sources of information were gained through this interview process.

Pilot study Based on the information collected from the secondary data sources, a pilot study was carried out to assess the practicability of the research. For this purpose, 10 mothers were interviewed at randomly to collect data. Research Instruments Both Survey Based Questionnaires and Interviews were used to collect primary data.

Sample A sample of 200 mothers was selected to get data for the study. This sample consists of mothers from both urban and rural areas, working and non-working mothers, mothers from different educational backgrounds, mothers from different income levels and specially mothers from different religious backgrounds. Most of the mothers in the sample are Sinhalese Buddhists, since majority of Sri Lankan are Sinhalese Buddhists.

Survey based questionnaires Survey based questionnaires were developed to collect primary data from a sample of 200 mothers. Basically, questions were designed with special consideration given to several


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infant formula advertisement. According to the statistical mean, (=2) it is clear that mothers do not accept the statement of ‘breast feeding makes them older’. Further, it was the view of most of the mothers that breast milk strengthens their baby’s immune system (mean = 6), while infant formula does not do that (mean = 2.25). Additionally, they believe that infant formula can be dangerous if not used properly (mean= 5.71) and it is not healthier for the baby (mean = 2.22).

DATA ANALYSIS Basically, frequency statistics were calculated to analyze the demographic variables. Further, the answers for the scale based questions were measured by using descriptive statistics. Here, changes of mothers’ beliefs as a result of advertising claims were determined by using mean values. On the other hand, the data collected from Medical Professionals was assessed qualitatively. Analysis of Mothers’ Ideas Changes of Beliefs about Baby Feeding Table 01 pointed out the mothers’ beliefs about baby feeding even after seeing the

Table 01: Changes of Existing Beliefs about Baby Feeding

Measured variable Questions Mean 1. Changes of Existing 2.00 x Breast feeding makes me look older Beliefs about Baby Feeding x Breast milk strengthens the baby’s 6.00 immune system x x x

Infant formula strengthens the baby’s 2.25 immune system Infant formula can be dangerous if not 5.71 used properly 2.22 Infant formula is healthier for my baby

Source: Survey Data,2009.


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closer to 2 (Disagree). Although, the company advertisement claims Alpha 1+ contains Prebio, mothers do not believe it as it is, without getting verification from the medical professionals.

Changes of Beliefs about Content of the Mixture The statistical data on Table 02 discloses that most of the mothers do not believe the content of the mixture. It is suggested by all the three mean values,

Table 02 :Changes of Beliefs about Content of the Mixture Measured variable Questions 2. Changes Beliefs about x You believe Alpha 1+ contains Prebio content of the mixture nutrition x You believe Alpha 1+ does not contain unhealthy chemicals which are harmful to the infants health x You believe Alpha 1+ contains the necessary nutrition for a healthy child Source: Survey Data,2009.

Mean 2.27 2.21


not think that Alpha 1+ as the best alternative for their infants.(mean = 2.22).

Changes of Beliefs about condemning motherhood In respective to the data on Table 03, it is obvious that respondents do not believe the company advertising claim of “Alpha 1+ as good as mother’s love” (mean = 2.19). Moreover, mothers do

Table 03:Changes of Beliefs about condemning motherhood Measured variable Questions Mean 3. Changes of Beliefs x You believe Alpha 1+ “As good as 2.19 about condemning mother’s love” motherhood


You believe Alpha 1+ is the best 2.22 alternative for your infant

Source: Survey Data,2009


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advertisement is not a true professional (mean = 2.16). Besides that they don’t think that Medical Professionals assure the nutrition of Alpha 1+ (mean = 2.11).

Changes of Beliefs about Medical Professional recommendation of the product As mentioned in the table below, it was the view of most of the mothers that the Medical Professional appear in the

Table 04: Changes of Beliefs about Medical Professional recommendation of the product Measured variable Questions Mean 4. Changes of Beliefs x You believe the Medical Professional 2.16 about Medical appear in the advertisement is a true Professional Medical Professional. recommendation of the product


You believe Medical Professionals 2.11 assure the nutrition of Alpha 1+

Source: Survey Data, 2009 the mean values closer to 2 for five indicators out of eight. However, they are in a moderate view relating to the 5,6, and 7 indicators.

Changes of Beliefs about Company Marketing Practices As far as the consumers (mothers) views of company marketing practices are concerned, it is depicted that mothers are in a negative attitude towards Alpha ’s marketing strategies. It is supported by

Table 05: Changes of Beliefs about Company Marketing Practices

Measured Questions variable 5. Beliefs x Your purchased decision of formula was strongly affected by about advertisements company x Alpha provides us with accurate information about the Infant marketing Formula practices x Alpha ’s Marketing of Infant Formula in Sri Lanka is truthful x Alpha uses true medical personnel in their marketing efforts x Instructions and health warnings on packaging are accurate and easily understandable x Alpha was attempting to undermine the implementation of


Mean 2.33 2.12 2.33 2.12 2.88 3.16

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international marketing code of conduct for infant formula x Alpha would not mislead its customers x Alpha promotes safe bottle feeding in Sri Lanka Source: Survey Data, 2009

2.90 2.11

3.47). Furthermore, they don’t believe that the child appearing the advertisement, has become healthier after having Alpha 1+ (mean = 2.11).

Changes of Beliefs about Child abuse in the advertisement According to the information given in the table 06, a significant portion of mothers believe that Alpha is abusing children in their advertisements (mean =

Table 06: Changes of Beliefs about Child abuse in the advertisement Measured variable Questions Mean 6. Changes of Beliefs x You believe Alpha is abusing children 3.47 about Child Appearing in in their advertisements the advertisement x You believe the child appearing in Alpha 2.11 1+ advertisement, become healthier after having Alpha 1+. Source: Survey Data, 2009. information from Health Clinics. During the interview, most of the rural mothers expressed that they are believing doctors’ advices than any other source (mean = 6.1111). At the same time, mothers get information from the Heath Clinic before making a purchase decision about infant formula (mean = 5.9000).

Impact of other information sources on mother’s buying behavior As depicted in the table 07, it is highlighted that Health Clinics and Doctors play a major role when giving information to the mothers about baby feeding. This is one of the most interesting and important findings from the analysis. Majority of mothers responded that they gained a lot of

Table 07: Impact of other information sources on mother’s buying behavior Information source Mean Mother 4.3333 Sister 2.9222 School 3.4000 Health clinic 5.9000 Friends 4.1111


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Doctors Husband Source : Survey data

6.1111 3.6444

Peadiatrics, Faculty of Medicine, University of Ruhuna were selected for the interview.

Analysis of Medical Professionals’ Views For the purpose of verifying the mother’s views and get a better understanding about the technical terms, Medical Professionals were interviewed to collect data. Under that four Senior Pediatricians from Department of

Their ideas can be summarized as follows.

Table 08: Doctor’s views about Breast Feeding Questions Pediatrician 01 What is the Breast feeding is the best. In best culture, alternative for our when the baby feeding feels hungry, babies? mothers are feeding the baby wherever they are. Role of breast It is the noble. No expenses, feeding nutrition is very much, I always recommend breast feeding as the best alternative Source: Interview data, 2009.

Pediatrician 02 Pediatrician 03 Pediatrician 04 Breast feeding Breast milk is the Breast milk is the is the best best best. It is free, clean, no expenses for equipment, preparation and also more nutritious It is the golden truth that every baby should be breast fed.

The table 08 disclosed the medical professionals’ views regarding the best alternative

I strongly believe they should feed first six months up to one year

It is a must to the baby. It increases baby’s immune system. Further, it keeps the baby safe from allergic diseases

for feeding babies. Based on the findings, it is clear that all four pediatricians accepted


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breast feeding as the best alternative. Further, they revealed that if the mother can feed theirbaby by breast milk, there is no point in giving infant formula for the children.Moreover, they revealed

that mothers are highly recommended and encouraged to breastfeed babies at least up to the first six months.

Table 09: Doctor’s views about Formula Feeding Question Role of Infant Formula

Pediatrician 01 Infant formula alsohas some importance in situations where mothers are suffering from adecease, when theyare working in full time, mothers whoare taking drugs Source: Interview data, 2009.

Pediatrician 02 When the mother isworking, she hasno alternative.

Pediatrician 03 When exceptional cases infant formula playing asthe next alternative for feeding babies

Pediatrician 04 I don’t think that we should give a place to infant formula, but there are some instances that mothers need these products

disease. However, medical professionals didn’t confirm the infant formula nutrition asgood as breast milk. By dealing with mothers, medical professionals have an understanding about mothers’knowledge of feeding babies. To get an understanding about mothers’ knowledge, Medical Professionals were asked the following question.

In contrast to the role of breast feeding, medical professionals were asked to explain therole of infant formula for children’s health. Their views for this question are summarizedin the above table 09.According to the information given by the table 09,it was the view of medical professionals that infant formula can be used in situationswhen the mothers are working outside their home and when they are suffering from a


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Table 10: Doctors’ view of Mothers’ awareness about baby feeding Question Pediatrician 01 Pediatrician 02 Pediatrician 03 Are mothers’ Yes I am quite There are some well happy to kind of gaps. informed? say most of the mothers are well informed Source: Interview data, 2009. The table 10 disclosed doctors’ view on mothers’ awareness about baby feeding. Three doctors out of four explained that, mothers are well informed about theirbaby’s nutrition, while contradictory opinion was found from one doctor. He noted thatthere are some gaps between

Pediatrician 04 Yes, I am happy to say that mothers are well informed

rural and urban mothers. Further, it was the view of Pediatrician three, that urban mothers’ ability to acquire new knowledge is higher since they havemore sophisticated technologies. But, when it comes to rural, mothers’ ability to gain new knowledge is limited.

Table 11: Doctors’ view of sources of information of infant formula Question What are the Sources that mothers are given information about the infant milk powder

Pediatrician 01 Pediatrician 02 Pediatrician 03 From From media From the advertisements, advertisements advertising media specially television

Pediatrician 04 *From the media. I think they are giving the necessary information to mothers *Word Of Mouth

Source: Interview data, 2009. As explained in table 11, it was the idea of all four pediatricians that advertising, specially television advertising isthe most powerful source of transiting information regarding infant formula. In addition,one of the doctors pointed out the importance of word of mouth

communication inspreading information about infant foods.


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Table 12: Doctors’ view of Company’s Advertising Claims Question Do you think Alpha 1+ deceive mothers?

Pediatrician 01 No, I don’t think they will do so as a recognized company. But as a whole I can say, advertisements havean impact on changing mothers behavior Source: Interview data, 2009.

Pediatrician 02 Yes. Not only Alpha 1+, but also all infant milk powder producers deceive mothers through their advertisements

As responded to declarations of medical professionals expressed in table 12, they donot believe Alpha is deceiving mothers as it is a recognized company in the world.

Pediatrician 03 It is very difficult to answer. If they just advertise, it is true some extent

Pediatrician 04 No, I don’t think so. They are promoting their products and give relevant information to customers. And also I don’t think that because of advertisements, mothers are selecting infant formula

CONCLUSION Based on the analysis results of both Mothers and Pediatricians, it seems that both groups disagree with theAlpha 1+ advertising claims. On the other hand, it is the health clinic that creates a greatest impact on changing mother’s beliefs about baby feeding. In addition to that, mothers are given information from several other sources such as from their family members, schools and from their friends.

However, they pointed out that advertisements have an impact on changing the mother’smind. It is the advertisement which shows healthy and fatty children running here andthere with a bottle of infant milk powder. According to the views of doctors, some mothers wanted to see their kids like the babies who appeared in the advertisements. In that sense, advertisements have a strong impact on changing mother’s beliefs about infant milk powder.

Based on all of the above discussions it can be concluded that Health Clinics and Medical Professionals are the most credible sources of getting information by the mothers. Whatever the decision they made regarding their baby feeding, they get information from the Health Clinics and Doctors rather than believing the advertisement as it is.


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Baby Feeding” , while rejecting the alternative hypothesis. The graphical explanation of the conclusion can be depicted as follows.

Finally, the overall analysis of the study created a path to Accept the Null hypothesis that is “There is no Ethical Impact of Infant Formula Advertisement on Changing Mothers’ Beliefs about Figure 04 Matrixes of Beliefs and Ethics

Advertising Arguments

Customer Beliefs regarding the product

Correct Good Lack of education

Positive Negative

Wrong Unethical No harm to the society

As illustrated by figure 04, the real picture of the study is more closed to the fourth cell of the matrix which explains that no harm from the

company’sadvertisements. Although, the advertising claims are wrong up to some extent, mothers are critical thinkers and not deceived by those claims.


babyclinics, Msc dissertation, Post Graduate Institute of Medicine, University ofColombo.

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[6.] Falkenberg, A.W. (2004). Moral Maturity and Ethics for International Economic [7.] Organizations. Journal of Business Ethics, 54: 17-32.

[3.] Bandusena, A.S.L. (2003), Selected determinants and sequel of exclusive [4.] breastfeeding up to six month in infants attending hospital and field well

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[20.] deceptive-advertising/4963441-1.html 37k -

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[22.] a.asp - 18k irect=true&db=aph&AN=J0E037238081 108& loginpage=login.asp&site=ehostlive

[11.] Sri Lanka Demographic and Health Survey, 2000 [12.] Tsang-Sing Chan and Geng Cui (2002) ,Consumer Beliefs and Attitudes Toward Marketing: an Emerging Market Perspective, in AP - Asia Pacific Advances in Consumer Research, 5 : 406-412. Internet sites [13.] pha .html [14.] %20-%20Alpha %Social%20 [15.] /archive/000152 [16.] mpanies/Alpha .html [17.] olutions/83Alpha Boycott.html [18.] ompfeb98.html [19.] www.babymilk.Alpha .com/NR/rdonlyres/A7B8DD17-06A644B3...Sri Lanka _ WHO _Code _ Report_ Assurance Statement _ FINAL _ pdf


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SRI LANKAN CORPORATE VOLUNTARY ENVIRONMENTAL REPORTING PRACTICES Rajeshwaran, N.a and Ranjani, R.P.C.b a Eastern University, Sri Lanka, b University of Kelaniya, Sri Lanka a, ABSTRACT Objectives of the study are to identify the extent and types of environmental disclosures of Sri Lankan public listed companies and to examine significance differences among the listed companies regarding the level of quality as well as quantity of environmental disclosures. The study employs legitimacy and stakeholder theories as the basis for explaining environmental reporting practices. By reviewing 284 companies annual reports published in 2012/2013, it was observed that 134 companies disclosed environmental information i.e. 47%. Out of them, 74% of (99) companies are selected by using proportionate stratified random sampling according to business sector as a sample to carry out the study. Descriptive statistics, Kruskal Wallis and Mannâ&#x20AC;&#x201C;Whitney tests were used to analysis the study. Results of the study show that companies disclose more soft environmental information than hard environmental information. Moreover, it is noted that a statement of corporate environmental policy, values and principles, environmental codes of conduct is disclosed by 78 companies. Notably diversified companies disclose more environmental information. Next to that bank, finance and insurance companies disclose. Further, it is noted that diversified and bank, finance and insurance companies significantly differ from manufacturing and beverage food and tobacco companies regarding quality as well as quantity of environmental disclosures. The findings from this research could provide relevant insights both to the companies, the stakeholder and the regulators in order to devise ways and means on how to move forward. Keywords: Environmental reporting, GRI, Legitimacy theory, Stakeholder theory. INTRODUCTION Contemporary perspective of firmâ&#x20AC;&#x2122;s main objective is contradicted to conventional perspective of a firm as Friedman (1970) noted principal purpose of a firm was to increase profit. The present dynamic business environment has created a demand for a firm to acknowledge their responsibility to a broader perspective.


Therefore, it involves various activities in the dynamic environment to enhance the competitive advantage while balancing societal concerns. Although there are different schools of thought concerning whether societal responsibilities increase value of an organization as it incurs additional cost to the company, there is evidence that these activities improve the value of

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the organization (Reinhardt, 1998 and 1999; Hart, 1995; Porter and Van der Linde, 1995). But, contrasting results are seemed between environmental performances and environmental disclosures as firms’ environmental performances are observed through the lens of environmental disclosures from the companies’ annual reports (Clarkson et al., 2008; Patten, 2002; Wiseman, 1982; Ingram and Frazier, 1980). Many companies disclose only favourable information to their corporate image (Kent, Kwong and Marshall, 1997; Deegan and Rankin, 1996) while other companies report limited information which reveals lack of relationship with companies’ environmental performance (Fekrat et al. 1996; Harte and Owen, 1991; Wiseman, 1982). Still other companies’ environmental disclosures are seemed to be a negative relationship with environmental performances (Patten, 1991, 1992, 2002; Hughes et al., 2001). In ethical perspective, these studies show that variation in reporting practices confuse stakeholders to make various decisions relying on the information provided by the companies. The reason to focus on only environmental disclosure, rather than holistically considering sustainability reporting (other subsets: economic and social), is made due to increasing environmental issues and urgency to address the state of our dying planet. Corporate activities are one of the major factors to pollute the environment. In the meantime,


corporate environmental activities could be observed via companies’ reports (Clarkson et al., 2008; Patten, 2002; Wiseman, 1982; Ingram and Frazier, 1980). An opinion poll in Canada in 1989 showed that people felt pollution to be the most important problem amongst others (Macleans, 1989 cited in ASCPA, 1999). In similar manner, US opinion poll revealed that environmental improvements should be done continuously without considering cost (Bragdon and Donovan, 1990). Moreover, report of Australian Federal Government pointed out in the perspective of 70% of people surveyed that safeguarding the environment is paramount important as like economic growth (Australian Bureau of Statistics, 1997). Environmental concern is not only in few countries but also it could be seemed in many countries. Elkington, (1994) cited view of George Gallup International Institute that opinion survey of 22 countries representing over 20,000 people believed main concern is to be given to protect the environment even at the expense of economic growth. Earth Summit is another attempt of the global community to protect the declining earth. Stakeholder Forum is also an international organization working to advance sustainable development and promote democracy at a global level. Consequently, Kyoto protocol was also implemented to prevent the environmental pollution. In addition, scientific studies proved that greenhouse gas emissions are linked to

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global warming, ozone destruction and acid rain.


In this scenario, Sri Lanka is also not exceptional. Sri Lanka has undergone rapid industrialization since the early 1980’s and the per capita income has almost doubled from 2006 to 2011 (Central Bank, 2011). Hydroelectricity, provided 60% of the country’s electricity needs in 2000, and this share has now been reduced to around 20% due to increased energy demands for households and emerging industries. Thermal power generation stood at around 80% in 2012 (Ceylon Electricity Board, 2012 and Ileperuma, 2000). At the same time petroleum consumption too has increased by 80% from 2002 to 2011 owing to the increased number of vehicles and power generation. According to Central Bank report (2011) the economy has also grown by 8.3% in 2011, which was the highest in Sri Lanka after independence, maintaining a growth rate more than 8% for the first time in two consecutive years. The result of this type of economic development increase environmental pollution in Sri Lanka as like ElijidoTen (2009, p. 86) indicated that “rapid economic growth comes the price of environmental degradation as a downside to industrialization”. Therefore, Sri Lankan government implemented several acts to look after companies’ activities for protecting environmental pollution (Ministry of Environment, 2013). But, there is not mandatory to disclose companies’ environmental performance via annual report or other media as the


Government does not introduce law relating to environmental reporting. Even though the Institute of Chartered Accountants of Sri Lanka also does not have any special standard regarding Environmental disclosures, Rajapakse, (2008); Pramanik, Shil, and Das, (2008); Senaratne and Liyanagedara, (2009) confirm that voluntary environmental reporting emerge in Sri Lanka. The basis of the study is given by legitimacy and stakeholder theories. Legitimacy theory states that organizations continually seek to ensure that they are perceived as operating within the bounds and norms of their respective societies (Lindblom, 1994). These bounds and norms are not considered to be fixed, but change over time (Islam and Deegan, 2008), thereby to maintain the legitimacy or social contact organization must take actions and those actions should be known by society. Dowling and Pfeffer (1975) indicate that communication plays instrumental role to ensure legitimacy. The communication takes form of annual or environmental report and website disclosure. Legitimacy provides a general framework in which to examine how a firm responds to its environment and society. However, within that society there are many groupings of individuals which are called as stakeholders (Cormier, Gordon and Magnan, 2004). Freeman et al. (2007, p. 6) and Freeman (1984, p. 46) defined stakeholder as “any group or individual who can affect or is affected by the achievement of the activities of an

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organization’’. Freeman (1984, p.1) indicates that “current approaches to understanding the business environment fail to take account of a wide range of groups”. He also pointed out that stakeholder theory provide ways to address the various demands of different stakeholders in order to manage them effectively in the dynamic environment. Even though stakeholder theory has been broadly applied in management literature, limited number of studies used the theory in the domain of company environmental disclosures. Many companies report environmental information to satisfy stakeholders’ expectations. Report users have difficult to cross-check the accuracy of the environmental information provided in the Annual Reports as Sri Lanka is a non-transparent setting of voluntary environmental reporting regime. Unlike other developed countries where public access to specific information of corporate environmental performance like the actual pollution discharge data from the US Environment Protection Agency’s Toxic Release Inventory (TRI) or TRI data provided by Investor Responsibility Research Center in the US. But this information is not publicly available in Sri Lanka. In addition, letters of warnings, penalties, and court sanctions pertaining to environmental activities which were issued to companies are also unavailable to public. This implies that the general public has no way of accessing the information on the environmental performance of Sri Lankan companies unless voluntarily


provided by those firms. It is questionable that variation in reporting practices due to lack of proper reporting regulations confuse the stakeholders to rely solely on the information provided by the companies for making decisions. Based on the above empirical observations and theoretical rigor, the study formulated the research problem, What is the current environmental reporting practice of Sri Lankan public listed companies? These lacks have led to conduct of this research, which attempts to fill the gap by adding the existing body of knowledge about voluntary environmental disclosure practices in a developing country like Sri Lanka which has no mandatory disclosure requirements. The remainder of the study commences with reviewing trends in corporate environmental accounting and reporting. It then moves to objectives. This is followed by methods and results of the study. Finally, conclusion is given. LITERATURE REVIEW Environmental Accounting Environmental Accounting is “covering all areas of accounting that may be affected by the business response to environmental issues” (Gray and Bebbington, 2001, p.7). Environmental Accounting consists of two branches, first, Environmental Financial Accounting (EFA), which focuses on reporting the cost of environmental liabilities and other significant environmental costs, and provide related environmental financial

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information to external stakeholders; second, Environmental Management Accounting (EMA), which as part of Management Accounting, addresses mainly to the information about monitory and physical aspects of material and energy flow, and provides information for internal decision makers of the corporation (Chang, 2007; Xiaomei, 2004). In this regard, management of organization has responsibility not only to carryout environmental activities to prevent wastage and protect environmental pollution but also those activities should be communicated to stakeholders. This brings need to discussion of environmental accountability.

which they operate”. Berthelot et al. (2003, p. 2) also defined environmental disclosure as “the set of information items that relate to a firm’s past, current and future environmental management activities and performance”. Stand-alone environmental report, company website, annual report, CD-ROM, press releases and communication media are used by the companies to inform environmental information (Elijido-Ten, Kloot and Clarkson, 2010; Tilt, 2008; Adams, 2002; O’Donovan, 2000). Quantity and quality of environmental disclosures are discussed in developed as well as developing countries perspective in subsequent sections.

Environmental Accountability Accountability is “duty to provide an account or reckoning of those actions for which one is held responsible” (Gray et al., 1996, p. 38). It has two types of responsibilities, first, undertake certain actions or not to take other actions, second, to provide an account of those actions. In brief, environmental accountability is consisting both environmental performance and environmental disclosures. Therefore, disclosing environmental information, to stakeholders is important part in environmental accountability, which is discussed next.

Quantity of Environmental Disclosures Content analysis is commonly used method for measuring the level of environmental disclosures (Alrazi, Villiers and Staden, 2010). Quantity of environmental reporting is measured using: number of words or number of sentences or number of pages (Unerman, 2000; Milne and Alde, 1999; Hackston and Milne, 1996; Gary et al., 1995) or line counts (Patten, 2002; Wiseman, 1982) or number of theme occurrence (Walden and Stagliano, 2004). Number of sentences is better than words as sentence has clear meaning and reduces the subjectivity involved in interpretation of the environmental facts (ElijidoTen, 2009; Hackston and Milne, 1996). Quantity deals with ‘how much is being disclosed’ (Raar, 2007; Walden and Schwartz, 1997 cited in Alrazi, Villiers and Staden, 2010).

Environmental Disclosure Wilmshurt and Frost (2000, p. 16) defined environmental disclosure as “those disclosures that relate to the impact company activities have on the physical or natural environment in


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Oâ&#x20AC;&#x2122;Donovan and Gibson (1994) studied the trend of environmental reporting by examining 41 companies for a ten year period (1983-1992). They found that environmental information was descriptive which increased form 43% in 1983 to 67% in 1992. Industry specific study of mining companies in Australia, Tilt and Symes (1999) also affirmed that amount of environmental information increased due to environmental sensitive industry.

Quantity of Environmental Disclosures in Developed Countries Recently KPMG (2011) has studied 3,400 companies about corporate responsibility (CR) reporting from 34 countries around the world including the largest 250 global companies based on fortune global 500 ranking. It has been reporting once in three years gap since 1993. According to the studies of KPMG, extent of CR (social and environmental) reporting has been increased to 100%, 99%, 94%, 83% and 79% in 2011 comparing with 91%, 93%, 59, 74% and 62% of companies in 2008 in United Kingdom, Japan, France, United States America and Canada respectively, among others.

Quantity of Environmental Disclosures in Developing Countries Chatterjee and Mir, (2008) analyzed environmental disclosures in website as well as annual report of top 45 Indian companies drawn from as on 31 December, 2003. Out of the 45 companies, only 23 companies have disclosed environmental information in the website which ranged from 1 sentence to 129 sentences and average was 20 sentences. Moreover, there were significant differences among the companies regarding volume of the disclosure. Notably, diversified companies disclosed more information which contrasts findings of Ahmed and Sulaiman (2004) that industrial sector disclosed more environmental information. Of these 29 companies, 10 companies did not provide any environmental information in the annual reports. These 19 corporations issued the average of 14 sentences and ranged from 2 sentences to 41 sentences in annual report of 20032004. The reason to non-disclosing in annual report was to minimize printing cost.

In United States, Razzed (2010) studied pattern of environmental disclosure (20 disclosures items) in internet verses annual reports over the years 2000, 2004 2008 in 102 listed companies. He found that â&#x20AC;&#x153;the mean levels of environmental disclosure in hard copy reports decreases from 9.67 (48.3% in 2000) to a high of 11.10 (55.5% in 2004) and to a fall of 10.12 (50.6%) in 2008. However, the mean levels of environmental disclosure on the Internet has increased steadily from 9.98 (49.9% in 2000) to 13.50 (67.5% in 2008)â&#x20AC;? (Razzed, 2010, p.9). But, in the case of Australia, amount of environmental disclosures was higher than USA, Canada and UK in 1995 (Gibson and Guthrie, 1995) whereas its place was 23rd among the 3,400 companies in 2011 (KMPG, 2011).


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Moving to South East Asia; Thailand, Singapore and Malaysia are Newly Industrialized Countries (NIC). In Thailand, Kuasirikun and Sherer (2004) investigated comparatively corporate social and environmental reporting using 63 and 84 annual reports in 1993 and 1999 respectively. They found the reporting companies were reduced from 86% in 1993 to 77% in 1999 due to financial crisis in 1997. Environmental information was the second most disclosed item next to employee information.

Senaratne and Liyanagedara (2009). They studied corporate sustainability reporting practices in Sri Lanka using guidelines of Global Reporting Initiative (GRI). They found that out of 34 companies, 11 companies (32% of sample) have provided some form of social and environmental reporting where just only 2 companies have presented sustainable report. The study revealed that environmental performance indicators was the least disclosed area (12%) out of three performance indicators (environment, social and economic).

Elijido-Ten (2009) examined quantity of environmental disclosure of companies’ 2001 annual reports in Malaysia. She reported that quantity of environmental disclosures ranged from 0 to 95 sentences with average 16.37 and median 9 sentences. She also indicated the information is reported in different parts of annual report: financial statements and notes to accounts, chairman’s statements, operational review and others.

Corporate social responsibility reporting has been analyzed by Rajapakse (2009) on critical perspective. The study showed 120 companies out of quoted public companies (238) have reported CSR. Moreover, he found although many companies produced CSR report those report did not communicate economic reality of corporate entities. Reporting companies used their power on accounting to politicalize social accountability via manipulating their operational results.

In Sri Lanka, Rajapakse (2008) found that 44% of sample companies disclose environmental information as they have a responsibility to protect the physical environment which may be affected by their operations. In addition, he indicated that most of the companies disclosed qualitative information and this information was not sufficient to make better decision relating to environmental issues of the firms i.e. “disclosures seem to be selflaudatory statements rather than qualitative information” (Rajapakse, 2008, p.7). Result of the Rajapakse is consistent with the findings of

Quantity of environmental disclosures is high in developed countries than developing countries. The next section discusses the quality of environmental disclosures. Quality of environmental disclosures Quality of reporting means type of data disclosed such as evidence (monitory, quantitative or declarative), news type (positive, negative or neutral) (Gray et al., 1995). It deals with ‘what is being reported’ (Walden and Schwartz, 1997


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cited in Alrazi, Villiers and Staden, 2010) and ‘how the information is measured’ (Raar, 2007 cited in Alrazi, Villiers and Staden, 2010). Further, quantitative assessment of qualities of disclosures uses indices to assess and compare companies’ environmental reporting (Clarkson et al., 2008).

gas, metals and mining and utilities industry, Clarkson et al., (2008) found positive association between environmental performance and level of discretionary environmental disclosures. Al-Tuwaijri et al., (2004) also investigated relations among environmental disclosure, environmental performance and economic performance using simultaneous equations approach of 198 US firms. The study reported that good environmental performance is associated with good economic performance and also environmental disclosures of specific pollution measures.

Quality of Environmental Disclosures in Developed Countries Wiseman (1982) evaluated annual reports of 26 large US companies’ environmental disclosures. He found no relationship between the environmental performance and environmental disclosures. Fekrat et al. (1996) studied relationship between the environmental performance and environmental disclosures using Wiseman’s (1982) index of environmental disclosures representing six industries from 18 countries. They found no relationship between the two variables. Later, Hughes et al. (2001) examined the relationship in 51 manufacturing corporations by adopting Wiseman’s (1982) index. They found negative relationship between the two variables that is poor environmental performers provided more environmental disclosures or vice versa. Reason for the mixed results is due to weakness in the Wiseman’s content analysis index which focuses on financial consequences of environmental activities and gives more weight on quantitative reporting (Clarkson et al., 2008). Therefore, they developed index based on GRI sustainability reporting guideline to measure discretionary reporting. Drawing from sample of 191 US firms in pulp and paper, chemical, oil and

Kent et al., (1997) investigated nine Australian chemical firms from 1993 to 1994 of annual reports which showed positive environmental information. Christopher et al. (1998) reported that 104 mining companies disclosed quality environmental information voluntarily in Australia as being an environmental sensitive industry. Quality of environmental report was measured using index of six categories, which are expenditures and risk, laws and regulation, pollution abatement, sustainable development, remediation and environmental management, in 41 North American and European companies representing seven industries (Cormier et al., 2004). They found mean of environmental disclosures was about 86 with a range from 4 to 205. In the categories, mean value of law and regulation was 3.71 as lowest and highest for


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environmental management was with mean 86.

In investigating Malaysian environmental disclosures, Elijido-Ten (2009) used content analysis to measure 2001 annual reports by applying stakeholder theory. The study showed that majority of organization provided general information and only 3 firms provided quantitative information. Moreover, she found quality of annual report environmental disclosure ranged 0 to 22 with an average of 6.58 where a firm could be able to get maximum number of 54. She concluded that overall quality of environmental disclosure was low and none of the firms disclosed on accrued liabilities tax provision relating to environmental expenditures, present litigation, potential litigation and estimated litigation cost/ contingent liabilities out of 18 criteria of environmental disclosure index.

Quality of Environmental Disclosures in Developing Countries In India, companies did not disclose any bad news in the annual as well as website (Chatterjee and Mir, 2008). They were reluctant to disclose bad news to users of such information. Several companies disclosed good and neutral news concerning environment. Results of the study are consistent with the studies of Guthrie and Parker (1990) and Deegan and Gordon (1996). Choi (1999) studied quality of environmental disclosures using 1997 annual report in South Korea which is NIC and emerging country to be become as developed country. He has found that high profile industries provide more and systematically better environmental information than low profile.

Although a number of companies disclosed social and environmental information, quality of disclosure was low in Egypt. The reasons for this scenario were lack of regulations, lack of knowledge of reporting and social awareness and under developed corporate reporting culture (Rizk, Dixon and Woodhead, 2008). Similarly, quality of environmental disclosure was inadequate for effective monitoring environmental activities of the firms in Swaziland as descriptive type of information was dominant type (Kabir and Akinnusi, 2012).

Fun (2002) indicated that 23 out of 160 firms reported only positive environmental disclosures and none of the firms disclosed negative and quantitative information in Singapore. Chung and Parker (2010) examined the phenomenon of corporate social and environmental reporting research of a last 10 years in Singapore for setting up hospitality industrial strategies and disclosing. They revealed that quality of environmental reporting was poor. Further, they stated that â&#x20AC;&#x153;corporate involvement and attention is growing, but arguably remains in its infancyâ&#x20AC;? (Chung and Parker, 2010, p.48).

According to the studies of Rajapakse (2008) and Senaratne and Liyanagedara (2009), quality of environmental disclosure is poor in Sri Lanka when compared with developed


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countries. Senaratne and Liyanagedara (2009) indicted quality of report was C level i.e. minimum level according to the GRI guideline. Rajapakse’s conclusion (2008) supported the view of SEAJ (2002 cited in Rajapakse, 2008) and Rajapakse (2001 cited in Rajapakse, 2008) on Sri Lankan environmental reporting was poor and not of a standard of satisfy requirements of stakeholders.

METHOD Method of Data Collection By reviewing 284 public companies annual reports published in 2012/2013, it was observed that 134 companies disclosed environmental information. Out of them, 99 companies were selected by using proportionate stratified random sampling according to business sector as a sample to carry out the study. Sample size is determined based on the table of sample size for a given population size (Krejcie and Morgan, 1970, cited in Sekaran, 2007, p.294).

Barrier for environmental reporting could be classified into three categories namely political, organizational and individual factors. Political factors are lack of legal provision in company act, national environmental act and tax act and lack of accounting and auditing standards. Lack of organizational policies, lack of qualified employees to undertake environmental reporting practices and contradicting business motives as it additional burden are come under the organizational factor. Finally individual factor consists of lack of knowledge and training of report prepares and negative attitude towards environmental reporting (Rajapakse, 2008).

Quality of environmental disclosures is measured by using Clarkson et al. (2008) index (appendix). Quality of environmental disclosure classified into two categories: hard (A1–A4) and soft (A5–A7). Hard disclosure “categories make it relatively difficult for poor environmental performers to mimic the environmental disclosures of good environmental performers” (Clarkson et al., 2008). Each item of categories in A1-A7 except A3 carries one point if it exist otherwise zero. Category A3 is measured 7 points scale i.e. the scoring scale of environmental disclosure data is from 0 to 6. A point is awarded for each of the following items where performance data is: 1 - presented in general, 2 presented in monetary or quantitative terms, 3 - presented relative to previous periods (trend analysis), 4 presented relative to targets, 5 presented both in absolute and normalized form and 6 - presented at disaggregate level (i.e., plant, business unit, geographic segment).

Quality of environmental disclosure is not only low in Sri Lanka but it is common in most of developing countries like India (Chatterjee and Mir, 2008), Bangladesh (Islam and Deegan, 2008), Swaziland (Kabir and Akinnusi, 2012), and Egypt (Rizk, Dixon and Woodhead, 2008). In addition, reasons of this phenomena also common in many developing countries such as lack of regulation, lack of knowledge and training of employees, etc.


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When companies are selected as a sample by using proportionate stratified random sampling, selected sample companies are less than five in some sectors due to less number of companies disclosed environmental information in that sector. But, minimum five companies are required to run ANOVA or Kruskal Wallis in each sector. Therefore, those sectors which have sample size less than five companies are grouped and named as other sector.

Quantity of environmental disclosure was measured using number of sentences. In cases where tables or figures are provided, each figure and description is counted as one sentence. Method of Data Analysis Descriptive statistics of data were performed to identify the main characteristics of the research variables. Kruskal Wallis and Mannâ&#x20AC;&#x201C; Whitney tests were used to test the significant differences among the listed companies regarding the quality and quantity of environmental disclosure.

Quality of environmental disclosure According to Table 2, mean value of total quality of environmental disclosure is 12.61 out of total value of 88 and standard deviation is 10.77. Mean value of hard disclosure is 7.65 out of 72 total hard score whereas mean value of soft disclosure is 4.96 out of 16 total soft disclosures. This is around 31% of total soft disclosures. It indicates most of the companies disclose soft items than hard items.

Hypothesis H1. There are significant differences among the listed companies regarding the level of quality as well as quantity of environmental disclosures. DATA ANALYSIS Validity and Reliability Validity of the research is confirmed based on Clarkson et al. (2008) environmental disclosure index which was developed based on GRI sustainability report. Reliability of collected data enhanced via randomly rechecking of the collected data from annual reports with the help of research assistant to identify whether there are any missing or additional data encountered.

It is noted that 34% of sample companies adopt GRI sustainability guidelines and 25% of companies implemented ISO 14001. Similarly 34% of companies discussed with stakeholders in setting corporate environmental policies. Further it is noted that a statement of corporate environmental policy, values and principles, environmental codes of conduct is disclosed by 78 companies.

Companies disclosed environmental information By reviewing 284 annual reports of listed companies, 134 companies disclosed environmental information i.e. 47% (Table 1).

At the same time, â&#x20AC;&#x2DC;existence of response plans in case of environmental accidentsâ&#x20AC;&#x2122; is disclosed by none of the companies in Sri Lanka.


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Out of 99, 34 companies involve Stakeholder engagement in setting corporate environmental policies and seven companies engage stakeholder involvement in the environmental disclosure process.

Moreover, following elements are disclosed by less than five companies. x Periodic independent verifications/audits on environmental performance and/or systems x



x x

Summary of rupees savings arising from environment initiatives to the company Periodic independent verifications/ audits on environmental performance and/or systems An overview of corporate environmental performance relative to industry peers Internal environmental awards Internal certification of environmental programs

Quality of environmental disclosure comparison with sector wise Diversified holdings sector reported more quality of environmental information where two companies got more than 53 points out of 88. Next to that baking sector report EI where a bank has 45 points. In the meantime 49 companies got below 10 points. Moreover, average score of quality of environmental disclosure is shown in Table 3 relating to hard, soft and total disclosure. It could be observed that there are much mean differences regarding hard and total quality of environmental disclosure among the sector wise while very little difference regarding soft quality of environmental disclosure among the sector wise.

Even though 25 companies have gotten certification for environmental performance and 11 companies have been certified for independent verification/ audits of reporting, they did not carry out periodic independent verifications/audits on environmental performance except 2 companies.

Quantity of environmental disclosure comparison with sector wise

Quantity of environmental disclosure Average quantity of environmental disclosure is 61 with standard deviation 70.89. Most of the companies disclosed high quantity for environmental performance related to energy use or efficiency (mean 7.77), waste management (recycling, re-use, reducing) (6.68) and land and resources use, biodiversity and conservation (5.36). Approximately 5 sentences were reported by each company about statement of corporate environmental policy, values and principles.

Highest quantity of environmental disclosure (402) gained by one of diversified company. Even though Bank, Finance and Insurance companies are normally less polluting environment, they disclose more environmental information. But, four of manufacturing companies just disclosed less than 5 (sentences) quantity of environmental information as generally the sector is expected to discharge more wastage/ pollution. Similarly, around 30% of beverage food and tobacco companies also disclosed less than 10 sentences. In addition, average score of quantity of environmental disclosure also is shown in Table 3 relating to hard, soft and total disclosure. It could be observed that there are mean differences regarding hard, soft


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and total quantity of environmental disclosure among the sector wise.

= 15.39 at significance level p = 0.05. On contrast, according to statistical Table 4, it seems that there is no significant difference among the listed companies regarding the quality of soft environmental disclosures at significance level p = 0.05. It shows that non environmental protecting companies may disclose environmental information as they committed to protect the environment. At the same time, quantity of soft environmental disclosure significant which indicates poor environmental performing companies may report less environmental information or number of sentences than good environmental performing companies.

According to the above discussions, quality or quantity of environmental disclosures are differed among the listed companies. In order to check whether it is statistically significant, one way ANOVA/ Kruskal Wallis is carried out. Hypothesis testing Following assumptions of ANOVA are not satisfied. Quality and quantity of environmental reporting for some of sectors are not normally distributed. In addition, the distributions of quality and quantity of environmental reporting for seven groups or sectors have not equal variances. Therefore, ANOVA cannot be performed. Subsequently, Kruskal Wallis test, nonparametric, is carried out to check whether there are significant differences among the listed companies regarding the level of quality as well as quantity of environmental disclosures.

Subsequent analysis of mean ranking (Table 5) and Mannâ&#x20AC;&#x201C;Whitney tests (untabulated) of quality as well as quantity of environmental disclosures regarding hard, soft and total show that diversified companies and bank, finance and insurance companies significantly differ from manufacturing and beverage food and tobacco companies.

Six Kruskal Wallis tests are conducted about quality as well as quantity of environmental disclosures relating to hard, soft and total disclosure among the listed companies. Results of Kruskal Wallis tests (Table 4) reveal a significant difference among listed companies regarding quality of hard environmental disclosure H(7) = 13.56, quality of total environmental disclosure H(7) = 13.75, quantity of hard environmental disclosure H(7) = 14.13, quantity of soft environmental disclosure H(7) = 16.83 and quantity of total environmental disclosure H(7)

DISCUSSION AND CONCLUSION Numbers of companies disclose environmental information has been increasing to 47% in 2013 from 44% Rajapakse (2008). Quality of environmental information is still in low level in Sri Lanka as indicated by Rajapakse (2008) and Senaratne and Liyanagedara (2009). Findings of the study is consistence with the finding of Clarkson et al. (2008) as companies disclosed more soft environmental information than hard environmental information in annual report published in 2012/ 2013. These kinds of soft


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disclosures can represent true commitment but they can also be imitated by companies which do not really commit to protecting the environment. Having environmental policies, indicating environmental performance in the chairman message and compliance with specific environmental standards are some of mostly disclosed soft categories by companies.

REFERENCES [1.] Adams, C.A. (2002) ‘Internal organisational factors influencing corporate social and ethical reporting: beyond current theorising’, Accounting, Auditing & Accountability Journal, 15 (2), pp. 223-50. [2.] Alrazi, B., Villiers, C and Staden, C (2010) ‘A framework for the integration of environmental legitimacy, accountability and proactivity (ELAP)’, Sixth Asia Pacific Interdisciplinary Research in Accounting Conference, (Accessed: 18 April 2011). [3.] Al-Tuwaijri, S. A., Christensen, T. E., & Hughes, K. E. (2004) The relations among environmental disclosure, environmental performance, and economic performance: A simultaneous equations approach. Accounting, Organizations and Society, 29(5-6), 447–471.

Notably diversified companies disclose more environmental information in Sri Lanka. This finding is similar to Indian phenomena (Chatterjee and Mir, 2008). Next to that bank, finance and insurance companies disclose. Further, it is noted that diversified and bank, finance and insurance companies significantly differ from manufacturing and beverage food and tobacco companies regarding quality as well as quantity of environmental disclosures relating to hard, soft and total disclosure. In Sri Lanka manufacturing firms disclose very low level of environmental information which is contradicted to finding of Sulaiman (2004) in India.

[4.] Australian Business Statistics, (1997) Environmental Issues: People’s Views and Practices, Commonwealth of Australia, Canberra.

Both stakeholder involvement in setting corporate environmental policies and environmental disclosure process show that companies maintain the link with stakeholders for managing them in respect of environmental activities. It is clear that companies legitimate their activities to society by reporting environmental performance to various stakeholders.

[5.] Bragdon, P and Donovan, B (1990). Voters’ concerns are turning the political agenda green. Congressional Quarterly, January: pp. 23-37. [6.] Central Bank, (2011) Central Bank Annual Report 2011, Sri Lanka


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[7.] Ceylon Electricity Board, (2012) Electricity generated, Retrieved from

reality, Journal of Business Ethics, 49, 143-165. Retrieved from

[8.] Chang, C. H. (2007) Environmental Management Accounting within Universities: Current state and future potential, Unpublished PhD Thesis, RMIT University.

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Table 1: Population and sample (adjusted) Type of the sector Bank, Finance and Insurance Beverage Food and Tobacco Diversified holdings Hotels and travels Manufacturing Plantation Others Total

No. of Companies

No. of companies disclosed environmental information

61 20 18 36 36 19 94 284

Sample 33 14 12 9 19 16 31 134

24 11 9 7 14 12 22 99

(Source: Colombo Stock Exchange, 20/06/2013 and developed by researcher)

Table 2: Quality and quantity of environmental disclosure Hard disclosure items (Numbers given in brackets are maximum score for quality of environmental disclosure in each elements)

(A1) Governance structure and management systems (max score is 6) 1. Existence of a Department for pollution control and/or management positions for environmental management (0–1) 2. Existence of an environmental and/or a public issues committee in the board (0–1) 3. Existence of terms and conditions applicable to suppliers and/or customers regarding environmental practices (0–1) 4. Stakeholder involvement in setting corporate environmental policies (0–1) 5. Implementation of ISO14001 at the plant and/or firm level (0–1) 6. Executive compensation is linked to environmental performance (0–1) (A2) Credibility (max score is 9) 1. Adoption of GRI sustainability reporting guidelines (0–1) 2. Independent verification/assurance about environmental information disclosed in the environmental performance report/web (0–1)


Number Quality of Quantity of of environmental environmental disclosing disclosure disclosure companies Mean Std. Mean Std. Dev. Dev. 1.13






























0.15 1.16

0.36 1.56

0.35 4.77

1.00 10.60











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3. Periodic independent verifications/audits on environmental performance and/or systems (0–1) 4. Certification of environmental programs by independent agencies (0–1) 5. Product Certification with respect to environmental impact (0–1) 6. External environmental performance awards and/or inclusion in a sustainability index (0–1) 7. Stakeholder involvement in the environmental disclosure process (0–1) 8. Participation in industry specific associations/initiatives to improve environmental practices (0–1) 9. Participation in other environmental organizations/associations to improve environmental practices (if not awarded under 8 above) (0–1) (A3) Environmental performance indicators (EPI) (max score is 54) 1. EPI on energy use and/or energy efficiency (0–6) 2. EPI on water use and/or water use efficiency (0–6) 3. EPI on greenhouse gas emissions (0–6) 4. EPI on other air emissions (0–6) 5. EPI on other discharges, releases and/or spills (0–6) 6. EPI on waste generation and/or management (recycling, re-use, reducing, treatment and disposal) (0–6) 7. EPI on land and resources use, biodiversity and conservation (0–6) 8. EPI on environmental impacts of products and services (0–6) 9. EPI on compliance performance (e.g., exceedances, reportable incidents) (0–6) (A4) Environmental spending (max score is 3) 1. Summary of rupees savings arising from environment initiatives to the company (0-1) 2. Amount spent on technologies, Rand D and/or innovations to enhance environmental performance and/or efficiency (0–1) 3. Amount spent on fines related to environmental issues (0–1) Soft disclosure items





































66 42 28 7 8

5.07 1.34 0.89 0.57 0.14 0.13

5.84 1.36 1.30 1.13 0.69 0.55

28.45 7.77 3.59 3.26 0.46 0.40

38.69 11.15 6.72 8.07 2.25 2.08

















0.20 0.28

0.53 0.67

0.35 0.69

1.02 2.27
















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(A5) Vision and strategy claims (max score is 6) 1. CEO statement on environmental performance in letter to shareholders and/or stakeholders (0–1) 2. A statement of corporate environmental policy, values and principles, environmental codes of conduct (0–1) 3. A statement about formal management systems regarding environmental risk and performance (0–1) 4. A statement that the firm undertakes periodic reviews and evaluations of its environmental performance (0– 1) 5. A statement of measurable goals in terms of future environmental Performance (if not awarded under A3) (0–1) 6. A statement about specific environmental innovations and/or new technologies (0–1) (A6) Environmental profile (max score is 4) 1. A statement about the firm’s compliance (or lack thereof) with specific environmental standards (0–1) 2. An overview of environmental impact of the industry (0–1) 3. An overview of how the business operations and/or products and services impact the environment. (0–1) 4. An overview of corporate environmental performance relative to industry peers (0–1) (A7) Environmental initiatives (max score is 6) 1. A substantive description of employee training in environmental management and operations (0–1) 2. Existence of response plans in case of environmental accidents (0–1) 3. Internal environmental awards (0–1) 4. Internal environmental audits (0–1) 5. Internal certification of environmental programs (0– 1) 6. Community involvement and/or donations related to environment (if not awarded under A1.4 or A2.7) (0– 1) Total hard disclosure Total soft disclosure Total disclosure
































0.16 1.52

0.37 1.06

0.76 7.13

2.76 8.33

















0.03 0.77

0.17 0.93

0.07 4.35

0.41 7.91






0 2 8

0.00 0.02 0.08

0.00 0.14 0.27

0.00 0.00 0.21

0.00 0.00 0.94







0.41 7.65 4.96 12.61

0.50 8.38 2.99 10.77

3.20 37.18 23.82 61

6.42 51.46 23.36 70.89

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Table 3: Average score of quality and quantity of disclosure among sector wise Sector


Bank, Finance and Insurance Beverage Food and Tobacco Diversified holdings Hotels and travels Manufacturing Plantation Others Total

24 11 9 7 14 12 22 99

Average score Total Total Total soft Total Total soft Total hard hard quality quality quantity quantity quality quantity disclosure disclosure disclosure disclosure disclosure disclosure 10.00 5.33 15.33 43.46 35.75 79.21 3.82 3.36 7.18 14.36 12.73 27.09 15.00 6.78 21.78 83.44 36.89 120.33 9.29 5.71 15.00 30.57 19.71 50.29 3.71 3.79 7.50 17.07 11.43 28.50 5.50 4.33 9.83 43.83 19.42 63.25 7.14 5.45 12.59 34.09 22.59 56.68 7.65 4.96 12.61 37.18 23.82 61.00

Table 4: Kruskal Wallis Test Quality of hard disclosure

ChiSquare df Asymp. Sig.

Quality of soft disclosure

Quality of total disclosure

Quantity of hard disclosure

Quantity of soft disclosure

Quantity of total disclosure







6 .035

6 .087

6 .033

6 .028

6 .010

6 .017

Table 5: Mean ranking of quality and quantity of disclosure among sector wise Sector

Bank, Finance and Insurance Beverage Food and Tobacco Diversified holdings Hotels and travels Manufacturing Plantation Others Total


24 11 9 7 14 12 22 99

Mean Rank Total Total Total soft Total Total soft Total hard hard quality quality quantity quantity quality quantity disclosure disclosure disclosure disclosure disclosure disclosure 60.5 55.54 59.71 59.52 63.62 61.85 37.68 33 35.27 35.73 36.23 35.73 65.61 65.72 66.28 66.78 68.5 66.83 55.21 56.71 56.29 52.86 46.43 50.36 33.93 38.36 34.79 32.36 33.36 32.46 42 45.17 42.46 46.42 45.58 45.83 51.25 53.93 51.91 52.16 48.59 50.64


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THE RELATIVE IMPORTANCE OF PACKAGING DESIGN ATTRIBUTES IN AFFECTING PERCEIVED QUALITY OF FOOD PRODUCTS A CONJOINT ANALYSIS APPROACH (THE CASE OF YOGHURTS) Samarasiri, W.W.M University of Sri Jayewardenepura, Sri Lanka ABSTRACT Quality of food is an exceedingly important aspect in the food industry as people become more and more concerned about nutrition, food safety and environmental issues in establishing their acceptance of food products. In this context packaging has become a major component of the product due to its significance for producers as well as consumers. Therefore the article examines the relative importance of packaging design attributes in affecting perceived quality of food products using a conjoint analysis approach. The result indicates that all the packaging design attributes have a notable influence on the perceived quality of food products but Information on the package is the most important attribute with the highest importance value. Finally it suggests that consumers are evaluating food product quality using some concrete package-information surrounded by a visually stimulating background. Keywords: Conjoint analysis, Cues Utilization, Packaging, Perceived food quality though researchers have not come up yet with a universally accepted definition. Based on prior literature, Reeves and Bednar (1994) provide a framework to explain the concept of quality consisting of four different aspects, quality as excellence, quality as value, quality as conformance to specifications and quality as meeting and/or exceeding customers’ expectations.

INTRODUCTION Product quality has become a main topic in Sri Lanka as consumers are becoming more deliberate and value conscious. Quality serves as an important criterion for consumers when purchasing food products and it builds customer value and satisfaction (Steenkamp, 1989).Therefore food companies pay a huge attention on the product designs, manufacturing processes, and marketing strategies to improve and communicate product quality. Thus, products quality has grown to be the most important single factor affecting a business unit’s performance in the long run, relative to those of competitors (Buzzel & Gale, 1987).

According to Zeithaml (1988), Products constitute an array of intrinsic and extrinsic attributes that consumers use to determine product quality. A top priority for marketers is to find out which of the many extrinsic and intrinsic cues consumers use to signal quality. Hence he accented the significance of identifying important quality signals from the consumers’ viewpoint, then communicating those signals rather than

Quality has been defined in many different ways and every single definition contributes to better understanding of the concept,


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generalities, is likely to lead to more vivid perception of quality.

This paper, x Provide empirical evidence for the relative importance of each packaging attributes in affecting perceived quality of food products. x Study the consumers' preferences for the particular features of the packaging design attributes (attributes' levels) in creating quality expectations on food products.

In this perspective packaging has become a major component of the product due to its magnitude in food marketing. It protects and preserves products and raw materials as they transit through the supply chain. By nature packaging is very visible and something that attracts the attention of consumers, the media and environmentalists (Silayoi and Speece, 2004).

This research study follows Silayoi & Speece (2007) in using conjoint analysis and in incorporating attributes of packaging. However, this study differs from them as per various facets,

Owing to the significant investments made by marketers on the packaging design, many researchers have studied that packaging has a substantial influence on consumerâ&#x20AC;&#x2122;s choice behaviour and product experience. (Ghoshal et al., 2009; Silayoi and Speece, 2004; Silayoi and Speece, 2007, MĂŠndez et al., 2011) regardless of this, there is little academic literature studying exactly how packaging design attributes impact on consumersâ&#x20AC;&#x2122; perceptions toward product quality.



Along with the given facts, several questions arise: How do packaging attributes influence on the perception of product quality? Relative importance of each these packaging attributes in affecting perceived food product quality and how the variations of these packaging design attributes influence on perceived quality? The answer to these questions is a priority for any actor trying to endure by understanding consumer behaviour.

This article investigates the relative importance of packaging design attributes in affecting perceived quality of food products. This article was carried out in the Sri Lankan context and used yoghurt packages as the subject of the conjoint experiment.

REVIEW OF LITERATURE What Does Packaging Mean? In marketing literature, packaging is considered to form part of the product and the brand. According to Evans and Berman (1992) packaging is a product property or characteristic. Generally, packaging is the container that is in direct contact with product itself, which holds, protects, preserves and identifies the product as well as help in facilitating, handling and commercialization (Ampuero & Vila, 2006).

Objectives of the Study The main purpose of this study is to examine the relative importance of the packaging design attributes in affecting perceived quality of foods in Sri Lanka. Specific research objectives are as follows:

There are three types of packaging. Primary packaging is in direct contact with the product. Secondary packaging contains one or more primary packages and serves to protect and identify them and to communicate the qualities of the product. It is normally discarded when the product is


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used or consumed. Finally, tertiary packaging which contains the two previous ones and its function is to distribute, unify and protect products throughout the commercial chain (Ampuero & Vila, 2006).

basis for developing various impressions of the product itself. Earlier studies have shown that consumers utilize quality cues such as the colour, place of purchase, appearance, price, packaging, origin and brand in deciding food quality (Bredahl, 2003; Glitsch, 2000; Grunert, 1997; Acebrón & Dopic, 2000; Jarvela, 1998, Zeithaml, 1988; Méndez et al., 2011).

Packaging is presented as part of the buying and consuming process, but often it is not directly related to the ingredients that are essential for the product to function (Underwood, 2003). Keller (1998) also considered packaging to be an attribute that is not related to the product and believed as one of the five elements of the brand together with the name, the logo and/or graphic symbol, the personality and the slogans.

Cox (1967) argues that products can be conceived as arrays of cues and that consumers assign information values to the cues available based on their predictive value – PV – (the degree to which consumers associate an attribute with the product’s quality) and confidence value – CV – (the confidence that consumers have in their own capacity to use and interpret an attribute effectively as an indicator of quality).

Packaging provides manufacturers with the last opportunity to persuade possible buyers before brand selection (Ampuero & Vila, 2006). A good package design attracts consumers to a product, communicates to them and adds value to the product by increasing the quality of the usage experiences. According to Bloch, (1995) attractively designed packages may provide sensory pleasure and stimulation, whilst unattractive appearance may evoke distaste.

Olson and Jacoby (1973) classified product attributes as intrinsic and extrinsic to products. x Intrinsic cues represent product-related attributes that cannot be manipulated without altering the physical product itself. They include ingredients, taste, freshness, texture, aroma and nutritional value. x Extrinsic quality cues are associated with the product, but they are not an integral part of the physical product itself, and they can be modified without altering the actual product. Extrinsic cues include brand, package

Quality Perceived by Consumers and Formation of Preferences There are many definitions of perceived quality, though some of them lack theoretical rationale and cannot be used as a foundation of a theoretical model of a quality perception model. According to Box (1983) perceived quality is, “the degree to which a product fulfils its function, given the needs of the consumer”. The best known definition of perceived quality is “fitness for use” (Acebrón & Dopic, 2000)

Which cues are more powerful? According to Zethmal (1988) extrinsic cues are used as quality indicators when consumers are operating without adequate information about intrinsic product attributes such as: x Initial purchase situations when intrinsic cues are not available.

When evaluating the quality of food products, consumers must contend with various quality cues. Each cue provides a


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x x

require more mental effort to process than to do visual elements, which evoke more of an emotional response (Silayoi and Speece, 2004). However, these elements usually introduce in separate terms but really they have very near relation (Silayoi and Speece, 2007).

Has insufficient time or interest to evaluate the intrinsic attributes. And when quality is difficult to evaluate (experience and credence goods).

Thus, it can be said that consumers assign greater CV to extrinsic cues than to intrinsic cues in making expectations on quality. However, in determining the real or the total quality of packaged goods consumers attribute more importance to intrinsic cues than to extrinsic ones (Méndez et al., 2011). Principally Consumers depend on intrinsic attributes than extrinsic attributes when intrinsic attributes are having high predictive value (Zethmal, 1988).

Verbal and non-verbal messages can be transferred to consumer with the help of the package. Visual elements of the package transfer non-verbal information and affect emotions. Verbal information, which is transferred with informational elements, affects cognitive orientation of a consumer (Silayoi and Speece, 2004). Perceived Food Product Quality Consumer quality perception and decisionmaking processes have been studied in many ways, according to Steenkamp, Wierenga, and Meulenberg (1986), four dimensions were identified in their research covering thirteen food products which differ considerably with respect to the importance attached to the four dimensions. Those were nutritional value (correlations with attributes like protein content, vitamin content and nutritional value), additives (correlation with preservatives, artificial flavour and colour additives), energy (correlation with attributes like fat, protein and caloric content) and sensory (correlating with smell, appearance and taste). Specifically, Steenkamp and Meulenberg (1986) found that perceived food quality is associated with storability, wholesomeness, appearance, well-known brands, taste, price, and nutritional value.

Holbrook (1986) observed that extrinsic attributes – mainly brand name and packaging –more important than intrinsic cues for products for which image is important. This argument is supported by studies of image-reflective products such as carbonated bottled water, beer and colas (Steenkamp, 1990; Méndez et al., 2011). PRESENT STUDY Packaging According to Silayoi and Speece (2004) model, five main packaging elements potentially affect consumer's decisions, which can be separated into two categories: visual and informational elements. x The visual elements consist of graphic, size and shape of packaging and relate more to the affective side of decisionmaking. x Informational elements relate to information provided and technologies used in the package and are more likely to address the cognitive side of decisions.

The Total Food Quality Model (TFQ Model), originally proposed by Grunert, Larsen, Madsen and Baadsgaard (1996), integrates the multi-attribute and the hierarchical approaches to quality perception. It should be noted that a number

Using packaging elements by consumer is an important issue for low involvement products. Generally, informational elements


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of similar models have been proposed in the literature (Andersen, 1994; Poulsen et al., 1996; Steenkamp & van Trijp, 1996).But the TFQ Model is considered so far the only one in the academic literature that gives comprehensive detection of the consumer’s quality perception processes.

pleasant images on commercial food products: if the package image is pleasant and congruent, it has positive effects on the consumer’s perception of the product. Underwood and Klein carried out an empirical research shown that placing a picture of the product on food packages significantly improve brand beliefs and has positive effects on attitudes towards the package (Underwood & Klein, 2002).

Accordingly, Grunert et al. (1996) identified four quality dimensions in his total food quality model; namely taste and appearance, health, convenience and process.

Health dimention Health has become a very important food characteristic to consumers and they consider it as important as taste. Consumers form preferences for this food characteristic motivated by expectations for a longer, high-quality life. The health quality of food is credence characteristic, because consumers cannot establish the consequences for their health right after consumption, so the consumer needs to trust this characteristic (Grunert et al., 1996).

Hedonic dimention The important dimension of quality for consumers is related to the hedonic characteristic of food, which is presented by taste, and appearance and smell. This hedonic characteristic can only be ascertained after consumption and therefore, it is called experience characteristic of food (Grunert et al., 1996). Food packaging plays a vital role in attracting consumer attention and generating sensory and hedonic expectations, which can affect their product perception and purchase decisions. Both colour and shape of food affect consumer’s willingness to purchase (WTP). Ares & Deliza 2010 conducting a conjoint experiment to study the influence of package shape and colour on consumer expectations of milk desserts concluded that the package colour has an influence on the consumer’s flavour expectations. On the other hand, package shapes were mainly associated with sensory expectations related to texture characteristics (e.g. runny and thick) and to specific types of desserts (e.g. egg custard or low-calorie desserts). Package colour also affected texture expectations on the creaminess and softness of the desserts. Especially yellow round packages were associated with creamy and soft desserts. Mizutani et al. (2010) provide experimental evidence for the efficacy of

Marketing food products based on credence dimensions is challenging and packaging information is therefore a priori source with low credibility. If labels, brands or other extrinsic cues verify the credence quality of health, then it becomes a search quality attribute in the shop (Grunert et al., 1996). Label use is said to be influenced by: nutrition knowledge, individual characteristics, economic conditions, time constraints, health concerns and habits, product involvement and lifestyle (Silayoi and Speece, 2004). Convenience dimention Consumers consider convenience as an important experience quality dimension of food. According to Gofton (1995) consumers perceive the convenience dimension as such that saves time in the overall meal process: planning and purchasing, storage and preparation of


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products, consumption, and the cleaning up and disposal of leftovers (Gofton, 1995).

becomes a key issue when buying food (Grunert et al., 1996).

Silayoi and Speece (2007) performing a conjoint analysis found that the most effective package would probably need to have a technology image which clearly conveys convenience and ease of use; clearly pointing out technology image on the package increased the consumer’s likelihood to buy. The other attributes included in this study were not much different from each other in importance. Packaging shape had a slight edge, followed by product information, colour and graphics and finally layout of graphics and information, but these were actually minor differences which are not statistically significant. The specific message that the packaging-technology conveys is about convenience and ease of use, so these results suggest that urban consumers give technology representing convenience more consideration (Silayoi and Speece, 2007).

In that percepective, Labelling practices have strong impact on the consumers’ judgements of the information available on the production process. A study on the purchase of organic diary products in Denmark and Germany (Grunert, BechLarsen, & Bredahl, 2000) shows that Danish consumers have more confidence in the information that a food is organic compared to the German consumers, which also demonstrates the fact that consumer’s assessment on packaging elements may differ from country to country. which can be related to the necessity of presenting information in different ways on food production. This suggests that involvement of a third party (for example, the government, statutury board) will provide more credibility to the producer’s claims. According to Grunert, Bech-Larsen, & Bredahl (2000) once a label has gained consumer confidence, it can also become the basis for consumer inferences.When it comes to labels of foods, it can be concluded that consumers infer other quality dimensions like taste (Kihlberg & Risvik, 2007) and health, (Baadsgaard, Grunert, Grunert, & Skytte, 1994) from the label, if the particular label has gained the consumer confidence.

Moreover conducting an exploratory study Silayoi and Speece (2004) concluded that while consumers think of product pictures, graphics and information as a means of communication, discussion about size and shape focus more on packaging as convenient to use and carry. Process dimention Finally, consumers are also interested in the way food is produced, that is the process dimension of quality. Consumers pay attention to the process dimension of food quality focusing on the naturalness of the food. Just like the health dimension, process dimension is credence characteristic, since the consumer has to trust various cues for the production-oriented quality of food. Credibility characteristics are difficult for the consumers to ascertain, therefore trust

THE MODEL The model (Figure 2) is based on the work of Zethmal (1988); Grunert et al. (1996) and Silayoi and Speece (2004); is focused on identifying the use of packaging design attributes in the quality evaluation process for a given food product category. Hypothesis Considering prior literatures and giving special attention to the product category,


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following hypotheses were formulated to be tested in the study.

H1: Information elements on the package are the most important attributes for the perceived quality of food products

H1a: visual elements on the package are the most important attributes for the perceived taste (deliciousness) of food products.

H2. Blue and green colour theme, tall shapes, more graphical elements on the package, use of aluminium lid (use of new packaging technology) as well as more information on the package positively affect on the perceived quality of food products.

H1b: Graphics on the package is the most important attributes for the perceived creaminess of food products

METHOD Quantitative method was carried out in order to empirically measure and test the relative importance of the packaging attributes in affecting perceived food quality. The instruments and methodology were identified through a comprehensive literature review.

H1c: Information on the package is the most important attribute for the perceived healthiness of food products. H1d: Packaging technology is the most important attribute for the perceived convenience on easy of opening. H1e: Shape of the package is the most important attribute for the perceived convenience on quick consumption.

Furthermore this study used individual level conjoint analysis to examine the relative importance weights of packaging elements in affecting perception of food quality.

H1f: Information on the package is the most important attribute for the perceived process reliability.


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Figure 2: Conceptual model [An own elaboration based on Zethmal (1988); Grunert et al. (1996) and Silayoi and Speece (2004)] The necessary data to carry out conjoint shapes, information and technology on the analysis consist of consumer evaluations of package are used as signals by consumers in alternative product concepts described as evaluating the quality of food products. sets of attributes levels. The advantage of Therefore cultured dairy product (yoghurts) conjoint measurement is the simulation of a category was selected. Furthermore real choice situation where products with a Probiotic, low fat stirred yoghurt was combination of attributes are available selected as the specific product since it is an Silayoi and Speece (2007). Principally unfamiliar product to the Sri Lankan Conjoint analysis measures the structure of consumers. Owing to some constrains of the consumer preferences by use of a research studies Probiotic and low fact decomposition model which is the least characteristic were not directly disclose to restricted model, also referred to the partthe respondents and scientifically disclosed worth form. In that case respondents assess on the label. total profile descriptions and not directly the Attribute Selection partǦworths of attribute levels (Gil and Murphy et al. (2000) suggest that the Sanchez, 1997). conjoint attributes should include those most relevant to potential consumers and those Product Categories: Experience Goods that can be influenced or manipulated by the Economics of information theory (Nelson, producer. Attribute levels must be chosen 1970, 1974; Darby & Karni, 1973) classifies carefully to represent what would be products into three categories according to realistic in the market, and should cover the how consumers evaluate the product; entire range or representative levels (Silayoi Experience, Search and credence goods. and Speece, 2007). Therefore in selecting the attribute levels, realistic alternatives Signalling is most useful for products which were considered. quality is unknown before purchase, such as experience goods. Thus, signalling may not Accordingly five packaging design attributes be appropriate for search products, well were selected. Each packaging attribute used known or mature products, or consumer two levels which still actually present in the markets with highly familiar buyers. market. Five attributes, each with two levels, Signalling may be particularly effective in gives rise to 32 possible scenarios (2 × 2 × 2 markets for relatively new products or × 2×2). Table: 1 presents the attribute levels products about which consumers are were selected in the study. relatively uninformed but are quality sensitive. Therefore, signals are unlikely to convey quality for credence products, which Presentation Method There are four presentation methods in a quality is not discernible even after purchase conjoint study. These include the trade off, and use (Darby & Kami, 1973). the full profile, the pair wise and the choice based. The full profile method is the most Thus for the purpose of this research, an common, because the researcher can reduce experience good was used in the experiment the number of comparisons through the use design to assess how colours, graphics,


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was structured in the form of a nine-point Likert type questions where "1=strongly agree with the statement, 9= strongly disagree with the statement" format.

of fractional factorial designs (Hair et al., 2006). Each stimulus is describe separately, often using a profile card and the results can be either ranked or rated. It is recommended when the number of factors is six or fewer.

Presenting the Stimuli The use of pictorial formats can enhance task realism and external validity in product categories where choices depend strongly on visual inspection (Silayoi and Speece, 2007). Rettie and Brewer (2000) used pictorial stimuli to explore the relationship between the positioning of copy and pictures on different sides of a package and recall of those elements. Jaeger et al. (2001) showed that photographs convey verbal and visual information about apple varieties equally well compared to prototype apple packages. Since they are equally valid, and cheaper and easier to use, photographic images of yoghurt packages were used in this study.

For this study Full-profile method was used to design the packaging profiles and all attributes were represented in the stimuli. The orthogonal design in SPSS was used to produce an orthogonal main-effects design. The 12 combinations of attribute level which resulted and were used in the study are shown in Table: 2. Research Instrument Self administered questionnaire was used to collect information from the respondents. At first participant were asked to fill the 1st part of the questionnaire which was asked their demographical, behavioural data. The second part of the questionnaire was devoted for the conjoint analysis. This part of the questionnaire was developed based on the work of Silayoi and Speece (2007). Then Participants were shown 12 pictures of yogurt packages (stimuli cards) and they were asked to fill the 2rd part of the questionnaire. This part of the questionnaire

Graphical images were presented on 12 separate stimulus cards, which consisted of 8.268*11.693 inches (A4 size) a highquality, four colour prototype of a package and the label. The prototype packages were designed against a black background and giving the effect of a real product. (See Figure: 1)

Table 01: Attribute Levels Colour



Colour themegreen and blue

More graphical elements on the pack including an image


Colour themeLesser graphical green and yellow elements Source: Author constructed.



Information On The Package More( nutritional facts, consumer hot line, information to assist consumers, Halal logo) Less(above informatin were not included)

Packaging Technology Aluminium lid Plastic lid

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Table 02: Fractional Factorial Design Card List Card ID

Colour Theme

1 A1 Green and Yellow 2 A2 Green and Blue 3 A3 Green and Blue 4 A4 Green and Blue 5 A5 Green and Yellow 6 A6 Green and Yellow 7 A7 Green and Blue 8 A8 Green and Yellow 9a A9 Green and Blue a 10 A10 Green and Yellow 11a A11 Green and Blue a 12 A12 Green and Blue a. Holdout Source: Author constructed.

Graphic Design

Shape Of The Package

Lesser More Lesser More Lesser More Lesser More Lesser More Lesser Lesser

Flatter Flatter Flatter Tall Tall Flatter Tall Tall Flatter Tall Flatter Tall

Information On The Package Less Less More More More More Less Less Less Less More More

Packaging Technology Aluminium lid Plastic lid Plastic lid Aluminium lid Plastic lid Aluminium lid Aluminium lid Plastic lid Aluminium lid Aluminium lid Aluminium lid Aluminium lid

Participants were invited based on their willingness to participate and whether they are responsible for food shopping for own consumption needs. Consumers who were not responsible for food shopping at all were excluded from the sample.

Sample Selection For the purposes of this study primary data were used. The study was conducted in the city of Colombo (Sri Lanka) using a convenience sample. All participants were invited at the university premises and public places and also the participants were encouraged through mailing the questionnaire and stimuli cards.


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Figure 1: sample of stimuli (A4, A3 and A5) The Sample size was 152 individual consumers who are currently (2012-2013) living in the Colombo area in Sri Lanka and responsible for food shopping by themselves or with the help of another member of their household.

the different levels of those attributes influence on perception of food quality. The data were analysed using SPSS16 statistical software. The Conjoint analysis gave the answers through the estimation of the part-worths of each attribute level. The results are shown in Tables 04.a &b.

The sample consisted with 52.6% of male consumers and 47.4% female consumers. Majority of them were in between age of 2030 (59.9%). University undergraduates and graduates represent the majority of the sample (50.7% and 9.2% respectively) which could have a huge effect in generalising the research findings.

Perceived Taste The results indicated that the most important package designing attribute in influencing the taste expectations was Graphic design on the package at a rate of 50.04% followed by Information on the package (13.26%) and packaging technology (13.44%). Colour theme and shape of the package have a rather low importance with 11.81% and 11.45% respectively. Therefore formulated H1a hypothesis is accepted to be true in view of the fact that visual elements on the package (73.3% of importance value) regulate the taste expectations of the yoghurts over information elements (with 26.69% importance).

The sample size was selected as 152 individuals by considering the complication of the research studies. Especially it was difficult to conduct a conjoint analysis with a bigger sample size. This sample was inline with the minimum recommended 100-200 sample size to obtain reliable results from conjoint analysis (Quester and Smart, 1998). DATA ANALYSIS The research questions of the study mainly focus on the importance of each one of the package design attributes in affecting perceived quality of food products and how

The average part-worth functions for five factors can then be used to understand how a change in an attributeâ&#x20AC;&#x2122;s performance influences the customers' quality expectations. Table 04.b indicates the utility


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estimates for each attribute level of each factor. Accordingly, consumers' expectations on the deliciousness of yoghurt packaging were positive if the package was in the form of green and blue, tall in shape, more graphical elements, more information and aluminium lid on the top.

Perceived Healthiness The results indicate that Information on the package plays the major role in the process of creating healthiness expectations in consumers' mind, the relative importance of this attribute is about 31% followed by shapes (20.47%), graphics (17.2%), colour (15.91%) and technology (15.61%).

Perceived Creaminess/ Texture of the Yoghourts It can be shown that almost 30.61 % of average customerâ&#x20AC;&#x2122;s creaminess expectations of yoghurts depend on the graphical elements on the package followed by shape 20.52%. Besides Colour (18.63%), information (14.75%) and technology (15.48%), have a relatively lower influence on the texture expectation.

Therefore H1c hypothesis is accepted to be true since information on the package was the most important attribute in affecting perceived healthiness. This is an indication that consumers value the product and nutritional information on food labels, which show that consumers are increasingly reading the label and want it to be clear and confirm the prior studies of Mitchell and Papavassiliou (1999); Silayoi and Speece (2004); Silayoi and Speece (2007). One thing this probably reflects is the impact of health conscious behaviours on food choice (Silayoi and Speece, 2007).

Therefore formulated H1b hypothesis is accepted to be true since graphical element of the package was the most important attribute for the perceived creaminess. Green and yellow colour theme, tall shapes, more graphical elements, more information and the aluminium lid technology have positively affected on creaminess expectations with positive utilities. The same as Ares & Deliza (2010) found in their studies, customer's creaminess or the texture expectations of the milk desserts depend on the visual elements on the package rather than information elements. Graphics on the package has a significant influence on the texture expectations; especially yellow colour packages have a considerable impact on the customer's expectations on creaminess of milk desserts.

Concerning the part worth of each attribute, Green and blue colour theme, tall shapes, more graphical elements, more information and the aluminium lid technology have affected positively on healthiness expectations yielding positive utilities. Accordingly, it is clear that people (majority of the sample were educated-university students) depend on verbal information surrounded by a visually appealing background to ensure the healthiness of the food which they are about to consume. Perceived Convenience of Ease of Opening The results indicate that the packaging technology was the most important attribute (33.6%) in making the customer more confident about the ease of opening attribute of the food package. Packaging shapes also have a significant importance (25.6%) in affecting the expectations on easy of

As a summary, the visual elements on the package have a relatively higher influence on the perceived hedonic characteristic (texture+ taste) of food products.


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opening. But Colour theme (15.6%) information on the package (13.9%) and graphic design (11.3%) had a subordinate impact on this dimension. Consequently H1d hypothesis is accepted to be true since packaging technology was the most important attribute in affecting perceived convenience of easy of opening. Packages consist with Green and blue colour theme, tall shapes, more graphical elements, more information and the aluminium lid technology were deemed enough to yield positive expectations on the easy of opening attribute having positive utility values. Perceived Easiness of Quick Consumption The conjoint results indicate that shape of the package plays the salient role in creating expectations on quick consumption with a relative importance weight of 28.42%. Packaging technology also plays a significant role in this aspect and it was given a relative importance weight of 23.5%. Colour, information and graphics on the pack have rather lower importance weights with 17.98%, 15.37% and 14.73% respectively.





Easy of opening Value Sig. 0.995 0.000 0.941 0.001

Quick consumption Value Sig. 0.986 0.000 0.964 0.001

Process quality

Perceived quality Value Sig. .955 .000 .837 .002


11.81 50.04 11.45 13.26 13.44


Source: Author constructed

Colour Graphics Shape Information Technology

Attributes 18.63 30.61 20.52 14.75 15.48


Importance Values (%) Easy of Healthiness opening 15.91 15.6 17.2 11.3 20.47 25.6 30.81 13.9 15.61 33.6

Table 04.a: Average Importance score for each dimension

Source: Author constructed

Quick consumption 17.98 14.73 28.42 15.37 23.5

16.84 16.09 18.08 27.76 21.23

Process quality

Value Sig. Value Sig. Value Sig. Value Sig. Pearson's R 0.984 0.000 0.989 0.000 0.990 0.000 0.999 0.000 Kendall's tau 0.929 0.001 0.857 0.001 1.000 0.000 0.857 0.001 Kendall's tau for 1.000 0.021 1.000 0.021 1.000 0.021 1.000 0.021 0.913 0.035 1.000 0.021 .667 .087 Holdouts **The following conjoint analyses relating to perceived quality dimensions are characterized by a very good internal validity with a Kendall’s Tau greater than 0.80 and a Pearson’s R greater than 0.95. “Subject” subcommand in SPSS 16.0 Conjoint analysis was used. This subcommand averages the values for “importance” of the individual subjects.


Table 03: Correlations between observed and estimated preferences

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Attribute levels Green and Blue Colour Green and Yellow More Graphics Lesser Tall Shape Flatter More Information Less Aluminum lid Technology Plastic lid (Constant)


Std. Error 0.066 0.066 0.066 0.066 0.066 0.066 0.066 0.066 0.066 0.066 0.066

Utility Estimate



0.456 -0.456 0.104 -0.104 0.121 -0.121


-0.123 5.31

Source: Author constructed



-0.088 5.466


0.476 -0.476 0.129 -0.129 0.006 -0.006



Utility Estimate

0.054 0.054


0.054 0.054 0.054 0.054 0.054 0.054



Std. Error


Table 04.b: The partworth values of attributes' levels for each dimension.

-0.164 5.679


0.271 -0.271 0.194 -0.194 0.457 -0.457



Utility Estimate

0.06 0.06


0.06 0.06 0.06 0.06 0.06 0.06



Std. Error


-0.22 5.77


0.043 -0.043 0.352 -0.352 0.046 -0.046



Utility Estimate

0.059 0.059


0.059 0.059 0.059 0.059 0.059 0.059



Std. Error

Easy of opening


-0.254 5.71


0.141 -0.141 -0.144 0.144 0.1 -0.1



0.041 0.041


0.041 0.041 0.041 0.041 0.041 0.041



Quick consumption Utility Std. Estimate Error

-0.049 5.724


0.243 -0.243 0.183 -0.183 0.572 -0.572



0.017 0.017


0.017 0.017 0.017 0.017 0.017 0.017



Process quality Utility Std. Est. Error

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The H1e hypothesis is seen as realistic to be accepted, since the shape of the package has obtained the highest relative importance value.

technology also yield positive utilities in affecting perceived process quality of foods. Relative Importance of Packaging Design Attributes in Affecting Perceived Quality of Yoghurts After conducting the conjoint analysis for each dimension of perceived quality, the next task was to conduct the conjoint analysis for perceived quality by combining the data were obtained for above dimensions. To perform the conjoint analysis task, the mean values of the scores of each stimuli card were calculated (a similar weight was assigned to all the four quality dimensions). Then those mean score values of 12 stimuli cards were used to perform the final conjoint analysis.

Moreover Green and blue colour theme, more graphical elements, more information on the package and the aluminium lid technology were the preferred levels, and especially respondents had given a flavour to flatter shapes as an indication of expediency. As a summary, it is clear that packaging technology and shapes of the package play the central role in determining convenience quality of food products. Perceived Reliability of the Production Process It was found that the most important attribute was the information on the package, with a relative importance of 27.76% followed by packaging technology with 21.23%, allowing information elements to dominate in the process quality dimension. Finally shapes of the package, colour theme and graphic designs were found with considerably lower importance weights of 18.08%, 16.84% and 16.09% respectively.

The results indicated that the information on the package was the most important packaging design attribute in evaluating the over all product quality of yoghurts having a relative importance value of 25.24%. Graphic design on the package was given the second highest importance value of 21.76%. Shape of the packaging and packaging technology were given a relatively similar importance (18.72% and 17.96% respectively) while colour theme of the package received the lowest importance value of 16.32%.

Therefore H1f hypothesis is accepted to be true since information on the package was the most important attribute in affecting perceived process quality/ reliability of yoghurts.

Table 05.a: Importance summary


Importance Values (%)

Colour 16.32 Graphics 21.76 Shape 18.72 Information 25.24 Technology 17.96 Source: Author constructed

The results show that the preferred levels of attributes were more information on the package including more nutritional information, more information to assist consumers and specially the indicated third party assurance(here Halaal logo); Green and blue colour theme, more graphical elements, tall shapes and the aluminium lid

Visual elements Vs. Information elements (%) 56.80 43.20

As a summary total importance value obtained by the visual elements was


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56.80%and information elements have obtained fairly lower importance value of 43.2%. Therefore, H1 hypothesis be rejected since the visual elements have been given a relatively higher importance weight than information elements of the package.

The result of this study was conflicting with Silayoi and Speece (2007) since they are in the view that, overall the respondents attract to a package that seems familiar and reliable, rather than exciting. Classic and calm graphics may better indicate the quality of the product inside. Also the shape should not be too fancy as Consumers seem to rely on traditional shapes that they are familiar with.

Concerning the partworths of information attribute, more information on the package has a positive utility of + 0.291 while less information on the package has a negative partworth of (-0.291). This indicates that consumers value the product information on food labels as an indication of the product quality.

This research shows that customers would be more confident with the quality of the product if the producer has given a significant importance to the graphic design on the package. And as shown in early Silayoi and Speece, (2004) customers may have thought that if the colour and graphic design were boring the quality concern of the producer would be pathetic. Hence it is not reasonable to say that classic and calm graphics is an indication of better quality. Particularly discussed under the Hedonic dimension, graphics and the colour have a significant influence in creating the expectations on taste and texture of the yoghurts.

Table 05.b: The partworth values of attributes' levels Attribute's Utility Std. Factors level Est. Error Green and .102 .041 Blue Colour Green and -.102 .041 Yellow More .268 .041 Graphics Lesser -.268 .041 Tall .149 .041 Shape Flatter -.149 .041 More .291 .041 Information Less -.291 .041 Aluminium .139 .041 lid Technology Plastic lid -.139 .041 (Constant) 5.633 .041 Source: Author constructed

Tall shapes and aluminium lid technology have also positive partworths of +0.149 and +0.139 respectively. This result is a better indication that the consumers value the convenience factor more powerfully when they making quality judgments on foods. (In this study convenience was measured using 2 indicators namely easy of opening and help in quick consumption. In both the analysis packaging technology and the shape were the most important attributes in creating expectations on convenience of food product, even though there were some contradictory preferences for the attributes' levels). As shown by Silayoi and Speece (2007), apart from reflecting the ease of cooking and consumption, people may more likely to pick the packaged food from the

As shown in the table 05: b more graphical elements on the package has a positive utility estimate of +0.268 and classical/less graphical elements has a negative utility estimate of (-0.268).


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shelf if the technology represents their selfimage well. If the product looks innovative, it would bring a contemporary image to the buyer too.

One of the noticeable limitations of this analysis was the poor representation of the sample in terms of the age and educational variables. It is clear that the sample of this study does not comparatively represent the educational level of Sri Lankans and has limited to a specific and one of a mostly educated respondent group. Thus the opinion of the general public could diverge from this analysis. And also the study itself has the possible drawbacks of conjoint analysis method.

Colour theme of the package has a relatively lower importance in creating expectations on the product quality. Concerning it's preferred attributes' level, Green and blue colour theme has a positive partworth of +0.102 and green and yellow colour theme has a negative partworth of -0.10. Finally H2 hypothesis is accepted to be true since blue and green colour theme, tall shapes, more graphical elements on the package, use of aluminium lid (use of new packaging technology) as well as more information on the package affect positively on the perceived quality of food products.

As majority of the respondents stated during the survey, apparently some stimuli (especially A4, A10 stimuli) had stood out among others and some stimuli had not made any sense. Therefore it is reasonable to assume that more experiential the productâ&#x20AC;&#x2122;s benefits are consumers will focus more on processing imagery and sensory information, which in turn may increase the relative importance of packaging design at the point of purchase. Thus food producers must pay a huge attention to package design in increasing the trial purchase; as the package itself has an influence on the marketability and making a good impression in consumers about what is inside the container.

DISCUSSION AND CONCLUSION Knowing customer needs and designing an appealing value preposition is a crucial success factor in todayâ&#x20AC;&#x2122;s competitive markets. The aim of this research is to shape such a value proposal that would propose an approach to determine the importance of packaging design attributes in affecting perceived quality of food products. In the current competitive business environment managers must carefully use every single tool which they have, in order to be thriving and promote their product successfully. In this sense managers can use packages as a carrier of delivering quality signals to the consumers.

Mainly, the result indicates that information on the package has a greater influence on the consumersâ&#x20AC;&#x2122; perception as an indication of the food product quality. And we should be happy that the educated Sri Lankan consumers (majority of the sample was graduates) do read and search the label information than just filtering out and relaying on syntactic elements on packages. Therefore it can be understood that the product to be perceived as a quality and healthier product, it must be included the product information in precise,

Therefore in establishing what aspects of the packaging influence the quality perception, a conjoint analysis was performed with a full profile presentation of stimuli. And also the research focuses upon a product category that is considered to be high in experiential benefits (stirred yoghurts).


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internationally accepted structure (especially nutrition panel) and understandable manner. Consumers had given the second highest and significant importance value to the Graphical elements as a quality indicator (especially as an indicator of hedonic characteristics). Therefore it suggests that marketers must not solely rely on the package information pertaining to experience goods. They must create it in visually attractive and appealing manner in order to catch the consumers' attention first when they searching products on shelves.

the simplicity of the analysis. As a further development to the present study, the costs associated with improvements of attribute levels and how much consumers willing to pay for those attribute should also be identified. Because preferred product configurations discovered by conjoint analysis more often maximize companyâ&#x20AC;&#x2122;s market share (sales) but not profit. Therefore the researcher highly concerns this issue as a further development to study. REFERENCES [1.] Ampuero,O., & Vila,N. (2006) Consumer perceptions of product packaging. Journal of Consumer Marketing, Vol. 23 Iss: 2 pp. 100 â&#x20AC;&#x201C; 112.

However, colour of the package has a minor vigour to influence consumers as a quality indicator. In spit of having a noteworthy impact on the perceived convenience quality of the product, packaging technology and shapes also have a statistically insignificant influence on the overall perception of food quality.

[2.] Ares, G., & Deliza, R. (2010b) Studying the influence of package shape and colour on consumer expectations of milk desserts using word association and conjoint analysis. Food Quality and Preference, vol. 21 No. 8, pp. 930-7.

Discussing the partworth of each attributes' level, consumers preferred Green and blue colour theme, tall shapes, more graphical elements on the package, more information on the package and the aluminium lid technology as positive signals of the quality of yoghurts. They appreciate innovative, convenience and creative design than utterly depending on the traditional thinking and also seek ascendancy in all the aspects of the product packaging. Therefore when introducing food product, marketers must keep in their mind to show the products' superiority by all the means of the product, (packaging, technology, visual aspects and information aspects) since all those have a significant impact on the consumersâ&#x20AC;&#x2122; quality judgments.

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Conference of the European Marketing Academy, Bielefeld, pp.346-366. [32.] Steenkamp, E. M., Wierenga, B., & Meulenberg, M. T. (1986) Analysis of food quality perception processes (synopsis). Netherlands Journal of Agricultural Science, Vol. 34, pp.227-230.

[24.] Quester, P.G., & Smart, J. (1998) The influence of consumption situation and product involvement over consumers’ use of product attribute. Journal of Consumer Marketing, Vol. 15 No. 3, pp. 220-38.

[33.] Steenkamp, E. M., & Meulenberg, M. (1986) Perceived quality and its relationship to preference: an application to margarine and butter. Contemporary Research in Marketing, Vol. 1, EMAC, Helsinki , pp.541-561.

[25.] Ragaert, P., Verbeke, W., Devlieghere, F., & Debevere, J. (2004) Consumer perception and choice of minimally processed vegetables and packaged fruits. Food Quality and Preference, Vol. 15, pp. 259-70.

[34.] Steenkamp, E. M., & Trijp, v. (1996) Quality guidance: A consumer-based approach to food quality improvement using partial least squares. European Review of Agricultural Economics, Vol.23, pp.195215.

[26.] Reeves, C., &. Bednar (1994) Defining Quality: Alternatives and Implications. The Academy of Management Review, Vol. 19, No. 3, Special Issue: "Total Quality”, pp. 419-445. [27.] Rettie, R., & Brewer, C. (2000) The verbal and visual components of package design. Journal of Product & Brand Management, Vol. 9 No. 1, pp. 56-70.

[35.] Underwood, R,L., & Klein, N.M.( 2002) Packaging as brand communication effects of product pictures on consumer responses to the package and brand. Journal of Marketing Theory and Practice, vol. Fall 2002, pp. 58 - 68.

[28.] Silayoi, P., & Speece, M. (2004) Packaging and purchase decisions: An exploratory study on the impact of involvement level and time pressure. British Food Journal, Vol. 106 Iss: 8, pp. 607 – 628.

[36.] Underwood, R.L., Klein, N.M., & Burke, R.R. (2001) Packaging communication: attentional effects of product imagery. Journal of Product and Brand Management, Vol. 10 No. 7, pp. 40322.

[29.] Silayoi, P., & Speece,M. (2007) The importance of packaging attributes: a conjoint analysis approach. European Journal of Marketing, Vol. 41 Iss: 11, pp. 1495 – 1517. [30.] Steenkamp, E. M. (1990) Conceptual model of the quality perception process. Journal of Business Research, pp309-333.

[37.] Zeithaml, V. A. (1988) Consumer perceptions of price, quality, and value: a means-end model and synthesis of evidence. Journal of Marketing, Vol.52 (2), pp. 2-22.

[31.] Steenkamp, E. M., & Meulenberg, M. (1985) Quality perception of food products. Proceedings of the 14th Annual


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ETHICS OF FUTURE ENGINEERS: DOES GENDER MATTER? Wijekoon, W.M.A.K a University of Moratuwa, Sri Lanka, a

ABSTRACT This paper attempts to examine the influence of gender on ethical perceptions of future engineers. Relationship between gender and ethics is a highly debated topic but, consensus results are rarely found. That is, some scholars argue women are more ethical than men and others vice versa. Drawing from the gender identity theory, this paper argues gender consists of not only biological sex, but it also consists of psychological gender traits and gender-role attitudes. Furthermore, the latter two factors influence ethical perceptions of workplace behaviors than biological sex. Findings highlight based on biological sex ethical perceptions do not differ between men and women. However, with a multidimensional perspective of gender, findings emphasize men and women with expressive traits and egalitarian gender role attitudes recognize unethical workplace behaviors as unethical. Implications are drawn from these findings and directions for future research are discussed. Keywords: Business ethics, gender, expressive traits, egalitarian gender-role attitudes INTRODUCTION In organizational behavior literature, unethical decision-making and behavior is a widely studied phenomenon as many corporate scandals (e.g. Enron, WolrdCom, Xerox, and Golden Key) have been reported in recent past (McCabe, Ingram, & Dato-on, 2006). Not only in the corporate sector, in the educational sector also can unethical behavior be seen. Students engage in many unethical activities such as cheating at exam, plagiarism, lying, etc. to get through the degree. These wrong attitudes and behaviors are more likely to bring into their professional lives as well (Nonis & Swift, 2001). Owing to these now, universities, media, government and organizations have drawn serious concerns on what is ethical and unethical (Ludlum, Moskalionov, & Ramachandran, 2013). The ethical decision-making process has been studied from various


perspectives such as philosophical, economic, sociological, psychological and theological. But, the most studied perspective is social and individual perspective (McCabe et al., 2006). These factors are more influential on moral reasoning of an individual than the other factors. Further, studies have particularly looked at the impact of gender on moral reasoning. The reason is many studies have highlighted the difference of ethical decision making among men and women (Robin & Babin, 1997). So moral reasoning is somehow different for men and women. However, there are contradicting findings regarding the relationship between ethics and gender (McDaniel, Schoeps, & Lincourt, 2001; Gill, 2010) because, most of these studies considered gender as a dichotomous variable. That is, gender is treated as a biological variable only (sex). These studies have ignored the socialization process of people and thereby, simply concluded men and

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women behave differently from one another. Furthermore, many organizations now recruit females with the belief that females are more ethical than men (Gill, 2010). But, these female characteristics go beyond the traditional concept of biological gender. It is more psychological than biological. By limiting the gender to biological sex without looking at social and psychological dimensions of the gender construct researchers and organizations arrive on wrong conclusions. It is evident that unethical decision making brings negative consequences to organizations and society. These are very costly consequences and even organizations can go bankrupt. Therefore, many scholars investigated the relationship between biological sex and ethical perceptions to understand the ethical decision making process at workplace. The conflicting findings stressed gender is a more complex construct which goes beyond biological sex and captures sociopsychological aspects. Ethical perceptions are largely shaped during the early stages of development especially as students and these attitudes are more likely to influence the future workplace behavior of them (Nonis & Swift, 2001). Therefore, today engineering students are the tomorrow’s professional engineers. As students if they have unethical perceptions, as engineers they may engage in unethical activities. In this context the study attempts to investigate the influence of social and psychological aspects of gender on ethical perceptions of engineering undergraduate students. LITERATURE REVIEW Ethics is a highly debated topic in the today’s business world and organizations have different


perspectives toward it. In general, ethics can be defined as “the code of moral principles and values that governs the behaviors of a person or group with respect to what is right or wrong” (Daft, 2012, p.124). So ethics is about making the right decision but, in most situations issues are difficult to resolve. An ethical dilemma arises in a situation concerning right or wrong when values are in conflicts. Identifying the right or wrong can be easier said than done (Daft, 2012). Therefore, when confronted with ethical dilemmas making the right ethical choice is a challenge. Is recruiting females a solution for this? Do they always stand against unethical workplace behaviors? Many would answer as ‘yes’ because this misconception has deep rooted in the society and even backed by much scholarly work (McDaniel et al., 2001; Gill, 2010) They argue women perceive unethical workplace behaviors are unethical than men. Yet, some scholars argue there is no difference in ethical perceptions and behaviors between men and women (Robin & Babin, 1997). The justification for these contradicting findings is that ethical behavior is more influenced by societal, individual and contextual factors than biological sex. Turiel suggested “social influences may affect moral reasoning in several ways. For example, societal and cultural norms exert a direct impact on moral standards by delineating role and moral responsibilities that, in turn, affect behavior” (as cited in McCabe et al., 2006, p.103). Though there are certain traits associated with biology, when people live in a society as a group they acquire various traits from the environment. They learn from others irrespective of the gender. The nurturing process of people plays a

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Figure 1: Gender Construct

Gender construct

Biological sex

Psychological gender traits

Gender – role attitudes

Source: Author constructed Psychological gender is about masculine (instrumental) and feminine (expressive) traits linked with men and women (Spence, 1993). Some of the instrumental traits are adventurous, dominant, forceful, independent and strong, where some expressive traits are sentimental, submissive and affectionate, emotional and sensitive (Lips, 2005, p.7). These traits are further given in Table 1. Depending on how individuals are nurtured, they acquire various


Table 1: Feminine and Masculine Traits Personality Cognitive


Gender is often considered as a dichotomous variable (a synonym for biological sex). But, gender is a broader construct than biological sex. Gender identity theory (Spence, 1993) provides the platform to explore the gender construct and it defines gender as a complex, multi-dimensional sociopsychological construct. Thereby, gender construct consists of biological sex, psychological gender traits and gender-role attitudes as shown in Figure 1.

qualities. It is no longer said, men should be masculine or women should be feminine. Also no one in the real world stands in one extreme pole. Each one of us has a combination of masculine and feminine traits. That is why an androgyny (one who has both masculine and feminine qualities) is accepted as an ideal person at work. Further, Table 2 illustrates traditional and modern perspectives of masculinity and femininity.

Affectionate Sympathetic Gentle Sensitive Nurturing Sentimental Sociable Cooperative

Imaginative Intuitive Artistic Expressive Perceptive Verbally skilled Creative Tasteful

Analytical Mathematical Good with numbers Exact Good at reasoning Good at abstractions Good at problem solving Quantitatively skilled Source: From Sex and Gender: An introduction (p.14), by H. M. Lips, 2005, New York: America, McGrawHill.


vital role in shaping their behavior. McGee highlighted that “the human genome isn’t solid terrain but a matrix of information that is constantly being changed in subtle and not so subtle ways by the environment and technology” (as cited in McCabe et al., 2006, p.103). Hence, it is worthwhile to explore the influence of these socio psychological aspects of gender on human behavior.

Competitive Daring Unexcitable Dominant Adventurous Aggressive Courageous Resistant to pressure

Gender-role refers to a set of behaviors socially defined as appropriate for one’s sex (Lips, 2005, p.69) and gender-role attitudes are beliefs of an individual regarding which roles are suitable for men and women, ranging from egalitarian to traditional. Egalitarian gender-role attitudes

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emphasize that suitability of gender roles is not determined by an individual’s biological sex. Whereas, traditional gender-role attitudes suggest that gender roles are determined by one’s biological sex (McCabe et al., 2006). Say, for example, an egalitarian would think looking after children should be done by both men and women as many women are working today. But an individual with traditional attitudes would argue looking after children is the sole responsibility of women and man should only protect the family and be the breadwinner. Table 2: Traditional and Modern Perspectives of Masculinity and Femininity Traditional Modern Femininity and Femininity and masculinity were masculinity are conceptualized as conceptualized as opposite ends of s separate, single continuum. independent A high feminine dimensions. Thus, score implied a an individual can low masculinity obtain a score that score is both highly feminine and highly masculine. This allows for an individual to be categorized as androgynous

Femininity and masculinity were defined according to the differences in the responses typically given by females and males

Femininity and masculinity are defined as the degree to which an individual’s self-description matches a set of traits categorized as typical or desirable for women or men Source: From Sex and Gender: An introduction (p.51), by H. M. Lips,


2005, New York: America, McGrawHill. As mentioned previously, many studies conducted on ethics and gender state women are more ethical than men. This conclusion is mainly due to the expressive characteristics of women such as sensitivity, gentleness, cooperativeness and lack of competitiveness. On the other hand, studies have concluded men are less ethical than women because of their instrumental traits such as competitiveness, aggressiveness and dominance (Hunt, 1997). Even modern business organizations demand competitive employees to engage in business activities. This stereotypical view has led to conclude that these traits are inherited to the men and women, which is not the reality. There are plenty of examples around us to say women are competitive than men and there are men who are sensitive and cooperative. The dichotomous view of gender has led to many misconceptions. Skoe et al. suggested that “knowing a person’s biological sex cannot lead to confident predictions about how a person will reason or assess the importance of moral problems” (as cited in McCabe et al., 2006, p.104). Figure 2: Conceptual Framework

Biological sex Psychological gender traits Gender – role attitudes


Ethical perceptions



Source: Author Constructed It is worthwhile to test the relationship between ethical perceptions and biological sex before treating gender as

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a multidimensional construct. Therefore, the first hypothesis (H1) is proposed as: H0 – Biological sex has no influence on ethical perceptions of men and women. H1 – Biological sex has an influence on ethical perceptions of men and women. The argument of this paper is that ethical perceptions of men and women are not determined by their biological sex, but by their psychological gender traits and gender-role attitudes. Hence, based on the preceding literature review, the second hypothesis (H2) is proposed as: H0 – Psychological gender traits have no influence on ethical perceptions of men and women. H1 – Psychological gender traits have an influence on ethical perceptions of men and women. Further, the third hypothesis (H3) is proposed as: H0 – Gender-role attitudes have no influence on ethical perceptions of men and women. H1 – Gender-role attitudes have an influence on ethical perceptions of men and women. The conceptual framework developed to illustrate the relationships among the variables while highlighting the hypotheses is displayed in Figure 2. METHOD Sample Reiss and Mitra highlighted, “In order to study the attitudes and behaviors of future organizational leaders one can look to current university business students” (as cited in Ludlum et al., 2013, p.13) because, the future


ethical workplace behavior depends on the current ethical perceptions of undergraduates. Today engineering undergraduates will be the future engineers who will be the decision makers of business organizations. There is a strong link between ethical views during the university and workplace behavior simply because people carry forward the learning of one stage to the next until they are questioned and proven wrong. Questionnaire Development The study implemented a survey method and a questionnaire was given to 196 undergraduates at the University of Moratuwa. The sample consisted of 158 males and 38 females from the final year. In order to measure the main variables of the study, that is ethical perceptions, psychological gender traits, and gender-role attitudes; items (questions) were adopted from various authors and are mentioned in Table 3. Table 3: Items Adopted

Variable Author(s) Psychological Personal attributes gender traits questionnaire by Spence, Helmreich, & Stapp (1974) Gender-role Male-female relations attitudes questionnaire by Spence, Helmreich, & Sawin (1980) Ethical Business ethics scale perceptions by Ruch & Newstrome (1975) Source: Author constructed Psychological gender traits Questions used to measure instrumental traits and expressive traits were adopted from the personal attributes questionnaire developed by Spence, Helmreich, and Stapp (1974). This is a widely used questionnaire to

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examine the relationship between gender and ethical perceptions (McCabe et al., 2006). There were eight questions each to measure expressive traits and instrumental traits respectively. Instrumental scale was comprised of traits which are socially desirable as traits of men and expressive scale was comprised of traits which are socially desirable as traits of women. Each item scored 1 to 5 and the final scores are obtained on each scale by totaling the individual scores on eight items. When measuring the reliability, Cronbach alpha values of both scales were above 0.7 (instrumental scale –

0.713 and expressive scale – 0. 775) which was the generally agreed upon lower limit (Hair, Black, Babin, Anderson, & Tatham, 2006, p.161). Hence, reliability of both scales was assured. Gender-role attitudes Questions used to measure gender-role attitudes were adopted from the malefemale relations questionnaire developed by Spence, Helmreich, and Sawin (1980). This scale measured to what extent participants have egalitarian or traditional gender-role attitudes. In other words, the degree to which their attitudes correspond to conventional gender-role expectations.

Table 4: Factor Loadings of Ethics Construct

Factor loadings 0.796 0.657 0.725 0.662

Mean a

1. Concealing one’s error 2. Passing blame for errors to an innocent coworker 3. Claiming credit for someone else’s work

0.765 0.863

2.34 1.24



1. Giving gifts/favors in exchange for preferential treatments 2. Accepting gifts/favors in exchange for preferential treatments





Four Falsification

1. Falsifying time/ quality/ quantity reports 2. Calling in sick to take a day off 3. Authorizing a subordinate to violate company rules

0.697 0.725 0.701

1.71 3.04 1.83

Five Padding expenses Six Deception

1. Padding and expense account up to 10% 2. padding an expense account more than 10% 1. Taking longer than necessary to do a job 2. Divulging confidential information 3. Not reporting other’s violations of company policies and rules

0.928 0.928

1.97 1.70

0.684 0.483 0.785

2.47 1.44 2.48



One Personal use

1. Using company services for personal use 2. Doing personal business on company time 3. Pilfering company materials and supplies 4. Taking extra personal time

Two Passing blame Three Bribery

Source: Author constructed


1.81 1.88 1.59 2.30

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Measured by a 5 – point Likert type scale (1 = behavior is very unethical to 5 = behavior is very ethical) The male-female relations questionnaire was comprised of 16 items. The scale had two versions, one for men and one for women. Items were presented using five point Likert typed scale ranging from ‘1 = strongly disagree’ to ‘5 = strongly agree’. Traditional gender-role attitudes are expressed by a high score and egalitarian gender-role attitudes are expressed by a low score. The Cronbach alpha value was 0.712 hence, the reliability was guaranteed. Ethical perceptions In order to measure the ethical perceptions Ruch and Newstrome (1975) business ethics scale was used. This is a heavily used questionnaire to measure ethics in educational settings (Dusseau, 2006; Ludlum et al., 2013; McCabe et al., 2006). The questionnaire was included 17 business practices and five point Likert typed scale was used to rank each item ranging from ‘1 = very unethical’ to ‘5 = not at all unethical’. Hence, a low score means person is ethically sensitive. Cronbach alpha value was 0.802 thereby, reliability was assured. Validity Factor analysis was conducted to measure construct validity of the scales used in the study. Instrumental scale, expressive scale and male-female relations scale were validated as having one factor. For business ethics scale six factors were loaded and those have been identified in previous studies as well. The six factors are given in Table 4. Method of Data Analysis Data were analyzed using SPSS. All the missing data were replaced through data imputation which was the process


of replacing missing data based on valid values of the variables (Hair et al., 2006, P.63). This ensures a common behavior in variables and brings accuracy in further analysis. The first hypothesis was tested using two-tailed independent samples t-test and the second hypothesis was tested using Pearson’s bivariate correlation procedure. DATA ANALYSIS The first hypothesis (H1) was ‘biological sex has no influence on ethical perceptions of men and women.’ This hypothesis was tested using two-tailed independent samples t-test. Samples of men (n = 158) and women (n = 38) were compared in the analysis. When equal variances are assumed, the findings were not significant (t = 3.665, p = 0.276, df = 194). So the null hypothesis was accepted. That is, when gender is only represented by biological sex, it has no influence on ethical perceptions of men and women. The second and third hypotheses were tested using Pearson’s bivariate correlation procedure. Several significant relationships were identified and given in Table 5. The second hypothesis (H2) was ‘psychological gender traits have no influence on ethical perceptions of men and women.’ The findings revealed when an individual’s expressive traits increase, overall unethical perceptions decrease (r = -0.227, p d 0.01). That is, a person with expressive traits is less likely to perceive unethical workplace behaviors as ethical. In addition, ethics factor one (personal use), three (bribery) and five (padding expenses) are also correlated with expressive

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traits (factor one r = -0.194, p d 0.01;

person with expressive traits strongly

Overall Ethics Ethics Ethics Ethics Ethics Ethics ethical factor 1 factor 2 factor 3 factor 4 factor 5 factor 6 perceptions Expressive - 0.227** - 0.194** - 0.090 - 0.254** - 0.122 - 0.140* - 0.021 traits Instrumental - 0.131 - 0.040 - 0.046 - 0.180* 0.006 0.016 - 0.184** traits Gender-role 0.153 0.044 0.192** 0.140 0.162* 0.195** - 0.117 attitudes believes personal use, bribery and factor three r = -0.254, p d 0.01; factor padding expenses are highly unethical. five r = -0.140, p d 0.05). That is, a Table 5: Findings of Correlation Analysis ** Correlation is significant at the 0.01 level (2-tailed) * Correlation is significant at the 0.05 level (2-tailed) Source: Author constructed The relationship between instrumental traits and overall ethical perceptions was not significant (r = 0.131, p = 0.067). But ethics factor three (bribery) and six (deception) are correlated with instrumental traits (factor three r = -0.180, p d 0.05; factor six r = -0.184, p d 0.01). That is, when instrumental traits increase bribing and deception is accepted as unethical behaviors at workplace.

Finally, the findings reveal both men and women with expressive traits and egalitarian gender-role attitudes perceive unethical workplace behaviors as unethical. DISCUSSION AND CONCLUSION The study investigated the influence of gender on ethical perceptions of engineering students, where gender was treated as a multidimensional construct than a dichotomous variable. Therefore, the study argued ethicality is more influenced by social and psychological variables than the biology. Gender identity theory (Spence, 1993) was used to support this argument. The findings supported the notion that, psychological gender traits (i.e. egalitarian traits and instrumental traits) and gender-role attitudes (i.e. egalitarian and traditional) are significant factors which affects perceptions of ethical behavior in the workplace.

The third hypothesis (H3) was â&#x20AC;&#x2DC;genderrole attitudes have no influence on ethical perceptions of men and womenâ&#x20AC;&#x2122; and there was a significant positive relationship between gender-role attitudes and overall ethical perceptions (r = 0.153, p d 0.05). That is, if a person has more traditional attitudes that person is less likely to perceive unethical workplace behaviors as unethical. Significant results were also found for ethics factor two (passing blame r = 0.192, p d 0.01), four (falsification r = 0.162, p d 0.05) and five (padding expenses r = 0.195, p d 0.01). That is, even a person with traditional attitudes believes passing blame, falsification and padding expenses are unethical behaviors. But, interestingly they believe personal use, bribery and deception as less unethical behaviors at workplace.

The first hypothesis supported as the results indicated that ethical perceptions do not differ between men and women. Thereby, biology doesnâ&#x20AC;&#x2122;t affect moral reasoning and ethicality of people.


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The second and third hypotheses were also supported as the results highlighted that expressive traits and egalitarian attitudes influence overall ethical perceptions. Irrespective of the biology, if a man or woman has expressive traits and egalitarian attitudes he/she is more likely to recognize unethical workplace behaviors as unethical. Hence, by treating gender as a multidimensional socialpsychological construct a true picture is revealed about ethical behavior.

Limitations and Future Research The study doesnâ&#x20AC;&#x2122;t measure the causal relationship between ethics and psychological gender traits or gender-role attitudes. Future studies can be conducted to investigate the causal relationship between these variables. Further, a longitudinal study or a cross cultural study can be conducted to investigate the differences in ethical perceptions. The study adopted a simple statistical analysis. But in real world ethical perceptions and decisions are influenced by more complex environmental factors. Hence, future research can address this gap by using more sophisticated statistical methods such as structural equation modeling to investigate significant business environmental factors that affect ethical behavior.

Theoretical Implications This study bridges an empirical gap by analyzing the gender construct in a broader way. Though, there are Sri Lankan studies conducted on gender and ethics, none has conceptualized gender as a multidimensional construct. McCabe et al. (2006) conducted a similar study in USA and reported same results. Hence, by conducting a study in Sri Lanka the author tried to verify the findings of USA context in the Sri Lankan context. Finally, the study gives enough evidence to support the validity of multidimensional approach to gender in Sri Lankan context as well.

REFERENCES [1.] Daft, R.L. (2012). New era of management, New Delhi: Cengage Learning. [2.] Dusseau, S. (2006, March-April). Ethics in engineering education. IllinoisIndiana and North Central Joint Section Conference. Fort Wayne, Indiana. [3.] Gill, S. (2010). Is gender inclusivity an answer to ethical issues in business? An Indian stance. Gender in Management: An International Journal, 25(1), 37-63.

Managerial Implications As many organizations working towards ethical environment, they can assess the psychological traits and gender-role attitudes of employees before recruiting them. Therefore, it is easy to build an ethical culture with such people. In the meantime, egalitarian approach can be adopted to solve ethical dilemmas faced by organizations. Finally, ethical behaviors should be recognized and rewarded to promote ethicality.

[4.] Hair, J. F., Black, W. C., Babin, B. J., Anderson, R. E., & Tatham, R. L. (2006). Multivariate data analysis (6th ed.). Delhi, India: Pearson Education.

Furthermore, educators also have a huge responsibility in cultivating ethics among students. Strict actions should be taken against unethical behaviors and ethics should be incorporated to curriculum irrespective of the field of study. Students must be taught business ethics as well as professional ethics.

[5.] Hunt, A. (1997). Are Women more Ethical than Men?. Baylor Business Review, 15(1). [6.] Lips, H. M. (2005). Sex and Gender: An introduction (5thed.). New York, America: McGraw-Hill.


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[7.] Ludlum, M., Moskalionov, S., & Ramachandran, V. (2013). Examining ethical behaviors by business students. American International Journal of Contemporary Research, 3(3), 13-21. [8.] McDaniel, C., Schoeps, N., & Lincourt, J. (2001). Organizational ethics: perception of employees by gender. Journal of Business Ethics, 33, 245-256. [9.] McCabe, A. C., Ingram, R., & Datoon, M. C. (2006).The business of ethics and gender. Journal of Business Ethics, 64, 101-116. [10.] Nonis, S. & Swift, C. O. (2001). An examination of the relationship between academic dishonesty and workplace dishonesty: A multi-campus investigation. Journal of Education of Business, 69-77. [11.] Robin, D. & Babin, L. (1997). Making the sense of research on gender and ethics in business: A critical analysis and extension. Business Ethics Quarterly, 7, 61-90. [12.] Ruch, W. A., & Newstrome, J. W. (1975). How ethical are we. Supervisory Management, 18. [13.] Spence, J. T. (1993). Gender related traits and gender ideology: evidence for a multifactorial theory. Journal of Personality and Social Psychology, 64(4), 624-635. [14.] Spence, J. T., Helmreich, R. L., & Stapp J. (1974). The personal attributes questionnaire: a measure of sex-role stereotypes and masculinity and femininity. Catalog of Selected Documents in Psychology, 4(43). [15.] Spence, J. T., Helmreich, R. L., & Sawin, L. L. (1980). The male â&#x20AC;&#x201C; female relations questionnaire. Catalog of Selected Documents in Psychology, 10(87), 1-35.


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Sameera M G Aa, and Kaluthanthri P Cb , Ernst & Young, Sri Lanka, bUniversity of Sri Jayewardenepura, Sri Lanka a

ABSTRACT The large volume of commuter movements on trunk roads opens an avenue for potential development for convenience shops. Location suitability based on “intuitive expertness” or "look and feel” of the property is not an option due to heterogeneity on geo-demographic, economic and social features of a built-up environment; a scientific approach is required. The model was designed for part of A04 trunk road; the main access to Southern Expressway (E1) and suburban Colombo. It is based on criteria derived from expert opinion; marketing managers of convenience shops, real estate specialists and town planners are included in this opinion panel; the views of the general public were also taken into account on assigning composite weights. Geographic Information System (GIS), as a multipurpose tool in spatial analysis and visualization, was used as a scientific tool in this modeling process. The multi-criteria, namely population density, optimum plot size, proximity to main road, proximity to town centre, side of the road, distance from own and competitor outlet, and land value were used in the spatial analysis process. The results were categorized as “most suitable”, “suitable”: and “not suitable” plots for convenience shops within either sides of A04 trunk road (part). Finally, the study validated the results with expert reviews and zoning regulations of Sri Lanka. Keywords: convenience shop, multi criteria model, expert choice, Geographic Information System, (GIS), Geo-demographic, Information INTRODUCTION A convenience shop is a store which sells a wide variety of foods and other household products. It could be a part of a chain which is controlled by the parent supermarket in the same country or same town. In Sri Lanka this concept became very popular in early 2000, and many public and private firms are investing in this segment. There are about 516 convenience shops operated in all 25 districts in Sri Lanka (Kulamannage, 2011). The profitability and success of convenience shops’ mainly depend on its location which creates easy access to customers and suppliers (Davies, 1977; Benoit and Clarke 1997). Once the business started or basic


infrastructure was developed, reversion of the decision is costly to the firm. Therefore, business organizations are keen on location, before finalizing an investment decision (Bell et al., 1998). Identification of the suitable land for a convenience shop is a difficult task if a systematic process is not used. There are many systems which can be used to determine the best location for the establishment of a convenience shop. One of the methods is Geographic Information System (GIS). Suitability criterions depend on business organization motives and customer requirements. Also planning requirements and demographic factors influence this decision. Thus, owners

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of convenience shops select suitability criteria depending on its importance adjusted with other requirements. Finding and understanding the data to perform a suitability functions in a traditional manner (through spreadsheets and by hand) is a very difficult task. Therefore investors now utilize GIS as the best solution to analyze and select new sites for convenience shops (Byrom et al., 2001). Thus, GIS opens a new avenue for analyzing a suitable location. GIS will bring the maximum benefit for the owner to efficiently find the most suitable locations. The A04 Truck Road (High-Level Road) is one of the main trunk roads of Sri Lanka which connects the commercial capital of Sri Lanka and many sub urban areas of Colombo. It is the longest highway in Sri Lanka, at 430 kilometres in length. It connects Colombo with Batticaloa, through a large number of important cities in the Western, Sabaragamuwa, Uva and Eastern Provinces. Also this connects main access to Southern Express Way (E1) of the country. Every day more than 300,000 commuters travel to the city of Colombo by using this road. Thus, there is a high market potential for existing convenience shops along this road. It is required to open new convenience shops alongside this road by taking into consideration the demand of the foreseeable future in order to serve anticipated commuter growth and development taking place in sub urban areas of Colombo. In the process of development of GeoDemographic information model for convenience shops, first the study identified possible criteria to select a suitable site and next, the importance of each criterion is exemplified. As the final step, it developed a model to


evaluate the site convenience shops.



RESEARCH OBJECTIVES The general objective of this study is to develop a GIS based geo-demographic model to investigate spatially suitable location for convenience shops based on part of A04 trunk road, Maharagama, Sri Lanka. The specific objective of the study is to a) define geo-demographic factors that define suitable location for convenience shops. b) develop a GIS-based model to evaluates the factors that define suitable location for convenience shops. c) apply the GIS-based model to evaluate and identify spatially suitable location for convenience shops within the part of A04 trunk road, Maharagama, Sri Lanka LITERATURE REVIEW The location of a property is essential when it comes to real estate investments. However, if somebody plans to keep the property for residential purpose, location becomes a secondary variable and particular need and desires become fundamental whereas when planning to commercial purpose the location becomes critical. Location is the most important factor in the process of deciding a place for a real estate investment. It can have an impact on profitability and the success for the whole firm. Location decision is very important because selecting a suitable site is a long term decision (therefore it must be planned), and decision it is not easy to reverse. In the opinion of Campbell (2008) there are many reasons why a business might need to relocate or find a location. As per Campbell (2008)

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choosing a location the business must take into account the costs of moving or establishing their business in the location. Such things they have to consider are; labor costs, site and capital costs, transport, proximity to suppliers, workforce disruption, language factors and exchange rates. Thus decision on suitable location is a complex, due to large set of feasible alternatives and multiple, conflicting and incommensurate evaluation criteria (Malczewski, 2006). Hence scientific approach is required. Carver (1991) and Langevin et al. (1991) are the pioneers on modern application of GIS based multi-criteria models. Carver (1991) was most cited model and however Langevin et al. (1991) not popular as in Carver. (Malczewski, (2006). As per the (Jankowski 1995, Malczewski 1999, Herwijnen and Rietveld 1999, Laaribi 2000, Chakhar and Martel 2003) a number of approaches on structuring GIS based multi-criteria models available. Despite the differences between each model, five generic components of multi criteria process can confirmed, namely: (i) a goal or a set of goals an individual attempts to achieve along with associated evaluation criteria on the basis of which the decision-maker evaluates alternative courses of action; (ii) the decision-maker or a group of decision-makers involved in the decision-making process along with their preferences; (iii) the set of decision variables; (iv) the set of uncontrollable variables (decision environment); and (v) the set of outcomes or consequences associated with each alternative-criterion pair. The taxonomy of geo-information components of the GIS based multicriteria models approaches based on


three dichotomies on GIS components: (i) the raster versus vector data models, (ii) explicitly spatial criteria versus implicitly spatial criteria, and (iii) explicitly spatial alternatives versus implicitly spatial alternatives. Out of these three components rater based approach is very prominent and popular among researchers. And next best popularity is with vector models. Literature found few studies based on other GIS components (Malczewski, 2006). Given the generic elements of multicriteria decision models three dichotomies namely; (i) multiobjective decision analysis (MODA) versus multi-attribute decision analysis (MADA), (ii) individual versus group decision-making, and (iii) decisions under certainty versus decision under uncertainty (that is, the probabilistic and fuzzy decision-making) models are available for GIS based decision making. Literature shows that Multiattribute (MADA) is popular among research with Weighted Summation or Boolean Overlay Combination rules. (Malczewski, 2006), found 146 articles on this model. STUDY AREA This study was carried out on either sides of High Level Road (A04 Trunk Road) which used to find out suitable locations for a convenience shop close proximity (600 m form both side) to High Level Road from Wijerama to Kottawa is one of the main transportation hub to the capital of Sri Lanka. And it connects main towns in the Colombo district namely Havelock Town, Thibirigasyaya, Kirulapana, Nugegoda, Delkada, Navinna, Maharagama, Pannipitiya, Kottawa. The high density of population available in these towns makes high

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traffic volume on High Level Road daily. Maharagama is a major suburb of Colombo situated on the High Level Road about 15 km away from the center of the commercial-capital Colombo. According to the geographical location in relation to the altitudes, Maharagama can be classified as a low country area. Presently Maharagama Urban Council (MUC) consisted of 41 Grama Niladhari (meaning, administrative) Divisions with a total population of 180,112 spread over a total area of 39.4 Sq.Km. It is surrounded by the townships of Boralesgamuwa, Nugegoda, Kottawa, Pamunuwa, Hokandara, Piliyandala. There are several Government and Local Government institutions like the Divisional Secretaryâ&#x20AC;&#x2122;s Office, and the famous Dharmayatanaya, a Buddhist Temple Complex. According to the Colombo Structure Plan, Maharagama is a center of the region and cultural as well as developed into a main center for economic and administrative functions. Maharagama is identified as a third level town based on the urban activities of the Western Province. For the efficient functioning of the informal sector activities, the city shows significant development priorities. Its daily migrant population is approximately exceeding 100,000150,000, Part of the MUC limit belongs to center of the administrative capital of Sri Lanka, Kotte-Sri Jayewardenepura in closer proximity to Rathmalana International Airport, Harbor and Commercial Capital. This area is being developed rapidly with possessing all the facilities like Super Markets, Department Stores, Clothing Shops, Food and Beverages


Shops to fulfill the needs of citizens. See table 3.2 for important places of Maharagama. Activities of Nugegoda and Delkanda towns are very important for this study. With the growth of Nugegoda town as the main commercial center it cause to have a day time population of over 100,000 at peak hours. Central Nugegoda is a collection of densely packed shops and mixed residential areas. This has contributed to a significant level of traffic congestion. There has been a huge increase in buildings and at present, a number of educational institutes are found here. The "SathiPola" in Delkanda (besides the High Level Road) which is probably one of the most acclaimed markets in Sri Lanka. Refer map 1 for commercial area distribution. Map 1: Distribution of commercial uses in Maharagama urban council area

Source: This case study area is very important for suitability analysis, due to the high accessibility of the road, while carries thousands of commuters per day making an enormous potential for supermarkets which seek daily essentials. This allows researcher to analyze variety of situations and its outcome will fill the gap of most suitable location for a successful supermarket.

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This area is clustered with large number of super markets. They come in, (i) Various brands and various sizes (ii) Various locations with a verity of marketing strategies and verity of target customers RESEARCH METHODOLOGY The study is based on multi-attribute Decision Analysis (MADA) or multi criteria model with Weighted Summation or Boolean Overlay Combination rule. Qualitative and quantitative aspects of data have been used in this process. The primary data was collected from a questionnaire survey, discussion with customers (100), resource persons and experts to identify criterions (15), weights for value fields and composite weights. The market survey is used to identify the physical developments within the study area. Secondary data were collected from MUC, Government Valuation Department, Urban Development Authority (UDA) records and Census and Statistics Department. Information regarding land use, land values and demographic was among them. Weighting of suitability analysis refers to assigning a numeric value to each factor in order to recognize its relative importance, and is usually expressed in percentages. The weight for the suitability of each factor was based on the interpretation of opinions given by the respondents, where pairwise comparison of Analytic Hierarchy Process (AHP) method was used. The pairwise comparison AHP is popularly used in lot of land suitability assessment case studies (Byun, 2001; Dae-Ho, 2001; Zahedi, 1986). “Expert Choice” computer programme was used for calculating the composite weight as with the formula given below.


‫ ܹܥ‬ൌ σሺσሺ‫ܽ݅ݎ݁ݐ݅ݎܾܿݑݏ‬Ǥ ‫ͳݓ‬ሻሻ‫ʹݓ‬ where CW is composite weight, w1 is weight of criteria no 01 and w2 is weight of criteria no 02. Seven separate hierarchical pair wise comparisons of main criterion factors were made for analyze the weights. Then pair wise comparisons of sub criterion factors were carried out to identify composite weights (see Table 1). The MADA analysis was done by standardizing the all criterion which enables the factors to be compared on a common scale (Jankowski, 1995). For this standardization, the values range from 0 to 1. A value of 1 represents the most suitable to accessing convenience shop, and a value of 0 represents those that are the least suitable convenience shop (Table 1). Once the individual maps were developed, all criterion maps have been combined to get the final outcome of the study. Here “Population density”, “Proximity to main road”, “Proximity to town centre”, “Side of the road”, “Distance from own and competitor outlet”, “Land value”, and “Optimum plot size” were aggregated. ArcGIS 10.1 was used as computer software with raster calculations. Then final weight was divided into scale intervals to get the suitability degree such as not suitable, suitable and most suitable Identification of Criteria The managers and the customers of convenience shops were interviewed to identify criteria to determine the location of convenience shops. Further literature review makes the base to finalized criterions. The criterions found in the literature review in the international context cannot be applied

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in the Sri Lankan setting due to the differences in socio-economic background of the country. Therefore, identified criteria have been modified by considering views of customers, experts, and the nature of Sri Lankan business environment. The study interviewed 10 convenience shop managers, 5 real estate experts, 2 town planners and customers to formulate criterions for convenience shop allocation. 50 customers were interviewed in various occasion in different outlets, different days of the week and different time slots of the day. Population density Population density has been included in much research investigating the role the physical environment plays in convenience store availability (Black et al., 2011). According to the analysis supermarkets should have an immediate catchment of 2000-3000 customers. These customers should be located in the vicinity of 1km-1.5km. Although the MUC has 195,355 population, density is not equally spread in the case study area. Hence, the population density has been classified in to four categories, namely less than 35P/Ha, 35P/Ha â&#x20AC;&#x201C; 55P/Ha, 55P/Ha â&#x20AC;&#x201C; 75P/Ha and more than 75P/Ha and interpreted as most suitable, suitable, less suitable and not suitable respectively. Proximity to main road Proximity ensures that not only it attracts its core customers but also the fleeting population. Density of the population gives a one-sided view since it does not show the commuters who come from outside the city. By using GIS (Buffer function) proximity to main road has been buffered into four categories namely less than 25m, 25m-50m, 50m-75m, more than 75m.


By considering all facts, the study describes the area most suitable, suitable, less suitable and not suitable locations Proximity to town centre Residents or commuters who depend on public transportation to travel are required to base their activities around the availability of public transit increasing their vulnerability because having low mobility correlates to food access vulnerability (Clifton, 2004). Thus proximity to city center is very important. Also Clifton (2004) noted that poor access to public transport reduce the turnover for convenience shops or grocery stores. Vehicle ownership gives residents the ability to reach more than one convenient shop, and this does not have to be the closest supermarket to their home (Baek, 2013). Navinna, Waththegedara and Pannipitiya are the small commercial centres located between Wijerama to Kottawa. The town centre has been buffered into four categories namely, less than 500m, 500m-1500m, 1.5km3km, more than 3km. The most suitable location are within 500m1500m from the town centre which gives easy access to both customers who travel on the A04 trunk road and come to the city for various needs. Investors can minimize their cost by paying low rent and it facilitates to find a land with optimum size. Side of the road Widener et al. (2013) also determined that daily commuters have higher access to convenience shop because they are already driving to work, and can access a supermarket on the way to or from work. People have a habit of purchasing their daily essentials and other goods when

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they are going back home. Therefore convenience shops should be located on the left hand side for customersâ&#x20AC;&#x2122; convenience (In Sri Lanka, left hand driving rule is practiced), which gives easy access to customers. This is because, heavy traffic flow is heading out of the Colombo in evening where it makes easy to drivers to turn convenience shops while located in the left side they are going back home.

5.5 million, 5.5million-9 million, more than 9 million and described as most suitable, suitable and less suitable. Optimum plot size Optimum plot size includes two criteria; (a) parking space and (b) space inside the supermarkets. If there is more space inside the convenience shop it may help to exhibit a majority of goods by using racks/shelves which is convenient to customers because they can easily select what they want. Also customers can easily move with their trolleys in between racks. Inside space is also necessary to locate the generator, allocate space to their staff and stores. Adequate space helps to minimize fraud and theft of goods.

Distance from another out-let Here two factors namely distance to competitor outlet and own outlet, were considered. Marketing managers of most convenience shops confirms (results of expertsâ&#x20AC;&#x2122; survey) that they neglect the competitor factor, when deciding the location. Thus, distance from competitor has zero weight. When determining the distance from an own outlet, at least 200m to 300m of distance is maintained to minimize profit/revenue sharing within the outlets.

Plot size is also important to allocate space for parking facilities. Most of the customers do not like underground parking facilities because of inconvenience. High preference is for parking access on in front of the shop. Thus, when allocating the plot size it should be considered about allocating space among these two factors. Therefore, most preferred size of land is above 5,000 square feet. Here the study considered about the building lines and the street lines as well.

Land value Land value is a cost for the company. When considering the case study area, it has high land values, but land values are not equally spread within the case study area. Based on per perch value, land values have been classified in to three categories, namely less than LKR


Table 01: Criterion, Composite Weights and Interpretation Criteria Classification Rank Weight

Population density

Proximity to main road

Proximity to town center

<35 35-55 55-75 75 < <25m 25m-50m 50m-75m 75m< < 500 m 500m-1500m

0.10 0.11 0.20 0.30 0.40 0.40 0.26 0.30 0.20 0.10 0.30 0.18 0.35


0.01 0.02 0.04 0.06 0.1 0.09 0.05 0.02 0.05 0.06

Composite Interpretation Wight Not suitable Less suitable Suitable Most suitable Most suitable Suitable Less suitable Not suitable Less suitable Most suitable

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Side of the road

Distance from another outlet

Land value

Optimum plot size

1.5km-3km 3km< Left (100m buf) Right (100m buf) <30 30-150 150-250 >250 < 5.5m 5.5 - 9m >9m < 3000 sq.ft 3001 - 5000 sq.ft > 5001 sq.ft

0.25 0.10 0.70 0.22 0.30

0.04 0.01 0.17 0.06

suitable Less suitable Most suitable Less suitable

0.05 0.04 0.20 0.35 0.40 0.44 0.06 0.33 0.22 0.06 0.13 0.44

0 0 0.01 0.03 0.03 0.02 0.01 0.00 0.05

Not suitable Less suitable Suitable Most suitable Most suitable Suitable Less suitable Not suitable Suitable



Most Suitable

Source: Compiled by the author RESULTS, DISCUSSION CONCLUSION


The study validated the results (locations) with the zoning regulations of Development Plan for the Urban Development Area of Maharagama, Special Gazette Notification of No 1566/29. The selected land for a convenience shops should be located in a commercial zone, special commercial zone or mix developed zone (see Map 1 and Map 2) Location No 3 is considered as the most suitable location. The area belongs to Pannipitiya North and Pannipitiya South, located closer to Pannipitiya town centre and in the left side of the road. The population density is high in the area and it is 92.78 per hectare. The physical observation confirms that, there is not a single outlet between these two towns. This site belongs to the commercial zone. Therefore, it is legally acceptable for the commercial developments. Further, this area has a good connectivity through the branch road network via Pannipitya-


Baththaramulla Road, PannipitiyaMalabe Road, Delgahawaththa Road and Arawwala Road. Therefore, this location is recommended as the most suitable location to have a convenience shop. Location 04 is 500 meters away from the Kottawa town and is selected as the second best location. The population density is 53 per hectare. The physical features of the lands are suitable for commercial development. The study found acceptable distance gap between convenience shops located in-between. Since Kottawa town connects to Aturugiriya, and Horana Towns, people who access the A04 road may become potential customers for these outlets. This area belongs to the commercial zone. Therefore, there are no legal restrictions are for convenience shops. The location 01 is situated between Wijerama and Nawinna towns. The population density is about 58.78 per hectare. Land value is moderate in this area and few convenience shops are already located. Thus, the proposal of the model is validated as moderately suitable area

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Map 1: Suitability areas for convenience shops

Source: Compiled by the author

Map 2: Most suitable locations for convenience shops Location 1

Location 2

Location 3

Location 4

Source: Compiled by the author


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The location 02 is situated between Wattegedara and Maharagama. Many commuting people can be found due to the close proximity to Maharagama and Pamunuwa towns, which are popular as one of the best domestic garment markets in Sri Lanka. Therefore, locating a convenience shop in this area can attract many customers. It is difficult to acquire suitable land due to fragmented developments and high land values. Thus, location no 2 is relatively less suitable than location 03. Finally, this study opens an avenue for contemporary discussion on location suitability for convenience shops. Thus, it is hoped that this study represents a beginning of the application of scientifically sound geodemographic model for location suitability analysis of convenience shops in Sri Lanka. REFERENCES [01] Baek, D. (2013), The Effect of Public Transportation Accessibility on Food Insecurity. Department of Economics Working Paper Series. Louisiana State University [02] Bell, D, Ho, T. and Tang, C. (1998), ‘Determining Where to Shop: Fixed and Variable Costs of Shopping’, Journal of Marketing Research, Vol 35, pp. 352-69 [03] Benoit, D., Clarke, D.P. (1997), ‘Assessing GIS for Retail Location Planning’, Journal of Retailing and Consumer Services, Vol 4, Issue 4, pp. 239–58 [04] Black, J., Carpiano, R., Fleming, S., and Laster, N. (2011), Exploring the Distribution of Food Stores in British Columbia: Associations with Neighbourhood Socio-demographic


Factors and Urban Form, Health & Place. 17: pp. 961 – 970 [05] Byrom, J., Bennison, D., Hernandez, T. and Hooper, P. (2001), ‘The Use of Geographical Data and Information in Retail Locational Planning’, Journal of Targeting, Measurement and Analysis for Marketing, Vol 93, pp. 219-29 [06] Carver, S. (1991), Integrating Multi-Criteria Evaluation with Geographical information Systems. International Journal of Geographical Information Systems. 5 (3): pp. 321-339. [07] Clifton I, J. (2004) ‘GIS-based multicriteria decision analysis: a survey of the literature’, International Journal of Geographical Information Science, 20 (7), pp. 703-726. [08]. Chakhar, S., and Martel, J. M., (2003), Enhancing Geographical Information Systems Capabilities with Multi-Criteria Evaluation Functions. Journal of Geographic Information and Decision Analysis. 7 (2): pp. 4771 [09] Davies, R. (1977), ‘Store Location and Store Assessment Research: The Integration of Some New and Traditional Techniques’, Transactions of the Institute of British Geographers, New Series, Vol 2 2, pp. 141-57 [10] Dae-Ho B. (2001), ‘The AHP Approach for Selecting an Automobile Purchase Model, Information and Management, Vol 38, pp. 289-97 [11] Herwijnen, M. van, Rietveld, P., (1999), Spatial dimensions in multicriteria analysis. In Spatial

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Multicriteria Decision Making and Analysis; A Geographic Information Sciences Approach, J.C. Thill (Ed), pp. 77-102 [12]. Jankowski, P. (1995), Integrating Geographical Information Systems and Multiple Criteria Decision Making Methods. International Journal of Geographical Information Systems. Vol 9 (3): pp. 251-273 [13] Kulamannage, S. (2011), Sri Lanka Cargills’ Food Manufacturing Business Emerges to Challenge Multinationals, Lanka Business Report, [Online] Available at: 0110605204836846 [14]. Laaribi, A. (2000), SIG et analyse multicitère. Paris: Hermès Sciences Publications [15] Langevin, C., Pernel, F. and Pointet, T., 1991, An aid to decisionmaking in hydrogeological exploration: multicriterion analysts in the evaluation of aquifer potential in a fractured medium. Hydrogeologie, Vol 1, pp. 51–64 [16] Malczewski, J., (1999). GIS and Multicriteria Decision Analysis (New York: John Wiley & Sons, Inc. [17] Malczewski, J. (2006) ‘GISbased multicriteria decision analysis: a survey of the literature’, International Journal of Geographical Information Science, Vol 20 (7), pp. 703-726. [18]. Widener, M., Farber, S., Neutens, T. and Horner, M. (2013). Using Urban Commuting Data to Calculate a Spatiotemporal Accessibility Measure for Food Environment Studies. Health & Place. Vol 21: pp. 1 – 9


[19] Zahedi, F. (1986) ‘The Analytic Hierarchy Process - A Survey of the Method and Its Applications’, Interfaces, 16 (4), pp. 96-108.

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RESPONSIVENESS CAPABILITY IN THE INTERNATIONAL CLOTHING INDUSTRY: GLOBAL QUICK RESPONSE AND PLANNING POSTPONEMENT CAPABILITIES Amila Jayarathne P.G. Sa. and Warnakulasooriya B. N. F.b a, b Department of Marketing Management, University of Sri Jayewardenepura, Sri Lanka a; ABSTRACT Responsiveness has been recognized as an essential strategy to enhance the capabilities of organizations as well as supply networks in the clothing industryto quickly and accurately respond to the changing market requirements. Although responsiveness embedded with several aspects including social concern, it has mostly been studied in terms of Quick Response (QR) initiatives in the clothing industry. However, as contemporary clothing industry operates globally, QR strategies need to be considered in the global context. With this wider context in mind, the concept of Global Quick Response (GQR) has been introduced.In order to make normative suggestions and to confirmthis new theoretical concept of GQR, a measurement scalefor GQR should be built up though none has paid the attention in the literature so far. Therefore, the first objective of this paper is to develop a measurement scale for GQR; and to validate the measurement properties of the same.Then, as responsiveness can also be enhanced through the planning postponement strategies, the second objective of this paper is to examine the association between the GQR and planning postponement capabilities. Data was collected from both strategic and operational level personnel in the clothing industry at the supply network level using mix research approach. A Multiple Discriminant Analysis was carried out taking the degree of GQR capability and Planning Postponement capability on board. The results uncovers that there is an association between GQR and Planning Postponement. The degree of GQR capability discriminates the Planning Postponement capability though the discriminating power is weak. Finally the paper makes important implications and suggestions for practitioners as well as for academics in order to enhance the responsiveness not only through GQR but also through planning postponement.

Keywords: Clothing Industry, Global Quick Response, Postponement, Responsiveness

Merschmann and Thonemann (2011), have recognized â&#x20AC;&#x2DC;responsive supply networkâ&#x20AC;&#x2122; as an essential strategy to enhance the capabilities of the supply networks to quickly and accurately respond to the changing market requirements. Here,

INTRODUCTION Capabilities of the supply networks need to be developed, maintained and upgraded timely and quickly to ensure the success in the fierce competition. Several researchers, for instance Gunasekaran et al (2008),


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responsiveness may include the social concern as well.

between the GQR and Planning Postponement capabilities in the clothing industry, as both these capabilities are aspects of responsiveness.

Among the several industries, responsive supply chain has widely been discussed in the clothing industry (e.g.: Forza and Vinelli 2000, Bhardwaj and Fairhurst 2010, Yi et al 2011). Despite the fact that responsiveness of the clothing industry has mostly been studied in terms of quick response (QR)initiatives, hardly has examined the QR at the supply network level. As contemporary clothing supply networks operate globally, QR strategies need to be considered in the global context. With this wider context in mind, MacCarthy and Jayarathne (2010) introduced the new concept of Global Quick Response (GQR).

This paper first briefs the theoretical background; then elaborates the methodological aspects, which is followed by the analysis section. The results are then discussed alone with the concluding remarks andrecommendations. LITERATURE REVIEW International Clothing Industry The international clothing industry contributes significantly to the world economy. It is one of the oldest and largest international export industries in the world. It is also one of the most globally prevalent as most countries produce some types of clothing products (Gereffi and Frederick 2010). This industry is the main foreign income generator for several developing countries. For instance the industry contributes to over 75% and over 50% of the industrial exports of Bangladesh and Sri Lankan respectively. Clothing supply networks which globally operate continue to change and develop due to changes in consumer demand and in retailer sourcing strategies, and the removal of barriers to international trade in textiles and clothing (Martin 2007). Thus, clothing supply network is called as highly dynamic and mobile network (Gereffi and Frederick 2010).

GQR strategies in the clothing sector need to incorporate QR concept but need additionally to focus on the capabilities of the supply network as whole in the international context. In turn, this study looks at the clothing supply networks through a lens of GQR capability. Thus, the first objective of this paper is to develop a measurement scale for GQR in order to make normative suggestions on the same; and to validate the measurement properties of the same. Further, postponement can also be used as a strategy to enhance the responsiveness in the clothing industry; because of the low forecasting accuracy in the industry. Achieving high forecasting accuracy is the most challenging and difficult aspect in the clothing industry (Forza and Vinelli 1996;Thomassey 2010). Planning postponement is one type of postponement among the different types of postponement strategies. Thus, the second objective of this study is to examine the association

Among the several industries, responsiveness has widely been considered as a competitive strategy in the clothing industry(e.g. Storey et al 2005), mainly due to the growing complexity within its dynamic context. Clothing supply


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networks are explicitly known as ‘responsive networks’ by several researchers, for instance Lee (2002).

The above phenomena disclose significance, relevance and necessity of the investigation of GQR capability at the clothing supply networks.

Global Quick Response (GQR) Capability in the Clothing Industry Responsiveness of the clothing industry has mostly been studied as Quick Response (QR) initiatives. In fact, the study of QR was initiated by Kurt Salmon Associates (KSA) in the US apparel industry in 1986 (Barnes and LeaGreenwood, 2006) and has spread widely in apparel industry since 1990 (Al-Zubaidi and Tyler, 2004). The studies of Hunter (1990), Perry and Sohal (2001), Hunter et al. (2002), Al-Zubaidi and Tyler (2004), and Barnes and Lea-Greenwood (2006) only few examples of QR initiatives in the clothing industry.

Previous studies underpin two distinguished approaches in assessing the degree of QR practices of either clothing manufacturers or retailers. In one approach, the level of QR was assessed through identifying the extent to which different types of QR techniques are adopted by the respective companies. Particularly, if the respective companies have used a large number of QR techniques, it mostly concludes as the high level of QR capability, otherwise low level or medium level of QR capability. For instance, Kincade (1995), Sullivan and Kang (1999) and Ko et al (2000) utilize this approach.

However, all the previous QR studies in the clothing sector have been carried out at the firm level, either at manufacturer’s level or at retailer’s level; none of the studies were at the network level. As contemporary clothing supply networks operate globally, QR strategies need to be considered in the global context. Therefore, MacCarthy and Jayarathne (2010) introduced the new concept of Global Quick Response (GQR) which facilitates the investigation of QR at the network level.

In the other approach, certain studies employ three-stage method for assessing the QR adoption in the apparel context. Particularly, Giunipero et al (2001) use three stages –stage 1: basic level of QR implementation; stage 2: the stage involves redesigning internal processes; stage 3: the stage in which collaboration take places and the success is measured in terms of total supply chain effectiveness in meeting consumer needs – in studying QR practices of the clothing retailers. Further, these three stages were used by Fernie and Azuma (2004) in studying Japanese fashion industry.

GQR is defined as a strategy that “seeks to achieve accurate, rapid, and cost-effective response to specific markets dynamically by leveraging the potential of dispersed global supply and production resources through lead time compression, effective real time information management, flexible pipeline management, and optimal logistics and distribution systems” (MacCarthy and Jayarathne 2010, p.43)

Owing to the limitations of these two approaches and the need of investigating the QR capability at the entire supply network, a new measurement scale should be built up in order to make normative suggestions on the global quick response ability. Thus, the first objective of this


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paper is to develop a measurement scale for GQR; and to validate the measurement properties of the same.

It is defined as ‘the dominant player in the supply network commits to the aggregate volumes at an early stage of the planning process, but delays the commitments to precise ratio/ mix requirements as much as possible.

Postponement Capability in the Clothing Industry Responsiveness can be enhanced through postponement strategies (Yang et al 2004b, Yang et al 2007). Graman and Magazine (2006) note that low forecasting accuracy increases the need of postponement in the clothing industry. Though several definitions have been given for the postponement concept Van Hoek’s definition is the most commonly used one. Van Hoek (2001) defines postponement as a concept whereby activities in the supply chain are delayed until a demand is realized.

Global Quick Response (GQR) Capability and Planning Postponement Capability As explained above, both GQR and Planning Postponement capabilities are two different aspects of responsiveness; because both these capabilities enhance the responsiveness in the clothing industry. Literature has identified some quick response enablers as market intelligence (e.g. : Forza and Vinelli 2000), advancements in information technology and systems (e.g. : Ko et al 2000, Forza and Vinelli 1997, 2000), partnership among the network members (e.g. Fiorito et al 1995; Kincade 1995; Forza and Vinelli 2000; Fiorito et al 1998; Perry et al 1999), flexible production systems (e.g. : Kincade 1995, Lowson et al 1999), changes in management practises (e.g.: Perry et al 1999, Ko and Kincade 1997), advancements in inventory management systems (e.g.: Fiorito et al 1995; Forza and Vinelli 1996), effective logistic systems (Forza and Vinelli 1996 & 2000; Fisher and Raman 1996), supportive organizational culture (e.g. : Lowson et al 1999, Christopher et al 2004), advancements in new product development process (e.g. : Forza and Vinelli 1996), development of employees (Fiorito et al 1995), consistency of performance measurement across the supply network (Ramesh et al 2008), innovations in dying process (Forza and Vinelli 1997 & 2000).

Different versions/types of postponement have been discussed in the literature. They are ‘form postponement’, ‘Time Postponement’, ‘Price Postponement, ‘Purchasing Postponement’, ‘Product Development Postponement’, and ‘Place Postponement’ (Yang et al 2004a). Upstream postponement, downstream postponement and distribution postponement are also types of postponement strategies noted in the literature (Waller et al 2000). Asnumber of these types of postponement strategies are infeasible or has limited applicationsin the contemporary clothing industry, as well as due to the possibility of practicing postponement at the planning cycle, which is very crucial for the clothing industry (Yang et al 2007), Jayarathne and MacCarthy (2013) introduced a new type of postponement, which is called as ‘Staged Planning Postponement’.


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These quick response enablers may have an impact on the planning postponement capability either at firm or at supply network level. Because, existing knowledge indicates that postponement strategies may be influenced by several factors including manufacturing practices (Pagh and Cooper 1998), information and communication technology (van Hoek 1998), operating characteristics (van Hoek 1998), and technology and process characteristics (van Hoek 1998). These factors and the quick response enablers noted above may be interrelated. For instance, information and communication technology certainly reflects the ability of possessing the marketing intelligence system, and supports to have an advanced inventory management system, advancement in manufacturing techniques. Therefore, it is reasonable to argue that GQR capability may influence the planning postponement capability. Thus, this study hypothesizes that there is an association between the GQR and Planning Postponement capabilities in the international clothing industry.

accessory suppliers that feed into the network, and the logistics partners that handle downstream warehousing and shipping. Both prime manufacturers’ and retailers’ perspectives have been taken on board as proxies. In-depth interviews have been carried out with all the key supply chain players at both strategic and operational levels to gain detailed information on the operation, management and relationships in different supply networks dictated by different clothing retailers. Strategic level personnel at the regional offices or agents representing eight leading retailers have been interviewed to get the retailers’ perspectives on the study. This is the first stage of the field work. Not only developing and illustrating the planning postponement concept, but also exploring the additional quick response techniques and strategies were done through a detailed and comprehensive analysis of the interview data. At the second stage of the field work, a structured questionnaire1 which was administrated by one of the researchers was used to collect GQR capability and the planning postponement information at the network levels. The questionnaire was developed based on QR techniques identified in the review of the literature and in the first stage in-depth interviews. A list of GQR practices was given in a ‘likert scale’ that ranges from 1 to 5 (1 = not at all, 5 = very often); and let respondents to mark the extent to which a particular GQR practice is utilized. Data on timing of committing in the planning cycle (critical

METHODOLOGY This is an exploratory study that investigates clothing supply networks where the prime manufacturing partners are located in Sri Lanka. It extensively studies comprising twenty six clothing manufacturers serving thirty nine retailers and brands that serve the US and the EU clothing markets extensively, and generating seventy three different supply networks in total. The unit of analysis for this study is a clothing supply network that includes the retailer or brand owner, agents working on behalf of retailers and/or manufacturers, a prime manufacturer and its manufacturing base, the textile and


The questionnaire is precluded due to the space restriction.


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path) – extent to which planning decisions can be delayed before the commencement of the production – were collected in order to gain information on planning postponement. This information was collected in number of days on the five main planning decisions identified through the in-depth interviews and reviewing relevant literature. Planning postponement capability was quantified and grouped using the decision criteria given in Table 1. These decision criteria are based on the information collected in the questionnaire. 163 usable questionnaires wereemployed for the analysis.

namely in-depth interviews, observations and documents.


ANALYSIS AND FINDINGS A Measurement Scale for GQR In order to achieve the first objective of the study, a measurement scale for GQR is first developed and then it’s measurement properties are validated following the recommended procedure suggested by Churchill (1979). Such procedure is given in Figure 1.

Table 1 : Decision Criteria – Degree of Planning Postponement Capability

Number of days 45 – 15 days ( i.e. first commitment is 45 days prior to the production, and last commitment is 15 days prior to the production) 90 – 30 days ( i.e. first commitment is 90 days prior to the production, and last commitment is 30 days prior to the production) 140 – 45 days ( i.e. first commitment is 140 days prior to the production, and last commitment is 45 days prior to the production)

Decision Low planning postponement capability Figure 1: The process of developing a measurement scale for GQR (Source: adopted from Churchill 1979)

Medium planning postponement capability

Taking all the quick response techniques discussed in the literature as well as the additional techniques explored through indepth interviews on board, Exploratory Factor Analysis (EFA) was carried out for exploring the underlying factor structure without prior specifications of the number of factors and their loadings; owing to the fact that EFA is the most suitable factor analysis approach usable in the current context of the study (Hair et al 2006, Gerbing and Anderson 1988).

High planning postponement capability

Accordingly both qualitative and quantitative approaches have been utilized here alone with multiple data sources

EFA was carried out with Varimax rotation and Kaiser normalization. Only items that had a factor loading of at least 0.50 and did not have a loading in excess


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of 0.40 on a second factor were maintained (Hair et al 2006, Tachizawa and Gimenez 2010). Final components (factors) and respective GQR techniques within each component (items in the factors) were derived after several iterations. In this process, certain GQR techniques (items) had to be deleted. However, the removal of these items does not hinder the strength of the scale; because these GQR practices are either not been used or have become common practices in the clothing supply networks.

Further, certain deleted GQR techniques (items) have become common practices and do not provide any competitive advantages in the contemporary clothing industry, though they were treated as QR techniques in 1990s. Such techniques are for instance sending floor ready garments by prime manufacturers to the retailer, utilizing third party logistic companies, and scanning fabrics to detect the defects. After all these iterations, three components (factors) were identified and they were labelled according to the GQR techniques (items) loaded into the respective factor. It is important to note that in this process the relevant previous studies were taken on board in order to maintain the rigour of the study. The identified three components are (1) Producing Small Lot Orders (SLO) â&#x20AC;&#x201C; F1, (2) System Integration (SysIn) â&#x20AC;&#x201C; F2, (3) Advanced Technology for Manufacturing (ADTM) â&#x20AC;&#x201C; F3.

For instance, Point of Sales (POS) and modular production system have not been used at the studied supply networks. This study considers the retailer supply networks in which prime manufacturing partners are in Sri Lanka (a developing country). The GQR techniques used in this study are identified through firm level studies carried out in developed countries. Therefore, such practices available in firm level studies in developed countries cannot be expected to operate in a similar manner in a network level study which includes both developed countries and developing countries.

The measurement scale assessed by EFA was further confirmed through Confirmatory Factor Analysis (CFA) using AMOS 16 software.Table 2 presents the final factor loadings and their underlying factors.

Table 2: Final Factor Loadings and Underlying Factors Factors Item F1 F2 F3 SLO SysIn ADTM Short cycle sewing .967 .230 .199 Accepting small lot orders .905 .307 .174 Integrated Designing




Integrated Strategic Planning




Integrating designing and production




Computer aided pattern making




Computer aided manufacturing

.152 .234 .815 Extraction Method: Principal Axis Factoring. Rotation Method: Promax with Kaiser Normalization.


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Validation Properties



Table 3 Model Fit Indicates for GQR


Improving the rigor of the study in positivist paradigm validity and reliability of the measurement scale of GQR were ensured. Content Validity: Content validity ensures that the measure includes an adequate and representative set of items that taps the domain of the concept (Malhothra 2005, Sekaran 2004). A rigorous literature review was carried out to ensure the content validity of the constructs.

Fit indices














Acceptable Limit Ratio of 3 to 1 0.90 or greater 0.90 or greater 0.90 or greater 0.90 or greater 0.05 or less

According to the results in Table 3, all the model fit indices are within acceptable limit ensuring the satisfactory overall fit of GQR measurement scale.

Construct Validity:It depends on how well scale of a construct actually measures that construct (Peter 1981). Unidimensionality, reliability, convergent validity and discriminant validity are the subdimensions of construct validity (Peter 1981).

Diagnosis indicators for evaluating components of measurement scale such as standardized residuals and modification indices, and the direction, magnitude, and statistical significance of the parameter estimates between indicators and latent variables were also examined (Garver and Mentzer 1999) for GQR measurement scale. For this scale standardized residual are below 2.58 at 0.05 alpha level and modification indices are below 7.88 (results are not shown due to space limitation). The standardized parameter estimates for the measurement scale are greater than 0.70 and exhibit the correct sign and magnitude. Critical ratios of regression weight of the items are statistically significant at 95% confidence level for the first and second order latent variables. Strong evidence that the constructs are unidimensionalty exists when the parameter estimates are greater than 0.70, are statistically significant, and

Unidimensionality : A scale is unidimensional when the items of such scale estimate one factor (Dunn et al 1994). The scale proposed for GQR here is a multiple indicator measurement scale. To ensure that each construct is measured by multiple indicators and each of the indicators measures only a single construct, the GQR scale was examined for unidimentionality through CFA provided by AMOS 16 programme. The CFA which describes how well the observed indicators serve as a measurement instrument for the latent variables, provides a more rigorous test of unidimensionality (Garver and Mentzer 1999). The overall measurement model fit was ensured for GQR as summarized in Table 3.


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are in the right direction (Garver and Mentzer 1999)

Bold figures are AVE values and non-bold figures are coefficients of variances.

Convergent Validity: It refers to the extent to which the latent variable correlates to items designed to measure the same latent variable. It is assessed through Composite Reliability and Average Variance Extracted (AVE). The respective values and the acceptable levels are given in Table 4.

Reliability: The internal consistency of the first order factors of GQR was assessed through reliability analysis (Malhothra 2005). The standardized Cronbach’s Alpha for all the dimensions exceeds threshold value 0.7 ensuring the reliability of the scale. The results are summarized in Table 6.

Table 4 : Assessment of Covergent Validity

Table 6: Assessment of Reliability

Composite Reliability (should be greater than 0.70) Small Lot 0.933 Orders System 0.775 Integration Advanced 0.825 Technology for Manufacturing


Average Variance Extracted (should be greater than 0.50) 0.877

Small Lot Orders System Integration Advanced Technology for Manufacturing


Association between GQR and Planning Postponement


The second objective of this paper is to investigate the association between the GQR and Planning Postponement capabilities in the International Clothing Industry. Here, the association between the GQR and Planning Postponement capabilities was examined under the hypothesis of ‘there is a strong association between the GQR and the Planning Postponement capabilities’.

Discriminant validity: It refers to the extent to which the items are indeed novel and not simply a reflection of some other variable. Discriminant validity was validated by calculating the shared variance between all possible pairs of constructs and verifying that they were lower than the AVE for the individual constructs. The results are given in Table 5

The criteria given in Table 1 were adopted to determine the degree of planning postponement capability and then to group it as High, Medium, and Low. Multiple Discriminate Analysis(MDA) was performed to test whether the groups were correctly classified in terms of the given criteria. The MDA is appropriate when the dependent variable is nonmetric and the

Table 5 : Assessment of Discriminant Validity


SLO 0.877 0.260 0.177

SysIn 0.541 0.215

Cronbach’s Alpha value 0.948 0.750 0.825

ADTM 0.706


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independent variables are metric (Malhothra 2005). To run the MDA the sample was divided into two parts – analysis sample (122 respondents) and validation sample (41 respondents). The analysis sample was used for estimation of discriminant function and the validation sample was reserved for validating the discriminant function (Malhothra 2005). The results of MDA are given in Table 7 and 8. The results in Table 7 show the Canonical Discriminant function – eigenvalues. The eigenvalue associated with the first function is 0.084, and this function accounts for 80.5 percent of the explained variance. The canonical

correlation associated with this function is 0.279. The square of this correlation indicates that 8 percent of the variance in the Planning Postponement is explained or accounted by this model. The second function has an eigenvalue of 0.020 and accounts for only 19.5 percent of the explained variance. The canonical correlation associated with this function is 0.141. The square of canonical correlation of this function indicates that 2 percent of the variance in the Planning Postponement capability is explained or accounted for by this model. Because, the eigenvalue and canonical correlation are larger, the first function is likely to be superior.

Table 7: Canonical Discriminant function - Eigenvalues Functio Eigenvalu % of Cumulative Canonical n e Variance % Correlation 1 .084a 80.5 80.5 a 2 .020 19.5 100.0 a. First 2 canonical discriminant functions were used in the analysis.

.279 .141

together significantly discriminate among the three groups. However, when the first function is removed, the Wilks’ Lambda associated with the second function is 0.480, which is close to 0, but is not significant at the 95% confidence level. Therefore, the second function does not contribute significantly to group differences.

Table 8 reports that results that are used to determine the significance of the discriminant function. The value of Wilks’ Lambda is 0.904 if no function is removed. The Wilks’ Lambda transforms to a chisquare of 16.026, with 8 degrees of freedom, which is significant at 95% confidence level. The Wilks’ Lambda is near to 1 and, thus the two functions

Table 8: Canonical Discriminant function - Wilks' Lambda Test of Function(s) 1 through 2 2

Wilks' Chi-square Lambda .904 16.026 .480 3.206



Sig. 8 3

.042 .361

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Some idea about the relative importance of predictors in discriminating the degree of reflection can be obtained by examining the absolute magnitude of the standardized discriminant function coefficients and the structure correlations (Malhothra 2005). Generally, predictors with relatively large coefficients contribute more to the discriminating power of the function, as compared with predictors with smaller coefficients and are, therefore, more important (Malhothra 2005)

In summary, it is appeared that the degree of GQR capability discriminates the Planning Postponement capability though its discriminating power is weak, only 8% of the variance of Planning Postponement is explained or accounted by the degree of GQR. Such diversity is descriptively shown in Table 11, as the Table reports the mean value of the GQR classified by the categories of Planning Postponement capability. Table 11: Mean of GQR classified by Planning Postponement Categories.

Table 9: Standardized Canonical Discriminant Function Coefficients Function 1 2 SLO .455 -.049 SYSI .854 .270 ADT -.453 .923 PIS -.270 -.140

Low Medium High

GQR mean 2.755 2.838 3.094

Std. Deviation 0.410 0.593 0.233

On priory basis, researchers assumed that GQR capability would have an association with Planning Postponement capability. It is supported by the empirical findings as it discloses that the degree of GQR capability discriminates the Planning Postponement capability. In turn, it provides evidence for nomological validity; because nomological validity is demonstrated when the empirical estimation shows a strong relationship between exogenous (GQR) and endogenous (Planning Postponement) variables depicted in the theory.

Table 10: Structure Matrix

Function 1 2 * SYSI .782 .420 * SLO .538 .161 ADT -.199 .966* PIS .010 -.022* *. Largest absolute correlation between each variable and any discriminant function An examination of the absolute magnitude of the standardized discriminant function coefficient and the structure correlation reported in the table 9 and 10 respectively indicates that the System integration, Small Lot Ordersand Advanced Technology for Manufacturingare the most important predictors in discriminating the three groups.

DISCUSSION AND CONCLUSION This study first aims for developing a measurement scale for GQR and then for exploring the association between the GQR and Planning Postponement capabilities in the International Clothing Industry. A measurement scale for assessing GQR was developed, and subsequently its validity and reliability


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were validated following the instructions of Hair et al (2006). In the process of developing such scale certain GQR techniques had to be deleted. Some of them are common whilst others have not been used in the supply networks. Similar approach was used by Kincade (1995) to operationalize the concept of QR – delete common and not utilizing techniques.

Clothing Industry does not solely mean the GQR capability; it may include several other aspects including social concern. Investigating the Planning Postponement capacity enriches the existing knowledge discussed by Fisher et al (1994),Yang et al (2007), and Jayarathne and MacCarthy (2012). Fisher et al (1994) and Yang et al (2007) argue that postponement is possible to apply in the planning cycle specially in the International Clothing Industry. Following them Jayarathne and MacCarthy (2012) introduced the Planning Postponement as a new type of postponement.

According to the measurement scale, GQR capability embedded by three components namely ‘Small Lot Orders’, ‘System Integration’, and ‘Advanced Technology for Manufacturing’. These three components enrich the two components of QR – information sharing and product availability – identified by Ko and Kincade (1997).

The new type of postponement – Planning Postponement – was quantified in this scrutiny at the supply network level in the Clothing Industry. It is certainly an extension of the study of Jayarathne and MacCarthy (2012). Similarly, it provides empirical evidence for implementation of the postponement in general and of the planning postponement in specific. It fulfils the need of empirical evidences in postponement as noted by Yeung et al (2007).

Three components reflect the significance of information technologies and systems in GQR capabilities; enriching several previous studies which discuss the vital role of information technology in responsiveness in general (e.g. Gunasekaran et al 2008, Reichhart and Holweg 2007) and in QR in particular (e.g. Ko and Kincade 1997, Forza and Vinelli 1997, 2000, Birtwistle et al 2003).

Several studies have explicitly noted that postponement strategies should be investigated along with other management practices in order to obtain a complete understanding as well as to gain an appropriate level of utilization; for instance Graman and Magazine 2006, Yeung et al 2007, Yang et al 2004a. The current study addresses this need with empirical evidence as the study investigates the planning postponement strategy along with GQR capability, which includes several manufacturing and management practices, in the clothing industry.

The study shows that GQR capability has not reached the maximum possible level, which is the maximum value in the scale. It is logically acceptable fact, since Fernie and Azuma (2004) found out that survival and competitive strength of the Japanese fashion manufacturers do not depend QR capabilities per se, rather it lies elsewhere for instance collaboration between textile suppliers, designers, and SME apparel manufacturers. Accordingly the study implied that responsiveness in the International


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Existing knowledge indicates that postponement strategies may be influenced by several factors including manufacturing practices (Pagh and Cooper 1998), information and communication technology (van Hoek 1998), operating characteristics (van Hoek 1998), and technology and process characteristics (van Hoek 1998). These factors and the GQR techniques are interrelated. Therefore, as the authors assumed the study discloses that GQR capability discriminates the Planning Postponement capability though the discriminating power is weak. Thus, the current study provides the empirical evidence for the arguments built up by Pagh and Cooper (1998), and van Hoek (1998).

insights on network characteristics – vertical integration, relationship, competency of manufacturers – helps to plan motivation packages for network entities, to motivate such entities to invest in required resources and skills. Insights can also be used by prime manufacturers to assess strength and weakness of their GQR and Planning Postponement capabilities. Accordingly the investment priorities are able to identify based on the characteristics and interests of the diverse retailers. Knowing that none has reached maximum possible level of GQR capabilities in their supply networks helps prime manufacturers to foresee the potential pressure would be coming from retailers to further increase the global quick response while compressing the lead time. Manufacturers, who do not have capacity to further improvements of GQR and/or Planning Postponement capabilities, are able to select the type of retailers whom can be fixed with the existing resources and capabilities. For instance, small scale manufacturers can become sub-contractors of supply networks which serve value players.

The weak discriminating power explained by the GQR capability on the Planning Postponement capability reflects that Planning Postponement capability depends upon several factors; GQR is only one of the factors. It explores a fertilized avenue for future researchers to pay their attention on. This study provides valuable implications for players in the International Clothing Supply Network. Knowledge and insights on GQR and Planning Postponement capabilities are important for clothing retailers and prime manufacturers, as well as for other entities. Retailers are able to understand the strength and weakness in GQR and Planning Postponement capabilities in compare to their rivals. It helps either to design or to alter their competitive strategies to success in the fierce competition. Insights can be used in identifying the GQR and Planning Postponement capabilities that need to be improved in the supply networks. Further,

Insights of this research can be used by main players in the clothing supply chain – retailers, prime manufacturers, raw material suppliers, embellishment service providers – and by policy makers at both developed and developing nations in order to enhance the responsiveness capability through GQR and Planning Postponement. The study can be extended for similar industries – for instance Toys Industry; and for other developing countries which supply clothing for the global clothing market – for instance Bangladesh,


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Thailand, in order to validate the findings in similar context but with wider scope.

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[45.] Van Hoek, R. I. (1998) ‘Reconfiguring the supply chain to implement postponed manufacturing’ International Journal of Logistics Management, Vol. 9 (1), pp.95-110 [46.] Waller, M. A., Dabholkar, P. A. and Gentry, J. J. (2000) ‘Postponement, Product Customization, and MarketOriented Supply Chain Management’ Journal of Business Logistics, Vol.21 (2), pp.133-159. [47.] Yang, B., Yang, Y. and Wijngaard, J. (2007) ‘Postponement: an interorganizational perspective’ International


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IMPACT OF WORKING CAPITAL MANAGEMENT PRACTISES ON PROFITABILITY: SPECIAL REFERENCE TO FOOTWEAR AND TEXTILE INDUSTRY IN SRI LANKA Shanika Ishari. M.P. a and Thevaruban. J.Sb ab University of Jaffna, Sri Lanka a ABSTRACT A well designed and implemented working capital management has a significant contribution for firmsâ&#x20AC;&#x2122; profitability as well as to maintain liquidity powers. Independent variables are current ratio, quick ratio, and cash ratio. These are included in the panel data regression to assess for 4 firms for the period of 10 years. The main objective of this is to study on the impact of Working Capital Management practices on firmsâ&#x20AC;&#x2122; profitability in Sri Lankan Footwear and Textile industries. To identify the relationship, researcher used secondary data taken from annual reports published for their statutory requirement from 2003-2012 in CSE. For the analyzing purpose, researcher has used Statistical Package for Social Science (SPSS V16.0). According to the survey researcher has found that there is a positive relationship between working capital management and profitability. The coefficient of correlation and regression analysis provide a positive significant relationship between working capital practices and firm profitability. Keywords: Working Capital Management, Profitability, Current Ratio, Return on Capital Employed.

Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the inter relationship that exists between them. The current assets refer to those assets which can be easily converted into cash in ordinary course of business, without disrupting the operations of the firm.

INTRODUCTION Working capital in simple terms means the amount of funds that a company requires for financing its day-to-day operations. Finance manager should develop sound techniques of managing current assets. Working capital may be regarded as the lifeblood of the business. Without insufficient working capital, any business organization cannot run smoothly or successfully. Therefore the study of working capital is of major importance to the internal and external analysis because of its close relationship with the current day to day operations of a business.

LITERATURE REVIEW Working capital management is defined as the ability of the organization to fund into the short term assets and short term liabilities (Haris


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2005). According to Van Horne (1971), working capital management is the administration of current assets in the name of cash, marketable securities, receivables and inventories. Haitham N and Maryam A ( 2005) also studied the relationship between working capital management and firm profitability. The results suggested that managers can increase profitability of their firms by shortening the cash conversion cycle, the receivables collection period and the inventory conversion period.

In the 1980â&#x20AC;&#x2122;s and prior to that period, working capital management was compartmentalized (Sartoris and Hill, 1983). WCM was divided in cash, account payables and account receivables. In most firms, these compartments were managed by different managers on various different organizational layers (Sartoris and Hill, 1983). But Sartoris and Hill (1983) argued that there was a need for an integrated approach, where all the three compartments are combined. This led to the integration of the management of inventories, account payables and account receivables, called Working Capital Management (WCM), these parts will now be discussed individually.

Efficient working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet short term obligations on one hand and avoids excessive investment (Eljelly,2004). Maintaining inadequate working capital is not just importance in the short term. Sufficient liquidity must be maintained in order to ensure the survival of the business in the long term as well.

Nazir and Afza (2009), have studied the relationship between profitability and working capital management policies in 208 companies listed in Tehran Stock Exchange throughout the years 1998 - 2005. Results have shown that managers using conservative strategies have been able to increase the value of their stocks. Findings indicate that in selecting a portfolio, investors choose companies that apply short term credit policies and retain a low level of current liabilities.

Working capital management is not only to immunize corporations from financial upheaval but can be managed strategically to improve competitive position and profitability. The wider perspectives of working capital management contribute to the greater opportunities to create wealth. Increasing the speed of a cash cycle through receivable and payable management helps generating more profitability and liquidity (Johnson & Soenen, 2003). Further, effective inventory management is also critical to the management of liquidity and profitability in many companies.

Samiloglu and Demirgunes (2008) study was aims to investigate the effect of working capital management on firm profitability. In line with this aim, a sample of 5, 843 Turkish listed manufacturing companies in Istanbul Stock Exchange (ISE) for the period of 1998-2007 are analyzed under a multiple regression model. Empirical results show that, for the mentioned


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sample and period, accounts receivables period, inventory period and leverage significantly and negatively affect profitability of Turkish manufacturing firms, while firm growth (in sales) significantly and positively affect firms profitability.

and financial leverage as the indicator for capital structure. Variables in this research were tested using the correlation coefficient and multi variable regression. Results of the research indicate that companies must increase current assets and decrease current liabilities for maximizing profitability. Findings reflect that the increase in cash flow would result in an increase in profitability. Moreover a positive relationship exists between profitability and the financial leverage.

The pioneer work of Shin and Soenen (1998) and the more recent study of Deloof (2003) have found a strong significant relationship between the measures of working capital management and corporate profitability. Their findings suggest that managers can increase profitability by reducing the number of dayâ&#x20AC;&#x2122;s accounts receivable and inventories.

Rehman (2006) investigated the impact of working capital management on the profitability of 94 Pakistani firms listed on Islamabad Stock Exchange (ISE) for the period 1999-2004. He studied the impact of the different variables of working capital management, including average collection period, inventory turnover in days and average payment period and on the net operating profitability of firms. He concluded that there is a strong negative relationship between working capital ratios mentioned above and profitability of firms. Furthermore, managers can create a positive value for the shareholders by reducing the CCC up to an optimal level.

H. Jamal Zubairi (2010) studied Pakistan automobile sector and checked the impact of working capital management and capital structure on profitability of the firm. To measure the profitability they used earnings before interest and taxes. Panel data set was analyzed using regression. The results showed that profitability variations due to the above mentioned four variables give three quarters of total variation. They also reported positive relation between profitability and size of the firm which is in accordance with the results of Raheman & Nasr (2007) study.

METHOD It describes conceptual model, hypothesis, sampling, data collection methods as well as data analysis method.

Zubiri (2010), studied the impact of working capital management on company profitability in a research performed on the automobile production industry in Pakistan from 2000 to 2008. The researcher has used current ratio as an indicator for working capital management policies

Conceptual Framework Working capital management is an independent variable and profitability is a dependent variable. According to those variables, working capital management will directly impact on


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firms’ profitability. The working capital management and profitability are quantitative variables.

Working Capital Management x

Current ratio Quick ratio Cash ratio

x x

Profitability x x x x


Source: Developed by Researcher Following hypothesis is formulated for the study purpose.

Method of Data Collection For the purpose of study of impact of working capital management on profitability of Footwear and Textile Industry of Sri Lanka, the secondary data are used. For the study, data have been collected for the period 4 years from 2003-2012 from published annual reports through from the website of the CSE. For this study, researcher has used following secondary data sources such as,


This research examines the relationship between Working capital management and Profitability by using SPSS. Four linear multiple regression model use in this research by using four categories of independent variable. The dependent variable is used for this research by GPM, NPM, ROA, ROCE. Based on the dependent variables four multiple regression models have been formulated as follows; Model 1: GPM = β0 + β1CR+ β2QR+ β3CSR Model 2: NPM = β0 + β1CR+ β2QR+ β3CSR Model 3: ROA = β0 + β1CR+ β2QR+ β3CSR Model 4: ROCE = β0 + β1CR+ β2QR+ β3CSR

H1: There is a relationship between working capital management and profitability.

x x

Quantitative data analysis will be used to analyze the evidence. Correlation Test, Regression and Descriptive Statistics are used to analyze the data with SPSS package.

Where, GPM-gross profit margin NPM-net profit margin ROA-return on assets ROCE-return on capital employed CR- current ratio QR- quick ratio CSR- cash ratio β0= constant

Web sites Annual reports of textile and footwear firms Magazine and publications

ߚ=coefficient of variable DATA ANALYSIS This research provided two types of data analysis such as descriptive and quantitative. All data has been analyzed by using the SPSS (Statistical Package for Social Sciences 16.0).Descriptive statistics (measures of central tendency,

Method of Data Analysis This research will select the sample as 4 listed footwear and textile companies in CSE. So the sample has to select from two methods of financial year of 31st March or 31st December.


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measures of dispersion) and inferential statistical tests like correlations and regression analysis and ANOVA as appropriate, are used to present findings.

Regression analysis. Table 2: Correlation analysis between independent and dependent variable in Footwear and Textile industry

Descriptive Analysis


Descriptive analysis is the first step in this analysis section MS -Excel is used to calculate descriptive statistics. It will help to describe and provide detailed information about each relevant variable. Descriptive analysis reports the mean, median and standard deviation of the all dependant and independent variables.





















































n Co.

Pearso n Co









































Source: Calculations are based on Annual reports


Deviat ion





CE .112









CR Mean


ty CR

Table 1: Analysis of data presentation of the Footwear and Textile industry 2003-2012 Year


M Pea rson

Mean, Median, and Standard Deviation are calculated for each independent and dependent variables in Footwear and Textile industry. It shows highest mean values and standard deviation for current ratio and lowest mean value for the Return on Assets.


Source: Survey data

Correlation analyze is a tool to analyze the relationship between independent and dependent variable. It shows the strong positive correlation, strong negative correlation, positive correlation and negative correlation for each and every variable. In the above Table 2 shows correlation between independent and dependent variables

Quantitative Analysis In quantitative analysis it was used Correlation and Regression Analysis: First it was used correlation models to measure the degree of association between different variables under consideration. Second: it was used


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in Footwear and Textile industry. Researcher has taken Current ratio (CR) and Cash ratio (CSR) as independent variable and dependent variables are Gross profit margin (GPM), Net profit margin (NPM), Return on assets (ROA), Return on capital employed (ROCE).

which means to aware the level of working capital and how it affects to the profit. Current ratio is accepted if it takes 2:1. Return on capital employed indicates the efficiency and profitability of a company's capital investments. If return on capital employed value takes more than 18% it is the best performance for the profitability.

There is a weak positive relationship between CR and GPM, CR and ROA, CR and NPM, CR and ROCE, CR and profitability because it takes the value of less than 0.5. There is a strong positive relationship between CSR to GPM and profitability, and weak positive relationship between CSR to NPM, ROA, and ROCE. In the case of independent variable of WCM there is a weak positive relationship between WCM to GPM, NPM, ROA, ROCE and profitability. The correlation between those two variables is positive in Footwear and Textile industry.

Table 4. Regression analysis Model Summary R Adjusted Std. Error of Model R Square R Square the Estimate .622a .465a

.388 .217

.354 .174

.22280 .52749

3 4

.492a .234a

.242 .055

.201 .003

.09564 .18977

Source: Survey data

Hypothesis Testing

Table 5.Coefficient

Table 3: Current ratio and ROCE of the Footwear and textile industry

Current Ratio















1 2

Unstandard Standardize ized d Coefficient Coefficient s s Std. Error

Model B 1 (Con stant .142 .055 ) CR .023 .039 CSR .631 .173 Source: Survey data

Source: Calculations based on Annual reports of the Public Listed Companies 2003-2012



2.589 .014 .094 .604 .550 .566 3.651 .001

The first model has adjusted R-squared of 0.388 that means approximately 38.8 % of the variance in the dependent variable GPM was accounted for by the model and 61.2 % of the variance remained unexplained. In the above table shows 35.4% of

Current ratio is one of the best measurement tool for understand the working capital management level and its impact on firmâ&#x20AC;&#x2122;s profitability. It is important for calculating current ratio



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adjusted R square value. In here, 38.8% of independent variable impact on dependent variable. There is a positive relationship between GPM and CSR, CR.

the company focus more on the time period between raw material purchases used for production and collection of receivables rising from sales of finished products.

Model 2 shows 21.7% R square value and 17.4% of adjusted R square value. In here, 21.7% of independent variable impact on dependent variable. It means 21.7% of CR and CSR impact on Net profit margin. There is a positive relationship between two variables.

Investors look for investment opportunities with the highest yields; thus they would need information to predict company policies. It is suggested for the Stock Exchange to request information from companies related to the level of risk acceptance in current asset and current liability management, the average period of collection of receivables, the average period of debt settlement and average period of inventory retention within two categories namely the company and industry and to disclose the same in complimentary notes.

Above table shows the R square and adjusted R square value for model 3. It shows 24.2% R square value and 20.1% of adjusted R square value. In here, 24.2% of independent variable impact on dependent variable. It means 24.2% of CR and CSR impact on Return on assets.

Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without: adequate supply of raw materials for processing; cash to pay for wages, power and other costs; creating a stock of finished goods to feed the market demand regularly; and the ability to grant credit to its customers. All these require working capital.

According to the model 4 R square values is 5.5% R square value and 0.3% of adjusted R square value. It indicates the positive relationship between working capital management and profitability. To check the effects of current ratio and cash ratio on profitability current ratio and cash ratio was included in the model. Cash ratio has a positive relation with profitability and significantly affecting it. It means if the cash ratio will increase the profitability will also increase. Under hypothesis testing, correlation and regression analysis shows, there is a positive relationship between working capital management and profitability Therefore, accepted.




Working capital management is an important component of management of corporate finance; since it directly influences firmâ&#x20AC;&#x2122;s profitability as well as liquidity in everyday activities. Management of short-term assets and liabilities implies the settlement of current assets and current liabilities. Actually, too high or too short current assets will affect the long-run return on assets (investments). Therefore, working capital should neither too high nor too low. Excessive working capital indicates an accumulation of idle current assets (resources) which donâ&#x20AC;&#x2122;t contribute in generating income


DISCUSSION Results from testing the hypothesis reflect that the working capital impacts company profitability. Thus it is suggested that financial managers of


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(profit) for the firm during the operating period. On the other side, inadequate working capital harms the credit worthiness and the day to day activities of firms and this may lead to insolvency (bankruptcy).

management, by using these variables the efficiency of working capital management can easily be check. The results shows that longer these components lesser will be the profit as these have a negative relationship with profitability. In this research current ratio and cash ratio is significant and are affecting the operating profitability.

In financial management, it is possible to mention that studies regarding working capital management are not as popular as the ones related with capital budgeting and capital structure. From this perspective, this study aims to analyze determinants of firm profitability by means of variables related with working capital management practices using a sample of Footwear and Textile firms for the period of 2003-2012. However, it is also concluded that cash conversion cycle, size and fixed financial assets have no statistically significant effects on firm profitability of Footwear and Textile firms for the period of 20032012.

Current Ratio (CR) has proved statistically significant and has impact on profitability, whereas cash ratio is statistically significant in this research and it has a positive relationship with profitability which shows that higher will be the leverage low will be the operating profitability of the firm. REFERENCES [1.] Afza T., & Nazir, M. (2009) ‘Impact of aggressive working capital management policy on firms' profitability’, The IUP Journal of Applied Finance, 15(8), 20-30.

CONCLUSION This study investigated the impacts of working capital management practises on firms’ profitability for 4 Public Listed Companies under the Footwear and Textile industry listed in Colombo Stock Exchange for recent period of 2003-2012. The impact of working capital practices and profitability has been examined through descriptive statistics such as mean, standard deviation and coefficient of variance, and inferential statistics such as correlations and regression models. The analysis found a positive relationship between the working capital management and profitability measures of Public Listed Companies and degree of working capital practices.

[2.] Deloof M. (2003) ‘Does working capital management affect profitability of Belgian firms’, Journal of Business Finance and Accounting, 30: 573-588.

In this research current ratio, and cash ratio are taken as a comprehensive components of working capital

[6.] Raheman A., & Nasr, M. (2007 ) Working Capital Management And Profitablity - Case of Pakistani Firms.

[3.] Eljelly A. (2004) Liquidityprofitability trade-off: an empirical investigation in an emerging market. International Journal of Commerce and Management, 14: 48-61. [4.] Harris A. (2005) Working Capital Management: Difficult, but Rewarding. Financial Executive 21(4), pp. 52-53. [5.] Jamal Zubairi H . (2010) "Impact of Working Capital Management and Capital Structure on Profitability of Automobile Firms in Pakistan"


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International Review of Business Research Papers, 3(1), 279 - 300. [7.] Samiloglu F. and K. Demirgunes, (2008) ‘The effect of working capital management on firm Profitability: Evidence from Turkey’, The Int. J. Applied Econ. Finance, 2: 44-50. [8.] Sartoris W. L., Hill, N. C., & Kallberg, J. G. (1983) A Generalized Cash Flow Approach to Short-Term Financial Decisions/Discussion. The Journal of Finance, 38(2), 349-360. [9.] Shin H.H and Soenen, L. (1998) ‘Efficiency of Working Capital Management and Corporate Profitability’, Financial Practice and Education, Vol. 8 No. 2, pp 37-45


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ABSTRACT Flying Geese Pattern (FGP) explain how East Asian countries achieved development through export diversification in mounting the technological advancement by imitating the path of head goose, Japan. Firstly, NIEs of East Asia join to the flock of geese. Currently China, India and Vietnam have joined to the FGP by diversifying their export structure from light manufacturing to high tech production. Based on above facts, this study has further scrutinized the idea of Wijewardena (2013) with special reference to the export sector in Sri Lanka to identify weather Sri Lanka is flying according to FGP in diversification of their export structure. As with findings, Sri Lankan export portfolio has limited to small number of items. Apparel products play the main role in export income by stagnating export structure for more than two years being a latest comer of Flying Geese Pattern. Hence, this is the time of Sri Lanka to flying ahead with flying geese flock through horizontal or vertical export diversification.

Keywords: Flying geese pattern, Export Diversification, Export Structure

INTRODUCTION Most economists consider that international trade can contribute extensively on development process by looking first and second group of newly industrialized countries (NICs) in Asia namely South Korea, Taiwan, Hong Kong, Singapore and Indonesia, Malaysia, Thailand (Rebelo,1992). At the time of independence in 1948, the Sri Lankan economy was an open economy specialized in exports of three crops: Tea, Rubber and Coconut. However this open economy was lasted from 1948 to 1960. After that, gradually economy was tending to apply the import substitution strategies which followed less export oriented

NIEs, the policy was shifted to the strong liberalization effort in 1977 which promote exports and foreign investments. However, the export composition of Sri Lanka has diversified very slowly compared to newly emerging economies in the world like China, India, and Vietnam etc. According to the explanation of flying geese model, Sri Lanka should be diversify their export structure from light manufacturing to high tech manufacturing to drive the economy towards development. Hence, this paper has scrutinized the current export structure in Sri Lanka to identify where Sri Lanka is in flying geese chain and the future of exports in Sri Lanka.

strategies from 1960 to 1977. But, after realizing the policy adapted was hindered the economic progress and development of the country compared

LITEATURE REVIEW Flying Geese Pattern (FGP) - The assessment of Asia-Pacific as an


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integrated economic region began with the flying geese idea, put forward by A. Kaname in the 1930s and then by K. Akamatsu in 1956 as cited in Ohino(2007). This model gives prominence to Japan as the driving economic force. Japan developed first, gaining a strong technological base. Then as wage costs rose home, Japanese production facilities were relocated to the four tigers and other lower-cost economies (Hobday, 1995). FGP developed by observing of the pattern of a flock of flying geese. The flying geese have a leader and the rest of the geese follow the leader in an arrowhead-shaped flying formation when they are up in the sky. FGP has derived from analysis of the historical evolution of the textile industry in Japan, focusing on the interrelations between the development of European capitalism and development of Asia. FGF traced out in seven stylized phases, laid down in sequence, the story of the interrelations between countries that give rise to â&#x20AC;&#x153;an awakening of less developed areas of the world to modern economic developmentâ&#x20AC;?. FGP has seen the industrialization process as a succession of sequences in which imports set off domestic production, which subsequently finds an outlet in exports. This sequence begins with consumption goods to extend later on to capital goods (Ohino, 2007) FGP further argued that regional integration and network

building should take place according to the same flying pattern. Consequently, after the western countries development Japan plays the role of the lead-goose and the rest of the countries in the region should follow Japan to achieve economic development by mounting the technological advancements of the country. Finally, this would create the regional developmental network where economic development will take place one country after other. After the Japan (head goose), first newly industrialized countries(South Korea, Taiwan, Hong Kong, Singapore) follows the Japan to pursue their development. Later Thailand, Malaysia, Indonesia and Philippine joined to the pattern as next flock of goose. Currently, China, Vietnam, India has join to this group as the newest flock of goose (Wijewardena, 2013) The Flying Geese Model could be used to explain the industrial transformation among Asian countries (Ohno, 2007).Following figure 01 explains the East Asiaâ&#x20AC;&#x2122;s industrialization from light industries to high tech industries. According to the figure it can be identified that how these newly developed and emerging countries in Asia have achieved their development through diversified industrializations mainly focusing the exports market. Table 01 illustrates changes in the structure of manufactured exports from Japan and the four tigers during


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Figure 01: Structural Transformation according to Flying Geese Model Structural Transformation in East Asia 3



Latest comers





Japan Garment


Popular TV


Digital Camera Time

Source: Ohno (2007)

Table 01: Structure of Manufactured exports from Japan and Four Tigers Export Category




1979 1988

1979 1988

Hong Kong




1979 1988



1.Natural-resource – intensive products











2.Unskilled –labourintensive products











3.Technologyintensiuve prodcucts











4.Human –capitalintensive products











Source: UNSO, Comtrade Data Base in Hobday(1995)

the 1980s.The table exemplified the shift away from export categories 1

and 2 (natural resource and labour intensive exports) to export categories

3 and 4 (human capital and technology-intensive items) of these countries. For example, South Korea's exports of 3 and 4 increased from 43% in 1979 to 57% in 1988. Similar

increases occurred in each of the four tigers. Electronics is now the largest export item for South Korea, Taiwan and Singapore. In Hong Kong, it is the second largest after clothing and


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textiles. Each country has progressed gradually from labour-intensive light manufacturing to capital intensive high –tech production (Hobday, 1995). Though, the idea of FGP speculated in 1930s before any of the countries in East Asia became economies of importance in the world. After that, it helped to explain the subsequent economic development in these countries. But the network that was developed among these countries was not among themselves but between East Asia and the West. Even Japan got promote from the western technological developments and western markets. It was the experience of the other East Asian countries. However, the economic transformation which these countries underwent took the style of FGP (Wijewardena, 2013). For instance, the economic transformation of the Lead Goose – Japan – was that it started with textiles and then went into more sophisticated products from chemicals to iron and steel to automobiles to electronics and finally to highly sophisticated advanced products. Hence, in the region, Japan is the leader of technological development that can give leadership to all other countries which form themselves in the gooseflying formation. Therefore, developing countries should follow the flying geese pattern but always they should make “flying fish” attempt which explain the important of shifting from light to high tech products with new innovations. If a country fails to make this series of flying, it will trap in a low income (Wijewardena, 2013). Sri Lanka has significant transform of export structure through from 1980 to 2000 under the sustained market oriented reforms (Athukorala, 2000). it has started export led industrialization after the 1977 which the market oriented policy initiated. After that export structure of the country has

been change from conventionally primary products to manufactured goods. Hence, the rapid growth of manufactured exports from Sri Lanka was the outcome of significant trade policy reforms. Sri Lanka immensely benefitted from the garment industry in the past but it cannot continue in the future because of huge competition coming from other developed country. And also, the threat to industry comes with unexpected sources which result of technology advancement like “doing away with sewing machine and using the 3D printer to make at home (Wijewardena, 2013). Export Diversification contributes to the acceleration of economic growth in developing countries. By increasing the number of export sectors, horizontal export diversification could be reduced the dependence on a limited number of commodities that are subject to extreme price and volume fluctuations. In other words it would enhance the economic stability. Vertical diversification promotes high value added exporting sectors which has dynamic spillover effect (Herzer and Felicitas,2005).According to the Prebish Singer thesis, vertical export diversification of manufacturing provide a support to the economy if there is a declining terms of trade in primary products(Athukorala ,2000) With above literature analysis, this study focused to identify the future of exports in Sri Lanka by comparing the structural transformation of flying geese model. METHODOLOGY This study has elaborated the idea developed by Wijewardena (2013)1, which was emphasized Sri Lanka’s 1 Article printed from DailyFT – Be Empowered:


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future according to the flying Geese Chain. Further, this is an empirical study which used secondary data solely for the analysis. The methodology being both qualitative and quantitative includes descriptive analysis and simple calculations to convert nominal value to real values. The study completely based on secondary time series data which collected from International and domestic publications. The data base of United Nations Conference on Trade and Development (UNCTAD) and World Bank was the main international publications which used to analyze the research question. In addition to that various journal articles were used to gather the data. Publications of Central Bank of Sri Lanka was the main source of data collected from domestically. Especially annual reports were the major source of data gathering.

independence from British rule in 1948. At the time of independence, the country had open economy which exported primary agricultural products: Tea, Rubber, and Coconut and they imported industrial products. That period was a neutral regime without any government incentive or barrier on foreign trade. Hence after 1948, Sri Lanka had a neutral trade regime. Sri Lanka was able to achieve higher growth rate and greater equity in this period compared to other developing countries by recording the third highest per capita income in Asia after Japan and Malaysia (Rajapathirana,1988). After that, gradually economy was tending to apply the import substitution strategies which followed less export oriented strategies from 1960 to 1977. But, after realizing the policy adapted was hindered the economic progress and development of the country compared NIEs, the policy was shifted to the strong liberalization effort in 1977 which promote exports and foreign investments. The economy of Sri Lanka illustrated as an example par excellence of an 'export economyâ&#x20AC;? and it was highly depended on a limited range of primary commodities which evolved during the colonial era (Levin, 1960).After implementing the trade liberalization in 1977, the export structure started to change dramatically. Manufactured exports grew at an annual compound rate of 20 percent during the 1978-97(Athukorala ,2007). According to the figure 02 annual export growth is very fluctuates. It does not show any pattern of increasing or decreasing. The following table 02 has summarized the composition of export structure from 1972 to 2011.

DATA ANALYSIS Sri Lankaâ&#x20AC;&#x2122;s great international trade history goes to the year 1153 during the period of King Parakumba, who ruled the country for 33 years. It is believed that the period is a golden era of Sri Lankan economy. The economy exist in that period called the public capitalism ,He has been trading with China, Cambodia, Burma, Parsia, Bengol, Middle East ,Egypt ,Greece etc. Sri Lanka was very famous for the entreport trading. Among the economic policies adopted by him included the establishing the export processing zone, establishing training school of labors, introducing the volunteer retirement plan (Wijewardena, 2012). However, after five hundred year colonization by Portuguese, Dutch and British, Sri Lanka got the


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Figure 02: Annual Export Growth Rate

Source: Author Constructed based on UNCTAD data At the beginning.99 percent of total exports consist with primary products mainly Tea, Rubber and Coconut. Among this main 60 percent consists with tea. However, with the time pass the export structure has dramatically changed for manufacturing products by representing 74.8 percent in 1998. However Sri Lankan exports grew with lot of fluctuations, with relatively elastic demand primary products exports. After liberalizing the economy in 1977 the textile and garment exports started to increase by becoming main foreign export earning item in Sri Lanka. From 1995 it was the major export item in Sri Lanka. Finally, textile and garment sector has become


































Agricultural Exports


7.7 7.1 7.9 5.5 3.9 3.1 2.7




























294 3.4

















Table 02: Export Structure of Sri Lanka

















Industrial Exports

















Textile and Garments

















Petroleum Products

















Leather Travel Goods and Footwear

















Machinery and equipments














Diamonds and Jewelery

















Mineral Exports

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1.5 1.4 2 2























































































Source: Author constructed based on Central Bank Annual Reports

























































































































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the major export item for 28 years. Secondly, Machinery and equipments, Diamonds and Jewelry is the other type of main export item in Sri Lanka. However, it is very lower amount out of total exports. It is important to say all these items are light manufacturing item which does require advance technology on production. Therefore, in briefly, by early 1990s, tea is the major export earner. However, from late 1980s, there has been a noticeable increase in exports of other labour intensive products such as: electrical and electronic products (based on simple assembly process), leather goods, ceramics, footwear, toys, plastic and plastic products, diamond and

jewelry. As more than a half of the total exports come from apparels, rubber & tea Sectors. Western countries continue to be the major destination of Sri Lankaâ&#x20AC;&#x2122;s exports. EU and U.S. together account for 60 percent of countryâ&#x20AC;&#x2122;s exports in 2010. For example, 77.7% of articles of apparel, accessories, knit or crochet go to top 3 exports markets; i.e. U.S (35.5%), U.K. (29.0%) and Italy (13.3%). In consistent with following figure 03, Sri Lankan export growth compared to world export growth , was growing very low rate during the period of before liberalization (19501976

Figure 03: Annual Export Growth Rate

Source: Author Constructed based on UNCTAD But, it is interesting to notice that after liberalizing the economy (1977-2000), export growth of Sri Lanka is more than world average. Sometimes ruling government which was right oriented also has effected to growing of export when it is considering exports in different time periods. However, during the period of year 2001 to 2010 the growth rate is low in half .it may be


the result of losing the competitiveness in garment sector because of raising other developing countries like Bangladesh, Vietnam, and Cambodia etc. As explained in figure 04 Export structure in Sri Lanka is higher sectoral concentration especially on primary products, compared to world or developing countries average.

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Figure 04: Export Sectoral Concentration 0.30 0.25 0.20 0.15 0.10 0.05 0.00 Sri Lanka



Developing economies 2000 2005

Developed economies 2010


Source: Based on UNCTAD Database Though, the low income and low middle-income countries concentrated export composition would be rather common, Sri Lanka is posited as a country of relatively less- concentrated export composition. So, Sri Lanka should be overcome from that problem by concentrating more on export composition to overcome from the structural problem of export. Moreover, the apparel stands for large share of exports though its relative comparative advantage is very low. And also, large part was exported two three main exporters which can highly vulnerable to external shocks (table 03). As explained in table 04, the value addition of apparel exports is very low compared to the imports related with textile industry. More than half of inputs related with textile are importing. It has effected to decline the value addition of main export item in


Sri Lanka significantly. This was a serious issue in Sri Lankan main export item. According to the international comparison, Sri Lanka reveals low export intensity relative to other developing economies (Figure 05). The gap between export intensity and import intensity is relatively wider than other countries. So, it is said that Sri Lanka is exporting low amount of goods and services while they importing lot of goods and services compared to other countries. Sri Lanka does not have competitiveness for technical products rather than primary Products. So, this issue is a big problem in the case of export promotion of Sri Lanka. Country should have a clear vision to start the export concentration by increasing Comparative advantage of products which they have a big potential.


22.2 21.6 18.2 6.8 6.4 2.5 1.9 1.1 1.1 1.0

1,538.1 1,293.9 483.0 458.9 179.0 136.6 81.1 80.8 69.0

Share of total exports (%)


Exports in value (mil. $)

Source: Author Constructed based on UNCTAD data bas

Articles of apparel, accessories, knit or crochet Articles of apparel, accessories, not knit or crochet Coffee, tea, mate and spices Rubber and articles thereof Pearls, precious stones, metals, coins, etc Fish, crustaceans, molluscs, aquatic invertebrates nes Electrical, electronic equipment Edible fruit, nuts, peel of citrus fruit, melons Vegetable textile fibres nes, paper yarn, woven fabric Residues, wastes of food industry, animal fodder


Table 03: Top 10 Exporting Sectors of Sri Lanka (2009)











Share of top 3 exported market (%)











Net exports (mil. $)











RCA index

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Table 4: Trade of Textile Industry (Billions Rs.)
























































Source: Author Constructed based on Central Bank Data

Figure 5: Trade Intensity (2011

Source: UNCTAD data Base

Hence, the huge problem it has is how they change this export structure from low technical to high technical production. Now the time has come to find own strategy by learning from Asian miracle countries which explain in flying geese model.


DISCUSSION AND CONCLUSION With the analysis of export structure in Sri Lanka, it can be concluded that the export diversification has been stagnant for more than two decades for two three exports items like, Garments, traditional exports etc. Further, the value addition of industrial exports is

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diminishing specially on apparel exports. The gap between export intensity and import intensity is very higher than average of developing nations while our export is highly sartorial oriented. Hence, this is the time to Sri Lanka to shift from traditional comparative advantage to dynamic comparative advantage in exports by learning from East Asian miracle which explains in flying geese paradigm. It should be focused on export connectedness goods which have the spillover effect. Spillover is more likely to technological “neighboring” products or more closely connected products. Sri Lankan policy makers should promote export development products by thinking about the spillover effect which added more value on exports. Moreover, it is necessary to shift from light industries to high tech industries progressively so that gathers the required technologies by increasing the research and development activities. This is the way the East Asian countries did by flying according to the flying geese pattern. East Asian countries first exported the labor intensive simple products. Then, they gradually collected both human and physical capital required to produce capital intensive products. Sri Lankan industrial export has stagnant on garments more than twenty five years. Now, Sri Lanka should have take action to move on other industrial products, if we want be a part of flying geese pattern like, Vietnam China and India which recently join to the pattern. Otherwise we will be a stagnant in export diversification which looses competitive advantage on garments products day by day due to latest comers like other developing countries. Hence, it is important to go for horizontal or vertical diversification of export structure to be in the flying geese flock.


REFERENCES [1.] Athukorala, P. (2007) Manufactured exports and terms of trade of developing countries: Evidence from Sri Lanka. The Journal of Development Studies.36(5):89-104. [2.] Athukorala, P and Jayasuriya, S (2000), Trade Policy Reforms and Industrial Adjustment in Sri Lanka. The world Economy.Blackwell Publisher,387-403 [3.] Central Bank Annual Reports of Sri Lanka -1972 to 2011. [4.] Dierk, H &Felicitas, N. L.D. (2005) What does export diversification do for growth? An econometric Analysis. The Journal of Applied Economics, Submitted Manuscript APE,C22 [5.] Hobday, M. (1995), Innovation in East Asia: Diversity and Development, Technovation. Science Policy Research Unit. University of Sussex, 15(2) (1995) 55-63. [6.] Levin, J.V. (1960).The Export Economies: Their Patterns of Development in Historical Perspective. Cambridge. Harvard University Press [7.] Ohno, K. (2007) Growth and Competitiveness from the East Asian Perspective. National Graduate Institute for Policy Studies, Tokyo. [8.] Rajapatirana, S. (1988).Foreign Trade and Economic Development: Sri Lanka’s Experience. World Development,16 (10). 1143-1157 [9.] Rebelo, S. (1992) Growth in open economies. CarnegieRochester Conference Series on Public Policy. 36: 5–46.

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[10.] Stieglitz, J. E. & Yusuf, Shahid. (2001) Rethinking the East Asian Miracle. The International Bank for Reconstructions and Development. Oxfords University Press, Washington D.C. 33-35 [11.] Takatoshi, I.& Krueger, A.O. (1995). Growth Theories in Light of the East Asian Experience. National Bureau of Economic Research. The University of Chicago Press, Chicago. [12.] The World Bank (2008) The Growth Report: Strategies for Sustained Growth and Inclusive Development. Commission of Growth and Development,7-38. Washington, DC 20433 [13.] The World Bank, (1993) The East Asian Miracle: Economic Growth and Public Policy. Policy Research Report. Oxford University Press, New York, [14.] UNCTAD –United Nations Conference on Trade and Development- [15.] Wijewardena, W. A. (2013) Sri Lanka’s future: A part of ‘flying geese’ chain or just a ‘sitting duck’? [16.] Wijewardena, W.A. (2012) Economic policies of Parakramabahu the Great: What Lessons are there for Today?


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Wasantha Perera and Nada Kulendran University of Sri Jayewardenepura, Sri Lanka, bVictoria University, Australia a ,b ABSTRACT

To determine whether Australian initial public offerings (IPOs) underprice in the short run, and to identify their determinants, this study investigated the short-run market performance of 254 IPOs listed during 2006 to 2011 by industry and year (listing and issue). To measure their short-run performance, the first listing day returns were divided into the primary market, the secondary market, and the total market. The investigation was then extended to a post-day listing analysis that included returns of up to nine trading days. To identify the determinants of short-run market performance, this study estimated binary regression models with offer, firm and market characteristics. Marginal probability analysis was also carried out to estimate the associated probability of each determinant that indicated a directional change in market performance. The study found that, overall, the Australian IPOs underpriced by 25.47% and 23.11% based on the market-adjusted average abnormal return (AAR) in the primary and total market respectively. However, the secondary market analysis indicated that the Australian IPOs overpriced by 1.55% based on the AAR. The examination of post-listing returns showed that the Australian IPOs underpriced based on the average cumulative abnormal return (CAR), and this signals that investorsâ&#x20AC;&#x2122; wealth can be diluted in the long run. The overall results varied by industry and year. The IPO period, time to listing, LISDs, total net proceeds ratio and market volatility were the main determinants for the observed short-run performance. Marginal probability analysis also indicated that the market volatility and total net proceeds ratio had a significant effect on the directional changes of the short-run performance. The findings support Rockâ&#x20AC;&#x2122;s hypothesis and the uncertainty hypothesis. Keywords: Australian IPOs, underpricing, binary models, marginal probability analysis


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are that (1) the investors do not know very much about the newly listed companies; (2) the motive of speculative investors on the very first day is to earn higher profit; (3) the market needs to have a reasonable time period to settle down in the short run; (4) the closing price performance (first-day return) does not provide a clear answer about who is the beneficiary of the short-run underpricing; and (5) there is price variation between the beginning and closing of the first trading day.

INTRODUCTION The evaluation of the short-run market performance of IPOs1 has been paid much attention in prior studies due to the wealth of initial investors in different countries. Underpricing2 of IPOs is widely accepted as a short-run market phenomenon which is also considered as a universal phenomenon. This phenomenon was first documented in the finance literature by Stoll and Curley (1970), Logue (1973) and Ibbotson (1975). To test the underpricing phenomenon, most of the researchers used the first listing day average return which is defined as the closing price performance which covers the period from issuing date to ending of the first trading day3 (Chan, Wang & Wei 2004; Chang et al. 2008; Dimovski & Brooks 2005; Finn & Higham 1988; Ibbotson, Sindelar & Ritter 1994; Lee, Taylor & Walter 1996; Loughran & Schultz 2006; Moshirian, Ng & Wu 2010; Omran 2005; Ritter 1987).

To overcome reasons (1), (2) and (3) associated with the first-day return, some researchers have suggested extending the evaluation period from the first-day return to the post-listing day return. Ritter (1991) also documented that short-run market performance can be evaluated using an initial period that includes both firstday and post-day returns. Thus, both the first-day return and the post-day listing return have been used to measure short-run market performance (Aktas, Karan & Aydogan 2003; Finn & Higham 1988; Kenourgios, Papathanasiou & Melas 2007; Sohail, Raheman & Durrani 2010). Other researchers have argued that short-run market performance should be evaluated using the opening price performance, which splits the first-day return into two parts, the first-day primary market return (PRIM) and the secondary market return (SECON), and thus overcomes reasons (4) and (5). The PRIM covers the period from the issuing date to the beginning of the listing date, and the SECON covers from the beginning to the end of the

However, analysing the short-run market performance based on the firstday return may not provide sufficient information to investors. The reasons 1

An IPO, refer as initial public offering which is the first sale of a corporation's equity shares to investors on a public stock exchange and it is known as unseasoned equity.


Dimovski and Brooks (2004) stated that the issue price of a newly listed companyâ&#x20AC;&#x2122;s shares being below the price at the shares subsequently trade is known as underpricing. The underpricing is considered as transferring wealth from issuing firm to initial IPO investors. 3

The positive (negative) average return of the first listing day is known as the underpricing (overpricing).


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listing date. Accordingly, Aggarwal and Conroy (2000), Barry and Jennings (1993), Bradley et al. (2009), Chang et al. (2008), Edwards and Hanley (2010) and Schultz and Zaman (1994) used the opening price performance, which includes primary (offer-to-open) and secondary (opento-close) market returns (MRs). However, a review of past Australian IPO studies has indicated that shortrun market performance has not yet been evaluated by the first-day PRIM, the SECON, the total MR and the post-day listing return. This type of IPO short-run market performance analysis could provide information that is more valuable for investors.

change in economic and financial factors which cause higher uncertainity in the IPO market.Therefore, some researchers have used binary regression models to estimates the associated probability of occurrence compared to the multiple regression model, providing more information to IPO investors for their investment decisions. The marginal probability shows the directional changes in the short-run market performance, which is used to find out which is the most important determinants that causes the changes in short-run performance. A review was undertaken on previous Australian IPO studies shows that the determinants of short-run market performance have not been analysed with the aid of a combination of binary regression and marginal probabilty analysis.

Having indentified the importance of analysing the short-run market performance (short-run underpricing) using the first day PRIM, SECON, total MR and post-day returns, it is necessary to find out the resons for short-run market performance. Ritter (1998) and Ritter and Welch (2002) studies provided a list of asymmetric information theories such as the winnerâ&#x20AC;&#x2122;s curse, signalling, uncertainty, agency cost etc. to explain the resons (determinants) for the short-run performance. These theories have been tested by many IPO researchers developing multiple regression models with different determinants. However, the multiple regression model identifies only the determinants but it does do not provide the associated marginal probabilities (risks) of determinants which shows the changes in short-run market performance. These marginal probabilities are more important for IPO investors due to the

Therefore, this research paper seeks to examine (1) whether Australian IPOs underprice in the short-run using the first day PRIM, SECON, total MR and the post-day return, and (2) what are the reasons for short-run underpricing with the aid of binary (logit and probit) regression models and a marginal probability analysis. The post-day returns are calculated up to 9 trading days after the first trading day. The market adjusted average abnormal return (AAR) is used to measure the short-run performance in the first day primary market, secondary market and total market and the average cumulative abnormal return (CAR) used in the post-listing period. The remainder of this article is organized as follows. Section 2


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reviews the evidence on short-run market performance. Section 3 covers the data and methodology. Section 4 discusses the results and analyses and section 5 concludes. Evidence on performance


underpriced by 37.35% and 26.72% respectively. US IPO market has been researched extensively by many researchers over the last two decades. Johnston and Madura (2002) have studied the internet and non-internet IPOs during the period of 1996 to 2000 and the study shows that the initial returns are more favourable for internet than noninternet firm IPOs. Further, the study shows that the level of underpricing of internet firms does not become statistically significant due to the demise of the internet sector. They investigated a sample of 366 IPOs and the average initial return was 78.5 per cent. The US IPO market was also analysed by Loughran and Schultz (2006) and Ritter and Welch(2002) who reported that the average initial day returns were 18.1 per cent and 18.8 per cent respectively. Further, Ibbotson(1975), Ritter (1987), and Ibbotson, Sindelar and Ritter (1994) reported that initial day returns are between 11.4 per cent and 47.8 per cent.


The Australian IPO market has been widely examined by many researchers over the past years. Finn and Higham (1988) reported that Australian industrial and commercial IPOs are underpriced by 29.2%. Lee, Taylor and Walter (1996), How, Izan and Monroe (1995) and Dimovski, Philavanh and Brooks (2011) also reported that the industrial sector IPOs are underpriced in the short-run market by 11.86%, 19.74% and 29.6% respectively. However, Dimovski and Brooks (2008) and How (2000) documented that mining IPOs are underpriced by 13.3% and 107.18% and respectively. Nguyen, Dimovski and Brooks (2010) found that resource IPOs are underpriced by 16.13%. Dimovski and Brooks (2005) and Dimovski and Brooks (2004) also found that Australian mining and energy IPOs and industrial and resource IPOs are underpriced by 17.93% and 25.6% on the first day return respectively. Da Silva Rosa, Velayuthen and Walter (2003) reported that venture capital-backed and non-venture capital-backed IPOs are underpriced by 25.47% whereas Gong and Shekhar (2001) found privatized IPOs are underpriced by 11.96%. Bird and Yeung (2010) and Bayley, Lee and Walter (2006) also found that Australian IPOs are

Moshirian, Ng and Wu (2010) examined the price performance of emerging and developed Asian markets and found that China, Korea, Malaysia, Hong Kong, Japan and Singapore are underpriced on the first day returns by 202.93%, 70.3%, 61.81%, 21.43%, 34.04% and 33.10% respectively. The study of Sohail, Raheman and Durrani (2010) indicated that Pakistan IPOs are underpriced under the general state of economy by 42.17%, 40.99%, 37.35%, 38.17% and 39.38% on the close of 1st, 5th, 10th, 15th & 20th days


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respectively. Chan, Wang and Wei (2004) also analysed the Chinese IPO market and found that the average level of underpricing in A-shares and B-shares are 178% and 11.6% respectively. Further, Banerjee, Hansen and Hrnjic (2009) found that on average investors of Singaporean IPOs out-perform (underpricing) in the short-run.

listed IPOs during this period are sub divided into seven sectors using the industry criterion. The financial sector IPOs and the property & equity trust or close-End funds IPOs are excluded from the sample following the other researchers (Dimovski & Brooks, 2004 and Ahmad-Zaluki, Campbell & Goodacre, 2007)5. Mergers, takeovers and restructuring schemes are also eliminated from the sample because it undeservedly impacts on the IPO companiesâ&#x20AC;&#x2122; performance. Due to the large number of listed IPOs in the resource sector, the selected sample from this industry represents only 33% of the total listed IPOs while other sectors represent 100%. Finally, we selected 254 IPO for this study as a sample based on the availability of data which represents 47% of the total listed IPOs in January 2006 to January 2011.

The evidence from the international literature on short-run market performance shows that the level of underpricing and its determinants could vary according to the sample period, state of the economy, nature of the market, industry etc. Therefore, there is a need to measure the level of underpricing and find out its determinants by market in the current time period due to the different state of economic condition. DATA AND METHODOLOGY

The table 1 shows the number of sample companies, offer proceeds (issue price per share * number of issued shares) and money left on the table (the first day returns in terms of AUS $) which are classified by industry, listed year and issued year. In comparison of number of IPOs with the offer proceeds by industries, the resource sector has 56% of the sample IPO companies but it gives only 12% of the total sample offer proceeds. Industrial sector represents 18% of the sample IPO companies and it contributes 65% of the total sample

Data and Sample Selection In order to analyse the short-run market performance of Australian IPOs, all IPO data was collected from the Connect 4 database ( which is more specialised for IPOs. The study examines listed fixed price offering equity4 IPOs in the Australian securities exchange (ASX) from January 2006 to January 2011. A sample is selected based on the stratified random sampling method by industry or sector as a main criterion. To analyse IPOs by industry, all the


These researchers mentioned that IPOs in Finance, Trust, and Closed-Ends Funds sector are not comparable with non-financial companies. These companiesâ&#x20AC;&#x2122; annual reports are normally prepared according to the different statutory requirements.


An IPO in which the price is set and quoted in the prospectus and remains unchanged until completion of the offer.


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proceeds which is the highest offer proceeds under the industries. The industrial sector has the highest value for money left on the table compared to all other sectors which shows that on an average market price of industrial sector is higher than other sectors. The utility sector indicates a negative value for the money left on the table which shows the wealth of

the investors in this sector diluted compared to all other sectors. When examining the listing years, money left on the table has the negative values in 2010 and 2011 due to higher issue price compare to the first listing day market price. Issue years 2008 and 2010 have the negative values for money left on the table due to higher issue prices.

Table 1: Number of sample companies, offer proceeds and money left on the table by industry, listing year and issue year Sample Classification

Number of IPOs


Offer Proceeds1 (AU$ 000â&#x20AC;&#x2122; )


Money left on the table2 (AU$ 000â&#x20AC;&#x2122;)

By Industry Resources (Energy, Metals & Mining) 143 56% 12% 1279743 1137267 Chemicals/Materials 4 2% 9% 953400 113042 Industrials 46 18% 65% 6717995 190481 Consumer Discretionary/Staples 31 12% 6% 588975 72296 Information Technology 20 8% 6% 645582 96831 Telecommunication 4 2% 0% 22573 2749 Utilities 6 2% 1% 79750 -7020 Total 254 10288018 582106 By Listing Year 2006 68 27% 28% 2856066 216233 2007 91 36% 16% 1607983 244248 2008 29 11% 4% 361219 166584 2009 17 7% 4% 368500 45445 2010 41 16% 49% 5045650 -85511 2011 8 3% 0% 48600 -4893 Total 254 10288018 582106 By Issue Year 2005 9 4% 1% 53296 19299 2006 69 27% 28% 2887770 191578 2007 96 38% 16% 1666183 421421 2008 19 7% 3% 272019 -10911 2009 16 6% 3% 332000 52203 2010 45 18% 49% 5076750 -91484 Total 254 10288018 582106 Note: 1. Issue price per share X Number of issued shares 2. Money left on the table indicates the first day returns in terms AU $ earned by initial investors. This is calculated by: (Market price per share - Issue price per share) X Number of issued shares


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Methodology Having selected the sample of IPO companies by industries, listing years and issue years, then the market prices of sample companies were selected from the Morningstar database ( measure the market performance of IPOs, this study selected the first day adjusted6 opening and closing market prices, and the post-listing day adjusted prices. In order to calculate abnormal returns, the first listing day primary, secondary market and total market raw returns are calculated using the following equations.

ು షು ௉ோ೔ ୀ ೔ǡ್ ೔ǡ೚ǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥሺଵሻ ು೔ǡ೚

Where, ࡼࡾ࢏ = the first listing day primary market raw return for security݅ measures between the issue price and beginning of the first listing day price ࡼ࢏ǡ࢈ = the beginning price of security ݅ at the first listing date ࡼ࢏ǡ࢕ = the issue (offer) price of security ݅ at the time of issue

௉ ି௉ ௌோ೔ ୀ ೔ǡ೎௉ ೔ǡ್ ǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥሺଶሻ ೔ǡ್

Where, ࡿࡾ࢏ = the first listing day secondary market raw return for security ݅ measures between the beginning price and the closing of the first listing day ࡼ࢏ǡࢉ = the closing price of security ݅ at the first listing day ࡼ࢏ǡ࢈ = the beginning price of security ݅ at the first listing date.

௉ ି௉ ்ோ೔ ୀ ೔ǡ೎ ೔ǡ೚ ୀሾሺଵା௉ோ೔ ሻൈሺଵାௌோ೔ ሻሿȂଵǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǥǤሺଷሻ ௉೔ǡ೚

Where, ࢀࡾ࢏ = the first listing day total market raw return for security ݅ measures between the issue price and closing of the first listing day price ࡼ࢏ǡࢉ = the closing price of security ݅ at the first listing day ࡼ࢏ǡ࢕ = the issue (offer) price of security ݅ at the time of issue ࡼࡾ࢏ = the first listing day primary market raw return for security݅ ࡿࡾ࢏ = the first listing day secondary market raw return for security݅


Adjusted prices are those prices adjusted for any dilution factors such as bonus issues, rights issues, options etc.


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From the above raw returns (ܴܲ௜ , ܴܵ௜ and ܴܶ௜ ), the market-adjusted abnormal/ excess returns are calculated to measure the short-run market performance in the primary, secondary and total market. The abnormal/excess return is considered as a superior performance measure relative to the raw return because it adjusts market return of each IPO. The market return can be calculated by using ASX indices such as ASX 200, ASX 300 etc. However, this study .

used All Ordinary Index as a market benchmark to measure the abnormal/excess market returns because this price index covers 95 per cent of the listed company prices in the ASX ( naries). All Ordinary Index were obtained from the DataStream database. The following equations are used to calculate the market-adjusted abnormal (AR) return and the AAR

‫ܴܣ‬௜௧ ൌ ܴ௜௧ି ܴ௠௧  ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ Ǥ Ǥ ሺͶሻ Where, ࡭ࡾ࢏࢚ = the market-adjusted abnormal rate of return for company (i) in period (t) ࡾ࢏࢚ = the rate of return for company (i) in period (t) from ܴܲ௜ , ܴܵ௜ , and ܴܶ௜ ࡾ࢓࢚ = the rate of return on the benchmark (market) during the corresponding time period (t) ௡

ͳ ‫ܴܣܣ‬௧ୀ ෍ ‫ܴܣ‬௜ǡ௧ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ሺͷሻ ݊ Where,


࡭࡭ࡾ࢚ = the market-adjusted average abnormal return, n = the number of IPO companies in period (t)

To determine whether the average raw and abnormal returns are statistically significant, this study uses the ‫ݐ‬ሺ‫ܴܣܣ‬ሻ ൌ  ‫ܴܣܣ‬௧ ‫כ‬

following t-statistics (Ritter 1991; Brown & Warner 1985; Omran 2005).

ඥ௡ ೟ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ Ǥ ሺ͸ሻ ఙ೟

Where, ࡭࡭ࡾ࢚ = the market-adjusted average abnormal return for day t ࢚࣌ = the cross-sectional standard deviation of the return for day t

From the above market-adjusted average abnormal return, this study calculates the cumulative average abnormal return (CAR) following the past studies (Ritter 1991; Aktas, Karan & Aydogan 2003). This measure is 7 .


useful to analysis the short-run performance of IPOs after the listing. Therefore, the CAR is calculated for nine post-listing days by using the following equation

The CAR is calculated after considering the first listing day total market return (TR).


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‫ܴܣܥ‬௤ǡ௦ ൌ ෍ ‫ܴܣܣ‬௧ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ Ǥ Ǥ ሺ͹ሻ ௧ୀ௤

Where, ࡯࡭ࡾࢗǡ࢙ = the market-adjusted post-day listing return (performance) from event day q to event day s

The t-statistic for the cumulative market-adjusted average abnormal return is computed as follows (Aktas, Karan & Aydogan 2003). ‫ݐ‬ሺ‫ܴܣܥ‬ሻ ൌ 

‫ܴܣܥ‬௧ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ሺͺሻ ߪሺ‫ܴܣܥ‬ሻ௧

Where, ࣌ሺ࡯࡭ࡾሻ࢚ ൌ ߪሺ‫ܴܣ‬ሻ௧ ‫ כ‬ሺ‫ ݐ‬൅ ͳሻଵȀଶ ࣌ሺ࡭ࡾሻ࢚ = the variance of market-adjusted abnormal return over t days

The short-run market performance models are estimated by using logit and probit binary regression statistical models. The dependent variable in the binary models is defined as “1” and “0”.The underpricing8 is considered as “1” and overpricing as “0”. The explanatory variables in all these models are given the in table 2. In addition to these explanatory variables, the industry represent dummy variables are also tested with these models with a view to capture the industry effect. The binary regression models are estimated with the Eviews (version 7) statistical package. The determinants of the short-run underpricing (short-run market performance) can be identified with aid of estimated binary regression models.

8 The Underpricing (overpricing) is defined as positive (negative) market-adjusted abnormal returns in the short-run IPO market



Attached share option availability



Hot issue market


Average market return



Market sentiment

Total assets at the end of the year preceding the IPO of an issuing firm

݈݊ (FSIZE)

Standard deviation of daily market returns over the two months before the closing date of the offer Square value of the average daily market returns over the two months before the closing date of the offer Changes in the All Ordinary Index (AOX) from the date of the issue to the AOX to the day of the listing Hot issue market is identified as issue year using IPO volume and first day return where number of IPOs and average first day returns (in the sample) are greater than the sample’s average. This is a dummy variable which defines 1 for “hot issue market” and 0 for “otherwise”

Number of years between the year of creation and listing

݈݊ (1+FAGE)

Percentage of shares retained by original owners

Total equity capital divided by the number of equity shares

Firm size Market Characteristics Market volatility


݈݊ (BOOKV)

This is a dummy variable which defines 1 for “underwritten IPOs” and 0 for ‘Not underwritten IPOs ” Some issued IPOs are attached with a free share option and some are not. This is a dummy variable which defines 1 for “yes” and 0 for ‘No” Some IPOs are accepted oversubscription and some are not. This is a dummy variable which defines 1 for “ yes” and 0 for ‘No” Some issued IPOs recover their working capital needs from the initial issued capital and some are not. This is a dummy variable which defines 1 for “Yes” and 0 for ‘No”

Period from opening to closing days of the offer which is measured in calendar days Number of demand shares over the number of shares offered Offer price of the issue The number of offered shares x issue price Time period between the proposed listing date and the actual listing date which is measured in business days Time period between the issued date and the listed date which is measured in business days Total Issue cost relative to the total offer proceeds. The total issue cost includes ASIC fee, ASX fee, broker commission, manager fee, annual report fee, legal cost, industry report fee, printing fee, other cost 1 minus issue cost ratio

Variable measure

Firm Age

Original ownership

Firm Characteristics Book value per share



Underwriter availability

Recover of working capital


Total net proceeds ratio



Issue cost ratio

Oversubscription option availability




Variable in the model

Total listing period (time to listing)

Oversubscription ratio Issue price Offer size Listing delay

Issue Characteristics IPO period (time given to invest)

Explanatory variables

Table 2: Issue, firm and market characteristics






Positive/ negative Negative








Positive Negative Negative Positive/ negative Negative


Expected sign

Hot issue market hypothesis

Uncertainty/Signalling hypothesis

Uncertainty hypothesis

Uncertainty hypothesis

Uncertainty hypothesis

Signalling/agency-cost /ownership dispersion hypothesis Uncertainty hypothesis

Signalling hypothesis

Uncertainty hypothesis

Signalling hypothesis/Rock hypothesis

Agency-cost hypothesis

Signalling hypothesis

Uncertainty hypothesis

Uncertainty hypothesis

Rock hypothesis

Signalling hypothesis/Rock hypothesis Signalling hypothesis/Uncertainty hypothesis Uncertainty hypothesis Uncertainty hypothesis/Rock hypothesis

Rock hypothesis

Variable proxy for theory

10th International Conference on Business Management - 2013

10th International Conference on Business Management - 2013

Logistic Model

݈݊ ൤

ܲ௜ ൨ ൌ ߙ ൅ ߚଵ ‫ܱܲܲܫ‬௜ ൅ ߚଶ ܱܸ‫ܴܧ‬௜ ൅ ߚଷ ݈ܴ݊ܲ‫ܧܥܫ‬௜ ൅ ߚସ ݈ܱ݊ܵ‫ܧܼܫ‬௜ ൅ ߚହ ‫ܦܵܫܮ‬௜ ൅ ߚ଺ ܱܶܶܲ௜ ͳ െ ܲ௜ ൅ ߚ଻ ‫ܴܱܥܫ‬௜ ൅ ߚ଼ ܴܶܰܲ௜ ൅ ߚଽ ܷܹܴ‫ܣ‬௜ ൅ ߚଵ଴ ‫ܣܱܶܣ‬௜ ൅ ߚଵଵ ܱܸܱܵ௜ ൅ ߚଵଶ ܹ‫ܲܥܫ‬௜ ൅ ߚଵଷ ݈݊‫ܸܭܱܱܤ‬௜ ൅ ߚଵସ ܱܹܵ‫ܪ‬௜ ൅ ߚଵହ ݈݊ሺͳ ൅ ‫ܧܩܣܨ‬௜ ሻ ଺

൅ ߚଵ଺ ݈݊‫ܧܼܫܵܨ‬௜ ൅ ൅ ߚଵ଻ ‫ܸܯ‬௜ ൅ ߚଵ଼ ܴ‫ܷܶܧ‬௜ ൅ߚଵଽ ‫ܵܯ‬௜ ൅ ߚଶ଴ ‫ܯܪ‬௜ ൅ ෍ ߚ௜ ‫ܦ‬௜ ௜ୀଵ

൅ ߝ௜ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ሺͻሻ

Probit Model ܲ௜ ൌ ߙ ൅ ߚଵ ‫ܱܲܲܫ‬௜ ൅ ߚଶ ܱܸ‫ܴܧ‬௜ ൅ ߚଷ ݈ܴ݊ܲ‫ܧܥܫ‬௜ ൅ ߚସ ݈ܱ݊ܵ‫ܧܼܫ‬௜ ൅ ߚହ ‫ܦܵܫܮ‬௜ ൅ ߚ଺ ܱܶܶܲ௜ ൅ ߚ଻ ‫ܴܱܥܫ‬௜ ൅ ߚ଼ ܴܶܰܲ௜ ൅ ߚଽ ܷܹܴ‫ܣ‬௜ ൅ ߚଵ଴ ‫ܣܱܶܣ‬௜ ൅ ߚଵଵ ܱܸܱܵ௜ ൅ ߚଵଶ ܹ‫ܲܥܫ‬௜ ൅ ߚଵଷ ݈݊‫ܸܭܱܱܤ‬௜ ൅ ߚଵସ ܱܹܵ‫ܪ‬௜ ൅ ߚଵହ ݈݊ሺͳ ൅ ‫ܧܩܣܨ‬௜ ሻ ଺

൅ ߚଵ଺ ݈݊‫ܧܼܫܵܨ‬௜ ൅ ൅ ߚଵ଻ ‫ܸܯ‬௜ ൅ ߚଵ଼ ܴ‫ܷܶܧ‬௜ ൅ߚଵଽ ‫ܵܯ‬௜ ൅ ߚଶ଴ ‫ܯܪ‬௜ ൅ ෍ ߚ௜ ‫ܦ‬௜ ௜ୀଵ

൅ ߝ௜ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ Ǥ ሺͳͲሻ

Where,ࡼ࢏ is the probability of underpricing (1) occurs in the short-run market,૚ െ ࡼ࢏ is the probability of underpricing does not occur or the overpricing (0) occurs in the short-run market,࢒࢔ ቂ

ࡼ࢏ ૚ିࡼ࢏

ቃ is the natural log value of the odds ratios (in other words the probability of

occurring) for the event of underpricing (1) occurrence, ࡵࡼࡻࡼ࢏ is a period from opening to closing days of the offering firm݅, ࡻࢂࡱࡾ࢏ is the oversubscription ratio of firm ݅, ࢒࢔ࡼࡾࡵ࡯ࡱ࢏ is the natural log value of the offer price of firm ݅, ࢒࢔ࡻࡿࡵࢆࡱ࢏ is the natural log value of the offer size of firm݅, ࡸࡵࡿࡰ࢏ is the period of listing delay of firm ݅,ࢀࡻࢀࡼ࢏ is the total time period for listing of firm݅,ࡵ࡯ࡻࡾ࢏ is the issue cost ratio of firm݅, ࢀࡺࡼࡾ࢏ is the total net proceeds ratio of firm݅, ࢁࢃࡾ࡭࢏ is the underwriter availability of the offer in firm݅, ࡭ࢀࡻ࡭࢏ is the attached share options available with the offer of firm݅, ࡻࢂࡿࡻ࢏ is the oversubscription option of firm݅, ࢃࡵ࡯ࡼ࢏ is the working capital recovery from the offer proceeds of firm݅, ࢒࢔࡮ࡻࡻࡷࢂ࢏ is the natural log value of the book value per share of the firm ݅, ࡻࢃࡿࡴ࢏ is the original ownership of firm ݅, ࢒࢔ሺ૚ ൅ ࡲ࡭ࡳࡱ࢏ ሻ is the natural log value of the age of issuing firm ݅, ࢒࢔ࡲࡿࡵࢆࡱ࢏ is the natural log value of the size of issuing firm݅, ࡹࢂ is the market volatility,  ࡾࡱࢀࢁ is the average market return before the closing date of the offer, and ࡹࡿ is the market sentiment, ࡴࡹ is the hot issue market dummy, ࡰ࢏ = industry dummy variables such as D1=dummy for resource industry, D2= dummy for chemical/material industry , D3= dummy for industrial sector, D4= dummy for consumer discretionary/staples industry, D5= dummy for information technology industry, and D6= dummy for utilities industry. The telecommunication industry is captured in the intercept term. ࢼ ࢏ is the coefficient of the explanatory variables and ࢿ࢏ is the error term of the model 9


The logit and probit regression models are differ due to the error term of each of the models. The cumulative distribution of the error term can be seen in a logit model and the normal distribution can be seen in a probit model (Kulendran and Wong, 2001, p. 423). Further, they mentioned that the results of these binary models will not vary unless the sample size is large.


10th International Conference on Business Management - 2013

The marginal probability analysis is based on the logistic binary regression model and it measures the likelihood of changing in probability (∆p) associated with the underpricing (short-run market performance) due to a change in the explanatory variables. .

The marginal probabilities are very important for IPO investors for their investment decisions. Therefore, the marginal probability (∆p) has been estimated by using the following probability equations

ܲ௜ ൌ

݁ ‫ן‬ା σ೔సభ ఉ೔௑೔ ೙

ͳ ൅ ݁ ‫ן‬ା σ೔సభ ఉ೔௑೔

ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ሺͳͳሻ

ο‫ ݌‬ൌ ߚ௜ ܲ௜ ሺͳ െ ܲ௜ ሻ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ǥ ሺͳʹሻ Where, ࡼ࢏ = the probability of underpricing (1) occurs in the short-run market, ο࢖ = marginal probability, ࢼ࢏ = Coefficient of each explanatory variables, ࢄ࢏ = the average value of each explanatory variables.

day returns are given in table 3 and 4 respectively.

RESULTS AND DISCUSSION This section provides the statistical analysis and the results which are derived from the methodology that are discussed in section 4.2. The discussion on empirical findings of the short-run market performance on the first listing day returns and the postday listing returns are presented in sections 5.1. The estimated models based on the short-run market returns are discussed in section 5.2. The discussion on the marginal analysis is shown in section 5.3.

The first trading day returns of IPOs Table 3 shows that sample companies are underpriced in the primary market by 25.47% based on the AAR which is statistically significant at 1% level. In comparison with the primary market returns, the Australian IPOs are overpriced in the secondary market by 1.55% which is statistically significant at 5% level. The first day total return indicates that all sample Australian IPOs are underpriced at 23.14% on the AAR which is statistically significant at 5% level.

The short-run market performance The short-run market performance was evaluated by using the first trading day AARs and the post-day CARs. The findings of the first trading day AARs are discussed under the first day primary market, the secondary market and the total market. Furthermore, the discussion is continued by industries, listing years and issue years under the primary, secondary and total market. The first trading day returns and post-

If we examine IPOs by industries, in the primary market, the highest level of underpricing can be seen in industrial sector IPOs which is 68.03% based on abnormal returns. However, this underpricing level is not statistically significant. The resources sector IPOs are generally underpriced by 16.64% which is statistically


10th International Conference on Business Management - 2013

significant at 1% level. The level of underpricing (23.88% on abnormal returns) in the telecommunication sector is also statistically significant at 10% level. The information technology sector IPOs are also underpriced on abnormal returns by 14.14%.In contrast with IPOs in other sectors, the chemical and material sector IPOs are overpriced by 10.91% based on abnormal returns. It is interesting to see that this sector IPOs earned negative returns in the very first day primary market. However, this negative return is not statistically significant. According to the closing price secondary market, the highest average overpricing level on abnormal returns can be seen in the utility sector (7.54%) and the lowest is in the resources industry (0.70%).The average overpricing levels in the chemical & material sector is 6.35%. The overpricing level (4.66% on abnormal returns) in the information technology industry is not statistically significant. In the secondary market, underpricing has not been found in any sectors. Total market return analysis shows that the highest level of underpricing can be seen in the industrial sector IPOs which is 65.31% based on abnormal returns. However, this underpricing level is not statistically significant. The resources sector IPOs are generally underpriced by 15.69% which is statistically significant at 1% level. The levels of underpricing (16.77% based on the abnormal return) in the telecommunication sector is also statistically significant at 10% level. The chemical and material sector IPOs are overpriced by 15.94% based on the

abnormal return compared to the other sectors because it gives a negative return for their investors. The listing year analysis shows that the highest level of underpricing takes place in the primary market in year 2008 based on abnormal returns by 106.37%. This level of returns is not statistically significant. In listing years 2006, 2007 and 2010, listed IPOs are underpriced on abnormal returns by 17.62%, 16.38% and 14.02% respectively and these are also statistically significant at 1% level. The IPOs in listing year 2009 are underpriced by 9.1% which is not statistically significant. The Australian IPOs are overpriced in 2011 by 4.12% on abnormal returns. The statistical significance cannot be seen in this overpricing level. The listing year classification of the secondary market shows that IPOs are not underpriced based on abnormal returns in listing year 2008 which is not statistically significant. Statistically significant overpricing levels can be found in 2007 and 2010 only. Listed IPOs in 2007 and 2010 are overpriced by 1.90% and 2.99% respectively. These rates of overpricing are statistically significant at 10% and 5% levels. In the total market, the highest underpricing level in 2008 is 101.26% on abnormal return. But this underpricing level is not statistically significant. Only in listing year 2011, the overpricing is reported as 6.65% which indicates that negative returns are given to investors in this listing year. IPOs are underpriced by 16.85%, 13.83% and 10.60% in 2006, 2007 and 2010 respectively. These levels are


10th International Conference on Business Management - 2013

also statistically significant at 1% and 5% levels.

in the secondary market except in 2008. The first day total market returns analysis shows that the highest level of underpricing can be seen in the issue year 2005 which is 56.06%. However, this underpricing level is not statistically significant. The statistically significant underpricing levels can be found only in issue years 2006, 2007 and 2010. In 2010, the issued IPOs are underpriced by 8.34% which is statistically significant at 1% level. Issued IPOs in 2006 and 2007 are underpriced by 42.58% and 7.37% respectively. These underpricing levels are statistically significant at 10% level. In comparison with the industry and listing year analysis, the overpricing has not been found under the issue year analysis.

When we examine IPOs in the primary market by the issue year, the highest underpricing level can be seen in 2005 based on abnormal both return which is not statistically significant, while the lowest in 2006 which is statistically significant at 5%. The issued IPOs in 2010 are underpriced by 11.15% which is also statistically significant at 1% level. In issued years 2007 and 2009, the IPOs are underpriced by 46.73% and 12.57% respectively which are significant at 10% and 5% levels. In the Australian IPO market, the overpricing has not been found in any issued years because the negative returns have not reported in these periods. Only statistically significant overpricing can be found in the secondary market in issued year 2007 and 2010. In 2007 and 2010, issued IPOs are overpriced by 2.09% and 2.58% respectively and these are significant at 5% level. The IPOs issued in all years are overpriced

The post-day returns of IPOs This section analyses the post-day returns by calculating the cumulative abnormal return for nine post listing days. The calculated CARs of all sample IPOs for the nine post listing days are shown in figure 1.


316 2.58*** 3.79*** 1.27 1.35 5.26*** -0.48 1.43 2.13** 1.84* 0.90 2.23** 3.74***

62.45 7.82 46.73 9.42 12.57 11.15

9 69 96 19 16 45

4.26*** -0.64 1.31 1.40 1.12 2.38* 0.71



17.62 16.38 106.37 9.10 14.02 -4.12

16.64 -10.91 68.03 18.29 14.14 23.88 10.09


AAR (%)

68 91 29 17 41 8

143 4 46 31 20 4 6



Primary Market

N= Sample size, AAR= Market-adjusted average abnormal return * statistically significant at 10% level, ** statistically significant at 5% level, *** statistically significant at 1% level

By Industries Resources Chemicals/Materials Industrials Consumer Discretionary/Staples Information Technology Telecommunication Utilities By listing year 2006 2007 2008 2009 2010 2011 By Issue year 2005 2006 2007 2008 2009 2010

All sample companies

Sample Classification

Table 3: First Trading Day Returns: Primary, Secondary and total Markets

-3.65 -0.58 -2.09 0.88 -1.36 -2.58

-0.60 -1.90 0.09 -2.05 -2.99 -3.28

-0.71 -6.35 -1.15 -1.89 -4.66 -4.56 -7.54


AAR (%)

-0.59 -0.49 -2.05** 0.23 -0.45 -1.99**

-0.45 -1.83* 0.04 -0.50 -2.06** -1.40

-0.76 -2.08 -0.84 -0.97 -1.69 -0.64 -2.00



Secondary Market

2.47** 3.15*** 1.25 0.91 3.58*** -0.75 1.34 1.79* 1.72* 0.93 1.45 2.64***

16.85 13.83 101.26 9.18 10.60 -6.65 56.06 7.37 42.58 10.90 12.20 8.34

3.93*** -0.96 1.28 1.42 0.73 2.83* 0.08


23.14 15.69 -15.94 65.31 13.71 9.80 16.77 1.09


AAR (%)

Total Market

10th International Conference on Business Management - 2013

10th International Conference on Business Management - 2013



24.50% 24.00% 23.50% 23.00% 22.50% 2nd 3 rd day day

4th day

5th day

6th day

7th day

8th day

9th day

10th day

Figure 1: The calculated CARs for the nine post listing days from 2006 to 2011

The table 4 provides only the post-day listing returns for the 3rd, 6th and 10th days by all sample companies, industries, listing years and issue years. All sample IPO companies are underpriced based on CARs by 24.63%, 24.07% and 23.35% in the 3rd, 6th, and 10th days respectively. However, only day 6 is statistically significant at 10% level. The post-day listing returns of all IPOs are decreasing from the 3rd date to the 10th day.

18.41% and 23.34% respectively. Only the return in day 6 is statistically significant at 1% level. The highest level of underpricing is found in the listing year 2008 which is statistically significant at 1% level. In 2008, the average levels of underpricing in the 3rd, 6th and 10th days are 98.97%, 98.21% and 95.91% respectively. The listed IPOs in 2011 are overpriced only in the 3rd day and 6th day and underpriced in the 10th day. However, these overpricing levels are not statistically significant.

All IPOs in industries are underpriced except the chemical and material sector. Only IPOs in the industrial sector are statistically significant at 1% level in all three post listing days and underpriced by 68.94%, 67.84% and 66.30% in the 3rd, 6th, and 10th days respectively. The chemical and material industry is overpriced in the 3rd, 6th and 10th days by 16.03%,

The issued IPOs from 2005 to 2010 are underpriced in the 3rd, 6th, and 10th day but issued IPOs only in 2005 are statistically significant in all three days. In 2007, the underpricing levels are statistically significant only in the 3rd and 6th day. The overpricing has not been found in these issue years


318 11.85

63.82 11.44 42.96 10.51

9 69 96 19 16

22.04 14.92 98.97 7.57 11.25 -7.48

17.52 -16.03 68.94 11.14 9.98 15.42 6.34

CAR (%) 24.63

68 91 29 17 41 8

143 4 46 31 20 4 6

N 254


2.34** 0.52 2.84*** 1.01

0.92 1.34 4.68*** 0.74 1.39 -0.95

0.99 -1.19 5.47*** 0.58 1.39 1.54 0.26

Day 3 t-stat 1.50


58.68 8.43 43.27 10.89

18.56 15.27 98.21 9.41 12.20 -5.68

17.23 -18.41 67.84 9.56 9.83 17.26 6.82


4.78*** 0.80 2.66*** 0.66

1.70* 1.14 4.39*** 0.72 1.01 -0.72

1.14 -9.32*** 6.54*** 0.69 0.79 1.95 0.87

Day 6 CAR (%) t-stat 24.07 1.75*

45 8.44 1.03 9.65 0.89 N= Sample size, CAR= Cumulative Average Abnormal Return * statistically significant at 10% level, ** statistically significant at 5% level, *** statistically significant at 1% level

2009 2010

2006 2007 2008 2009 2010 2011 By Issue year 2005 2006 2007 2008

By Industries Resources Chemicals/Materials Industrials Consumer Discretionary/Staples Information Technology Telecommunication Utilities By listing year

All sample companies

Sample Classification

Table 4: Post-day Returns



55.00 8.68 41.00 7.56

19.21 12.45 95.91 10.40 11.61 6.99

17.00 -23.34 66.30 7.34 10.13 13.12 10.01



3.07*** 0.47 1.15 0.35

1.03 0.35 3.78*** 0.89 0.82 0.07

0.42 -1.18 5.94*** 0.49 0.90 1.60 0.62

Day 10 CAR (%) t-stat 23.35 0.74

10th International Conference on Business Management - 2013

10th International Conference on Business Management - 2013

the demand of informed investors’ because informed investors think this issue is not an attractive issue to invest and they withdrawing from the market. In other words, this may give an opportunity to uninformed investors to invest in this issue. This situation may lead to minimize the winner’s curse problem and much underpricing is not necessary to attract uninformed investors. Therefore, According to the Rock’s hypothesis, we cannot expect a higher level of underpricing with longer delay in listing. The finding is consistent with the Australian prior studies in IPO performance (How 2000; Lee, Taylor & Walter 1996). They found that listing delay is an important variable of the underpricing in Australian IPOs and can be used to test the Rock’s hypothesis. According to the uncertainty hypothesis, however, Chowdhry and Sherman (1996) found that the longer time period of listing indicates more uncertainty about the offer. Mok and Hui (1998), Su and Fleischer (1999), Megginson and Tian (2006) and Salama Zouari et al. (2011) also found a positive association between the level of underpricing and LISD.

The estimated models for the shortrun market performance This section estimates binary regression statistical models with a view to identify the significant determinants of the short-run market performance. In section 5.1, the shortrun IPO market performance is identified as the underpricing which measured using short-run abnormal returns. The estimated binary regression models for the primary, secondary, total and post-day listing market are presented in table 5. To eliminate multicollinearity issue, highly correlated variables are excluded from the estimated models. Only the statistically significant explanatory variables are reported in these estimated models which indicate only the issue and market characteristics as the short-run determinants. The firm characteristics are not statistically significant in these estimated models. Some of the industry represent dummies are also significant in the estimated regression models. LR statistics of the estimated models in table 5 are significant at 5% levels which indicate that models are valid. The significant determinants of the short-run underpricing in the estimated models are discussed as follows.

Underpricing (short-run market performance) and IPO period (IPOP)

Underpricing (short-run market performance) and listing delay (LISD)

The primary market, total market and post-day market binary regression models show that the IPOP coefficient is negative and it is statistically significant at the level of 1% in the primary and total market and 5% in the post-day market. This shows that if the IPOP is increased it leads to decrease the level of underpricing. The finding argues that the level of underpricing can be reduced due to the uninformed investors (Rock 1986). If the IPOP is increased it may gives chance to uninformed investors to

The estimated regression models in table 5 show that LISD is negatively and significantly associated with the level of underpricing which is statistically significant at 1% level for the all estimated binary models except the secondary market. The result shows lower LISD IPOs are more underpriced compared to the higher LISD IPOs. It may suggest that increasing LISD will lead to decrease


10th International Conference on Business Management - 2013

invest in this offer. Therefore, the future demand may decline due to the less number of uninformed investors in the market and relative high level of underpricing cannot be used to attract or compensate uninformed investors who suffer from the winner’s curse problem. Therefore, we can expect at a lower level of underpricing with longer IPO period according to the Rock’s hypothesis.

lower the level of underpricing based on the estimated binary models except secondary market model is. It could be argued that there is a lower risk for the IPOs with greater TNPR, which results in lower underpricing. If TNPR increases, the future investors feel this offer as lower risk investment for them. They cannot earn higher return on this investment because this is considered as a low risk investment. Therefore, the lower prices can be expected due to the lower risk. As a result of the lower prices, the higher levels of underpricing can be seen in the short-run IPO market. Dimovski and Brooks (2004) have also reported a negative association between retained capital and the level of underpricing. The retained capital is a similar variable to the TNPR which shows what percentage of equity capital retained by an IPO company after paying issue cost. Therefore, our result is consistence with the uncertainty hypothesis ant it is statistically significant at 1% level for the estimated total and post-day market models and 5% level for the primary market.

Underpricing (short-run market performance) and total listing period (TOTP) The estimated secondary market models show that there is an inverse relationship between underpricing and TOTP. This implies that IPOs with higher TOTP tend to have lower level of underpricing. Rock (1986) found that underpricing can be used to attract uninformed investors who exist due to the winner’s curse problem. This problem indicates that informed investors do not give a chance to uninformed investors to invest when the offer is attractive and they withdraw from the market when the offer is unattractive. Lee, Taylor and Walter (1996) also found that quickly sold issues (longer issues) are more underpriced (less underpriced) due to the higher (lower) level of informed demand. How (2000) found that there is a statistically significant negative relationship between underpricing and time to listing. The finding is statistically significant at 1% level and consistent with the Rock’s hypothesis.

Underpricing (short-run market performance) and market volatility (MV) According to the estimated binary primary market model in table 5, the market volatility (MVt-60) appears to be positively related to underpricing, indicating that the IPO firms with higher market volatility tend to have higher degree of underpricing in the primary market. In other words, lesser the market volatility of the firm, low riskier the firm, the lower the level of underpricing will be. This relationship is also consistence with the uncertainty hypothesis, which in turn also supports the normal hypothesis of a risk-return relationship. This result is also statistically significant at 10% level

Underpricing (short-run market performance) and total net proceeds ratio (TNPR) The table 5 shows that there is an inverse association between underpricing and TNPR of the issuing company. This finding implies that higher the TNPR of an IPO firm,


݈݊ ቂ

݈݊ ቂ

Total market

Post day market




(0.000)*** (0.012)***

2.173 D7 (0.016)** (0.081)* (0.001)***

(0.005)*** (0.013)** (0.005)*** (0.052)*


ቃ= 8.828 - 0.028 IPOP - 0.028 LISD - 10.481 TNPR + 2.216 D1 + 2.650 D3 + 1.858 D4 + 2.223 D5 +










LR statistics





Probabilit y (LR stat.)






Estimated Probit Model from January 2006 to January 2011 254 28.51855 0.000010 28.8% ܲ௜ = 5.020 - 0.021 IPOP– 0.018 LISD – 4.665 TNPR + 44.276 MVt-60 (0.005)*** (0.000)*** (0.029)** (0.102)* 254 7.034133 0.007997 10.1% Secondary market ܲ௜ = 0.205 - 0.010 TOTP (0.013)*** 254 35.05781 0.000000 22.4% Total market ܲ௜ = 5.874 - 0.019 IPOP - 0.022 LISD - 5.301 TNPR (0.006)*** (0.000)*** (0.013)*** 35.15332 0.000025 25.2% Post day market ܲ௜ = 5.318 - 0.017 IPOP - 0.017 LISD - 6.324 TNPR + 1.359 D1 + 1.619 D3 + 1.133 D4 + 1.341 D5 + 1.319 254 D7 (0.014)*** (0.001)*** (0.012)*** (0.009)*** (0.003)*** (0.043)** (0.024)** (0.077)* Note: Figures in brackets indicate the significance levels. Negative sign indicates an inverse relationship between explanatory variables and dependent variable whereas positive sign shows direct relationship between these. Where, N = sample size, TOTP = total listing period in days, IPOP = IPO period in days, LISD = listing delay in days, TNPR = total net proceeds ratio, MVt-60 = market volatility of 60 days period prior to closing date of the offer, D1= dummy for resource industry, D3= dummy for industrial sector, D4= dummy for consumer discretionary/staples industry, D5= dummy for information technology industry, D7= dummy for utilities industry. LR statistics test the joint hypothesis that all slope coefficients except the constant are zero. Probability is the p value of the LR test statistics. R2 is the McFadden R-squared. * statistically significant at 10% level, ** statistically significant at 5% level, *** statistically significant at 1% level




ቃ= 10.090 - 0.033 IPOP - 0.038 LISD - 9.173 TNPR


ቃ= 0.334 - 0.017 TOTP

(0.005)*** (0.001)***

ቃ= 8.591 - 0.034 IPOP– 0.030 LISD – 8.073 TNPR + 76.348 MVt-60




݈݊ ቂ

Secondary market

Primary market



݈݊ ቂ

Estimated Logit Model from January 2006 to January 2011

Table 5: Estimated binary (logit and probit) regression models for the short-run market performance

Short-run Market Performance Primary market

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explanatory variables that contribute to the change the short-run market performance. The calculated marginal probability associated with the variables in the short-run market (based on the first day returns) such as primary, secondary and total markets are presented in table 6 and the postday market (based on the post listing returns) in table 7

The marginal probability analysis on the short-run market performance This section analyses the marginal probability associated with the significant variables in the short-run IPO market in Australian based on the logistic estimated models in table 5. Marginal analysis is used to find out which is the most important .

Table 6: The change in probability (∆p) due to a change in explanatory variables Variables TOTP IPOP LISD TNPR MVt-60

Primary market

Secondary market ∆p=-0.041 x10-3

∆p=-0.071 x10-3 ∆p=-0.063 x10-3 ∆p=-0.169 x10-1 ∆p= 0.160 x 100

Total market ∆p=-0.076 x10-3 ∆p=-0.080 x10-3 ∆p=-0.212 x10-1

Note: Negative sign indicates an inverse relationship between explanatory variables and underpricing whereas positive sign shows direct relationship between these. Where, ∆p = marginal probability, TOTP = total listing period in days, IPOP = IPO period in days, LISD = listing delay in days, TNPR = total net proceeds ratio and MVt-60 = market volatility of 60 days period prior to closing date of the offer.

Table 6 shows the calculated marginal probabilities for the significant explanatory variables in the primary, secondary and total markets. Except MVt-60, all other explanatory variables in these market models have a negative sign. The negative sign for IPOP shows that if IPOP is increased by one day then the probability of change to overprice or decrease in the level of underpricing is 0.071 x10-3 for the primary market and -0.076 x10-3 for the total market .The positive sign for MVt-60 in the primary market indicates that if the market volatility increases by one unit then the probability of change to underprice or decrease in the level of overpricing is 0.160 x 100. The negative sign for LISD indicates that if listing is delayed by one day then the probabilities of change to overprice or .

decrease in the level of underpricing are 0.063 x10-3 and -0.080 x10-3 for the primary market and the total market respectively. A one unit increase in TNPR will result in a decrease in the probability of occurrence of underpricing by -0.169 x10-1 and -0.212 x10-1 for the primary and total markets respectively. The market volatility (MVt-60) and TNPR are the most important explanatory variables in the primary and total market models. Only one explanatory variable is significant under the secondary market model which is the total period (TOTP). The negative sign for TOTP indicates that a day increase in the total period will result in a decrease in the probability of the level of underpricing or an increase in the probability of overpricing by 0.041 x10-3


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Table 7: The change in probability (∆p) due to a change in explanatory variables Industry dummy D1 D3 D4 D5 D7 Average Marginal Prob.




∆p=-0.065 x10-3 ∆p=-0.055 x10-3 ∆p=-0.069 x10-3 ∆p=-0.065 x10-3 ∆p=-0.065 x10-3

∆p=-0.065 x10-3 ∆p=-0.055 x10-3 ∆p=-0.069 x10-3 ∆p=-0.065 x10-3 ∆p=-0.065 x10-3

∆p=-0.241 x10-1 ∆p=-0.206 x10-1 ∆p=-0.259 x10-1 ∆p=-0.241 x10-1 ∆p=-0.244 x10-1

∆p=-0.064 x10-3

∆p=-0.064 x10-3

∆p=-0.238 x10-1

Note: Negative sign indicates an inverse relationship between explanatory variables and underpricing whereas positive sign shows direct relationship between these. Where, ∆p = marginal probability, IPOP = IPO period in days, LISD = listing delay in days, TNPR = total net proceeds ratio, D1= dummy for resource industry, D3= dummy for industrial sector, D4= dummy for consumer discretionary/staples industry, D5= dummy for information technology industry, and D7= dummy for utilities industry.

Table 7 shows the calculated marginal probabilities associated with the significant variables in the post-day market based on the industry dummies. Table 5 shows that some industry dummies were statistically significant on the return in the postday listing market .The post day market model also show an inverse sign for the explanatory variables.

negative sign for TNPR indicates that If TNPR is increased by one unit then the probability of change to overpricing or decrease in the level of underpricing is 0.238 x10-1. Conclusions This research paper has evaluated the short-run market performance of the Australian IPOs listed from 2006 to 2011 using the first listing day returns and the post-day listing returns. The first listing day returns are analysed by considering the first listing day primary market, the secondary market, and the total market using the AARs. The post listing returns are analysed using the CARs. This study identifies the issue, firm and market characteristics as determinants of short-run underpricing with the aid of binary regression models. A marginal probability analysis was carried out to measure the risk associated with the determinants of short-run underpricing.

The resource industry and the information technology industry dummies show similar marginal probabilities for the significant explanatory variables whereas the other industry dummies indicate different marginal probabilities in relation to each significant variable. The highest marginal probability of the all explanatory variables shows in the consumer discretionary industry whereas the lowest probabilities in the industrial sector. However, a considerable difference cannot be seen among the probabilities of the explanatory variables in different industries. Therefore, the average marginal probability is also estimated for each of the explanatory variables. According to the average marginal probability, TNPR is the most important variable of the post-day market due to the highest marginal probability compared to others. The

The analysis based on the first listing day PRIMs, total MRs and the postday listing returns shows that Australian IPOs are underpriced in the short-run. This finding is lined up with the underpricing phenomenon of IPOs, which is widely accepted as a


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universal phenomenon. Although the Australian IPOs are underpriced, the post-day listing return indicates that the level of underpricing is slowly decreasing after the listing particularly from 7th day to 10th day period due to the decrease in post-listing prices. The decreasing trend of post listing returns is in line with the findings of Aktas, Karan and Aydogan(2003), Kenourgios, Papathanasious and Melas (2007) and Kazantzis and Thomas (1996). However, Sohail, Raheman and Durrani(2010) argue that this trend can be expected only up to the 10th day under the normal economic condition. The decreasing trend of post-listing returns signals that investors’ wealth can be diluted due to overpricing in the long-run. However, this finding is in contrast with the finding of Finn and Higham (1988) that the level of underpricing is steady after day 6.

The analysis of short-run IPO market performance by industries, listing years and issue years shows that there is a substantial variation in the level of short-run performance. The determinants of underpricing in Australia IPOs are the IPO period (IPOP), time to listing (TOTP), listing delays (LISD), total net proceeds ratio (TNPR) and the market volatility (MV). These determinants confirm that the issue and market characteristics are more important than the firm characteristics when explaining the short-run underpricing in Australian IPOs. The IPO period, time to listing, listing delays support Rock’s hypothesis while the total net proceeds ratio and market volatility confirm the uncertainty hypothesis. The marginal probability found that increasing (decreasing) of market volatility (MV) and decreasing (increasing) of total net proceeds ratio (TNPR) lead to increase (decreasing) the level of uncertainty which causes to increase (decrease) the level of underpricing in short-run.

The SECON analysis indicates that the Australian IPOs are overpriced by 1.55% on abnormal returns. This result is consistent with studies by Barry and Jennings (1993) and Benveniste and Spindt (1989). Barry and Jennings (1993) found that 90% of the initial day’s returns comes though the opening transaction, suggesting that initial IPO subscribers who take shares at the offer price are the sole beneficiaries of underpricing. In contrast with this finding, Chang et al.(2008), Bradley et al. (2009), Aggarwal and Conroy (2000), and Schultz and Zaman (1994) documented that IPOs were underpriced in the first-day secondary market10.

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GOVERNMENT AS A CATALYST IN MANAGING BUSINESS ETHICS (WITH SPECIAL REFERENCE TO ARTICLE 19(1) (G) OF INDIAN CONSTITUTION Sunil Khanduji Gaikwad All India radio Jalgaon, India ABSTRACT In India Indian constitution is supreme and it is the law of the land. Article 19(1)(g) of the constitution guarantees to all citizen the right to practice any profession or to carry on any occupation trade or business. But the freedom given to the citizen is not uncontrolled some reasonable restrictions have been imposed on it in the interest of general public and these reasonable restrictions are nothing but standard ethics for business management. The present research paper discusses in detail the freedom of business given to the citizen and ethics prescribed for business management and the role of government in ethical business management in accordance with the constitutional provisions. Keywords: Indian constitution, Freedom of business, Reasonable restrictions.

INTRODUCTION: India is one of the greatest democratic and fast growing economy in the world. After the liberalization 1991 International and national business players have flooded Indian market to carry out their business and services which created stiff competition in the market. To earn maximum profit some time these business players indulge in malpractices and unethical practices at the cost of business ethics and principles. But to not let this happen and to protect the interest of the general public and environment Indian constitution has laid down strong and concrete foundation for healthy and ethical business management under reasonable restrictions.

LITERATURE REVIEW For the current research paper the following literature has been referred to drive the point home. Indian constitution which provides freedom to carry out any business but with reasonable restrictions for healthy growth of business for the interest of general public. The consumer protection Act, which protects the interests of the consumers from unethical practices in business and provides legal defense to the consumers. The companies Act, which provides for the redressal mechanism for the dispute between workers and management bodies of the company to have smooth functioning of the manufacturing activity and welfare of the workers and to prevent


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exploitation of the workers in any form by the company.

dangerous goods or trafficking in women may be prohibited altogether and there is nothing unconstitutional in the laws doing so. But trades which are not illegal or immoral can be regulated or their evils mitigated in the interest of the general public. In accordance with the Constitution provision for business freedom for carrying out any legal business and reasonable restrictions in the interest of general public Government has enacted various laws and regulation to give boost to the healthy business competition but at the same time to protect the interest of general public to protect them from any kind of exploitation. The following are the legislative measures taken by government for this purpose.

Government of India in accordance with the Indian constitution has laid down various rules and regulations and acts to protect environment from any kind of industrial hazards and pollution. Minimum wages Act which provides for the minimum wages to the workers and thus prevent them from economic exploitation. For the present research paper content analysis method has been found most suitable as it analyses the provisions of Indian constitution for the morality in business management and other related rules, regulations framed from time to time to manage the affairs of management of business .

LEGISLATIVE MEASURES In India various Acts intended to protect the consumers against different forms of exploitation were enacted. Such as , the Indian Penal code 1860; Indian Contract Act 1872 Drugs Control Act 1950, Industries[development and Regulation] Act 1952, Indian standards Institution[certification marks]Act 1952,Drugs and magic Remedies [objectional Advertisement] Act 1954 Essential commodities Act 1955, Trade and Merchandise marks Act 1958, Hire Purchase Act 1972, Cigarettes[Regulation of production supply and distribution]Act 1975, Prevention of black marketing and maintenance of supplies of essential commodities Act 1980 Essential Commodities[special provision]Act 1981, multistate cooperative Societies Act 1984, Standard of weight and

Indian constitution and business management Article 19(1)(g) of the constitution guarantees that all citizens have the right to practice any profession or to carry on any occupation or trade or business. But this freedom is not unbridled for it imposes reasonable restrictions on this right in the interest of the general public. Reasonable restrictions in the interest of the general public:- under this heading the restrictions imposed must be required in the interest of general public and it must be a reasonable restrictions. In order to determine the reasonableness of the restrictions regard must be had to the nature of the business and conditions prevailing in that trade. Thus trades in noxious or


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measures[enforcement] Act 1985, Narcotic Drugs and Psychotropic Substances Act 1985, Some significant consumer protection enactments of pre independence time are the sale of goods Act 1930, Agriculture Produce [gardening and marketing] act 1857 and drugs and Cosmetic act 1940. A latest addition to the list of legislation is the competition act 2002. The committee appointed under the chairmanship of SVS Ragahvan submitted its report on May 2000. The committee framed the new competition policy which proposed repeal of monopolies and Establishment of a regulatory authority competition commission for implementation of competition commission for implementation of competition act. On the recommendation of the committee the competition Act was passed and the monopolies and restrictive trade practice Act 1969 has been repealed. The objective of the Act is to provide for the establishment of the commission x To prevent practices having adverse effect on competition x To promote and sustain competition in markets. x To protect the interest of consumers x To ensure freedom of trade carried on by other participants in the markets in India. To protect the interest of the consumers the government enacted consumer protection act 1986. In fact this act is a social legislation in our country. The consumer protection Act is an assertion of right by a consumer.

Law protects the one who seeks to be protected. In modern society, the awareness and supremacy of the consumers is very necessary. The maxim â&#x20AC;&#x153;Caveat Emptorâ&#x20AC;? means buyer beware, permits the seller to disown his liability. The consumer had to make the sellers beware and hence, the dirty linen in trading had to be cleansed with the mechanism of law and agencies of redressal. Thus, every man is bound to warrant the thing he sells or conveys, albeit, there be no express warranty as he is bound by the common law. The Consumer Protection Bill 1986 having been passed by both the houses of parliament received the assent of the President on 24th December 1986. It came on the statutes Book as The Consumer Protection Act. Under section 1[4] of the Act shall apply to all goods and services, save as otherwise expressly provided by the central Government by notification and the central Government has not so far issued any notification excluding any service rendered by the Government Department from the purview of the Act, have the service done by the Registration Department was a service within the meaning of the Act, and since it was done for consideration namely stamp duty and registration were consumers within the meaning of section 2[i] [ii] of the Act. The consumer protection Act, 1986 was enacted to meet the long felt necessity of protecting the consumers from getting cheated by unscrupulous suppliers of goods and services for


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x Makes a false or misleading representation concerning the need for, or the usefulness of any goods or services; x Gives to the public any warranty or guarantee of the performance, efficacy or length of life of a product or of any goods that is not based on an adequate or proper test thereof; x Makes to the public a representation in a form that purports to btx A warranty or guarantee of a product or of any goods or services; or x A promise to replace, maintain or repair an article or any part thereof or to repeat or continue a service until it has achieved a specific result. x If such purported warranty or guarantee or promise is materially misleading or if there is no reasonable prospect that such warranty, guarantee or promise will be carried out; x Materially misleads the public concerning the price at which a product or like products or goods or services have been or are, ordinarily sold or provided, and for this purpose, a representation as to price shall be deemed to refer to the price at which the product or goods or services has or have been sold be sellers or provided by suppliers generally in the relevant market unless it is clearly specified to be the price at which the product has been sold or service have been provided by the person by whom or on whose behalf the representation is made. x Gives misleading or false facts disappearing the goods, services or trade of another person.

which the remedy under various existing laws like the sale of Goods Act, the prevention of Food Adulteration Act, the Standards of weights and Measures Act, the dangerous drugs Act. The Act has provided a machinery whereby consumers can file their complaints against defective goods or deficient services with consumer forums. Section 2(1)速 of the Act defines unfair trade practice as follows: x Unfair trade practice means a trade practice which for the purpose of promoting the sale, use or supply of any goods or for the provision of any service, adopts any unfair method or unfair or deceptive practice including any of the following practice, namely,x The practice of making any statement, whether orally or in writing or by visible representation which,x Falsely represents that the goods are of a particular standard, quality, quantity, grade, composition, style or model; x Falsely represents that the services are of a particular standard, quality or grade; x Falsely represents any re-built, second-hand, renovated, reconditioned or old goods as new goods; x Represents that the goods or services have sponsorship, approval, performance, characteristics, accessories, uses or benefits which such goods or services do not have; x Represents that the seller or the supplier has a sponsorship or approval or affiliation which such seller or supplier does not have;


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x Permits the publication of any advertisement whether in any newspaper or otherwise for the sale or supply at a bargain price, of goods or services that are not intended to be offered for sale or supply at the bargain price,, or for a period that is and in quantities that are reasonable, having regard to the nature of the market in which the business is carried on the nature and size of business, and the nature of the advertisement. x Permits the offering of gifts, prizes or other items with the intention of not providing them as offered or creating impression that something is being given or offered free of charge when it is fully or partly covered by the amount charged in the transaction as a whole the conduct of any contest, lottery, games of chance or skill, for the purpose of promoting , directly or indir4ectly the sale, use or supply of any product or any business interest. x Withholding from the participants of any scheme offering gifts, prize or other items free of charge, on its closure the information about final results of the scheme. x Permits the sale or supply of goods intended to be used or are of a kind likely to be used by consumers, knowing or having reason to believe that the goods do not comply with the standards prescribed by competent authority relating to performance, composition contents, design, constructions finishing or packaging as are necessary to prevent or reduce the risk of injury to the person using the goods.

x Permits the hoarding or destruction of goods or refuses to sell the goods or to make them available for sale or to provide any service, if such hoarding or destruction or refusal raises or tends to raise or is intended to raise the cost of those or other similar goods or services. x Manufacture of spurious goods or offering such goods for sale or adopting deceptive practices in the provision of services. Restrictive trade practice Section 2(1) (nnn) defines restrictive trade practice as follows: Restrictive trade practice means a trade practice which tends to bring about manipulation of price or its condition of delivery or to affect flow of supplies in the market relating to goods or services in such a manner as to impose on the consumer unjustified costs or restrictions and shall include; Delay beyond the period agreed to by a trader in supply of such goods or in providing the services which has led or likely to lead to rise in the price; Any trade practice which requires a consumer to buy, hire or avail of any goods or, as the case may be, services as condition precedent to buying, hiring or availing of other goods or services. All the above provisions in the consumer protection act on one hand are giving protection to the consumers while on the other these are ethics for business management on the other. The Consumer Protection Act also provides for the Consumer Protection Councils.


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The Act provides that the object of the Central Council shall be to promote and protect the rights of the consumers.

Bill proposes that a minimum of two members should be appointed and the maximum number of members should be prescribed by the state Government. Under the Act, the state Government appoints the members of the District forum on the recommendation of the selection Committee. The Bill proposes that the state Government may refer back the recommendation to the Selection Committee if in its opinion the nominee is not fit to be appointed. The Bill empowers the state Government [in consultation with the state commission] to notify places other than the district headquarters from where the District Forum may perform its functions. The Bill permits online filing of complaints. Under the Act, The admissibility of a complaint has to be decided within 21 days from date on which the complaint was received. The bill proposes to increase to 28 days.

This Act also provides for the constitution of The State consumer Protection Council. The object of every State Council shall be to promote and protect within the State the Right of the consumers laid down in clauses [a] to [f] of sections 6 of the Act. The Consumer Protection Act also provides for the consumer Disputes Redressal Agencies. THE CONSUMER PROTECTION {AMENDMENT} BILL 2011 The Consumer Protection [amendment] bill 2011 was introduced in the Lok Sabha on December 16, 2011 by Mr. K. V. Thomas. It has been referred to the standing committee on Food, Consumer affairs and public Distribution. The Bill defines unfair contract to include a contract which has one or more of the following clauses [a] excessive security deposit; [b] imposition of disproportionate penalty;[c] refusal to accept early repayment of debt and; [d] termination of contract without reasonable cause. Under the bill Unfair Trade Practice includes [a] failure to take back the goods or withdraw the services within a period of 30 days after the receipt of the goods by the consumer; and [ii] disclosure of confidential personal information. Under the act, a maximum of two members are to be appointed to the District Forum. The

The Bill increases the minimum age of members from 35 years to 45 years in the case of state Commission and from 35 years to 55 years in the case of National Commission. It also increases the tenure of experience requires to be appointed as members from10years to 20 years in the case of the state Commission and from 10 years to 30 years in case of the national Commission Under the Act, a maximum of 50 percent of the members of the national Commission are required to be persons having a judicial background. The Bill defines the term judicial background to include present and former judges of a


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High Court or the Supreme Court of India.

pollution) Act 1981; the Environment (protection) Act, 1986; Judicial activism in India to protect the environment and public health from unethical business. The Supreme Court has played a powerful and efficient role in interpreting the provisions of the constitution and the environment law. For example Article 21 gives right to live. The Supreme Court interpreted this article and extended it to the environmental pollution. It held that the right to love under article 21 is very exhaustive and it includes right to fresh air, water and environment. This is Judicial activism which has put reasonable restrictions on those business units which tries to use unethical means to carry out their activities. Some important court cases which put check on unethical way of functioning of some business. M.C. Mehata vs. Union of India and others. (Brick Kilns Case] 91998)9 SCC 149 Brief facts: the petitioner, a practicing advocate, filed a writ petition alleging that there were 246 brick kilns in Delhi. All of them were polluting the air. They causes public nuisance. The air pollution caused by the brick kilns disturbed the eco-system and spread the diseases of skin and lungs to the people in the surrounding areas. Judgement: the Supreme Court gave the Judgement that all the 246 brick kilns should stop functioning in the city. The deputy commissioner of police concerned is directed to close these brick kilns and to file compliance report in this court.

Government of India has enacted environmental laws to make business players take care of environment and put on them the responsibility to protect environment while carrying out business the Supreme Court gave a broader and depth meaning to the article 21 of the Indian constitution and observed that Right to wholesome Environment is a Fundamental Right. It interpreted that the right to life and personal liberty includes the right to a wholesome environment. It held that right to live is not a real right to live that it should accompany with free and pure air, land and water. Accordingly government enacted laws to protect environment along with sustainable development. These laws are as follow, In the Stockholm declaration for the first time serious concern were raised about the environmental pollution. This conference suggested some ways to protect the environment and ecological balance while carrying on business. It also suggested the principal of sustainable development. India being a participant member Indian Parliament enacted several Acts for the prevention and control the pollution of the environment thus protecting both environment animals and human being and allowing business also by putting the responsibility on business houses as business ethics. The Acts include: The water (Prevetion and control of pollution) Act,1974; the air(prevention and control of


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The workmen employed in the above mentioned 246 kilns shall be entitled to the rights and benefits as were given in Vellore citizensâ&#x20AC;&#x2122; welfare forum case.

national integration, which are as follows.

What Article 19(1)(a) of the Indian constitution says,

Such decisions of the court have helped to benefit both to the environment and sustainable development with ethical business practices.

Article 19(1)(a) secures to every citizen the freedom of speech and expression. The freedom of speech and expression means the right to express oneâ&#x20AC;&#x2122;s convictions and opinions freely by word of mouth, writing, pictures or any other mode. But this right does not confer an absolute right it imposes some restrictions on it.

Government also brought amendments to the factories act, 1948 which has been recently replaced with new amended one which take care of both.

Reasonable restrictions under Article 19(2). The freedom of speech and expression does not confer an absolute right to speak, broadcast or publish, without responsibility, whatever one may choose or an unrestricted or unbridled lincence that gives immunity for every possible use of language and prevents punishments for those who abuse this freedom. Clause (2) of Article 19 specifies the limits up to which the freedom of speech and expression may be restricted. It enables the legislature to impose restrictions on the right to free speech under the following heads: 1) Security of the States 2) Friendly relations with foreign States 3) Public order 4) Decency or morality 5) Contempt of Court 6) Defamation 7) Incitement to an offence 8) Sovereignty and integrity of India Now we will discuss these heads one by one

Managing business ethics through Media. Today media has emerged as the most powerful instrument of social change. Today media reaches almost all parts of the world and to each and every person in the nook and corner of the world. In a democratic country like India the role of media is very pivotal and crucial. Media is known as the fourth pillar of democracy. People also canâ&#x20AC;&#x2122;t live without media. Considering the importance of the media business tycoon are trying to rope in this powerful means to take their product and services to the people. There is a strong possibility of this media being misused by these business tycoons to carry out their propaganda through advertisements mostly false and misguiding. Keeping all these hidden threats in mind the constitution of India has put some reasonable restrictions on media in the interest of general public and for


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1. Security of the states- Under clause (2) of article 19, reasonable restrictions on the freedom of speech and expression can be imposed in interests of the security of the state. The security of the State may be endangered by crimes of violence intended to overthrow the government. Serious and aggravated forms of public disorder are within the prohibition of the expression security of the State. Incitement to commit violent crimes like murder can also endanger the security of the Stat. 2. Friendly relations with foreign states. 3. Public order- the preservation of public order is one of the grounds for imposing restrictions on the freedom of speech and expression. The expression public order is used here as synonymous with public peace, safety and tranquility. Utterances tending to incite breach of the peace or riot, use of threatening, abusive or insulting words or behavior in any public place or ay any public meeting with intent to cause a breach of the peace or whereby breach of the peace is likely to be caused, and all such acts as would endanger public safety. Utterances made with deliberate intentions to hurt the religious feelings of any class of persons is also a threat to public order. 4. Decency or morality- decency or morality is another ground on which freedom of speech and expression may be reasonably restricted. Decency connotes the same as lack of obscenity. Obscenity becomes a subject of constitutional interest since it illustrates well the clash between the right of the individual to freely express his opinion and the duty of the state to safe guard the morals. It is obvious that the right to freedom of speech cannot be permitted to deprave and corrupt the community, and therefore, writings or other objects, if obscene may be

suppressed and punished because such action would be to promote public decency and morality. 5. defamation- defamatory matter which exposes a person about whom it is published, to hatred, ridicule or contempt. 6. Incitement to an offence- the freedom of speech cannot confer a licence to incite people to commit offence. 7. Integrity and sovereignty of India. This provision is made to guard from the freedom of speech and expression being used to assail the territorial integrity and sovereignty of the union. For keep check on the advertisements being given in various media government has constituted The Advertising standards Council of India as a part of business ethics. ADVERTISING STANDARDS COUNCIL OF INDIA In order to enforce an ethical regulation code, the Advertising Council Of India was set up. It laid down following basic guidelines in order to achieve the acceptance of fair advertising practice in the interest of the consumers. To ensure the truthfulness and honesty of representations and claims made by advertisements and to safeguard against misleading advertisements. To ensure that advertisements are not offensive to generally accepted standards of public decency To safeguard against indiscriminate use of advertisement for promotion of products which are regarded as hazardous to society or to individuals to a degree or of a type which is unacceptable to society at large; and


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importance hand in hand relations between business and welfare of human being.

To ensure that advertisements observe fairness in competition so that the consumers need to be informed on choices. New media and Government control for business ethics.

REFERENCES [1.] D.K.Singh, Constitution of India,. Eastern Book Company, Law Publishers, 34 lalbagh Lucknow,

With the emergence of new social media new challenges and problems arose regarding its control as it is being used rampantly by business hubs to advertise their products and services. To keep watch and control on such media government of India has enacted The Information technology Act, 2000 and amended one 2008, 2009. With this the government has carried out necessary changes in the Criminal procedure, The Indian contract Act. Thus in accordance with the provision of Indian constitution government has initiated several effective steps and measures to manage business ethics. Here government playing purely as a catalyst to promote business and at the same time to protect the general interest of the people.

[2.] Gade veera Reddy, The Environmental Law, Sujata law Books Kothi Hydrabad 2006 [3.] Amina Iqbal Yusuf, The Consumer Protection Act, 1986[Mumbai, C. Jamanadas &Company, 2004] page no 3, 5, 8, 10, 12,13 [4.] Gade Veera Reddy, The Companies Act, 1956, Sujata law Books Kothi Hydrabad 2006 [5.] Yashwantrao Chavan Maharashtra Open University, Nashik, Business Law, 2006

CONCLUSION From the above discussion it can be conclude that Indian constitution has laid down a very strong and sound foundation for the robust growth of business along with the reasonable restrictions on it to protect the interest of general public. Government strictly in conformity with these provisions from time rose to the occasion by framing appropriate rules and regulations like The consumer Protection Act, The Protection of Environment, media laws, Information technology Act tec. Not only this judiciary is also playing a very constructive and active role in protecting the interest of business and general public under sustainable development which underlines the


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CORPORATE GOVERNANCE FAILURES IN CORPORATE SCANDAL: THE CASE OF ALPHA CREDIT CARD COMPANY Shehanie Widanagama University of Sri Jayawardenapura ABSTRACT Alpha Credit Card Company Limited (hereafter ACCCL) which was engaged in unauthorized fund collecting from the Sri Lankan public, collapsed in year 2008. Analysis of ACCCL’s multiple sources of archival data found reason being inefficiency of ACCCL’s corporate governance system. Three research questions describe the field “corporate governance structure of ACCCL” were addressed. Thereafter analysed how prevailed governance failures contributed to collapse of ACCCL. Aim of this paper is to explain why the company failed, and will discuss question “governance structure prevailed at ACCCL?” and objective “salient features of governance structure prevailed at ACCCL. Access to corporate data is the key to case study success (Starkey, 1997). Prevailed scandalous environment embedded within the company resulted ACCCL ranked among the largest frauds committed in South Asia. This setup prevailed grounds for my analytical study as unique field with available resources to analyse the case. Despite difficulty to access data directly from company, multiple sources of data were used. Findings were internal, external corporate governance failures where both information demand and supply side actors, failed to monitor ACCCL’s activities. Keywords: Case Study, ACCCL, Corporate Governance failures, Scandal.

INTRODUCTION There is an increasing interest in corporate governance practices of companies since year 2001 due to collapses of large international companies. Most researchers found financial reporting irregularities, inadequate internal controls and risk management as causes of such failures.

history (29.06.2011 CCA Report p, 30). ACCCL was second largest scam in South Asia because estimated fraud of Satyam Computer scandal is Indian Rupees 78,000 million (Jones 2010). Above facts explains ACCCL case as the most important case and accounting scandal. Sri Lankan Court dictated fraud was above Rs 26 billion.

ACCCL was reported as the largest credit card fraud (Deputy Solicitor General (of 2009) in Mt. Lavinia Court) and the largest tax fraud by a white collar in Sri Lankan

Between year 1980 and 2000, Sri Lanka reported 13 failures of finance and real estate companies that collected public funds (Committee on Public Enterprises Report 2007). The nation witnessed 11 corporate


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worth the effort studying ACCCL as it rationalise being very much in agenda of a contemporary issue in Sri Lanka.

failures in year 2008 (local newspapers), which raised questions among public on credibility and effectiveness of corporate governance model, financial reporting standards and regulation in Sri Lankan fund collecting companies.

LITRATURE REVIEW Corporate governance received emphasis both in practice and in academic research (Blue Ribbon Committee Report 1999, Ramsy Report 2001, SarbanesOxley Act 2002, Bebchuck and Cohen 2004). This emphasis is due to highly publicized financial reporting and frauds as Enron, Aldelphic and Parmalat. And unprecedented number of earnings restatements (Loomis 1999, Wu 2002, Palmrose and Scholz 2002, Larcher et al. 2009) and claims of earnings manipulation by corporate management (Krugman, 2002). Academic research found an association between weaknesses in governance and poor financial reporting quality, earnings manipulation, financial statement fraud and weak internal controls (Dechow et al. 1996, Beasley 1996). (Levitt and Vinten 2000) emphasise the need to improve corporate governance over financial reporting process. Whittington (1993) and Melis (2004a) argue corporate financial reporting and corporate governance systems are highly correlated. Rezaee et al. (2003), reveal role of audit committee and the disclosure level of the committee play a vital role in fostering good corporate governance practices. Closest we have come to seek cause of liabilities for banking failures in our countries has been massive corporate governance failures (Kirkpatrick, 2009).

Sri Lankan literature on precedent scandals was nonexistent. While trying to distinguish reasons why the company collapsed, examination of Deputy Solicitor General representing the Attorney Generals Department for ACCCL’s fraud case filed at Mt. Lavinia Court criticized the main regulator, Central Bank of Sri Lanka and The Ministry of Finance for failing to use their whistle blowing provisions. A Major credit card fraud by ACCCL board of directors and the company was not audited for 15 years as professional diligence by the external auditor. Such internal and external failures signaled symptoms that ACCCL suffered from a poorly designed corporate governance system. While many reasons seem to appear being associated with scandal, reason for corporate governance failures in ACCCL was not addressed in foregoing Sri Lankan literature. Accordingly the study attempted to fill such gap. Probably this study was “the first case” that comprehensively examined reasons for failure of an outstanding Sri Lankan company. For literature on ACCCL only one academic paper was available (Senaratne 2009), it was studied on a different context. Though corporate governance failures are being debated and researched in western countries, it remains largely neglected and under researched in Least Developed Countries (Uddin and Hopper 2001). Considering views explained above it is

Corporate governance in least Developed Countries (hereafter LDC’s), this area of research has been receiving attention since 1997 Asian Debacle (Mock et al. 2005,


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Singh and Zammit 2006). International Monitory Fund and World Bank (2002) introduced it as a key international development issue. Senaratne (2009) found ACCCL operated Ponzi scheme which is an investment fraud. Withdrawals were financed by investors than profit obtained through investment activities. Thus above literature supports importance of analyzing corporate governance structure of ACCCL.

as data will be definitely flawed with a bankrupt company (Melis, 2005). This study adopted descriptive case study approach from empirical evidences emerged in ACCCL case. Archive triangulation was not possible with the other methods of data collection. Disadvantage of using archives was it was subject to validity. To verify the validity, each piece of data was compared with other kinds of evidence on the same issue by myself, data triangulation was possible. ACCCL could not analyse in isolation due to cross holdings of Beta Consolidated.

METHOD Livedoor scandal at Japan in 2004, lawsuit was proceeding at time of writing in 2007, Suda (2010). Prosecution was examined at Parmalat analysis, Melis (2005b). This study was carried out while legal proceeds were on going in Sri Lankan courts. Archives were used to discuss 18 accounting scandals by 20 authors in 12 countries (Jones 2010 p, 14). Archives were the only source ACCCLâ&#x20AC;&#x2122;s

ANALYSIS AND DISCUSSION Internal and external governance actors associated with ownership, control structure and monitoring structure are as follows. Ownership and Control Structure

corporate governance history could be unearth, this method was used to collect data. Interviews

Figure 1.1 illustrates author constructed view of ACCCLâ&#x20AC;&#x2122;s concentrated share ownership by Chairman/Managing Director through cross holdings structure


nership oof Figure 1.1, Figure 1.1, concentrated ow ownership ACCCL (E&Y Report p,116).


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Companies Act Section 118 state, directors giving notice can inspect records. Whereas the Chairman said “only during last few days I realized ACCCL involved in major credit card fraud (22.12.2008 Daily News)”. On 23.12.2008 he said “Deputy Chairman told me we are not breaking law accepting deposits”. Thus, Senior Management failed to perform duties in Companies Act.

In Sri Lankan public companies, ownership is highly concentrated, an individual’s share ownership exceed 50% indicate controlling shareholder has absolute control over the firm (Senaratne and Gunarathne 2007). In Beta Consolidated (16th respondent FR case), the 450 subsidiaries (Janmabhinanda Journal 2007) was controlled by Chairman/Managing Director through “cross holdings”.

Role of Board of Directors As per Company Act Section 166, the board within six months after balance sheet date to prepare the Annual Report. The 31.03.2007 Profit and Loss Account and Balance Sheet was only 02 pages (E&Y Report p, 67). Section 151, financial statements should give true and fair view of profit or loss, expenses, for accounting period. ACCCL did not maintained accounting records. Most liabilities reported as assets (E&Y Report p, 05). Estimate loss after investigative audit was Rs 2,634,298,140 (E&Y Report p, 70). Laurie Muthu Krishna audited financial statement for same period document profit of Rs 20,096,763. Profit in financial statements and book entries are not always real to consider (Hepworth, 1953). Thus ACCCL directors failed performing duties in Companies Act.

He held individually 2%, via institutional ownership 94.9%, as block holder 96.9%, imply ACCCL was dominated by a “corporate insider”. Main institutional shareholder was Beta Ltd 41.4% which implies ACCCL is a closely held subsidiary of Beta Consolidated. Corporate Governance Actors of ACCCL Information Supply Side Actors Role of Corporate Senior Management Deputy Solicitor General (of 2009) informed court, ACCCL is a white collar crime and Criminal Investigations Department said Rs 26 billion was deposited in ACCCL, of which Rs 06 billion transferred to related parties, Rs 01 billion used as illegal payments, Rs 14 billion misappropriated and Rs 05 billion missing”. From this point ACCCL case seems a false accounting story due to governance failures. Thus role of governance actors as persons responsible governing ACCCL is examined. If Chairman has superior power (figure 1.1) as major shareholder, minority shareholders (who were ACCCL depositors) needed a well function internal governance system and external auditor giving true and fair view of financial statements (Melis, 2005).

Role of Internal Audit Division (Written submission on 04.05.2009) confirm internal audit division directed by the Chief Financial Controller (11th respondent of Fraud case, E&Y Report p, 13). There were unexplainable differences in cash and bank confirmations. Physical cash balances not available (E&Y Report p, 03, 16). Role of audit committee, disclosure level is vital to


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foster good corporate governance (Rezaee et al. 2003). In such governance environment, related company records (E&Y Report abbreviations) can be manipulated as same management was in 44 Alpha cluster companies (27.10.2010 CCA Report p, 02). Latest financial statements of companies ACCCL invested were not available (E&Y Report p, 22), imply subsidiaries failed preparing Annual Reports. Otherwise as Section 120, E&Y can obtain copy from Registrar of Companies. Above examination advocate ACCCL’s internal audit did to perform expected role in Companies Act.

Role of Company Secretary Companies Act Section 221 state, every company to have a Secretary. International Consultancy and Corporate Services Pvt Ltd (hereafter IC&CS) was secretary (CBSL Interim Report 2009, E&Y Report p 39, written submission by Attorney General HC 5675/11 CF/09/2008). CBSL Interim Report 2009 states “there is no clear record of directors or employees. Names of 112 past and present directors were handed to CBSL by IC&CS. In spite of the declaration order, ACCCL directors failed furnishing details of past and present directors or of employees as at 30.04.2009”. This justify that Company Secretary did not maintain employee details though 3,500 were employed (CBSL Interim Report 2009), thus failed to perform expected duties.

Role of External Auditor Companies Act Section 153 state, financial statements to certify by the person prepared dated and signed by two directors. ACCCL balance sheet was signed by auditors Laurie Muthu Krishna & Company (LMK) (E&Y Report p 28, 39, 67 and 28.12.2008 Sunday Times). E&Y could not locate any journal entries suggested by LMK. E&Y adjusted entries of audited financial statement by LMK and later adjustments by E&Y (E&Y Report p, 08). In Enron auditor Arthur Anderson, Japanese Kanabo auditor Chuo Aoyama Price waterhouse Coopers lack of professionalism, led to collapse of two audit firms (Jones 2010 p, 475). Restatement is a good proxy for presence of accounting fraud in a firm’s history (Thomasic 2011). Section 158, auditor be re appoint at Annual General Meeting. No record LMK was re appointed or giving notice they do not wish to be re appointed. Thus external auditor did not perform expected role in Companies Act.

Information Demand Side Actors Role of Individual Shareholders ACCCL shareholders represented the main Board, so they did not file prosecution for non conduct of meetings as Section 133, 134, 137. No surprise individual shareholders allowed preparers of financial statements to manage measurement and presentation of accounts so that they gave the view of corporate insiders, at expense of minority shareholders (Melis, 2010). Role of Banks Temporary loan to ACCCL from Beta Seylan Bank PLC, Beta Insurance PLC, The Beta Finance PLC, Beta Investcorp prior to year 2005 (E&Y Report p, 46). Funds to ACCCL from Beta Seylan Bank PLC, Beta Insurance PLC, Beta Asian Finance PLC, Beta Ltd, Alpha Holdings (E&Y Report p,


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63). Banks of Beta Consolidated subsidiaries were not independent to question such transactions, due to ownership of de facto Chairman/Managing Director. Thus Individual shareholders did not perform expected role in Companies Act. Economic structural policies increased noncompliance of listed companies in LDC’s (Wallace 1990, Wallace & Briston 1993).

Eye & ENT Hospital failed to detect above illegal share transfer, no surprise E&Y could not detect ACCCL deficiencies. Financial analysts in Beta Consolidated companies failed to detect ACCCL violated Company Act Sections 219, 220, 367. The monitoring structure of ACCCL Internal governance of Sri Lankan private limited liability company is characterized by presence of one main gate keeper, the external auditor. But some have an internal audit division on voluntary compliance. Main gate keepers for external governance are Register of Companies and Sri Lanka Accounting and Auditing Standards Monitoring Board.

Role of Institutional Investors Ownership was widely held by Beta Ltd by 41.43%. Institutional investors were Beta Consolidated subsidiaries. Though Beta Asian Finance held 11.2% shares it was not independent refusing invest in ACCCL as ultimate owner was Chairman/Managing Director. Presence of dominant corporate insider is associated with poor disclosure (Forker, 1992). Deputy Chairman/Chief Executive Director of Asian Finance (13th respondent of FR case), also served in ACCCL (E&Y Report p, 63). Board composition is important to determine quality of reported earnings (Klein 2002). Thus institutional investors did not perform the expected role in Companies Act.

Role of the statutory auditors Role of Sri Lanka Accounting and Auditing Standards Monitoring Board On submission of ACCCL’s annual reports as at 31.03.2007 to SLAASMB, no evidence found SLAASMB reported irregularities, mismatches, errors done by ACCCL’s external auditor LMK, the violations of Sri Lanka Accounting and Auditing Standards later identified by investigative auditor (E&Y Report 2011). No evidences found ACCCL filed annual reports with SLAASMB. Greate Wall Fund Raising in China, dubious activities was not discovered by Zongcheng accounting firm (Chen, Hu, Xiao 2010). (E&Y Report p, 03-09) reports, unrecorded journal entries, non availability of latest financial statements, age analysis of outstanding credit cards, doubtful recoveries, reasons for write off of credit card balance is not available. Most developing and transition economies failed

Role of Financial Analysts Share transfer between ACCCL, Alpha Eye & ENT Hospital and Beta Insurance PLC’s Employees Gratuity Trust Fund (13.01.2010 CCA Report p, 11-12) took place violating Company Act Sections 219, 220 being aware company was insolvent as Criminal Investigations Department seized ACCCL operations on 22.12.2008. Company Act Section 367 state, another company at transaction controlled by same director is a related company. E&Y as auditor of Alpha


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to enforce their laws, rules and regulations consistently and evenly. Such offences go unpunished even if stiff penalties apply in theory. Auditing is another area of weakness in corporate governance (World Bank Report 2003, on Corporate Governance). (a) Role of Statutory Regulators

Banking or Finance Companies Act. Notice on 21.07.2003, among names of such 31 institutions 29th was ACCCL. Notice on (12.10.2008 Sunday Observer) published 06 prohibited finance institutes, but “omission of unregulated firms in Beta Consolidated” in prohibited list, questioned Chief Justice (of 2009) (24.03.2009 Daily Mirror). As Companies Act Section 172, Registrar of Companies may appoint inspectors to investigate a company on application by Special Resolution. Section 120, company shall keep records for inspection any person serving notice. Upon SIU Report findings of ACCCL in 2005, no record CBSL served notice to inspect such documents, thus CBSL failed performing duties to ACCCL. White collar and corporate crimes are part of the market and are most difficult crime for legal system to deal. As crimes are huge, powerful individuals, corporations promote, powerful political support for corporate risk taking (Gobert and Punch 2003, Orland 1995, Simpson and Gibbs 2007).

Role of Registrar of Companies in Sri Lanka Section 170, subsection (2) Registrar may notice in writing, a private company to deliver to him within 20 working days financial statements, group financial statements, copies of Auditors Report. 02 page copies of Profit and Loss and Balance Sheet were given by CCA to E&Y (E&Y Report p, 67). Such document was not filed at Register of Companies or court testimony it was not certified from Registrar of Companies. Justify Deputy Solicitor General’s statement in Mt.Lavinia Court, ACCCL not audited for 15 years (19.04.2010 Sunday Times). Companies Act Section 154 require, at Annual General Meeting to appoint the auditor by shareholders. E&Y Report said LMK was ACCCL’s external auditor. Deputy Solicitor General in Mt. Lavinia court (19.04.2010 Sunday Times) said ACCCL was not audited for 15 years. Thereby Register of Companies failed to monitor, take action as Subsection (02) of 154.

Role of Department of Inland Revenue of Sri Lanka As Inland Revenue Act No 10 of 2006, the department collects income tax from companies. Rs 1,981,785,438 defaulted tax from ACCCL to Department of Inland Revenue (hereafter DIR) (E&Y Report p, 57 and 29.06.2011 CCA Report p, 30). (E&Y Report, p 20, 32, 33) state, tax receivable Rs 16,707,583 was un reconciled from year 2002. E&Y did not locate withholding tax records (hereafter WHT) deduct from security deposits as ACCCL paid rebate (E&Y Report p, 20). Justify ACCCL did not deduct as WHT was not applicable. E&Y

Role of Common Regulators Role of Central Bank of Sri Lanka CBSL public notices on 29.01.2003 and 30.01.2003 said, some institutions do not accept deposits, but raise funds by other means, are not required to obtain license by


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(3rd respondent of FR case) for violating Fundamental Rights. Regulation should seek to develop more effective strategies with bank and finance companies failures as we have been doing cheap supervision (Larsen, 2008). (16.10.2011 Sunday Island) states, what motivated CBSL Governor disregard SIU Report by Supreme Court, merits investigation by His Excellency President of Sri Lanka (of 2006) as Minister of Finance, CBSL function under Ministry of Finance in year 2006. Thus Ministry of Finance failed to perform expected duties towards ACCCL.

did not mention if WHT was paid from ACCCL or Alpha cluster companies as consolidated statement was maintained. German ComRoad auditor failed to spot there was a fictitious customer (Jones 2010 p, 475). Deputy Solicitor General (of 2009) in ACCCL’s fraud case said, company evaded taxes due to DIR for 09 years (19.04.2010 Sunday Times). E&Y said they could not verify from DIR, as investigative audit was completed on 25.03.2011 (letter to CCA by E&Y 16.05.2011). Interestingly DIR sent letter to CCA on the “very closing date” of investigative audit. Justify E&Y aware ACCCL did not pay tax, withheld commenting. Thus DIR failed to perform expected duties. Parmalate auditors allowed company to post a letter requesting confirmation of bank balance in cash and investments from Bank of America. Letter was returned agreeing a fictitious balance. Auditors then relied on this fraud letter, fact there was no such money held by company went undetected (Jones 2010 p, 475).

CONCLUSION Analysis of ACCCL case explained ACCCL deviated from main business of issuing credit cards for Beta Seylan Bank. Instead ACCCL accepted public deposits, by issuing ACCCL’s own credit card which was collateral to Articles of Association. A major falsification of corporate accounts by fraudulent accounting practices which violated both fair and faithful presentation of corporate financial reports. Information demand and supply side governance actors were corporate insiders and related parties of Beta Consolidated. This made financial statements fraud much easier. ACCCL’s financial statements included created assets and revenues from related parties, overstated earnings, under stated liabilities. Thus liabilities were reported as assets, fictitious investments in banks, misreported actual transaction (payment transfers as donations to related companies, directors ex gratia payments), ACCCL created false transactions (credit card loans to board of directors, employees and preferential customers), consolidated financial statement of 44 companies in Alpha cluster represented as ACCCL to portray balanced view causing material misstatement in individual and group accounts. In Balsam AG scandal Germany, control failure of supervisory board made

Role of Ministry of Finance of Sri Lanka (16.10.2011 Sunday Island) said Supreme Court Order on 23.03.2009 SC Application 191/09, 192/09 197-216/09, 225-226/09 head of SIU record “examiners view ACCCL carried finance business contravene Finance Company Act No 78 of 1988”. Document to Monitory Board on 24.11.2006 said “Monitory Board is informed of above, invite approve discontinue ACCCL exam as Section 11 Finance Companies Act. Section 11 (1) prima facie deny equal protection of law Article 12 (1) of the Constitution”. Minister of Finance (2nd respondent of FR case), Secretary to the Ministry of Finance


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of Good Corporate Governance and More Market Control”. Corporate Governance, An International Review, 10 (2) p p 83-93.

financial statements fraud easier. Red flags ignored by external auditor (Lenz, 2010). Thus apparent gap between the expected role and absolute role performed by governance actors led to the ultimate failure of the company. Non compliances to Codes, Laws and Acts in ACCCL case, left traits of typical South Asian scandal while bearing country specific characteristics due to regulatory failures. Accounting research in least Developed Countries, non compliances and non disclosures are common findings of many studies (Perera 1975, Larsen and Kenny 1995, Mir and Rahaman 2005, Belal and Owen 2007). As required by University of Sri Jayawardenapura, hypothetical names were used. Issues of corporate governance can be further examined if company internal documents were unearthed. If financial statements could be traced, gaps in Accounting Standards, creative accounting practices could be reviewed.

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