Online form to request ADDITION of a new journal - …€¦ · Online form to request ADDITION of a...

Online form to request ADDITION of a new journal

This form is designed to formalise requests to the ABDC Journals Mini Review Panel 2016 seeking the inclusion of an academic journal which is

currently omitted from the ABDC Journal Quality List 2013.

Eligible journals are those that:

(a) are newly launched since 1 January 2011;

(b) achieve a minimum "business element test" and

(c) satisfy a minimum threshold of research quality.

Please complete a separate form relating to each journal for which you wish to make a submission of this type.

Publication Information

Journal Title: Journal of Asian Finance, Economics and Business

Year of Inception: 2014

Field of Research (FoR) Panel: 1502 Finance

What ABDC rating do you propose for this journal?: A

Nominate the "best" comparator journal (journal from the ABDC Journal Quality List 2013 that is most similar in research quality): Journal of World

Business

Journal information

Publisher: Korea Distribution Science Association

Frequency: Quarterly (4 issues per year)

Current Volume: 3

Current Issue: 2

ISSN: 2288-4637

Refereed: y

Editor's Name: Jung Wan Lee

Institution: Boston University

Web Address: http://www.jafeb.org/

Nature of Submission

Submitter type: Individual Submission

Submitter Name: Jung Wan Lee

Submitter Email: [email protected]

Institutional Affiliation: Boston University

Executive Summary

Brief statement on the unique features of the journal and how it is distinguished from other journals in the field. First, the journal introduces region

specific content. The journal publishes original research analysis and inquiry into contemporary issues of finance, economics and business in Asia,

including Central Asia, East Asia, South Asia, Southeast Asia, and Middle East. The mission of the journal is to bring together the latest theoretical

and empirical finance, economics and business management research in Asian markets. The journal audience includes: academics and

researchers, economists, social scientists, international business persons, and policy makers, as well as managers from both for profit and not for

profit corporations. [See further detail http://www.jafeb.org/AboutUs/01.php] Second, the journal introduces Asian scholars and researchers who use

English as a secondary language to the world. The journal publishes four issues per year quarterly in full English. To extend a large readership and

to improve quality of English presentation, all accepted articles for publication in the journal require English language editing services, which is

committed to the highest standards of editorial review and quality control of the journal. All articles for publication in the journal are peer-reviewed.

[See further detail http://www.jafeb.org/ForContributors/01.php] Third, the journal introduces the highest standards of publication ethics to Asian

scholars and researchers. The journal is committed to upholding the highest standards of publication ethics and takes all possible measures against

any publication malpractices. By supporting the Committee on Publication Ethics (COPE) the journal helps support the ethical imperative in

promoting publication ethics and providing advice for authors and contributors. The journal is committed to actively combating plagiarism using

CrossCheck and CrossRef. [See further detail http://www.jafeb.org/ForContributors/01.php] Fourth, the journal is making good progress to become a

prestigious and regional business, economics and finance journal with a rejection rate of 80%. Rejection rate 2014 February Vol.1(1): 37% 2014

May Vol.1(2): 55% 2014 August Vol.1(3): 63% 2014 November Vol.1(4): 66% 2015 February Vol.2(1): 69% 2015 May Vol.2(2): 69% 2015 August

Vol.2(3): 70% 2015 November Vol.2(4): 77% 2016 February Vol.3(1): 80% 2016 May Vol.3(2): 80% Due to increasing number of submissions,

rigorous double-blind peer review process, and an issue of publication space in each issue, the average overall time from submission of the

manuscript to publication and print from now on takes 3-6 months. All publications will include the public disclosure of publication information,

editorial board, table of content, full manuscript of published articles on the issue, guides for authors, publication ethics policies and guidelines, and

Journal Publishing Agreement Form. Fifth, the journal truly helps those authors who want to publish their scholarly articles with no submission fee,

no article processing charge, and no publication fee. Publication fees and charges: Free Thank you in advance for your evaluation. Sincerely,

Substantive Business Element Analysis Metric

ABDC FoR 1401 Economics

1502

Finance

1503

Management

1504

Marketing

No. of

Article

Rejection

Ratio

Vol.1 (1) [3], [4]*, [5] [1], [2] 5 37%

Vol.1 (2) [6], [7] [9] [8] 4 55%

Vol.1 (3) [11] [10] [12], [13] 4 63%

Vol.1 (4) [16] [14] [15], [17] 4 66%

Vol.2 (1) [20]* [19] [18], [21] 4 69%

Vol.2 (2) [22]

[23], [24], [25],

[26] 5 69%

Vol.2 (3) [31], [32] [28] [29], [30] [27] 6 70%

Vol.2 (4) [34], [35] [33] [36] 4 77%

Vol.3 (1) [37], [38], [39] [40] 4 80%

Vol.3 (2) [41], [45], [46] [42], [43], [44] [47] [48] 8 80%

Portfolio 39.58333333 22.91666667 22.91666667 14.58333333

Coverage 39.58% 22.91% 22.91% 14.58%

Content > 95%

Contributors > 95%

* interdisciplinary

Business

Faculty

Title of the paper Authors Affiliation Paper DOI

[1] Dynamic Relationship between Stock Prices and

Exchange Rates: Evidence from Chinese Stock

Markets

Jung Wan Lee, Tianyuan

Frederic Zhao

Administrative Sciences Department,

Boston University, USA

doi:

10.13106/jafeb.2014.vol1.no1.5.

[2] Emerging Trends of Financial Markets Integration:

Evidence from Pakistan

Irfan Ahmed Università degli Studi di Macerata, Italy doi:

10.13106/jafeb.2014.vol1.no1.15.

[3] The Formation of Innovative Clusters in

Kazakhstan: Analysis and Methods for Identifying

Specialization

Anel A. Kireyeva, Nailya K.

Nurlanova

Institute of Economics of the Ministry of

Education and Science of the Republic of

Kazakhstan

doi:

10.13106/jafeb.2014.vol1.no1.23.

[4]* A Model for Collaborative Development in the

South China Sea

Virginia A. Greiman Administrative Sciences Department,

Metropolitan College, Boston University,

USA

doi:

10.13106/jafeb.2014.vol1.no1.31.

[5] Economic Impacts of Energy Development on

Domestic Economy

Tahereh Alavi Hojjat Division of Business, DeSales University,

USA

doi:

10.13106/jafeb.2014.vol1.no1.41.

[6] Microfinance and Poverty Alleviation: An Empirical

Reflection

Stephen Mago Faculty of Commerce, Great Zimbabwe

University

doi:

10.13106/jafeb.2014.vol1.no2.5.

[7] Priorities, Mechanisms and Prospects on Industrial

Clusters and Special Economic Zones in Kazakhstan

Saken S. Yespayev Institute of Economics of the Ministry


Kazakhstan

doi:

10.13106/jafeb.2014.vol1.no2.15.

[8] The Effect of Warning Labels on Cigarette

Packages: Textual vs. Textual-Visual and Self-

Efficacy

Rizal Edy Halim, Faisal

Muttaqin

Management Department, Faculty of

Economics, University of Indonesia

doi:

10.13106/jafeb.2014.vol1.no2.25.

[9] FC Aヮヮヴﾗ;Iｴｷﾐ Pﾗヴデaﾗﾉｷﾗ “WﾉWIデｷﾗﾐﾗa TWｴヴ;ﾐげゲ Stock Market

Elham Shadkam Department of Industrial and Systems

Engineering, Isfahan University of

Technology

doi:

10.13106/jafeb.2014.vol1.no2.31.

[10] Asymmetric Information Spillovers between

Trading Volume and Price Changes in Malaysian

Futures Market

You-How Go, Wee-Yeap

Lau

Faculty of Business and Finance,

Universiti Tunku Abdul Rahman (UTAR),

Malaysia

doi:

10.13106/jafeb.2014.vol1.no3.5.

[11] The Impact of Product Distribution and Information

Technology on Carbon Emissions and Economic

Growth: Empirical Evidence in Korea

Jung Wan Lee Administrative Sciences Department,


USA

doi:

10.13106/jafeb.2014.vol1.no3.17.

[12] Do Analyst Practices and Broker Resources Affect

Target Price Accuracy? An Empirical Study on Sell

Side Research in an Emerging Market

Samie Ahmed Sayed International Management Institute,

New Delhi, India

doi:

10.13106/jafeb.2014.vol1.no3.29.

[13] Most to Least Preferred Parameters Affecting the

Quality of Education: Faculty Perspectives in India

Neeraj Kumari Faculty of Engineering & Technology,

Manav Rachna International University

Faridabad, Haryana, India

doi:

10.13106/jafeb.2014.vol1.no3.37.

[14] The Value of Reverse Mortgage Loans: Case Study

of the Chinese Market

Ping Wang, Ji-Pyo Kim Graduate School of Public Policy and

Information Technology,Seoul National

University of Science and Technology,

Korea.

doi:

10.13106/jafeb.2014.vol1.no4.5.

[15] Proposal of Eco-M Business Model : Specialty Store

of Eco-friendly Agricultural Products Joined with

Suburban Agriculture

Jong-Baek Kim, Hyen-Ho

Lee, Hoe-Chang Yang

School of Business, Jangan University,

Korea

doi:

10.13106/jafeb.2014.vol1.no4.15.

[16] Analysis of Innovative Activity in Regions of

Kazakhstan

Karlygash Mukhtarova,

Aigul Myltykbayeva

The High School of Economics and

Business, Al-Farabi Kazakh National

University, Kazakhstan

doi:

10.13106/jafeb.2014.vol1.no4.23.

[17] A Study upon Effects of Family Restaurant

Consumption Values upon Satisfaction,Reliability

and Behavioural Intentions in Korea: Focused on

College Students at Metropolitan Area

Ha-Ya Sung, Jong-Jin Kim,

Myoung-Kil Youn

Dept. of Medical IT, & Marketing, College

of Health Industry, Eulji University, Korea

doi:

10.13106/jafeb.2014.vol1.no4.29.

[18] Customers Trust on Islamic Banks in Indonesia Hardius Usman Faculty of Economics and Business,

University of Indonesia, Indonesia

doi:

10.13106/jafeb.2015.vol2.no1.5.

[19] Mergers and Acquisitions as Vital Instruments of

Corporate Strategy: Current and Historical

Perspective

M. Jibran Sheikh, Mah-a-

Mobeen Ahmed, Qudsia

Arshad, Wajid Shakeel

Department of Management

Sciences,COMSATS Institute of

Information Technology, Pakistan

doi:

10.13106/jafeb.2015.vol2.no1.15.

[20]* On the Establishment of a New Spiritual and

Technological Cluster 岱Turkestan Valley帯 for

Kazakhstan Society

Sabden Orazaly the Center of Industrialization,

Competitiveness and Business, Institute

of Economy, Kazakhstan

doi:

10.13106/jafeb.2015.vol2.no1.23.

[21] Antecedents of Acceptance of Social Networking

Sites in Retail Franchise and Restaurant Businesses

Jung Wan Lee, Michael

Kwag, Rajasekhara Mouly

Potluri

School of Hospitality Administration,

Boston University, USA

doi:

10.13106/jafeb.2015.vol2.no1.29.

[22] A VAR Model of Stimulating Economic Growth in

the Guangdong Province,P.R. China

Jaime Ortiz, Jingwen Xia,

Haibo Wang

Global Strategies and Studies, University

of Houston, USA

doi:

10.13106/jafeb.2015.vol2.no2.5.

[23] The Optimization of Bank Branches Efficiency by

Means of Response Surface Method and Data

Envelopment Analysis: A Case of Iran

Elham Shadkam, Mehdi

Bijari

Industrial Engineering Department,

Faculty of Engineering, Khayyam

University, Mashhad, Iran

doi:

10.13106/jafeb.2015.vol2.no2.13.

[24] Human Capital and Methodic of Determination of

Its Cost: A Case of Kazakhstan

Zaure K. Chulanova, Anel S.

Ussenova

Institute of Economics under the

Committee of Science of the Ministry of


Kazakhstan, Kazakhstan

doi:

10.13106/jafeb.2015.vol2.no2.19.

[25] Up-gradation in Human Resource Management

Practices for the Biotech Industry in India

Neeraj Kumari Department of Humanities and

Management, Faculty of Engineering &

Technology, Manav Rachna International

University, India

doi:

10.13106/jafeb.2015.vol2.no2.27.

[26] Interactive Motivational Concept: A Study of

Motivation among Corporate of Bhopal Region in

India

Bharti Venkatesh, Amit

Kumar Sharma

VNS Institute of Management, Bhopal,

Madhya Pradesh, India

doi:

10.13106/jafeb.2015.vol2.no2.35.

[27] Factors Defining Store Atmospherics in

Convenience Stores: An Analytical Study of Delhi

Malls in India

Sanjeev Prashar, Pranay

Verma, Chandan Parsad, T.

Sai Vijay

Professor of Marketing, Indian Institute

of Management (IIM), India

doi:

10.13106/jafeb.2015.vol2.no3.5.

[28] An Exponential GARCH Approach to the Effect of

Impulsiveness of Euro on Indian Stock Market

Sahadudheen I Department of Economics, Calicut

University Centre, Kadmat, Union

Territory of Lakshadweep, India

doi:

10.13106/jafeb.2015.vol2.no3.17

[29] Demographic Trends and the Methods of their

Regulation in the Republic of Kazakhstan

Nailya K. Nurlanova,

Marziya K. Meldakhanova

Institute of Economics of the Ministry of


Kazakhstan.

doi:

10.13106/jafeb.2015.vol2.no3.23.

[30] Innovative Mechanisms in the Procurement

Logistics of Kazakhstan

Erzhan B. Zhatkanbaev,

Ernur S. Mukhtar, Maiya M.

Suyunchaliyeva

Department of Management and

Marketing, The High School of Economics

and Business, Al-Farabi Kazakh National

University.

doi:

10.13106/jafeb.2015.vol2.no3.33.

[31] Problems of Decarbonization of the Economy of

Kazakhstan

Bakhyt K. Yessekina Scientific Research and Education Center

"Green Academy".Kazakhstan

doi:

10.13106/jafeb.2015.vol2.no3.37.

[32] Energy Efficiency and CO2 Emissions of the

Transportation System of Kazakhstan: A Case of

Almaty

Aiman Yessekina, Amina

Urpekova

Scientific Research and Education Center

"Green Academy".Kazakhstan

doi:

10.13106/jafeb.2015.vol2.no3.41.

[33] Performance of Taiwanese Domestic Equity Funds

during Quantitative Easing

Ömer Faruk Tan Faculty of Economics, Administrative

and Social Sciences, MEF University,

Istanbul, Turkey

doi:

10.13106/jafeb.2015.vol2.no4.5.

[34] Does the Rise of the Korean Wave Lead to

Cosmetics Export?

Young-Seaon Park KOTRA New Delhi doi:

10.13106/jafeb.2015.vol2.no4.13.

[35] Development of Green Economy via

Commercialization of Green Technologies:

Experience of Kazakhstan

Karlygash S. Mukhtarova,

Aknur Zhidebekkyzy

Department of Management and

Marketing, The Higher School of

Economics and Business, Al-Farabi

Kazakh National University.

doi:

10.13106/jafeb.2015.vol2.no4.21.

[36] Independence and Transparency of the Central

Bank of Kazakhstan

Daniyar Nurbayev School of Business, Kazakh British

Technical University, Kazakhstan

doi:

10.13106/jafeb.2015.vol2.no4.31.

[37] Foreign Direct Investment Projects of Korean

Companies

YW;ﾐ; Cｴﾗｷが A┞ズW Y┑IW Ted Rogers School of Management,

Ryerson University. Canada

doi:

10.13106/jafeb.2016.vol3.no1.5.

[38] J;ヮ;ﾐげゲ EIﾗﾐﾗﾏｷI PWヴaﾗヴﾏ;ﾐIW さLﾗゲデ DWI;SWざぎ Myth, Reality, or Role Model?

Richard G. Anderson School of Business and Entrepreneurship,

Lindenwood University.USA

doi:

10.13106/jafeb.2016.vol3.no1.15.

[39] A Model of Innovation Development of the

National Economy of Kazakhstan

Raushan T. Dulambayeva,

Zhansaya Temerbulatova

High School of Economics and Business.

Kazakh National University named after

al-Farabi. Kazakhstan

doi:

10.13106/jafeb.2016.vol3.no1.33.

[40] The Impact of HR Practices on Job satisfaction: A

Case Study of Hotel Industry in Pakistan

Zia ul Islam, Shah Bano

Bangish, Hussain

Muhammad, Asad Shah

Jehan

Department of Management Sciences,

Hazara University Mansehra, Pakistan.

doi:

10.13106/jafeb.2016.vol3.no1.43.

[41] Iﾏヮ;Iデﾗa M;ﾉ;┞ゲｷ;げゲ C;ヮｷデ;ﾉ M;ヴﾆWデ ;ﾐS Determinants on Economic Growth

Md. Arphan Ali, Yap Su Fei Department of Economics, Faculty of

Economics and Administration,

University of Malaya

doi:

10.13106/jafeb.2016.vol3.no2.5.

[42] The Relationship between Working Capital

Management and Profitability: A Case Study of

Tobacco Industry of Pakistan

Hussain Muhammad,

Ashfaq U. Rehman,

Muhammad Waqas

Department of Management Sciences,

Hazara University Mansehra, Pakistan.

doi:

10.13106/jafeb.2016.vol3.no2.13.

[43] Microfinance Institutions and Legal Status: An

Overview of the Microfinance Sector in Bangladesh

Md Aslam Mia Faculty of Economics and

Administration, University of Malaya,

Malaysia

doi:

10.13106/jafeb.2016.vol3.no2.21.

[44] Modeling Effect of Exchange Rate Volatility on

Growth of Trade Volume in Pakistan

Muhammad Ayub Siddiqui,

Naila Erum

Professor of Finance, National University

of Computer and Emerging Sciences,

Pakistan

doi:

10.13106/jafeb.2016.vol3.no2.33.

[45] The Customs Union between the European Union

;ﾐS T┌ヴﾆW┞ ;ﾐS ｷデゲ Iﾏヮ;Iデゲﾗﾐ T┌ヴﾆW┞げゲ EIﾗﾐﾗﾏ┞Kip Becker, Ibrahim Baki,

Jung Wan Lee

Administrative Sciences Department,


USA

doi:

10.13106/jafeb.2016.vol3.no2.41.

[46] The Formation of Information Technology Clusters

in Kazakhstan: System and Structured Approaches

Anel A. Kireyeva Institute of Economics of the Ministry of


Kazakhstan

doi:

10.13106/jafeb.2016.vol3.no2.51.

[47] The Precarization of Employment: A Case of

Kazakhstan

Seisembay Jumambayev Department of Management and

Marketing, The Higher School of

Economics and Business, Al-Farabi

Kazakh National University

doi:

10.13106/jafeb.2016.vol3.no2.59.

[48] Antecedents of Corporate Adoption of Social Media

and the Role of the Technology Acceptance Model

in the Path

Jung Wan Lee, Kip Becker,

Rajasekhara Mouly Potluri

School of Business & Entrepreneurship,

American University of Nigeria, Nigeria

doi:

10.13106/jafeb.2016.vol3.no2.67.

躓

The Journal of Asian Finance, Economics and Business (JAFEB) has been indexed in.

The Journal of Asian Finance, Economics and Business (JAFEB) publishes four issues per year quarterlyon the following dates:

The Journal of Asian Finance, Economics and Business (JAFEB) is published in international standardsboth in print and online versions with Digital Object Identifier (DOI) information.

Administrative Sciences Department, Metropolitan College, Boston University808 Commonwealth Avenue, Boston, MA 02215, USATel: (+1 617) 358-5627 Fax: (+1 617) 353-6840E-mail: [email protected]

Korea Distribution Science AssociationHanshin Officetel 1030, 2463-4 Shinheung-dong Sujeong-gu, Seongnam-city, Gyeonggi-do, KOREATel: (+82 31) 740-7292 Fax: (+82 31) 740-7361E-mail: [email protected].

For submission to the Journal, please access to

Tel: (+82 2) 478-2066 Fax: (+82 2) 478-2068

The Journal of Asian Finance, Economics and Business Volume 3 Issue 2 is published on May 30, 2016

The Publisher, Association and Editors cannot be held responsible for errors or any consequences arisingfrom the use of information contained in this Journal: the views and opinions expressed do not necessarilyreflect those of the Publisher, Association and Editor. The author(s) of each article appearing in thisJournal is/are solely responsible for the content thereof; the publication of an article shall not constitute orbe deemed to constitute any representation by the Editors, the KODISA, the KODISA Journals, or theInstitute of Economics that the data presented therein are correct or sufficient to support the conclusionsreached or that the experiment design or methodology is adequate.

連

椴, Ph.D.

Administrative Sciences Department, Metropolitan CollegeBoston University, USA

, Ph.D.School of Social SciencesUniversiti Sains Malaysia, Malaysia

Ph.D.Graduate Institute of International BusinessNational Taipei University, Taiwan

Ph.D.The Institute of Economicsunder the Ministry of Education and ScienceRepublic of Kazakhstan

Ph.D.Department of Medical IT Marketing, College of Health IndustryEulji University, Korea (the Republic of)

Ph.D.Department of Economics, School of BusinessLebanese American University, Lebanon

Ph.D.Department of Economics, School of BusinessLebanese American University, Lebanon

Ph.D.Department of Banking and Finance, Faculty of EconomicsYarmouk University, Jordan



Ph.D.Graduate Institute of International BusinessNational Taipei University, Taiwan

Ph.D.Department of Management & Entrepreneurship, College of BusinessRowan University, USA

Ph.D.Department of Management StudiesNimra Institute of Science & Technology, India

Ph.D.Bahria Institute of Management and Computer SciencesBahria University, Pakistan

Ph.D.Division of BusinessDeSales University, USA

Ph.D.College of BusinessPurdue University North Central, USA

Volume 3 Issue 2 May 30 2016

[Regular Research Article]

Impact of MalaysiaUs Capital Market and Determinants on Economic Growth符

Md. Arphan Ali, Yap Su Fei ｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲ —

The Relationship between Working Capital Management and Profitability: A Case Study of Tobacco符

Industry of Pakistan

Hussain Muhammad, Ashfaq U. Rehman, Muhammad Waqas ｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲ 13

Microfinance Institutions and Legal Status: An Overview of the Microfinance Sector in Bangladesh符

Md Aslam Mia ｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲ 21

Modeling Effect of Exchange Rate Volatility on Growth of Trade Volume in Pakistan符

Muhammad Ayub Siddiqui, Naila Erum ｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲ 33

The Customs Union between the European Union and Turkey and its Impacts on TurkeyUs Economy符

Kip Becker, Ibrahim Baki, Jung Wan Lee ｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲ –1

The Formation of Information Technology Clusters in Kazakhstan: System and Structured Approaches符

Anel A. Kireyeva ｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲ —1

The Precarization of Employment: A Case of Kazakhstan符

Seisembay Jumambayev ｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲ —’

Antecedents of Corporate Adoption of Social Media and the Role of the Technology Acceptance符

Model in the Path

Jung Wan Lee, Kip Becker, Rajasekhara Mouly Potluri ｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲｲ 67

5Md. Arphan Ali, Yap Su Fei / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 5-11

Abstract

This study investigates the impact of Malaysia瀞s capitalmarket and other key determinants on Economic Growth fromthe period of 1988 to 2012. The key determinants studied areforeign direct investment and real interest rate. This study alsoexamines the long run and short run relationship between theeconomic growth and capital market, foreign direct investment,and real interest rate by using bound testing cointegration ofAutoregressive Distributed Lag (ARDL) and Error CorrectionModel (ECM) version of ARDL model. The empirical results ofthe study suggest that there is long- run cointegration amongthe capital market, foreign direct investment, real Interest rateand economic growth. The result also suggests that capital marketand real interest rate have positive impact on economic growthin the short run and long run. Foreign direct investment doesnot show positive impact on economic growth in the short runbut it does in the long run.

Economic Growth, Determinants Factors,Cointegration, Malaysia.

E6, E00, G1.

1. Introduction

Over the decades, capital market has been researched onextensively due to its significant correlation with countrieseconomic development. It is mainly stressed on the issuewhether capital market has an impact on economic growth orotherwise. Some say that financial development paves the wayfor economic development while others argue that economic

* First Author and Corresponding Author. Department of Economics,Faculty of Economics and Administration, University of Malaya[Jalan Lembah Pantai, —0603 Kuala Lumpur, Malaysia]Email: [email protected]

** Associate Professor. Department of Economics, Faculty of Economicsand Administration, University of Malaya.[Jalan Lembah Pantai, —0603 Kuala Lumpur, Malaysia]Email: [email protected]

development brings the financial development. Some even arguethat there is no relationship between them at all. According toOke and So (2012) capital market is considered the majorengine of economic development of a nation because it providesthe initial seed for organizing the factors of production tomaintain the sustainable economic development and growth. Inaddition, capital market acts as an intermediary of financialinstitution in mobilizing the funds from surplus units to the deficitunits. Beside, Al-Faki (2006) stated that capital market helps tobring suppliers and demander of funds to increase the long-terminvestment in socio-economic developmental projects.However, Malaysia瀞s capital market plays a significance role

accelerating its economic growth and capable enough to attractboth local and foreign investors. As well, it offers an effectivemeans to raise capital for investment and widen the scope foreconomic development. Seeing that Mun, Lin, & Man (2008)conclude based on their study that stock market of Malaysia瀞scauses economic growth. They also emphasize that governmentshould promote stock market by implementing new policy andrules as stock market could be one of the leading indicator ofeconomic growth. In the same context, Choong et al. (2003)stated that there is long run conintegration between stock marketdevelopment and economic growth in Malaysia.However, it is evident that there are so many key determinants

which contribute to the economic development of a particularcountry. Therefore, in case of Malaysia, the authors have chosenforeign direct investment (FDI) and real interest rate (RINTR)among other key determinants to examine their contributiontoward economic development. It would appear that among otherskey determinants which are contributed to economic growth of acountry; foreign direct investment (FDI) is regard as one of theimperative determinants for accelerating economic growth of hostcountry. As we are living in globalization and integration world,the effect of FDI to world economy especially to economic growthis relatively debatable issue from one study to another. Still,foreign direct investment is considered one of the significancetools of contributing to economic growth in the case ofdeveloping countries and some economists even argue thatcountries which are focusing on outward development strageyhave greater chance to foster higher economic growth comparewith countries whose focus on internally (Sethi & Sucharita, 2009).According to De Mello (1999) the enormous effect of FDI on

economic growth is probably contributed by the capital

Print ISSN: 2288-4637 / Online ISSN 2288-4645doi: 10.13106/jafeb.2016.vol3.no2.5.

Impact of Malaysia�s Capital Market and Determinants on Economic Growth1)

Md. Arphan Ali*, Yap Su Fei**

[Received: November 9, 2015. Revised: December 16, 2015. Accepted: April 10, 2016.]

6 Md. Arphan Ali, Yap Su Fei / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 5-11

accumulation, transfer of new technology to the recipient countriesand augmented stock of knowledge of the recipient countries. Onthe other hand, Interest rate is considered one of the majordrivers of the economy. It has crucial impact on country瀞seconomic growth. For instance, interest rate has direct effect onthe credit market. If the interest rate is high then it makesborrowing costly which in effects hurt the consumer. By contrast, ifthe interest is low then borrowing becomes cheaper. It increasesthe consumer spending and in turn stimulates the countryeconomic growth. Udoka & Roland (2012) argued that the inverserelationship exists between the economic development and interestrate in Nigeria. It means when interest rate increase, it decreasesthe Nigerian GDP growth and vies-versa.Therefore, the main purpose of this study is to provide an

empirical evidence of the impact of Malaysia瀞s capital market,foreign direct investment and real interest rate on economicgrowth. Moreover, the rest of this paper is organized as follows:the next section discusses the literature review of capitalmarket, foreign direct investment, and real interest rate oneconomic growth. Section 3 presents the methodology andmodel specification of the study. Section 4 is the finding of thestudy and Section 5 concludes.

2. Literature Review

2.1. Capital Market and Economic Growth

There are significant numbers of literatures on the impact ofcapital market on economic growth. Kolapo & Adaramola (2012)stated that there is causal relation between capital market andeconomic development. The authors further argued that capitalmarket activities have a propensity to impact positively oneconomic growth. On the other hand, Mishra et al. (2010) foundbased on their study on capital market efficiency in India thatthe capital market of India has the potentiality towards economicdevelopment of the country. They also highlighted that economicgrowth of modern economy depends on the efficient financialenvironment which pools the domestic savings and mobilize theforeign investment into a productive investment. Similarly,inefficient capital market hinders the long run productivity of theeconomy by increasing transaction cost or unfair stock price.As a result, Fama (1965) came out with efficient market

hypothesis theory (EMH) because if the capital market is efficientit will create positive impact on public and investor. Therefore,there will be large number of investment on securities byinvestor in order to get higher return in future. For that reason,an efficient capital market is necessary for long run economicgrowth (Osaze, 2000). Christopoulos and Tsionas (2004) statedlong run causal relationships exist between financial developmentand economic growth, and there is no bi-directional causalitybetween them. Further, Rajan and Zingales (2001) said that theservice which are provided by financial sector like allocation ofcapital and risk sharing has significant affected on economicgrowth. In the same way, Caporale, Howells, & Soliman (2004)

based on their study on seven countries conclude that stockmarket can accelerate economic growth in the long run byaccumulation of capital and efficient resource allocation. Ewah,Esang, & Bassey (2009) argued that capital market consider oneof the powerful tool to influence the economic growth of acountry.However, Ang & McKibbin (2007) investigated the effect of

financial growth on economic development in Malaysia. Theirempirical results by using times series data from 1960 to 2011suggested in case of Malaysia that economic development causesfinancial growth. The authors also admitted that the findingswhich they have got from this study are not satisfactory. Majid(2008) concluded based on his study related to economic growthand financial development in Malaysia by using ARDL model thatthe long run relationship exist between economic growth andfinancial development in Malaysia. The author also concludedfrom the findings that there is unidirectional granger causalitybetween the economic growth and financial development. Lastly,the author argued that the long term policy of financialdevelopment should be undertaken by government to promotelong term economic growth in Malaysia.

2.2. FDI and Economic Growth

The essence of foreign direct investment has been increasingin all reasons, countries and all over the world due to itspositive effect on economic growth. With the help of globalizationprocess foreign direct investment has increased dramaticallysince 1980. Due to the globalization, most of the countriesbecame liberal to foreign inward capital flow and entrance ofcapital became easy. Ali Riza & Ali (2012) did a study onEconomic Cooperation Organization (ECO) countries to examinethe theoretical argument of FDI whether it has a positive effecton economic growth of host country or not. The authors use tenECO countries data from 1995 to 2011 for causality test. Theresult of causality test shows that there is causal relationshipbetween economic growth and foreign direct investment. Theauthors also highlighted that theoretical expectation of foreigndirect investment and economic growth is proven.In the same context, Usha & Diana (2001) did a study on 24

developing countries for the phase of 1971 to 1995 by usingpanel data estimated method. They test causality relationbetween economic growth and foreign direct investment. Thetest result demonstrates that the effect of FDI on economicgrowth varies among the developing countries. The authorsfurther suggest, though the impact of foreign direct investmenton economic growth differ across emerging countries but theeffect is large when the countries in more open. Hence, Iqbal,Shaikh, & Shar (2010) tried to examine the relation among theFDI, trade and economic growth in Pakistan. They use quarterlydata from 1998 to 2009 in order to examine the relation amongthe variables. The results suggest that the long run relationexists among the variables. The VECM test result shows thatthere are bidirectional relations among the FDI trade andeconomic growth. However, the authors further argue thatforeign direct investment has strong impact on trade


enlargement in Pakistan.On the other hand, Antwi & Zhao (2013) conducted a study

on Ghana to investigate the causal relation between economicgrowth and foreign direct investment from the period of 1980 to2010. They used cointegration approach to trace the long andshort run relation between FDI and economic growth. Thecointegration result suggests that the long run causal relationexist between the foreign direct investment and economicgrowth in Ghana. The authors further argue that the short runrelationship between economic growth and foreign directinvestment are nearly imaginary. However, one of the significantproblem of developing and least developing countries is thatthey do not have sufficient capital to finance their domesticinvestment. Therefore, they mostly depend on the foreign capitalflows or aid in order to precede the domestic investment. In thebeginning, they used to borrow from the commercial bank.During 1980 so many commercial bank got bankruptcy due tothe debt crisis, and this financial crack down forced so manycountries to reform their investment policy.As a results, the new investment polices attract more stable

form of foreign invest and foreign direct investment withouttaking any linkage to the debt. The Asian development bank(ADB) outlook (2004) in Asian state that the foreign directinvestment has increased tremendously in recent years due toso many factors like technological progress, rapid increase ofglobal marketing networks and integrated production, bilateralinvestment treaties and lastly positive support from thedeveloping countries to open the door for FDI.Karimi & Yusop (2009) did a study on Malaysia to scrutinize

the impact of foreign direct investment on Malaysia瀞s economicgrowth. They use the Toda-Yamamoto causality test on timeseries data from 1970 to 2005. The econometric test resultshows that there is no long run relation and bi-directionalcausality between the economic growth and foreign directinvestment. Their result further shows that FDI has negativeimpact on economic development of Malaysia. However, a studyby Kogid et al. (2011) shows by using Johanson and VECMapproach that the long run relation exists between foreign directinvestment and economic growth in Malaysia. Therefore, theirstudy suggest that FDI is significant factor for accelerating theeconomic growth of country and FDI could be taken as one ofthe importance stimulate factor for a country future economicdevelopment policy.Lean (2008) conducted study in Malaysia to examine the

relationship between the FDI and GDP growth rate ofmanufacturing sector from 1980 to 2005. The empirical findingsof the study show that long run relationship does not existbetween FDI and economic growth of Malaysian manufacturingsector. The findings of this study further suggest that thecorrelation between FDI and GDP growth in manufacturingsectors are autonomous. The author also argues that FDI willbring economic growth if the host country has sufficient skilllabor force and government should play significant role todevelop the human capital in order to bring growth inmanufacturing sectors. Lean & Tan (2011) did a study toinvestigate the linkage among domestic investment, foreign

direct investment and economic growth in Malaysia. Theempirical result advocates that FDI, domestic investment andeconomic growth are co-integrated in the long run.The empirical finding of the study shows that FDI has positive

effect on economic development while domestic investmenteffects the economic development negatively in long run. Theempirical result further suggests that FDI inflow will bring positiveeffect on domestic investment. Mun and Lin (2009) conductedstudy on Malaysia to investigate the relation between foreigndirect investment and economic growth by using OLS methodfrom the period of 1970 -2005 time series data. Their empiricalresult suggests that the long run relationship exists betweeneconomic development and inward FDI. Therefore, Malaysiagovernment should come out with more effective FDI policy andpolicies that attract more FDI inflow in order to faster theMalaysia economic growth in future.

2.3. Interest Rate and Economic Growth

Harvey (1988) said that real interest rate predict the futureconsumption .However, Udoka & Roland (2012) did a study onNigeria to investigate the effect of interest rate fluctuation oneconomic development. The empirical result of the study revealsthat the inverse relationship exists between the economicdevelopment and interest rate in Nigeria. It means when interestrate increase, it decreases the Nigerian GDP growth. Hence,D'adda & Scorcu (1997) did a study on the 20 industrializedcountries to scrutinize relationship between real interest rate andeconomic development from 1965 to 1994.The empirical result of the last 30 years data shows that if

the real interest rate is increase by 1% then economic growthdecrease by 1/5 rate. The authors further argue that long termincrease in the real interest rate effects become more severe ineconomic growth in recent years and the study result alsoshows that positive relation exists between the economicdevelopment and capital accumulation, and negative relationshipexists between the real interest rate and economic growth. Inthe same context, Saymeh & Orabi (2013) carried out a studyon Jordan to examine the impact of interest rate and inflationon real economic growth from the period of 2000 to 2010. Theirempirical result shows that interest rate has influence on theeconomic growth.However, Anaripour (2011) did a study on Iran to explore the

relation between the interest rate and economic growth from theperiod of 2004 to 2010. The empirical result of the study showsthat there is negative relationship between interest rate andeconomic growth. The study result indicates that causal relationwhich exit between interest rate and economic growth isunilateral. Therefore, it does not matter whether interest rateincrease or decrease to the economic growth. In the samecontext, Hansen & Seshadri (2013) did a study to investigatethe relation between productivity growth and interest rate. Theirstudy found that there is inverse relation between the interestrate and productivity growth. Because, when interest rate is lowin the long run it shows that productivity growth is high.Besides, when the interest rate is high in the long run, the


productivity growth rate is low. There is vice-versa relationbetween productivity growth and interest rate. Therefore, interestrate is said to be one of the significant determinants ofeconomic development for a country. It is also regard as vitalvariables of policy makers in macroeconomics. This is because,change in the interest rate not only affect the economic agentbut also overall country economic growth. Most of theeconomists believe that there is positive relation betweeneconomic growth and capital accumulation and negative relationbetween capital accumulation and capital cost.However, Chang & Huang (2010) did a study on Japan to

investigate the weather real interest rate has impact on theJapanese economy and finance or not. The empirical result ofthe study showed that lower interest rate has impact on thebanking industry to contribute to the Japanese economic growth.Hence, Nakaota (2005) did a study on Japan to scrutinize theeffect of term structure of interest rate on future economicactivity. He also examines whether the nature of this relationshipchange with the time or not. The empirical results of this studyfound that there is break point among the interest rate andeconomic growth. Firstly, result shows that the relation amongthe future economic movement and yields spreads change overtime. Secondly, yields spreads has more information regardingfuture economic activity compare with the other variables.

3. Methodology

3.1. Data Specification

This study is conducted based on the secondary data. Thesource of data is from World Bank development indicatorwebsite and United Nations conference on trade anddevelopment (UNCTAD). This study uses annual times seriesdata cover the period from 1988 to 2012 in Malaysia on RealGross Domestic product, Market Capitalization, Foreign DirectInvestment and Real Interest Rate. RGDP is used as a proxyfor economic growth.However, Market capitalization is used to measure the role of

Malaysian capital market on economic growth. Besides, thisstudy is also used foreign direct investment, real interest rate asproxy to examine the other determinants impact on Malaysia瀞seconomic growth. All data on Real Gross Domestic product,Market Capitalization, foreign direct investment except interestrate is converted in natural logarithm before any econometricsteat performed.

3.2. ARDL Bound Test of Cointegration

The Autoregressive Distributed Lag (ARDL) model isdeveloped by Pesaran and Shin in 1999 and the model wasfurther expanded in 2001 by Pesaran, Shin, and Smith. One ofthe important causes of using ARDL cointegration method inthis study is because of small sample size. This study is usingonly 26 years of times series data due to unavailable of data

for some of the variables and this is most proficient method tobe applied for small data series. According to Dritsakis (2011)that the ARDL method has a significant compare with the othereconometric method in the case of relationship analysis becauseit allows cointegration test regardless of stationary at (I0) or (I1).However, Unrestricted Error Correction Model (UECM) version ofARDL model has been used in this study to check for furtherlong and short run relation between the variables. Since, thisstudy uses annual time series data, the maximum lag of 1 hasbeen chosen by lag selection criterion. The derived of UECMversion of ARDL model in this study is presented below.

ヴ q:ヰ

･

ヴザヰ q:ヰ

･

ヴザ

q:ヰ

･

ヴザ q:ヰ

･

ザ

q ヴザ q ヴザ q ヴザ q ザ {ザ

Where ln(RGDP), ln(MCAP), ln(FDI) and (RINTR) arelogarithm of Real Gross domestic product, logarithm of MarketCapitalization, logarithm of Foreign Direct Investment and RealInterest Rate (RINTR) respectively. The sign denotes for喺optimal lag selection. Moreover, Wald coefficient test is used forexamining the cointegration among the variables. When the testis done, the F-statistic value is compared with critical value inorder to decide whether accept or reject the null hypothesis.

4. Results

The table 1is highlighting the lag selection criteria ofcointegration test of ARDL and UECM model. Basically,there are different types of criterion for selecting the lagwhich we can see from below table. From the table 1, italso shows that maximum criterion have chosen to takemaximum lag of 1 for all variables. Therefore, the optimumlag of 1 would be better for cointegration test of ARDL andUECM model. In addition to that maximum lag of 1 or 2 isbetter for yearly base time series data. Since, this study isusing annual time series data then it would be better totake maximum lag of 1. However, Akaike informationcriterion (AIC) will be used by this study to select the lag.

Results of Lag Selection Criteria of ARDL and UECM modelLag LogL LR FPE AIC SC HQ0 38.533 NA* 0.002 -3.453 -3.254* -3.4141 39.754 1.832 0.002* -3.475* -3.226 -3.426*2 40.365 0.854 0.002 -3.436 -3.137 -3.378

* indicates lag order selected by the criterion.LR : sequential modified LR test statistic (each test at —% level),FPE : Final prediction error,AIC : Akaike information criterionSC : Schwarz information criterion,HQ : Hannan-Quinn information criterion.


4.1. Co-integration Test

To test the short run and long run relation among all thevariables, ARDL cointegration test is being applied. The rationalfor using ARDL cointegration test in this study that theresearcher has got mixture of stationary of variables at (I0) and(I1). Besides, the sample size of this study is small consists ofonly 26 years. This research uses maximum lag of 1 for all thevariables as it has been suggested by the lag selectioncriterion. The table below is presenting the results of ARDLcointregation test. From there it can be decided whether allvariables are cointegrated in the short run and long run or not.

ARDL Co-integration Test Result

Variables Coefficient Std. Error t-Statistic Probability

C 2.298 0.709 3.239 0.005

D(LNRGDP(-1)) -0.246 0.163 -1.509 0.153

D(LNMCAP(-1)) 0.049 0.016 2.998 0.009

D(LNFDI(-1)) 0.011 0.007 1.534 0.147

D(RINTR(-1)) 0.004 0.002 2.298 0.037

LNRGDP(-1) -0.121 0.038 -3.112 0.007

LNMCAP(-1) 0.044 0.019 2.343 0.034

LNFDI(-1) -0.012 0.009 -1.276 0.222

RINTR(-1) -0.006 0.002 -2.282 0.038

The above table 2 shows the output of the ARDLco-integration test. However, to see the long run or short runco-integration exist among all the variables, Wald coefficient testneeded to be run

F-Statistics for Testing the Existence of Long-RunRelationship

Computed F-Statistic 2.803Dependent Variable is LNRGDP:

Bound Testing Critical Values at 5% 2.365 (lower)3.553 (upper)

It shows from the above table 3, the F-statistic value is2.8039 which are not significant at 5% level. The F-statisticsvalue is lower than upper bound critical value of Pesaran (table:3, 2001) 3.553 of the bound test. According to Pesaran et al.(2001), if the F-statistics value is less than the upper boundvalue, then null hypothesis is accepted. Therefore, this resultsuggests that there is no long run relationship between thedependent and explanatory variables.

F-Statistics for Testing the Existence of Short-RunRelationship.

Computed F-Statistic 11.649

Bound Testing Critical Values at 5% 2.365 (lower)3.553 (upper)

It shows from the above table 4, the F-statistic value is11.6497 which are significant at 1% level. The F-statistics valueis higher than upper bound critical value of Pesaran (table: 3,2001) 3.553 of the bound test. According to Pesaran et al.(2001), if the F-statistics value is greater than the upper boundvalue, then null hypothesis is rejected. Therefore, this resultsuggests that there is short run relationship between thedependent and independent variables.

Error Correction model

Dependent Variable is LNRGDP:ち

Variable Coefficient Std. Error t-Statistic Prob.

C 0.060 0.010 5.800 0.000

LNRGDPち t-1 -0.169 0.154 -1.095 0.288

LNMCAPち t-1 0.049 0.016 3.045 0.007***

LNFDIち t-1 0.009 0.006 1.422 0.173

RINTRち t-1 0.003 0.001 2.171 0.044**

ECM (-1) -0.103 0.037 -2.758 0.013**

Note: * 10 % Significant level, **—% Significant level,*** 1% Significant level

To examine further long run co-integration between thedependent variable and explanatory variables, Error CorrectionModel (ECM) has been presented in the table 5. The mainrational of ECM model is to identify the speed of adjustmenttowards equilibrium in the long run where dependent variable isadjusted to the changes in explanatory variables and shifttowards converge in the long run equilibrium level. From thetable 5 shows that the coefficient value (-0.103) of ECM (-1) isnegative and the probability value of ECM (-1) is 0.013 which issignificant at 5% level.This result indicates that the long run co-integration exist

between the dependent and independent variables. This result issimilar with the study done by Hondroyiannis et al. (2005),Calderón & Liu (2003), Minier (2003), Hooi & Wah (2010),Karimi & Yusop (2009), Kogid et al. (2011), Sethi and Sucharita(2009), Mun et al. (2009), Anaripour (2011), D瀞adda & Scorcu(1997), Udoka & Roland (2012). This also means that allvariables have long run association and they move together.However, the estimated coefficient of ECM (-1) indicates thatthe speed of adjustment towards long run equilibrium is10.396%. This means that 10.396% disequilibrium in theprevious year is closed by adjustment in the current year.


5. Conclusion

The main objective of this study is to investigate the impactof Malaysia瀞s capital market and other key determinants oneconomic growth. Because, capital market provides long termcapital financing such as bonds, securities and selling of sharesplay a major role to bring country economic and financialdevelopment. Besides, capital market acts as an intermediary offinancial institution in mobilizing the funds from surplus units tothe deficit units. Therefore, the significance of well-establishedcapital market in order to faster country economic developmentis unavoidable and if a country has higher capital accumulation,the faster would be the country economic development.However, the authors have chosen foreign direct investment(FDI) and real interest rate (RINR) among other keydeterminants to examine their impact toward economicdevelopment in case of Malaysia.However, ARDL version of ECM model result shows that

there is long run cointegration among the economic growth andmarket capitalization, foreign direct investment and real interestrate. It means that market capitalization, foreign directinvestment and real interest rate have significant impact oneconomic growth in the long run. Therefore, it is demonstratedthat Malaysia瀞s capital market has significant impact oneconomic growth in the long run. The finding of this study givesfurther support to the "Finance-led Growth Hypothesis" which issupported Schumpeter (1912), Goldsmith (1969), & Mc Kinnon(1974). Besides, Wald test of coefficient indicates that there isshort run relationship between economic growth and marketcapitalization, real interest rate except for foreign directinvestment (FDI). Based on the finding, this study suggests thatthe government should come out with the appropriatemacroeconomic plan and policy to draw more inward foreigndirect investment in order to faster the economic growth infuture. As finding of this study shows that foreign directinvestment does not have significant impact on economic growthin Malaysia in the short run.

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13Hussain Muhammad, Ashfaq U. Rehman, Muhammad Waqas / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 13-20

Abstract

Firms can use working capital management which is one ofthe essential determinants to influence their profitability. Themain theme of present study is to investigate the relationshipbetween working capital management and profitability ofTobacco Industry of Pakistan. This study is based on secondarydata collected from financial statements of selected companiesof Tobacco Industry of Pakistan for the period of 2005-2014.For data analysis, both descriptive and inferential statistics wereused. Correlation analysis is used to check the relationshipbetween the variables, while multiple regression analysis is usedto examine the effects of working capital management onprofitability of firms. The result reveals that there is a strongnegative relationship between variables of working capitalmanagement and profitability of Tobacco Industry of Pakistan.This means that as the cash conversion cycle increases, it willlead to declining of firm profitability and managers can create apositive value for shareholders by reducing the cash conversioncycle at optimal level. The study concludes that managers cancreate value for shareholders by managing the working capitalwell designed and implemented, and by keeping eachcomponents of it at optimal level.

Working Capital Management, Profitability, TobaccoIndustry, Pakistan.

G29, G39, L25.

* First Author and Corresponding Author. Department of ManagementSciences, Hazara University Mansehra, Pakistan.Email: [email protected]

** Department of Political Science, University of Peshawar, Pakistan.*** Lahore School of Accountancy and Finance, University of Lahore

Islamabad Campus, Pakistan.

1. Introduction

The concept of working capital (WC) was first developed byKarl Marx, however in rather diverse shapes and was termed as"variable capital" (Bhattacharya, 2009). Later on Guthman andDougall (1948) noted that current assets less current liabilitiesare known as working capital (WC) and their analysis waselaborated by Park & Gladson (1963). Working capital isconsidered to be an important part of short term financialmanagement. Long term financial management frequently attainsmore consideration, whereas most of the studies (e.g. Jose,Lancaster, & Stevens, 1996; Deloof, 2003; Raheman & Nasr,2007) have founded that short term financial management alsohas a clear effect on company performance.A company asset is divided into two distinct areas, fixed

assets and current assets. Firm fixed assets are comprised ofequipment and plants, while currents assets are considered tobe WC of a company. Company current assets are those assetswhich are expected to convert into cash within one year. Theseassets include short term marketable securities, receivables andinventories of raw materials, and finished goods of a company.An essential difference between a company fixed capital and WCis that, WC components such as number of days accountsreceivable (AR), number of days inventory (INV) and number ofdays accounts payable (AP) can be increased or decreased insmall level, while fixed assets are generally purchased as awhole. WC has also an importance that it is easily convert itscomponents into other assets (Mao, 1976; Levy & Sarnat, 1995).Raheman & Nasr (2007) argued that working capital

management is considered a key element of financialmanagement, because it directly effects on firm performance andliquidity. Working capital keeps attention on current assets andcurrent liabilities of firm. Similarly, Haq et al. (2011) also viewedthat working capital management (WCM) is the essential decisiontaken by the financial managers. It is an important part offinancial decision making and directly affects firm performance.Smith (1980) argued that WCM plays a significant position in

company performance as well as risks and for its value as well.Lamberson (1995) noted that WCM is considered to be one ofthe critical issues in the firm, so it is a big challenge forfinancial managers to recognize the key aspects of workingcapital and its reasonable level for a company. According to


The Relationship between Working Capital Management and Profitability:

A Case Study of Tobacco Industry of Pakistan

Hussain Muhammad*, Ashfaq U. Rehman**, Muhammad Waqas***2)

[Received: November 5, 2015. Revised: December 25, 2015. Accepted: April 10, 2016.]

14 Hussain Muhammad, Ashfaq U. Rehman, Muhammad Waqas / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 13-20

Lamberson (1995), if financial managers identify the positionsand determinants of WC, they can minimize risk and maximizeprofitability of the firms. Filbeck & Krueger (2005) argued thatthe importance aim of WCM is to keep the best balance amongeach components of working capital. To obtain achievement in afirm, it mostly depends on talent and skill of the financialmanagers to handle AR, INV and AP effectively.

The major aims of the present research are as below:To analyze a relationship between WCM and profitability符of Tobacco Industry of Pakistan.To check the effects of WCM components on profitability符of Tobacco Industry of Pakistan.To dig out how Tobacco Industry of Pakistan manages符cash, account receivables, inventory, and accountpayables of their organization.


For firms' profitability it is important to organize and managetheir WC efficiently. Different studies have been conducted onthe relationship between WCM and profitability of firms. Previousstudies related to the present study are as below:WCM is defined the management of current assets and

current liabilities. WCM is also essential for getting shareholdersvalue. Moreover management of WC has significant effects onprofitability and liquidity of company that studied in differentnations (Shin & Soenen, 1998). Shin & Soenen (1998) observedWCM and its negative effects on corporate profitability. Theyused a COMPUSTAT sample of 58985 firms for the period of1975-1994. The net trade cycle (NTC) was used as a measureof WCM. They check WCM and its effects on corporateprofitability by using correlation and regression analysis. Basedon their findings, they suggested that decreasing of firms NTCis a suitable way to make better value of shareholders. Deloof(2003) studied the relationship between WCM (measuredthrough CCC, AR, AP and INV) and profitability measured bygross operating profit. He used a sample of 1009 Belgiancompanies for the period of 1992-1996 and established a strongnegative relationship involving WCM as well as profitability. Fordata analysis he used correlation and regression analysis.Based on results, he suggested that to decrease the AR andINV managers could create shareholders value to a best level.Lazaridis and Tryfonidis (2006) studied WCM and its negative

effects on profitability. WCM was measured through CCCwhereas profitability was measured by gross operating profit.The data was collected from 300 companies of Athens StockExchange which later on decreased to 131 firms for a period of2001-2004. They recommend that through managing the CCCproperly and handling its each element properly managers cancreate value for their firms to a best level. Padachi (2006)observed the impact of WCM on profitability of 58 Mauritiansmall manufacturing firms. WCM was measured through AR, AP,INV and CCC, whereas profitability was measured through

return on total assets. His findings indicated negative effects ofAR and AP on firm performance. Moreover, he showed negativerelation between profitability and CCC. He suggested thatmanagers be able to maximize firm performance throughreducing their WC cycle.Raheman & Nasr (2007) studied WCM and its effects on

profitability of 94 Pakistani companies of Karachi StockExchange for 1999-2004. WCM was measured through CCC,inventory turnover in days, average payment period, averagecollection period and current ratio, while profitability wasmeasured through net operating profit. They suggested that anincrease in CCC minimize firm profitability and a decrease inCCC managers could maximize shareholders value to a bestlevel. Garcia-Teruel & Martinez-Solano (2007) examined WCMand its negative effects on profitability of 8872 SMEs Spanishcompanies for 1996-2002. They used ROA as a measure ofprofitability and AR, INV and AP as a measure of WCM. Theyalso suggested that by decreasing the CCC firms could makeworth for their shareholders.Samiloglu & Demirgunes (2008) studied WCM and its effects

on performance of manufacturing companies of Istanbul StockExchange for 1998-2007. They used CCC, AR and INV as ameasure of WCM, while ROA as a measure of profitability.They also used financial assets, firm size, leverage and firmgrowth as control variables. Their findings indicated thataccounts receivable, leverage and inventory period have strongnegative effect on profitability of Turkish companies. Further,CCC, firm size and financial assets indicated no significanteffects on firm profitability. Moreover, leverage also showednegative effects on firm profitability, while firm growth indicatedpositive effects on firm profitability. Falope and Ajilore (2009)studied WCM and its effects on profitability of 50 companies ofNigerian Stock Exchange. They found negative relationshipbetween WCM (measured through CCC, AR, AP and INV) andprofitability (measured by net operating profit). Moreover, theyindicated no important changes of the effects of WCM betweensmall and large companies.Based on previous literatures on WCM, it has been

concluded that by decreasing CCC a company can maximize itsprofitability (e.g. Deloof, 2003; Shin & Soenen, 1998; Lazaridis& Tryfonidis, 2006). Previous studies have found a strongnegative relationship between CCC and firm profitability. Basedon these findings, it has been indicated that shareholders valuecan be created by decreasing AR and AP to an optimalminimum stage.

3. Research Methodology

This empirical study of the Tobacco Industry is conducted byanalyzing audited financial statements. The study could bedefined as archival research (Secondary data). Archival data isdefined as data, for which the original purpose for gatheringwas not academic research, and the approach has beencriticized because of uncritical usage of databases where


scholars have an easy access (Moers, 2007). In this study thisproblem is tackled by using only official financial statements andannual reports instead of databases. In case of a group,consolidated financial statements were used. All the financialstatements used in the study have been collected from publicsources: from firms web sites and some have been found inthe Karachi Stock Exchange database during 2005-2014, whichis free of charge and where many Pakistani companies publishtheir financial reports. This ensures that all data of companies iscollected similarly.Based on research methodology, the present study used

secondary data method because the important purpose ofpresent study is to analyze the relationship between WCM andprofitability of tobacco industry of Pakistan. The data wereobtained from the audited financial statements of TobaccoIndustry of Pakistan. These financial statements were obtainedfrom the following firms:Pakistan Tobacco Company (www.ptc.com.pk )Philips Morris (Lakson) Tobacco Company(www.philipmorrispakistan.com.pk)

3.1. Theoretical Framework

Independent Variables Dependent Variable

Theoretical Framework

3.2. Dependent Variable

The present study used ROA as a dependent variable. ROAindicates the success of firms in generating income from itsexisting funds. It is mostly employed to examine the incomecreation of firm profitability. It is related with the net incomeafter tax in income statement to the assets in balance sheet offirms. A greater ratio of ROA indicates successful managementand best opportunity for future development of company. ROAreproduces control of expenses, operating decisions, selling,over buying and management of assets (Brealey, Myers, &Allen, 2006; Oliver & English, 2007; Hatten, 2008).

3.3. Independent Variables

The present study employed to analyze the relationshipbetween WCM and profitability of Tobacco Industry of Pakistan.Therefore, components of WCM were used as independent

variables.

3.3.1. Number of days accounts receivable (AR)

It is the standard duration of time that a firm takes in acquiringmoney from its customers (Garcia-Teruel & Martinez-Solano, 2007).

3.3.2. Number of days accounts payable (AP)

It is the standard durations of time that a company takes todo payments to their suppliers (Garcia-Teruel & Martinez-Solano,2007).

3.3.3. Number of days inventory (INV)

It is the standard durations of time that a company held inits stock (Garcia-Teruel & Martinez-Solano, 2007).

3.3.4. Cash conversion cycle (CCC)

Keown et al. (2002) defined that CCC which also known ascash gap is the sum of AR and INV less AP. Jose et al.(1996) indicated that CCC is the gap between money pays outfor its capital and money received from its sales of goods. CCCis mostly active in nature because it brings balance sheet andincome statement simultaneously to make a measure with time.A company CCC may be positive or negative. Positive resultindicates duration of time that a firm should borrow or tie upcapital as until payment from customers. Negative finding showsthe duration of time that a firm has to get money from productsale before it should give to its sellers (Hutchinson, Farris, &Anders, 2007).

3.4. Hypotheses

A hypothesis is a plan that is practically tested. It is also anexperimental statement which shows association and relationshipamong the variables (Zikmund, 1997). Hypotheses of presentstudy were created on the basis of previous studies in relationbetween WCM and profitability.<H1> There is a negative relationship between the AR and

profitability.<H2> There is a negative relationship between the INV and

profitability.<H3> There is a negative relationship between the AP and

profitability.<H4> There is a negative relationship between the CCC and

profitability.

4. Data Analysis and Results

4.1. Descriptive Statistics Showing Mean & StandardDeviation

Table 1 showed mean and standard deviation of TobaccoIndustry of Pakistan for a period of 10 years from 2003-2012.


These statistics showed that mean of ROA was 16.8% of thetotal assets whereas its standard deviation was 13.5%. Thesefigures indicated profitability value for divergence from mean toboth sides by 13.5%. The maximum value of ROA was 0.39whereas the minimum value was -0.04. Table 1 further indicatedthat average of CCC was 122 days whereas its standarddeviation was 96 days. Similarly maximum time of CCC was318 days whereas the minimum time was 6 days. The numberof days accounts receivable average was a single day whereasits standard deviation was as well a single day. The minimumtime for firm to obtain its money from accounts receivable waswithin a single day whereas the maximum time for this purposewas 3 days. The mean of number of days accounts payablewas 14 days whereas its standard deviation was 8 days. Theminimum time for company to pay their suppliers was a singleday whereas the maximum time for this purpose was 33 days.The average time to sell the inventory was 136 days, whereasits standard deviation was 101 days. The minimum time takenby a company was 5 days in order to sell inventory whereasthe maximum time for this purpose was 329 days.

Descriptive Statistics showing Mean & Standard Deviation

ROA* AR** INV** AP** CCC**

Mean .167 1.031 135.612 14.449 122.194

Std. Deviation .135 1.055 100.790 7.964 95.953

Minimum -.040 .000 4.630 1.170 6.250

Maximum .390 2.790 328.730 33.190 318.140

*. Dependent Variable**. Independent Variables

4.2. Correlation Analysis between WCM Componentsand Firms Profitability

The data was analyzed by using Pearson Correlation Analysis.The present study examined the relationship between WCM andprofitability of tobacco industry of Pakistan. Thus, PearsonCorrelation Analysis was applied to check the associationbetween the component of WCM used as independent variablesand profitability used as dependent variables. The result ofcorrelation analysis was showed in table 2.Table 2 revealed the relationship between numberof days

account receivable and return on assets (ROA). It also indicatedthat coefficient of correlation was 0.151 and its significancevalue was 0.525 that indicated a small positive relationshipbetween AR and ROA, which was statistically insignificant. Nrepresented the number of observation. Table 2 alsorepresented correlation between the INV and ROA. The resultsindicated significant and negative relationship between the INVand ROA. Moreover, coefficient of correlation was -0.673** andit significant value was 0.001 that showed high significantrelationship between the variables.

Correlation Analysis between WCM and ProfitabilityROA AR INV AP CCC

ROA

PearsonCorrelation 1

Sig. (2-tailed)N 20

AR

PearsonCorrelation .151 1

Sig. (2-tailed) .525N 20 20

INV

PearsonCorrelation -.687** -.017 1

Sig. (2-tailed) .001 .942N 20 20 20

AP

PearsonCorrelation -.568** -.331 .634** 1

Sig. (2-tailed) .009 .155 .003N 20 20 20 20

CCC

PearsonCorrelation -.673** .020 .698** .579** 1

Sig. (2-tailed) .001 .933 .000 .007N 20 20 20 20 20

**. Correlation is significant at the 0.01 level (2-tailed).

Table 2 further indicated relationship between the number ofdays account payable and return on assets (ROA). It alsoshowed significant and negative effects of AP on return onassets of tobacco industry of Pakistan. Moreover, it alsoindicated that coefficient of correlation was -0.568** and itssignificance value was 0.009 that showed highly significantresult.Finally, table 2 showed relationship between the CCC and

ROA, which indicated highly significant and negative correlationbetween CCC and ROA. Moreover, coefficient of correlation was-0.673** and it significant value was 0.001 that showed highsignificant relationship between the variables.

4.3. Multiple Regressions Analysis

Pearson Correlation Analysis just shows relationship betweenthe variables that whether it is statistically significant or not, butit doesn't identify causes from consequences. Therefore, MultipleRegression Analysis was used to examine the effects of WCMcomponents on profitability of firm.

4.3.1. Regression Analysis: AR verses ROA

This regression analysis tested the first hypothesis of thestudy and hypothesis was "There is a negative relationshipbetween the number of days accounts receivables andprofitability". It used AR as independent variable and ROA asdependent variable. Results of regression analysis werepresented by table 3.


Model Summary & Regression CoefficientModel Summary

R .151a

R-Square .023

Adjusted-R-Square .012

Durbin-Watson 1.910

F-Statistics .420

Regression Coefficient

Model

UnStandardizedCoefficient

StandardizedCoefficient

T Value SignificanceBeta Std. Error Beta

1

(Constant) .148 .043 3.403 .003

No. of daysAccountsReceivable

.019 .030 .151 .648 .525

Dependent Variable: ROAIndependent Variable: AR

Table 3 showed R as a coefficient of correlation and Rsquare as a coefficient of determination. It further revealed thatR value was 0.151 which meant that there was 15% correlationexisting between the AR and ROA. Similarly the R² value was0.023 which indicated 2% of variation in return on assets dueto AR. Moreover, adjusted R square also known as coefficientof multiple determinations value was 0.012.Table 3 also showedDurban Watson that is used to find out autocorrelation betweenthe independent variables. Its value was 1.91 that was belowDurban-Watson 2.00 or above, which showed no autocorrelationbetween the independent variables.

4.3.2. Beta and P Value

Beta value also known as coefficient of regression showsrelationship between dependent and independent variables. Pvalue shows significance level of regression coefficient. If Pvalue is greater than 0.05 then null hypothesis is accepted,whereas if P value is less than 0.05 then the researchhypothesis is accepted and null hypothesis is rejected. Thesignificance level of model was examined through F Statisticsand Profitability. Table 3 indicated that profitability value ofmodel was greater than 0.05 and F Statistics was 0.420, whichindicated that model was statistically insignificant. It also statedthat regression coefficient of AR was 0.019 and coefficient ofcorrelation was 0.151, which indicated small positive insignificantrelationship between AR and ROA.

4.3.3. Regression Analysis: INV verses ROA

This regression analysis tested the second hypothesis of thestudy and hypothesis was "There is a negative relationshipbetween the number of days inventory and profitability (ROA)".This regression used number of days inventory as independentvariable and ROA as dependent variable. Results of regressionanalysis were presented by table 4.

Model Summary & Regression Coefficient

Model Summary

R .687a

R-Square .472


Durbin-Watson 1.870

F-Statistics 16.075


ModelUnStandardizedCoefficient

StandardizedCoefficient T Value Significance

Beta Std. Error Beta

1(Constant) .293 .038 7.610 .000No. of daysInventory -.033 .007 -.687 -4.009 .001

Dependent Variable: ROAIndependent Variable: INV

Table 4 showed R as a coefficient of correlation and Rsquare as a coefficient of determination. It further indicated thatR value was 0.687 which meant that there was 68% correlationexisting between the INV and ROA. Similarly, R² value was0.472 which indicated 47% of variation in return on assets dueto number of day瀞s inventory. Moreover, it also showed theadjusted R square was 0.442, which showed 42% explanatorypower of independent variable.Table 4 also showed Durban Watson which was used to find

out autocorrelation between the independent variables. Its valuewas 1.87 which was less than Durban-Watson 2.00 or above,which showed no autocorrelation between the independentvariable.


The significance level of model was examined through FStatistics and Profitability. Table 4 showed that profitability valueof the model was less than 0.01 and F Statistics for regressionwas 16.07, which meant that model was statistically significant.Moreover, it also indicated that regression coefficient of INV was-0.033 and its coefficient of correlation were -0.687 whichindicated highly significant negative relationship between the INVand ROA. Consequently, it is concluded that a company hasnegatively effect on its profitability, if they take more time inselling their inventory.

4.3.5. Regression Analysis: AP verses ROA

This regression analysis tested the third hypothesis of studyand the hypothesis was "There is a negative relationshipbetween the number of day瀞s accounts payable and profitability(ROA)". It used AP as independent variable and ROA asdependent variable. Results of regression analysis werepresented by table 5.



R .568a

R-Square .323Adjusted-R-Square .285Durbin-Watson 1.89F-Statistics 8.570


Model

UnStandardizedCoefficient

StandardizedCoefficient

T Value Significance

Beta Std.Error Beta

1(Constant) .307 .054 5.687 .002

No. of daysAccounts Payable -.010 .003 -.568 -2.927 .009

Dependent Variable: ROAIndependent Variable: AP

Table 5 showed R as a coefficient of correlation and RSquare as a coefficient of determination. It also indicated that Rvalue was 0.568 which meant that there was 56% correlationexisting between the AP and return on assets (ROA). Further itshowed that R² value was 0.323 which indicated 32% ofvariation in return on assets due to number of days accountspayable. Moreover it also showed the adjusted R square was0.285 that indicated 28% explanatory power of independentvariable. Table 5 also showed Durban Watson which is used tofind out autocorrelation between the independent variables. Itsvalue was 1.89 which was less than Durban-Watson 2.00 orabove, which shows no autocorrelation between the independentvariables.


The significance level of model was examined through FStatistics and Profitability. Table 5 showed that profitability valueof model was less than 0.01 and F Statistics for regression was8.57, which meant that model was statistically significant.Moreover, it also indicated regression coefficient of AP was-0.010 and its coefficient of correlation were -0.568 whichrevealed significant negative association between the AP andROA. Consequently, it is concluded that a company couldincrease their profitability by lengthening the time period ofpayment.

4.3.7. Regression Analysis: CCC verses ROA

This regression analysis tested the fourth hypothesis of thestudy and the hypothesis was "There is a negative relationshipbetween the CCC and profitability (ROA)". It used CCC asindependent variable and ROA as dependent variable. Resultsof regression analysis were presented by table 6;


R .673a

R-Square .452


Durbin-Watson 1.90

F-Statistics 14.876


ModelUnStandardizedCoefficient

StandardizedCoefficient T Value Significance

Beta Std. Error Beta

1(Constant) .284 .038 7.503 .003

CCC -.031 .010 -.673 -3.857 .001

Dependent Variable: ROAIndependent Variable: CCC

Table 6 showed R as a coefficient of correlation and RSquare as a coefficient of determination. It revealed that Rvalue was 0.673 which meant that there was 67% correlationexisting between the CCC and ROA. It also indicated that R²value was 0.452 which showed 45% of variation in ROA due toCCC. Further, it showed adjusted R Square was 0.422 thatindicated 42% explanatory power of independent variable. Table6 also showed Durban Watson which is used to find outautocorrelation between the independent variables. Its value was1.90 which was less than Durban-Watson 2.00 or above, whichshowed no autocorrelation between the independent variable.


The significance level of model was examined through FStatistics and Profitability. Table 6 indicated that profitabilityvalue of model was less than 0.01 and F Statistics forregression was 14.876, which meant that model was highlysignificant. Moreover, it also revealed regression coefficient ofCCC was -0.031 and its coefficient of correlation were -0.673which stated highly significant negative association betweenCCC and ROA. Consequently, it is concluded that a companycan increase their profitability, if they decrease time period ofCCC.

5. Conclusions and Recommendations

5.1. Conclusions

The findings of present study indicated negative relationshipbetween WCM (measured through INV, AP and CCC) andprofitability (measured through ROA) of Tobacco Industry ofPakistan for the period of 2005-2014. It is related with theprevious studies i.e. Deloof (2003) and Raheman & Nasr (2007)who have also established a negative association betweenWCM (measured by INV, AP and CCC) and performance of


firms. Furthermore, present findings also showed a smallpositive relationship between AR and ROA of Tobacco Industryof Pakistan that was statistically insignificant. The findings ofpresent study showed negative relationship between CCC andreturn on assets of tobacco industry of Pakistan. It means thatif the time duration of CCC is longer, its profitability would besmaller. Hence, the present study recommended that managerscould maximize the worth of shareholders by decreasing thetime duration of CCC to a reasonable lowest stage.The results of present study also indicated that INV has

negative effects on profitability of tobacco industry of Pakistan. Itrevealed that by decreasing INV firms can improve theprofitability. The findings further indicated that number of daysaccounts payable (AP) has also a negative effect on profitability,which observe that firms will have more profitability if they waitlonger to pay their bills. Finally, it is also indicated that AR hassmall positive effects on profitability of tobacco industry ofPakistan, which was statistically insignificant.

5.2. Implications of the Study

The present study implicated that to obtain better profit forfirm; managers must improve the effectiveness of WCM.Moreover, regression analysis revealed that there was a negativerelationship between CCC and firm performance. Therefore, it isimportant for managers to seek out some better solutions todecrease the CCC as well as to increase profitability of firms.

CCC = AR + INV APP

From above equation of CCC, it is recommended that a firmcan decrease its CCC by given points;

Decreasing inventory time in which goods are held. Tominimize INV, it is essential for managers to improve controlprocess and to obtain delivery of raw materials exactly fromsuppliers when they are needed in production process.

Quick collection of accounts receivable is mostly based onthe term and condition of operating business. Thereforemanagers must seek a suitable solution as by offering discountsto customers who pay earlier and by charging interest onaccounts that pay late.

Slow payment of bills. In order to paying bills more slowly,managers need to build effective cash management that notonly concerns with quick collection of cash and receivables butalso focus to slowing payment of cash to the suppliers.

5.3. Recommendations

This study has the following recommendations; This studyrecommended that managers could make worth for shareholdersby decreasing INV, CCC and increasing AP. It is recommendedthat managers should give more consideration to the entirephases of WCM components, particularly the inventory period,collection period and payable period. Because propermanagement of inventory, payables and receivables can

increase the firm performance. It is recommended that managersshould create policies for the entire parts of WCM which includeinventory, collection and payment policies. It is recommendedthat managers should compare performance of WC withcompetitors and other firms in order to get the target fordevelopment. It is recommended that management of WCcomponents should be in cooperation. It means that componentsof WC should be in reasonable balance with each other. It isrecommended that firm WCM must be corresponding by oneresponsible person.

5.4. Limitations of the Study

This study has the following limitations; The present studycould not cover the overall components of WCM, but is limitedonly to the specific components. The time period for this study isshort compared to some of previous findings on the associationbetween WC Mand profitability, e.g. Deloof (2003) and Shin &Soenen (1998). The study is based on secondary data obtainedfrom the Tobacco Industry of Pakistan, therefore quality of thestudy depends purely on accurateness, consistency andexcellence of secondary data. Estimation and measures withregard to the origin of data might influence results.The recommendations for future research are as follow;

Researchers should take all sectors of the economy rather thanrandom selection, because WC is vary across the industries. Itsuggested for researchers that each component of WC shouldbe paid attention individually for its position in the firm, industryand economy. This attempt would produce formulation of somesort of theory. The scope of future research may be extendedto the other components of WCM which is not covered in thisstudy.

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21Md Aslam Mia / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 21-31

Abstract

Although the microfinance sector in Bangladesh is mainly drivenby Non-Governmental-Organizations (NGOs), there are other typesof Microfinance Institutions (MFIs) that also provide financialservices to the poor. Despite the criticism of microfinanceprograms, the current poverty situation in Bangladesh still requiressuch programs for consistently battling poverty. Hence, the aim ofthis paper is to profile the microfinance sector based on their legalstatus and investigate any possible differences (if any) betweenthem in various aspects. After a thorough investigation of thesector, it was found that around 33 million of the clients are beingserved by the mainstream MFIs (NGO and Grameen Bank) whileanother 10-15 million clients are served by other types of MFIs(financial cooperatives, credit unions, various ministries etc.),accounting for the one-third of the total population in Bangladesh.While the mainstream MFIs basically works with poor, othercategories of MFIs are concerned with relatively wealthy clients.Looking into the financial performance and social intermediation ofthe MFIs, the NGO-MFIs performed better than other types ofMFIs in the sector.

Microfinance, Microfinance Institutions,Non-Governmental Organization, Poverty, Bangladesh.

D60, G21, I38, O17.

1. Introduction

After observing devastated and struggling life of rural poor inthe southern part (Chittagong)1) of Bangladesh, Professor

* Department of Development Studies, Faculty of Economics andAdministration, University of Malaya[Jalan Lembah Pantai, —0603 Kuala Lumpur, Malaysia]Email: [email protected]

1) Chittagong is the commercial capital of Bangladesh and secondlargest city after Dhaka(capital city of Bangladesh). Due to thegeographical location, Chittagong faces severe natural disasters

Muhammad Yunus in 1976 established 酉Grameen Bank瀞, amodern microfinance provider (Yunus, 2003, 2007)2). Thefundamental social goal of this institution is to provide financialservices3) to the poor, particularly to the disadvantaged womenwho have no access to formal financing. With the success of suchcredit movement, the sector has expanded globally, particularly inthe developing countries as a potential development tool to battlepoverty. Due to the significant contribution in poverty alleviation,community development and women empowerment throughmicrocredit initiative, Professor Muhammad Yunus received theworld most prestigious 酉Nobel Peace Prize瀞 in 2006 along with hisGrameen Bank.Despite the lack of resources and large numbers of people

being under the poverty line, Bangladesh has shown remarkablesuccess in achieving 酉The Millenium Development Goals(MDGs)瀞and continued to be a role model for other developing countries.Although the per capita income has not increased much,Bangladesh has managed to achieve 5 out of 8 MDGs statusby 2012, three years before the deadline (United NationsDevelopment Program, 2014). The substantial improvement hasbeen done in the areas of poverty alleviation; women瀞sempowerment, school enrollment, child mortality rate, maternityhealth improvement and immunization.Historically, microfinance programs have placed significant

impact on such MDGs progress as they have diversified theiroperations to better outreach to the society (Pronyk, Hargreaves,& Morduch, 2007). There are a vast amount of research thatshows the positive correlation between microfinance and womenempowerment (Aruna & Jyothirmayi, 2011; Leach & Sitaram,2002; Swain & Wallentin, 2009), education (Dunford, 2001;Holvoet, 2004) and health (DeLoach & Lamanna, 2011; Geissler& Leatherman, 2015; Leatherman & Dunford, 2010; Moseson,Hamad, & Fernald, 2014). These achievements have further

almost every year. The comprehensive discussion of Chittagong canbe found in Mia, Nasrin, Zhang, and Rasiah (201—).

2) The situation was exacerbated due to severe unemployment, naturaldisasters (famine, flood, storm and etc.) discrimination againstwomen in the society of patriarchal and most importantly theusurious interest rates practice by the village money lenders,

3) Initially, the MFIs were only providing credits while the gradualdevelopment of the sector incorporated other financial services suchas savings, micro- insurance, remittance etc. in their operations.


Microfinance Institutions and Legal Status:

An Overview of the Microfinance Sector in Bangladesh

Md Aslam Mia*

[Received: January 24, 2016. Revised: February 4, 2016. Accepted: April 10, 2016.]

22 Md Aslam Mia / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 21-31

promoted through non-financial services provided by the MFIs.Thus, it is very important to have a clear idea of the sector forfurther development and related policy reforms in the industry.This paper is further aimed to help the countries with low levelsof socio-economic development for possible replication ofmicrofinance.This paper aims to provide a basic overview of the

microfinance sector in Bangladesh based on their legal status.Considering the different legal statuses of Microfinance Institutions(MFIs), the microfinance services may vary, at least potentiallybetween various types of MFIs. Thus, it is interesting to learnabout the MFIs and their differences (if there is any) due to theinherent importance of microfinance in alleviating poverty andtheir impact on socio-economic development. This study willassist policy makers and concerned authorities to have a glimpseabout the sector. A brief overview of poverty situation inBangladesh from 2000 to 2010 is also discussed to show theimportance of this policy intervention continuation. Sincemicrofinance is greatly criticized nowadays as a potentialdevelopment tool, this profile could reiterate the importance ofmicrofinance as a development tool. While documenting themicrofinance sector, it is learned that most of the studies havemainly focused on NGO-MFIs in their analyses. However, thisstudy explores other types of MFIs along with the mainstreamMFIs in Bangladesh. Their outreach, financial performance andbasic statistics are also comprehensively discussed. Furthermore,we also investigate some financial performance of these differenttypes of MFIs. This may help the donors and financiers toidentify their potential recipient of funds.The rest of the study is organised as follows: Section 2 briefly

discusses about the overview of poverty in Bangladesh. Section3 briefly explains the concept of microcredit and microfinance.Section 4 discusses the existing regulatory framework ofmicrofinance sector in Bangladesh. Section 5 comprehensivelydiscusses the types of MFIs based on their legal status andprovide some financial and outreach information. Section 6concludes the study with some policy implications, limitations andrecommendations for future studies.

2. An Overview of Poverty in Bangladesh

It is unequivocally important to take a glimpse of the ideaabout the poverty situation in Bangladesh to better understandthe prospects and importance of MFIs in combating poverty. Inview of the multidimensional characteristic of poverty, toconsider based on a single measurement or aspect is neitherreliable nor unanimously accepted. To better capture theessence of poverty, there are several available povertymeasurements; and each method has its own advantages anddisadvantages within its context. To simplify our understandingof poverty, we have to rely on the secondary sources ofpoverty estimates. The poverty status has been adapted fromthe Bangladesh Economic Review (2014), prepared by theMinistry of Finance, along with the Bangladesh Bureau of

Statistics. They have reported three measurements of poverty,namely Head Count Index (HCI), Poverty Gap, and SquaredPoverty Gap, which are similar to the World Bank estimates ofpoverty that are most commonly used in the literature.The HCI4) or incidence of poverty is one of the simplest

measurement of poverty that shows the proportion of thepopulation that is poor (World Bank, 2015a). The measurementis easy to construct and understand. It is possible to usevarious poverty lines to estimate incidence of poverty andextreme poverty levels. However, it does not account for orreveal the intensity of the poor, how poor is the poor, and itrefers to individuals rather than families or households.The poverty gap5) is a moderate measurement of poverty that

shows the extent to which an individual falls below the povertyline (poverty gap) as a proportion of the poverty line (WorldBank, 2015a). This basically shows how far the people are fromthe below poverty line to the level above poverty line.6) Thisprovided information of the distances is so meaningful that wecan learn what resources are required to bring the poor to thelevel above the poverty line. This method is preferable whentargeting cash transfer services to eliminate poverty, assumingthe transfers are perfectly targeted and implemented. However,it does not represent the changes in inequality among the poor.The squared poverty gap7) averages the square of the pov-

erty gaps relative to the poverty line. This measure not onlytakes into consideration of the distance separating the poor fromthe poverty line but also indicates the inequality among thepoor. This measure lacks intuitive meaning and is not easily in-terpretable resulting in poor acceptance and usage among thedevelopment economists.Overall, Bangladesh has shown remarkable success in com-

bating poverty, and poverty rate has decreased over the lastdecade. Based on the HCI, the poverty rate is about 31.5% ofthe national level in 2010. The poverty rate is high in the rural

–) Following are the mathematical form of measuring HCI:

@

ギ (1)

Where, is denoted by the HCI, ギis the number of poor peopleand is the number of total population.

—) To measure poverty gap (P1), following is the mathematical formula.

@i ヰ @

ヰ (2)

Where ヰ is the poverty gap, ヂ is the poverty line, and N is thetotal population.

6) The poverty line is estimated based on the cost of basic needsapproach. This tells the minimum expenditure required to fulfil thebasic needs or threshold consumption needed for a household toescape poverty. A person or households that live below thisconsumption is known as poor. It can be estimated based on thecost of acquiring enough food for adequate nutrition, particularly2100 calories per person per day associated with cost of otheressential goods (e.g. clothes, shelter).

7) @i ヰ @

ヰ (3)

This is basically shows that the poverty gap is divided by the

poverty line, then squared and averaged to get


areas compared to urban areas when all three measurements ofpoverty are taken into consideration. Subsequently, the nationalpoverty gap has reduced at an annual average rate of 6.3% be-tween the periods of 2005 to 2010 and shows gradual improve-ment in income inequality among the poor based on thesquared poverty gap estimates (Table 1).

Trend of Income Poverty (2000-2010)

2010 2005 Annual Change(%) 2000 Annual Change(%)2000 to 20052005 to 2010

Head Count IndexNational 31.5 40.0 -4.6 48.9 -3.9Urban 21.3 28.4 -4.2 35.2 -4.2Rural 35.2 43.8 -5.5 52.3 -3.5

Poverty GapNational 6.5 9.0 -6.3 12.8 -6.8Urban 4.3 6.5 -7.9 9.1 -6.5Rural 7.4 9.8 -5.4 13.7 -6.4

Squared Poverty GapNational 2.0 2.9 -7.1 4.6 -8.8Urban 1.3 2.1 -9.1 3.3 -8.6Rural 2.2 3.1 -6.6 4.9 -8.7

Source: Bangladesh Economic Review (201–).

Division-wise Incidence of Poverty by Head Count Index 8)

National/Division 2010 2005Using the Lower Poverty LineNational Rural Urban National Rural Urban

National 17.6 21.1 7.7 25.1 28.6 14.6Barisal 26.7 27.3 24.2 35.6 37.2 26.4

Chittagong 13.1 16.2 4.0 16.1 18.7 8.1Dhaka 15.6 23.5 3.8 19.9 26.1 9.6Khulna 15.4 15.2 16.4 31.6 32.7 27.8Rajshahi 21.6 22.7 15.6 34.5 35.6 28.4

Rajshahi (new) 16.0 16.4 14.4 N/A N/A N/ARangpur9) 27.7 29.4 17.2 N/A N/A N/ASylhet 20.7 23.5 5.5 20.8 22.3 11.0

Using the Upper Poverty LineNational 31.5 35.2 21.3 40.0 43.8 28.4Barisal 39.4 39.2 39.9 52.0 54.1 40.4

Chittagong 26.2 31.0 11.8 34.0 36.0 27.8Dhaka 30.5 38.8 18.0 32.0 39.0Khulna 32.1 31.0 35.8 45.7 46.5Rajshahi 35.7 36.6 30.7 51.2 52.3 45.2

Rajshahi (new) 29.7 29.0 32.6 N/A N/A N/ARangpur 42.3 44.5 27.9 N/A N/A N/ASylhet 28.1 30.5 15.0 33.8 36.1 18.6

Source: Bangladesh Economic Review (201–).

In Bangladesh, there are two types of poverty line measurements,upper poverty line and lower poverty line. The upper poverty line isroughly about 20% higher than the lower poverty line. An under-standing the division-wise incidence of poverty is useful in prioritizing

‘) Cost of Basic Need (CBN) method has been used to estimateincidence of poverty.

’) Before the formation of Rangpur division in 2010, it was part ofRajshahi Division.

policy intervention and resource allocation for the gradual develop-ment of the region, particularly the spatial distribution of MFIs tocombat poverty. While the division-wise incidence of poverty showsthat the affluent areas, particularly Dhaka, Chittagong and Khulna, ob-served lower level of poverty incidence, the highest incidence of pov-erty were observed in the northern (Rangpur) and Southern (Barishal)divisions of Bangladesh (Table 2). Hence, prioritizing the policies to-wards targeting these divisions requires the special attention of policymakers, and microfinance program could be an inevitable choice inthis circumstances. Since the poverty level in Bangladesh is still quitehigh, providing financial services to the poor will add an advantage tocreate self-employment cum combat poverty in a greater extent.

3. What is Microcredit/Microfinance?

There are subtle differences between microcredit and microfinance.In general, microfinance refers to the financial services, includingcredit, savings, insurance and remittances tailored to includefinancially excluded people to meet individual and household瀞sdemands (Abdelkader, Hathroubi, & Jemaa, 2014), while themicrocredit simply means providing credit to the poor of the society.The initial aim is to cater the poorer by providing loans for newbusiness creation or expansion to promote self-employment andwomen瀞s empowerment in the rural areas. The microfinance sectorputs special emphasize on targeting women as they are mostlyneglected in the society of patriarchal. Institutions that providemicrofinance services; they are known as MFIs. Despite the originalaim of providing financial related services, the MFIs itself can beclassified into four different types or categories based on theiractivities (Viswanath, 2015). The first type of MFI provides creditwhile the second type of MFI provides financial related services suchas credit, savings, micro-insurance, remittance, and etc. The thirdtype of MFI works to enable capacity building in the society, and thefourth type provides social and other development services to thewider clients. Table 3 shows the services offered by MFIs inBangladesh.

Summary of Financial Products Offered by MFIs.Credit Savings Insurance Others

Term Loan Regular/Compulsory Saving Health Mobile Subscription10)

Entrepreneurs Loan Flexible Savings Life Mobile Financial ServicesHousing Loan Daily Savings Property Inward Remittance ServicesHealth AndSanitation Voluntary Savings Credit Micro Leasing

Seasonal Time Deposit CropEducation Fixed Deposit OthersDisaster Risk Fund

ConsumptionLoan Top UpMid-Term LoanEmergency Loan

OthersIslamic Microfinance

Source: AuthorUs compilation from various sources.

10) Grameen Bank first initiated such mobile services with partnershipof Grameen phone, a Telenor company from Norway.


4. Regulatory Framework of Microfinance Sectorin Bangladesh

The microfinance sector in Bangladesh has undergone regulatoryenforcement, particularly after the establishment of the MicrocreditRegulatory Authority (MRA) in 2006. This act is the full-fledged actintended to monitor, control and supervise the microfinance sector inBangladesh. The setup of MRA came with the global success ofmicrofinance when the microcredit program was declared 酉TheInternational Year of Microcredit瀞 in 2005 by the United Nations andProfessor Muhammad Yunus and his Grameen Bank claimed the酉Nobel Peace Prize瀞in 2006. Although the authority was set up in2006, there are successive historic stories behind the establishment.Initially, in 1997, the Bangladesh bank commissioned a study toexamine the viability of regulatory aspects of MFIs and based onthe recommendation, a committee was formed in 2000. Thecommittee was in charge of supervising microfinance activities underthe direction of Bangladesh Bank. When the government enacted酉Microcredit Regulatory Authority Act 2006瀞, the authority isresponsible to bring the microcredit sector under a full-fledgedregulatory framework. The original aim behind such an establishmentwas to create a conducive and healthy environment for microfinancepractices across the country. Additionally, the Microcredit Act furtherprovides detailed directions for MFIs to enhance governancepractices through prudential policy guidance and to promotecompetition and stimulate productivity and efficiency for long-termsustainability of the sector (Micro-Credit Regulatory Authority, 2015).Prior to the formation of the MRA, the microfinance sector was

regulated by various acts. Table 4 shows the types of MFIs and therelated Acts to regulate and supervise the sector. The microfinanceactivities of the commercial and state-owned banks are supervisedunder the Bank Company Act瀞1991 (with several amendments) whilethe cooperatives follow the 酉Cooperatives Societies Act瀞 establishedin 2001. The first MFI in Bangladesh, Grameen Bank, follows the酉Grameen Bank Ordinance 1983瀞, which solely prepared for it.

Conventional Laws Related to Microfinance Sector.

Institutions Conventional Laws

Co-operatives Cooperative Societies Act瀞 2001(Amendment in 2002符and 2013)

State-OwnedCommercial andAgricultural Banks.

Bank Company Act瀞 1991 (Amendment in 2013)符Directions/instructions from governments.符Circular/instructions/guidance issued by central bank.符

Private CommercialBanks

Bank Company Act瀞 1991 (Amendment in 2013).符Circular/instructions/guidance issued by central bank.符

Grameen Bank Grameen Bank Ordinance瀞1983.符

NGO-MFIs

The Societies Registration Act瀞1860.符The Trust Act瀞1882.符The Company Act瀞1994符Charitable and Religious Trust Act瀞1920.符The Voluntary Social Welfare Agencies Ordinance瀞符1961.Foreign Donations Regulation Ordinance瀞 1978.符The Cooperatives Societies Act瀞2001.符The Microcredit Regulatory Authority Act瀞2006.符

Source: Adapted and modified from Ahmed (2013).

After the Microcredit Regulatory Act瀞 2006 was enacted, allthe NGO-MFIs are supervised based on this act, while othercategories of MFIs are based on the respective acts. By theconstitutional supremacy, MRA is the only legal entity in thecountry to monitor and supervise microfinance operationalactivities. To operate microcredit activities in Bangladesh, eachMFI is required to obtain a license from MRA. The authority hasthe ultimate right to issue/reject or withdraw license if an MFIfails to comply with the requirements set by the authority.Moreover, to ensure the transparency and accountability ofmicrofinance operations and activities, the authority also applies酉carrot and stick瀞approaches in supervising MFIs. As part of therequirement of the license, individual MFIs are also obliged toreport prescribed data twice a year and financial data once ayear to the authority, which is later published by the MRA.

5. Types of MFIs Based on Legal Status inBangladesh.

To understand the nature of MFIs, the following sectionprovides an overview of MFIs in Bangladesh based on theirlegal status.

5.1. Non-Governmental Organization (NGO)

The microfinance sector in Bangladesh is predominantlycontrolled by the NGO type of MFIs. Generally, NGO means anon-profit voluntary group of citizens performing several activitieswith a common interest to better serve the people and societyat national and international levels. According to the definition ofUnited Nation (UN), a NGO can be defined as any kind oforganization that is not directly under the control of thegovernment given that it is nonprofit, non-criminal and not anopposition political party (United Nations Rule of Law, 2015).The activities of NGO MFIs are funded by individuals,businesses, government and international donor communities.For example, to support the operational activities of worldwideMFIs, almost 1 billion US dollars per year is channeled tosubsidize MFIs (Hudon & Traca, 2011). While most of theNGOs were donor driven in the late 1990s, the foreign fundedcredit programs stood roughly at 3% of total loan outstanding in2013, a gradual decline since the beginning of the 21st century(Micro-Credit Regulatory Authority, 2015). The commonNGO-type MFIs in Bangladesh are Bangladesh RuralAdvancement Committee (BRAC), Proshika, Association of SocialAdvancement (ASA), BURO-Tangail, Bangladesh ExtensionEducation Services (BEES), Community Development Center(CODEC), Satkhira Unnayan Sangstha (SUS), ThengamaraMohila Sabuj Sangha (TMSS) and Action- Aid. BRAC is theworld largest and fastest growing NGO that received numerousglobal awards and recognitions for their significant contributionsto society (The Economist, 2010). Table 5 shows the basicstatistics of NGO-type MFIs in Bangladesh.


Basic Statistics of Registered NGO- MFIs in Bangladesh,200—-2013 11)

Indicator 2005 2006 2007 2008 2009 2010 2011 2012 2013

MFI 469 641 344 453 420 516 576 590 649

Branches 7,733 12,156 11,112 13,636 16,851 17,252 18,066 17,977 14674

Number ofclients (million) 18.82 22.89 20.83 25.13 24.77 25.28 26.08 24.64 24.60

LoanOutstanding(Billion)a

56.06 75.2 85.87 134.54 143.13 145.02 173.8 211.2 257.01

(0.72) (0.96) (1.1) (1.72) (1.84) (1.86) (2.2) (2.7) (3.29)

Savings 21.01 27.64 37.76 47.39 50.61 51.36 63.27 75.21 93.99

(Billion)a (0.27) (0.35) (0.48) (0.61) (0.65) (0.66) (0.8) (0.9) (1.20)

Source: Adapted and modified from Mia and Chandran (201—).Note: aValues in the parenthesis are in US$ at an average rate of US$

1=Taka 7‘.10 in 2013 as per (World Bank (201—b)).

5.2. Credit Unions

Credit Unions are sometimes known as savings and creditcooperatives, usually owned and controlled by the members ofthe credit unions. Domestically, the members are the ones whodecide the operational and functional rules unless the lion shareis owned and redistributed by the local government ormembers瀞cronies. Although the concept of micro financing is notfor profit, this type of MFI usually goes for profit in theiroperation. However, their profit motives are not similar to theformal banking sector as they charge as much as possible fortheir products to maximize the shareholder wealth. The marginalprofit is later either shared or reinvested in the operation togrow the business. Their operation is basically 酉communityoriented and serve the people than piling up profit.瀞These creditunions also have regional and national networks for sharingliquidity in case of necessity and other organizationalco-movements (Zeller & Johannsen, 2006).There are severalinstitutional advantages of this type of MFI, particularly theirability to serve a large number of clients. Despite the urbanoriented depositor and non-poor type of members, surplus unitsof the member瀞s savings are loaned to the rural poor in adiversified loan schemes that substantially enhances the socialoutreach program. Furthermore, many of the credit unions alsoprovide non-financial extension services to their clients andnon-clients as part of their community development program.The credit unions in Bangladesh are gradually developing and

expanding. The apex organization of credit unions is known as酉The Cooperative-Credit Union League of Bangladesh (CCULB)established in 1979 with only 11 primary credit unions and most ofthem are from greater Dhaka (CCULB, 2015). Until June 2012,there were a total of 628 credit unions affiliated with CCULB witha membership of 335,312, and accumulated assets over Taka 10.7

11) The table values are excluding Grameen Bank. Although, the figuresare only included for registered MFIs, there are several thousandnon-registered MFIs are currently operating in Bangladesh whichare not included in this table.

billion. Among the top ten credit unions, most of them areChristian dominated, namely The Christian Co-operative CreditUnion Ltd., Nagori Christian Co-operative Credit Union Ltd., andHasnabad Christian Co-operative Credit Union Ltd are the topthree. The initial objective of creating such credit unions was tohelp the poor by providing them with access to credit, particularlythe Christian community in Dhaka during that time. The basicstatistics of the top ten credit unions are provided in the AppendixA including their share, deposit, reserve and other funds.Interestingly, the recent example of shifting from MFI to creditunion is Caritas Bangladesh.12) They started providing microfinanceservices since 1979 but they finally terminated their loan activitiesin 2012 due to the piling up of a considerable amount of loansoutstanding and portfolio risk (Ashraf, 2014). In general, the creditunions are supervised and monitored by the cooperativesdepartment, Ministry of Local Government, Rural Development andCooperatives, and the Government of the People瀞s Republic ofBangladesh.

5.3. Financial Cooperatives

Although credit union is a special form of financialcooperatives, there are subtle differences between these twotypes of financial institutions. Financial cooperatives are givendue recognition for their significant contributions to the provisionof financial services to the unbanked community of the society.The cooperatives are wholly owned by its members and adhereto the cooperative principle of one person one vote. Usually,they are regulated under the supervision of both banking andcooperative legislation in Bangladesh. Cooperative financialinstitutions are highly integrated and their management systemare locally managed, although the crucial decision must besought from the central office. The statistics in Table 6 showthat the cooperatives in Bangladesh are quite large in numberand the majority of them are under the Department ofCooperatives, Peoples Republic of Bangladesh.

Basic Statistics of Cooperatives in Bangladesh (Up toMarch, 2015).

Description National LevelCooperatives (cum.)

CentralCooperatives

PrimaryCooperatives Total

(cum.) (cum.)Number 22.00 1160.00 189181 190363

Number ofClients 10333310 10333310

ParticipatoryCapital

420.40(5.38)

941.60(12.06)

30948.70(396.27)

32310.80(413.71)

Deposit Savings 122.60(1.57)

2265.40(29.01)

55886.50(715.58)

58274.60(746.15)

Effective Capital 7878.00(100.87)

11576.30(148.22)

99547.20(1274.61)

119001.70(1523.71)

Source: Department of Cooperatives (201—). Values in the parenthesesare in USD and without parentheses are in Taka, million.

12) Caritas is a Latin word. Literally it means "charity" or universal love.This organization was working with Adivasi or Indigenous people inBangladesh for their socio-economic development.


5.4. State-Owned Commercial Banks

The state owned or National Credit Bank (NCB) andspecialized banks were not involved in financing the agriculturalcredits to rural areas till 1977. Due to the importance ofagriculture in Bangladesh GDP and to provide financial servicesto the marginal and small farmers, these banks started toexpand their branches in the rural areas since the early 80s. Asa result, notable changes were observed in rural financialmarket during this time. Entry of new banks, change in legalstatus and re-orientation of the objectives, and change in banksownership structure were most prominent (Ahmed, 2013). Aspart of the financial reform, two banks (Pubali and Uttara) wereprivatized in 1985 in order to involve the private sector credit inrural development and to revive the agrarian economy ofBangladesh. These state-owned commercial banks played asignificant role in providing rural credits, and their performancewas satisfactory in terms of financial sustainability as theaverage recovery rate stood at close to 98% in June, 2014(Table 7).However, despite the rapid growth of the branches of NCB in

the 80s and early 90s, the growth was slowed down due to therapid expansion of NGO-MFIs involvement in financing ruralagricultural sector (Figure 1). The sluggish growth was furtheraffected by the central bank financial reform policy in early 90瀞s,and they were suggested to close down or merge the lossmaking branches due to their inherent focus is more onfinancial sustainability rather than social objective. In contrast,the branch expansion of specialized private banks graduallyincreased over the period from 1983 to 2004. The example ofstate-owned commercial banks that provide credit services areprovided in Figure 1.13)

Basic Statistics of Microcredit Provided by State-ownedCommercial Banks.

upto-2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14

Up toJune, 2014(cum.)(cum.)

Disbursement

14412.43(184.54)

16007.70(204.96)

20149.10(257.99)

15350.80(196.55)

23979.90(307.04)

23330.00(298.72)

25533.40(326.93)

268475.20(3437.58)

Recovery

14436.30(184.84)

15694.20(200.95)

15912.00(203.74)

14851.00(190.15)

23743.20(304.01)

232670.00(2979.13)

25037.90(320.59)

262868.30(3365.79)

Rateof recovery(%)

100.17 98.04 78.97 96.74 99.01 99.73 98.06 97.91

Source: Adapted and modified from Bangladesh Economic Review(201–). Values in the parentheses are in US$, and withoutparentheses are in Taka, million.

13) There are total 6 banks, namely, Sonali Bank, Rupali Bank, AgraniBank, Janata Bank, Rajshahi Krihsi Unnayan Bank and BangladeshKrishi Bank.

Source: Adapted from Ahmed (2013).Total Number of Rural Bank Branches by Types of Banks.

5.5. Private Commercial and Specialized Banks

Although the last two decades of 20th century witnessed theentry of first generation commercial banks, they were notengaged in microcredit activities except Islami Bank BangladeshLtd. Until recently, while the Pubali and Uttara banks arespecialized commercial banks, Ansar VDP is a non-scheduledbank14)that provides credit services to the poor of the society.The purely commercial private banks, such as National Bank,Trust Bank and BASIC Bank, also started similar type ofmicrocredit activities to support small medium enterprises(SMEs) and provide seasonal loans. Additionally, BASIC bankalso provides finance to the NGO-MFIs activities at very lowinterest rates as per their Corporate Social Responsibility (CSR).The Table 8 shows the microcredit activities of private andspecialized banks in Bangladesh. Interestingly, one of thespecialized banks (Uttara Bank) recorded very low level ofcumulative recovery compared to other commercial banks, andthe rate was far beyond the state-owned commercial banks andmicrocredit programs of various ministries in general.Additionally, while the main target of NGO-MFIs are women, thecommercial banks mainly target men for their microcreditactivities. The total number of men being served by thecommercial bank are double than their female counterpart.

1–) The banks which are established for special and definite objectiveand operate under the acts that are enacted for meeting up thoseobjectives, are termed as Non-ScheduledBanks. These banks cannotperform all functions of scheduled banks.


Basic Statistics of Microfinance by Commercial andSpecialized Banks.

Number of Beneficiaries Disbursement up toJune, 2014 (Mill)

Rateof

Recovery(%)

Male Female Totalin Taka In USD

Ansar-VDP 685,658 293,853 979,511 20011.10 256.22 97.94NationalBankLimited

1836 31,017 32,853 87783.10 1123.98 95.32

Islami BankLimited 733,240 165,997 899,237 87558.80 1121.11 N/A

The TrustBank 14 5940 5954 1334.50 17.09 98

BASICBankLimited

300200 70418 370618 4246.90 54.38 98.14

PubaliBank Ltd. 103875 9046 112921 8044.30 103.00 100

Uttara BankLtd. 6445 125910 132355 61389.20 786.03 71.17

Total 1,831,268 702,181 2,533,449 270390.00 3462.10

Source: Bangladesh Economic Review (201–)

5.6. Grameen Bank

Grameen Bank or Village Bank or Bank of the Poor is one ofthe most cited and oldest development microfinance models. TheGrameen model can be divided into two types, the ClassicGrameen Model and Grameen II. The former one was inexistence prior to 2000, and the latter one emerged after 2000.Since 2000, the Grameen II model is being extensively usedacross the developing countries. There are several differencesbetween these two models. Grameen II is a more comprehensivethan the classic one, and it needs based microfinance model thatemerged based on many lessons learnt from past experiences(Rutherford, 2005). The three main distinctive features ofGrameen II are public deposit services15), extended memberdeposit services16) and improved loan contracts.17)The basic component of Grameen model is a form of group

consisting of five members, where they have mutual bindingguarantee in lieu of collateral and most of them are womenborrowers. Until now, the majority of Grameen Bank瀞s customersare women since the conventional banking system are mostlyanti-women, anti-illiterate and anti-poor in a patriarchal society.

1—) Now MFIs are allowed to mobilize deposits from public (evennon-member).

16) Comprehensive individual and group savings products are evenmore flexible than before.

17) Wider range of loan products, loan Ttopped upU, rescheduling system,no obligation of borrowing and etc. provided additional synergies tothe clients. For more details , please see Rutherford (200—).

Key Information of Grameen Bank (in Million USD)(1995-2007).

Particulars 1995 2001 2002 2003 2004 2005 2006 2007

GB's Profit 0.37 1.05 1.03 6.12 7 15.21 20 1.56

GB's Deposit 94.77 127.32 162.77 227.66 343.52 482.92 634.28 758.93

GB'sOutstanding 294.77 223.37 218.04 274.04 331.76 427.25 475.74 529.54

Deposit as %of Outstanding

Loan32% 57% 75% 83% 104% 113% 133% 143%

TotalDisbursement 333.17 286.96 271.99 369.32 435.1 611.74 726.97 731.49

CumulativeDisbursement 1404.6 3393.45 3667.52 4180.21 4615.31 5227.05 5954.02 6685.51

Members(Million) 2.07 2.38 2.48 3.12 4.06 5.58 6.91 7.41

No. ofVillagescovered

35,533 40,477 41,636 43,681 48,472 59,912 74462 80678

Employees 12,420 11,841 11,709 11,855 13,049 16,142 20885 25283

No. ofBranches 1055 1173 1178 1195 1358 1735 2319 2481

Source: Grameen Bank (201—).

The Table 9 below shows the basic information of GrameenBank over a decade. It is evident that after establishing GrameenII, its profit has increased almost 6-fold from 2002 to 2003 andthe trend continued till 2006. Additionally, the members, coverageof villages, total disbursement and deposit sharply increased eventhough the employees, number of branches observed a marginalincrease after the launching of Grameen II. The most strikingfindings emerged from Table 9 is that the deposits of GrameenBank have exceeded its loan outstanding since 2004. This is avery good achievement for Grameen Bank to motivate their clientsto save. The innovations of Grameen瀞 s savings services andoperational dynamics could be an ideal example for othermicrofinance service providers in the sector.

5.7. Specialized Credit Programs by Various Ministry ofBangladesh.

The government of Bangladesh has taken special initiatives infighting poverty across the country. In accordance with thisobjective, several ministries of Bangladesh, roughly around 17ministries and departments, run microcredit related programswith the donors driven funds (Alamgir, 2010). Due to the donordriven projects, some of the programs were closed or collapsedwhen the funding was exhausted. Moreover, the sustainability ofsuch projects were not given due attention because theiroperations were short term in nature. Also, the consequentportfolio risk, recovery rates and financial viability were verypoor compared to the activities of NGO types MFIs. Theexamples of specialized credit programs funded by thegovernment are Swanirvar Bangladesh and RD-12 run byseveral ministries viz., Ministry of Women & Children Affairs,Ministry of Youth & Sports, Ministry of Social Welfare, Ministry


of Land, Ministry of Finance, Ministry of Industry, Ministry ofTextile and Jute, Ministry of Liberation War Affairs and etc.

Basic Statistics of Micro-finance Provided by VariousMinistry of Bangladesh.

Upto-2008/09 2009/10 2010/11 2011/12 2012/13 2013/14

Up toJune,2014(cum.)(cum.)

Disbursement

493195.60(6314.92)

122112.00(1563.53)

134308.10(1719.69)

143037.00(1831.46)

159223.00(2038.71)

171920.00(2201.28)

1223800.00(15669.65)

Recovery 406408.80(5203.70)

110095.00(1409.67)

131051.20(1677.99)

134368.00(1720.46)

154639.00(1980.01)

180690.00(2313.57)

1117259.00(14305.49)

Rate ofrecovery(%)

82.4 90.16 97.58 93.94 97.12 105.1 91.29

Source: Adapted and modified from Bangladesh Economic Review(201–). Values in the parentheses are in US$ and withoutparentheses are in Taka, million.

5.8. What are the Differences between the Types ofMFIs?

While almost 33 million of clients are served by themainstream MFIs (NGO-MFIs and Grameen Bank), roughlyaround 13 to 15 million of clients are being served by othertypes of MFIs in Bangladesh. Thus, we could say that almost50 million of people in Bangladesh are currently being servedwith various types of MFIs, which accounts almost one-third ofthe total population. The main distinguishable difference betweenthe mainstream MFIs and other types of MFIs could be theamount of average loans, durations, frequency of payments andfinancial collateral. While the NGO types and Grameen Banksusually provide small loans with a short term period, most ofthe commercial, state-owned, financial cooperatives, creditunions and ministries provide larger loans with long termrepayment facilities (most of the cases, more than a year).Based on the target groups, it is widely seen that NGO-MFIsand Grameen Bank always try to cater poor group of people inthe society, while other types of MFIs basically provide financialservices to the wealthy clients.18) Moreover, some of the MFIs,such as financial cooperatives and credit union, may requiresubstantial amount of collateral against the loan amount whilemost of the NGO-MFIs and Grameen Bank loans are almost(no physical collateral in most of the cases) collateral free.Since most of the poor people reside in the rural areas, theimportance of NGO-MFIs and Grameen Bank are always crucialfor providing financial services to them.Additionally, although the original aim of MFIs is to provide

financial services to the poor, there are some MFIs, such ascredit unions, also aims to maximize their profit. This mayhamper the welfare of the poor as the high interest bearing

1‘) Generally, poor people require small loans and relatively wealthyclients demand larger loans.

loans will financially distort their living standards. However, thiskind of MFIs is basically target relatively wealthy clients, most ofthem are basically owner of the formal enterprises. This is oneof the main drawbacks of financial institutions whose aim is toearn maximum profits and target wealthy clients rather than thepoor with less or not for profit.After looking into the financial performance of all these

categories of MFIs, it revealed that MFIs under variousministries showed the lowest performance in terms of loanrecovery rates. This is mainly because of the mismanagementof the funds, lack of expertise and human capitals as well asinnovative techniques in delivering the financial services to thepoor. While most of the NGO-MFIs recovery rate is around 97-98% (Micro-Credit Regulatory Authority, 2015), the state ownedcommercial banks also showed quite remarkable performance.However, the Uttara Bank (commercial bank) has observed thelowest loan recovery rates among others and stood at anaverage of 71%, which is the lowest loan recovery rates in thesector. Thus, they should learn from the respective majormicrofinance players in the industry to combat low recoveryrates and gradually improve their financial performance.Another distinguishable difference between the mainstream

MFIs and other types of MFIs is about the social intermediation.While the former types of MFIs are not limited to providefinancial services to the poor clients, but they also work associal intermediation. Qudrat-I Elahi and Lutfor Rahman (2006)defined social intermediation as to organize and raise the voiceof the poor for their aspirations and concerns over any policiesor issues pertaining to the development of these neglectedcommunities. These MFIs are basically the mixture of differentcategories of MFIs as classified by Viswanath (2015). Forexample, they provide financial related services such as credit,savings, micro-insurance, remittance, etc. They work to enablecapacity building in the society. Moreover, they also providesocial and other development services to the wider clients.However, the other types of MFIs (Financial Cooperatives,State-Owned Bank, and Commercial Banks) are mainlyconcerned with the financial activities with their clients than thesocial intermediation. Hence, it is quite important for Bangladeshto foster the growth of mainstreaming MFIs for sustainablesocio-economic development of the country.

6. Conclusion

Although in most of the cases NGO-MFIs and Grameen Bankare always in the lime light of the discussion, this studyunexplored other types of MFIs currently providing microfinanceservices in Bangladesh. In aggregate, almost 50 million clientsare currently being served with various types of MFIs. However,NGO-MFIs and Grameen Bank are always in the leadingposition, particularly in providing financial services to the clients.Although there are some differences between the types of MFIsbased on their legal status, the fundamental aim of such microfinancing activities is to combat poverty. The importance of


NGO-MFIs and Grameen Bank is very crucial to meet thefinancial demands of the poor while most of the other types ofMFIs preferred relatively wealthy groups of people. Additionally,the social intermediation is one of the crucial activities ofmainstream MFIs which is very much neglected in other typesof MFIs. Hence, those international donors/financiers, whoconcerned with good financial performance, outreach and bettersocioeconomic development of the poor, should have focusedon NGO-MFIs due to their inherent success in those aspects.As we have found that most of the microfinance activities

provided by the various ministries of Bangladesh have lowestlevel of loan recovery rates, they should clearly think whether tocontinue such activities or not. Due to the huge loan losses (asthe loan recovery rates is too low), which would have beencreated more outreach if it had been properly managed. Thus,the respective authority should concern about solving this issue.They may have channeled the funds through other types ofMFIs, which has shown good performance in terms of servingthe poor and financial sustainability. Similarly, some of thestate-owned banks also showed very poor performance in termsof their loan recovery rates. They have a lack of expertise inmicrofinance activities as it is not their core business, and theyare observed severe financial turmoil in their operation. Hence,they could have learned from the best practice of MFIs inBangladesh about the operational dynamics of the microfinance.Moreover, despite the critical arguments about the microfinanceprograms, it remains an important channel for the poor to getaccess to financial services. As the NGO-MFIs and GrameenBank closely work with the poor of the society, their servicesshould be further extended to the unreached communities of thesociety.The study has provided some insights of the microfinance

industry in Bangladesh. However, this study has further raised manyquestions for further investigation. Future studies may be carried outto empirically investigate the financial performance and outreach ofvarious types of MFIs. Moreover, investigating the operationaldynamics of NGO-MFIs to explore their excellent financialperformance could help other types of MFIs in various ways.

Acknowledgement

The author is very grateful to his supervisor AssociateProfessor Dr. VGR Chandran and Dr. Lee Hwok-Aun for theirconstructive comments and suggestions. The author appreciatesvaluable comments and suggestions from the Editor (Jung WanLee) and the anonymous reviewers that have substantiallyimproved the quality of the paper. The author has alsobenefited from discussion with Imene Tabit, Shamima Nasrin,Halima Shilpi, Hasanul Banna, Sohel Rana, Md. Arphan Ali andZhang Cheng (Dana) on various occasions while preparing thismanuscript. The author also acknowledges Bright Spark Program(BSP), University of Malaya, Malaysia, for funding his doctoralprogram. The remaining errors in this manuscript are my own.The usual caveats apply.

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Appendix A

Basic Statistics of Top-Ten Credit Unions in Bangladesh (in Taka) (up to 2015).

Name of Credit Union Share Deposit Reserve Fund TotalThe Christian Co-operative Credit Union Ltd. 661,066,241 1,152,670,837 16,446,841 1,116,507,225Nagori Christian Co-operative Credit Union Ltd. 115,018,780 389,022,592 8,461,236 48,078,232

Hasnabad Christian Co-operative Credit Union Ltd. 6,791,714 304,232,106 2,067,529 45,057,345Tumilia Christian Co-operative Credit Union Ltd. 89,551,745 179,261,682 3,269,515 30,015,856Mathbari Hindu Co-operative Credit Union Ltd 5,385,729 233,500,105 1,932,610 24,308,932

Barnali Co-operative Credit Union Ltd. 1,653,700 178,316,754 250,273 34,399,934Solepur Christian Co-operative Credit Union Ltd. 40,589,355 100,276,727 2,210,226 28,631,121Bonpara Christian Co-operative Credit Union Ltd 55,033,460 105,802,932 2,878,213 4,383,056The Morning Star Co-Operative Credit Union Ltd. 3,678,014 120,210,758 5,672,444 33,889,197Mausaid Christian Co-operative Credit Union Ltd. 43,283,896 100,387,142 0 17,215,762

Source: CCULB (201—).

33Muhammad Ayub Siddiqui, Naila Erum / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 33-39

Abstract

This study empirically evaluates the impact of exchange ratevolatility, foreign direct investment, terms of trade, inflation, andindustrial production and foreign exchange reserves on Pakistanitrade volume over the period of 1975-2010 using quarterly dataset. The study employs financial econometrics methods such asAugmented Dickey Fuller (ADF) test GARCH (1, 1) techniqueand Almon Polynomial Distributed Lag (APDL) models toestimate the relationship of variables. Findings of the study arein accordance with theoretical relationships presented by Clark,Tamirisa, Wei, Sadikov, & Zeng (2004), McKenzie (1999), Dellas& Zilberfarb (1993) and Côt‘ (1994). These findings are also inaccordance with the empirical studies which support positiverelationship of exchange rate volatility and exports presented byHsu & Chiang (2011), Chit (2008), Feenstra & Kendall (1991),Esquivel & Larra“n (2002) and Onafowora & Owoye (2008).Findings of the study in terms of imports are supported by thestudies such as Lee (1999), Alam & Ahmad (2011) and Arize(1998). The study also recommends some very important policyprescriptions.

Exchange Rate, Uncertainty, Foreign Trade,APDL, Pakistan.

C11, C32, F31, F40, F41.

1. Introduction

Exchange rate is one of the very important macroeconomicvariables. Volatility of exchange rate plays a pivotal role inchanging the volume of trade and subsequently affecting the

* First Author and Corresponding Author. Professor of Finance, NationalUniversity of Computer and Emerging Sciences, Pakistan[Sector H-11/–, AK Brohi Road, Islamabad, Pakistan]Email: [email protected] [email protected]

** PhD Scholar, National Defense University, Islamabad, Pakistan.Email: [email protected]

trade balance in very diverse nature. Unstable exchange ratemakes the process of trade balance slow down and underminesthe movements of capital. It shakes investor瀞s confidence as toinvest in a country where the nature of exchange rate is highlyvolatile which intuitively slows down the process of growth.Instability of exchange rate do affect long term decisions byupsetting the volume of trade, allocation of investment andpolicy framework of the government regarding sales andprocurement. It equally affects balance of payments and othereconomic activities in the medium term. Domestic consumersand traders are also affected in the short run. Changingexchange rate provides a chance to investors to get higherreturns by investing in foreign currency and streng then foreigncurrency instead of home currency and further exacerbate tradebalance.According to Farooq (2009) exchange rate is a conversion

factor that determines rate of change of currencies. The effectsof exchange rate instability on the international trade volumehave been extensively studied since the late 1970瀞s when mostof the countries adopted the fixed exchange rate regime.Theoretically high rate of exchange rate instability will reducetrade by creating uncertainty about future profit from trade. Inthe short run by using the forward markets, firm can reduce theuncertainties by managing the timings of payments and receipts.Exchange rate instability also affects trade by influencing longterm investment decisions of firms.Exchange rate volatility does have an influence on the

decisions of policy makers regarding the volume of exports andimports, manufacturing of goods, reserve money, and balance ofpayments. In order to get higher profits and returns, exchangerate volatility offer chances to investors to invest in foreigncurrency. System where the difference between actual andexpected value of exchange rate is minimized always supporttraders and investors. Sengupta & Sfeir (1998) find out tworeasons for exchange rate volatility to have an impact on theinternational trade. The impact of declining exchange rate islikely to raise volume of exports and improves balance ofpayments and provide a large incentive for domestic economicgrowth. Moreover, the investors are likely to increase globaldiversity in the asset market.Since 1982, Pakistan followed the floating exchange rate

system and exchange rate fluctuations were very nominal at the


Modeling Effect of Exchange Rate Volatility on

Growth of Trade Volume in Pakistan19)

Muhammad Ayub Siddiqui*, Naila Erum**

[Received: December 8, 2015. Revised: March 17, 2016. Accepted: April 10, 2016.]

34 Muhammad Ayub Siddiqui, Naila Erum / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 33-39

initial stage. However, exports changed generally in line withtotal world imports. In 1980 the share of Pakistan in the worldimports was 0.12 percent whereas in 1992, the share was0.18percent which further changed to 0.17 percent in 2002-2003and increased to 0.22 percent during 2008-09. The share ofPakistan瀞s export in total world exports was 0.21 percent in1999 which declined in the subsequent period to 0.11 percentand 0.13 respectively. This volatility of exports may be attributedto the volatile exchange rate, in addition to the other factors.The generalized floating system was launched in the early

1973. High degree of instability and volatility of exchange ratehave motivated researchers and policy makers to study thedegree and nature of impact of volatility and uncertainty ofexchange rate on the volume of trade. Mixed results have beenyielded by the studies which deal with the effects of volatility ofexchange rate on flows of trade. Volatility of exchange rate willaffect the risk-averse participants by imposing costs and favorforeign markets in spite of domestic markets, as argued by anumber of studies. The mixed results have motivated to conductthe present study. Some studies find negative effect of instabilityon trade volume while some other studies show positive effectof volatility of exchange rate on growth of trade volume.Purpose of the present study is to analyze exchange rateinstability by using different estimation techniques in order toexplore consequences of instability on the growth of Pakistanitrade volume and examine its relationship with monetary, tradeand fiscal policies. Findings of the study would be helpful ineconomic planning, decisions of exchange rate management andmaintaining good trade relations with the other countries.The present study examines whether or not the exchange

rate volatility affects the imports and exports of Pakistan. Thestudy also explores and empirically tests the impact of FDI, CPI,manufacturing production index, terms of trade and real interestrate on imports and exports of Pakistan. Another objective ofthe study is to suggest policy recommendations in connectionwith the relationship of trade related variables.Remaining part of the study is organized as follows. Sections

2 and 3 present literature review and methodology. Results anddiscussions are presented in the section 4. Section 5 concludesthe present study with certain policy recommendations.


Pakistani exports to its trading partners have been affectedby volatility of exchange rate from 1974 to 1985 (Kumar &Dhawan, 1991). Instability of exchange rate has been observedadversely affecting demand for exports. The effect of volatility ofexchange rate on the demand for Pakistani exports has beeninvestigated by Alam (2010). Findings of these studies concludethat real exports are co-integrated with real effective exchangerate instability. Alam & Ahmad (2011) investigate the effect ofexchange rate volatility and some important explanatoryvariables on Pakistan瀞s bilateral trade with its major tradingpartners such as USA, UK, Japan, Saudi Arabia, UAE,

Germany and Kuwait by using quarterly data from 1982Q1 to2008Q2. Results reveal negative and statistically significanteffect of exchange rate volatility on Pakistan瀞s trade balancewith all the trading partners in general but substantially with UK.These adverse effects persist in the long run.The relationship of volatility of exchange rate and international

trade is also an empirical issue (Arize, Osang, & Slottje, 2000).Findings of the study reveal an adverse effect of volatility ofexchange rate on the demand for exports form Less DevelopedCountries (LDCs瀞). Similar findings are reported by Chowdhury(1993). However, the effect remains equivocal in case ofbilateral trade volume. US bilaterally imports from the UK,Germany, France, Japan, and Canada and imports areadversely affected by volatility of exchange rate as investigatedby Koray & Lastrapes (1989). The flow of exports and importsis affected by instability of exchange rate of Japan with itsseven trading partners (Daly, 1998). Exchange rate instabilitycan affect volume of trade positively and negatively as perfindings of the study. The effect is found to be insignificant byKlaassen (2004) who employed data of bilateral aggregateexports of US with the other G-7 countries.The impact of exchange rate uncertainty on the

disaggregated imports of UK by focusing on 15 mainmanufacturing categories has been investigated by Pattichis*,Cheong, Mehari, & Williams (2004). Findings of the study revealthe effect of Euro on exchange rate risk which if recognized,would have a positive impact on the UK瀞s trade and itsmacroeconomic policy. Bredin, Fountas, & Murphy (2003) haveanalyzed short-run and long-run association betweenmerchandise volume of exports and their determinants such asrelative prices, foreign income and exchange rate instability byapplying the econometric methods of cointegration and errorcorrection. The results of the study reveal insignificant effect ofexchange rate instability on the trade volume in the short rumbut in the long run significant positive effect is observed. Lee(1999) has examined the effect of exchange rate volatility onUS imports of manufacturing sector in terms of durable andnondurable goods. The study finds neither price nor volume issignificantly affected by the volatility of the exchange rate.Ahmed (2009) investigated the impact of exchange rate

instability on growth of trade volume of Bangladesh. Findings ofthe study reveal depressing effects on the trade volume of thecountry with Western European and North American countries inthe short run and the long run. Wang and Barrett (2007)examines the effect of exchange rate instability on the flows ofinternational trade by focusing on the exports of Taiwan to theUnited States for the period of 1989 to 1999. Findings of thestudy are particularly specific to the relationship of instability ofmonthly exchange rate and the flows of agricultural products.Doğanlar (2002) has examined the impact of exchange rateinstability on the exports of Asian economies. The study finds along-run equilibrium association between real exports, foreignactivity, relative prices and exchange rate instability. Arize et al.(2000) have empirically investigated the impact of real exchangerate instability on the flows of exports for 13 less developedcountries (LDC瀞s) over the quarterly period from 1973 to 1996.


According to the study, instability of the real effective exchangerate negatively affects the demand for exports both the short-runand the long-run in each of the 13 LDC's. Rashid & Husain(2010) have investigated the effects of inflows of capital ondomestic price level, monetary growth and exchange rateinstability. The study finds an inflationary impact of capitalinflows for the period of the study. Aurangzeb, Stengos, &Mohammad (2005) have analyzed the impact of exchange rateinstability on Pakistan瀞s exports to its major trading partnersunder the floating exchange rate regime for the period1985 to2001.The study reveals an increase in exchange rate volatilityapproximated by the conditional variance of exchange rate,exerts a significant negative effect upon the volume of exportsin the short-run.The literature speaks of mix findings in terms of effectiveness

of volatility of exchange rate on the macroeconomic activities ofan open economy. Most of these studies relied upon linearrelationship of variables. Volatility of exchange rate may not belinearly related with other macroeconomic variables because thebehavioral variables are not related at a constant rate. There isneed for a study employing the nonlinear relationship ofexchange rate volatility and the volume of trade. There arestudies which propose non-linear effects of volatility in exchangerate on the volume of trade. In order to understand then onlinearity in the relationship of bilateral exports and the exchangerate uncertainty, Baum, Caglayan, & Ozkan (2004) haveemployed the data set of 13 developed countries for the periodof 1980-1998. The study also includes volatility of foreignincome in addition to the volatility of exchange rate in theregression model. Volatility of foreign income can intensify ordiminish the impact of exchange rate instability on exports asindicated by results of the study. By employing the econometricmethods of time-series data on the volume of bilateral exportsof US with the six other G-7 nations has been examined withreference to the threshold effect of exchange rate instability byZhang, Chang, & Gauger (2006). The study reveals nonlinearrelationship of exchange rate instability with volume of exports.Volume of exports has a tendency to increase when exchangerate instability exceeds a certain threshold.

3. Methodology

The data employed in the present study is time series innature. Quarterly data from 1975Q1 to 2010Q4 is arranged fromthe authentic data sources such as International FinancialStatistics (IFS-CD-ROM, 2011) and State Bank of Pakistan(SBP-Annual report, 2011).Real Exchange Rate (RER), Consumer Price Index (CPI),

Industrial Production Index (IPI) have been employed as themain variables in the study. The IPI is used as a proxy forEconomic Activity (EA) or aggregate income of importingcountries. Real Imports (RIM), Real Exports (REX), Real ForeignDirect Investment (RFDI), Real Foreign Exchange Reserves(RFER) and Terms of Trade (ToTs) have also been

incorporated. All the variables are normalized by assuming theirappropriate transformation. Mostly log transformation is used inthe studies. The nominal exchange rate (NER) is converted toreal exchange rate (RER) by using the formula:

@__

In this calculation, CPI_USA is the price level in USA andCPI_Pak is price level in Pakistan. This formula of real exchangerate is also used by Lee (1999). The Industrial production indexfor industrial countries is used as a proxy for foreign economicactivity or aggregate income of importing countries (Alam, 2010). Itis calculated by using the quarterly average production index of alladvanced countries. Terms of trade is calculated by dividing theunit value of exports by the unit value of imports (Mankiw, 2014).Real Exports are calculated by diving unit value of exports byprice per unit of exports based on 2005 index (Arize, Malindretos,& Kasibhatla, 2003). Real imports are obtained by dividing unitvalue of imports by price per unit of imports1). Volatility ofexchange rate is calculated from GARCH (1,1) variance series ofthe real exchange rate. The GARCH variance series is based ontime period and the squared roots of the series indicates volatilityof exchange rate. Data of FDI and Foreign Exchange Reservesare in millions of US dollar. The variables in their real forms arecalculated by dividing the nominal values by the CPI. CPI is alsoused as measure of inflation and independent variable of themodel in order to view the impact of price changes on the growthof imports and exports.Coefficients of the lag in the Koyck distributed-lag model are

assumed to decline geometrically, as the lag length increases.That is why such models may not be applicable when there isfunctional relationship between the coefficients and time lags2).The finite distributed-lag model can be presented as follows:ザ pqザ qザ qザ qヮザヮジザ (1)

Equation (1) can be written more precisely as equation (2).

ザ p:ヰ

ヮ

qヰザヰジザ (2)

In this expression q is approximated by length of the lag.Hence, q is polynomial function of lag length (i) with degree ofpolynomial (k) less than length of the lag.qヰﾙﾙヰﾙヰ

ﾙヰﾙケヰ

ケ (3)

On substitution of value of q equation (4) can be derivedgiven below:

ザ p:ヰ

ヮ

ﾙﾙヰﾙヰﾙヰ

ﾙケヰケザヰジザ (4)

The equation can be further reduced to the estimable formas follows.

1) Both the unit value of imports/exports and their prices are in US $.2) (Gujarati et al., 2012), pp. 6—6-712.


ザ p:ヰ

ヮ

ﾙヰヰザジザ (5)

Thus Almon scheme regresses Y on the new constructedvariables Z instead of the original X variables. That is why OLSassumptions hold and parameters meet all the desirablestatistical properties. For instance, second degree polynomial,gives the values of i酉s from the estimated values of theﾚparameters of equation (5) as follows:qﾙ

qﾙﾙﾙ

qﾙﾙﾙ

qﾙﾙﾙ

qヮﾙヮﾙヮ

ﾙ

(6)

End point restrictions are imposed on i depending uponﾚwhether or not the value of independent variable with certaindegree of lag affects the dependant variable3). With theapplication of end point restrictions on the values of i theﾚmodel becomes Restricted-Least Squares Model. The question oflag length is settled by starting with a very large value of thelag length and then using the criteria of Akaike or Schwarzinformation the appropriate lag length and degree of polynomialare selected (Gujarati et al., 2012).Two separate equations are estimated in the study one for

real exports and the other for real imports. The independentvariables included in the study are real exchange rate, industrialproduction index, real foreign exchange reserves, real foreigndirect investment, terms of trade, volatility of exchange rate andconsumer price index. The econometric methods employed inthe study are described along with their findings and results inthe subsequent section.

4. Results and Discussions

In this section of the study results of the estimated models arepresented. Discussion on the methodology in terms ofmathematical equations and their logic has been cut short forspace saving.Results of the unit root test suggest that all the variables are

statistically insignificant at level by using both constant and trend (C& T). All the values are significant and the hypothesis of stationarityat 1st difference is accepted. However, CPI is stationary at 2nd

difference. The variables become stationary by using first differenceas they reject the null hypothesis at five, one and 10 percent levelof significance. The test concludes that there was a problem ofnon-stationarity in the time series data which is removed byapplying the ADF-first and second difference method. Thesubsequent analysis employs the stationary series by taking the firstdifference of each variable and the second difference of CPI.

3) For example, when qヮ <= then kth lagged form ofindependent variable is not affecting dependent variable.

Results of ADF Unit Root Test

Var. inLog Form

Level 1st Difference 2nd Difference Order ofIntegrationC C & T C C& T C C & T

RER -1.63 -0.18 -7.43 -7.66 - - 1(1)IPI -1.06 -2.18 -3.48 -3.54 - - 1(1)REX -1.59 -2.51 -3.33 -3.46 - - 1(1)RIM -1.09 -2.88 -4.75 -4.76 - - 1(1)RFER -1.83 -2.28 -11.12 -11.15 - - 1(1)RFDI -2.55 -4.04 -13.47 -13.49 - - 1(1)ToT -1.16 -3.39 -13.54 -13.64 - - 1(1)

Vol. ER -2.31 -2.55 -6.03 -6.04 - - 1(1)CPI -0.94 -2.93 -2.23 -2.68 -8.14 -8.16 1(2)

Note: — %, 1 % and 10 % level of significance are used.

4.2. Results of the Almon Polynomial Distributed LagModel

The results of Almon polynomial model are used for theestimation of impact of explanatory variables on the real exports(REX). The regression equation for REX is as follows: p p p p p p

p p p p ppガカ_pガカ {ザ

WhereYREX = Real ExportsXRER = Real Exchange RateXToT = Terms of TradeXCPI = Consumer Price IndexXFER = Foreign Exchnage ReservesXIPI = Industrial Production IndexZFDI = Foreign Direct InvestmentWVol_ER = Voltality of Exchange Ratemt = Error Term

Variable REX is regressed on the variables ToT, CPI, IPI,FER, Vol_ER, FDI and their appropriate lagged valuesincorporated in the equation4). The FDI has got four degree ofpolynomial and Vol_ER was assigned one degree polynomial.The results are presented in the Table 2.The results from the estimated model reveal significant impact

of real exchange rate (RER) on real exports (REX). For everyone percent increase inRER there is 68 percent rise in REX.TOTs significantly affect REX. For every one percent rise inTOTs the REX fall by 14 percent. It adds much to our surpriseto find insignificant contribution of CPI (the inflationary effect) tothe changes of REX. Though statistically foreign exchangereserves (FER) show significant impact on REX but itscontribution is very small. For every one percent increase in theforeign currency reserves, the REX increases by five percent onthe average. Similarly industrial production index seems to havecontributed much significantly to the change in the real exportsof the country.

–) Selection of Lag has been made by estimation of models in E-views.


FDI also has significant impact on exports. The coefficients oflagged values of the variable FDI have shown significant impactfrom the first lag through fourth period of lag. The results alsoreveal increasing impact of FDI on exports with increasing theperiods of the lag but with different direction of relationship. Thevolatility of exchange rate (Vol_ER) indicates significant butnegative effect on the REX as shown by the W0Vol_ERvariable. The effect subsides with the increase in time lag.

Results of Almon Model For Real Exports

Dependent Variable: REXVariable Coefficient Std. Error t-Statistic Prob.

C -8.936 1.581 -5.649 0.000RER 0.683 0.196 3.473 0.000TOT -0.458 0.141 -3.230 0.001CPI -0.023 0.135 -0.175 0.861FER 0.057 0.028 1.988 0.049IPI 1.513 0.241 6.265 0.000

Z0FDI -0.015 0.017 -0.882 0.379Z1FDI -0.058 0.018 -3.216 0.001Z2FDI 0.021 0.011 1.908 0.058Z3FDI 0.012 0.004 3.097 0.002Z4FDI -0.003 0.001 -2.275 0.024

W0Vol_ER -0.042 0.017 -2.413 0.017W1Vol_ER -0.021 0.011 -1.980 0.050AR(1) 0.497 0.084 5.865 0.000

R-squared 0.967 Akaike info criterion -1.187Adjusted R-squared 0.964 Schwarz criterion -0.878

Log likelihood 91.186 F-statistic 268.931Durbin-Watson stat 2.042 Prob (F-statistic) 0.000

LagDistribution ofLFDI_PAK(-1)

qヰ Coefficient Std. Error T-Statistic

. * | 0 0.022 0.019 1.164

. * | 1 0.047 0.020 2.364

. * | 2 -0.015 0.017 -0.882

. * | 3 -0.043 0.018 -2.395

. * | 4 -0.006 0.020 -0.298

. *| 5 0.033 0.018 1.845Sum of Lags 0.037 0.058 0.639

Lag Distributionof VOL

rヰ Coefficient Std. Error T-Statistic

* . | 0 -0.087 0.053 -1.635* . | 1 -0.067 0.033 -2.022* . | 2 -0.048 0.018 -2.605* . | 3 -0.029 0.022 -1.330* . | 4 -0.010 0.039 -0.270.*| 5 0.008 0.059 0.138

Sum of Lags -0.236 0.105 -2.230

The value of R2 in this model comes out to be 0.94 whichshows 94 percent variation in dependent variable (RIM) isexplained by the explanatory variables included in the model.The problem of autocorrelation controlled by AR(1) roots whichreduce the autocorrelation to almost nil. That is why the newvalue of Durban Watson is 1.94 which is approximately 2. Thevalue of F-statistic is 184.20 with its p-value 0.000 which showsoverall significance of the estimated model of real imports. Thevalues of Akaike and Schwarz are -1.80 and -1.56 respectivelywhich are at the minimum level from amongst the modelstested alternatively.The variables RER, TOT, and CPI do not have had

significant impact on real imports. Foreign exchange reserves(FER) indicate positive and significant impact on the realimports (RIM). Every one percent increase in the foreignexchange reserves creates provision of 4 percent increase inthe real imports(RIM). Industrial production index (IPI) alsoraises the real imports. Every one percent increase in IPI raisesRIM by 78 percent on the average. According to the results,FDI plays its significant role to the extent of one period lagvalues. As the number of lags is increased, the sign of thecoefficient is reversed (from positive sign to the negative sign).That clearly indicates short term effect of the FDI on the realimports only. Volatility of exchange rate has also significant butnegative impact on the real imports to the extent of immediatelagged values. For the longer lags the relationship of RIM andvolatility of exchange rate does not last.Overall the results of Almon model suggest that the model

provides a good fit both for real exports (REX) and real imports(RIM). The CPI does not have any significant impact on bothexports and imports. It is concluded that the effect of RER onREX is significant and RER do not have significant impact onRIM. Therefore, Pakistani imports have had inelastic demandamong the consumers in the country. Pakistan is a developingcountry and Pakistani currency has been depreciating veryrapidly against US dollar for the period of the study. This maybe because of increase in inflation, decrease in domesticinvestment, increase in government expenditures and low taxbase ratio. All these factors are creating shocks to the Economyof Pakistan.

5. Findings and Recommendations

Objective of the study is to examine the impact of exchangerate volatility, FDI, FER, RER, TOT and CPI on real exportsand real imports of Pakistan. Using the log transformation of thedata the present study calculates very important elasticities. Inorder to suggest some useful policy recommendations thepresent study has employed state of the art econometricmethods such as ADF-Unit Root and Almon PolynomialDistributed Lag models. Results of unit root reveal stationarity ofall the variables by taking first difference except CPI which issignificant at second difference.Results of the Almon model reveal significant effects of real


exchange rate on exports and insignificant impact on importswhich have developed deep-rooted part and parcel of theconsumption bundle of Pakistani consumers. Results of thisstudy are supported by Alam (2010). Results of the Almonmodel also reveal negative and significant effects of volatility ofexchange rate on both exports and imports. The results ofstudy for real imports are supported by Alam and Ahmad(2011). Based on these findings the present study stronglyrecommends policy makers to ensure political and economicstability in the country in order to be out of the uncertaintyprevailing in the country. The lagged effects of uncertainty lastfor around three to four quarters of the financial year of theeconomy of Pakistan. Instability is dangerous as it adverselyaffects the trade volume of the country and thereby distortseconomic growth and internationalization of the economicactivities of Pakistan.Regarding uncertainty, findings of the present study are quite

contrary to the those revealed by Hosseini and Moghaddasi(2010), Arize et al. (2000) and Arize et al. (2003) who haveshown advantages of exchange rate volatility in terms of exportsand imports of their focused economies. TOT has shownnegative and significant impact on exports but insignificantimpact on imports. That clearly reiterates the fact that demandfor Pakistani imports are highly insensitive to change in relativeprices of imports. These results are also supported by Mendoza(1995) but these findings are different from Chowdhury (1993).The policy makers are recommended to adopt importsubstitution policy by adopting business friendly policies inPakistan. Productive capacity of the country should beexpanded.Almon model has also shown significant positive impact of

IPI, FER and RER on real exports as indicated by earlier byAlam (2010). Industrial production index and the real exports arethe cohesively reinforcing factors to one another. Foreignexchange reserves seem to have supportive effect for theexpansion of export oriented industries of Pakistan by providinga capital base for the macro economy of Pakistan. Generallyforeign exchange reserves raise affordability of the exportoriented industries to expand their capacity when they areearning more in terms of foreign currency reserves. Realexchange rate and real exports theoretically move in the samedirection. That positive relationship applies to the economy ofPakistan as well. Only the variable FER and IPI have shownsignificant positive impact on real imports. Foreign exchangereserves raise capacity of the country to import more. This iswhat seems to have happened for the Economy of Pakistan forthe period of the study. Theoretically national income of thecountry positively affects real imports. Since IPI is employed asproxy for the national income, therefore the positive sign of itscoefficient is quite convincing for the Pakistan economy. Risingforeign reserves enable Pakistan to import capital goods fromabroad. That also improves value of the local currency.It is concluded from the study that volatility of exchange rate

creates significant level of uncertainty in respect of both exportsand imports with different direction and different lag periods. Thefindings of the study are in accordance with theoretical

relationships presented by Clark et al. (2004), McKenzie (1999),Dellas & Zilberfarb (1993) and Côt‘ (1994). These findings arealso in accordance with the empirical studies which supportpositive relationship of exchange rate volatility and exportspresented by Hsu & Chiang (2011), Chit (2008), Feenstra &Kendall (1991), Esquivel & Larra“n (2002), Onafowora & Owoye(2008). Findings of the study in terms of imports are supportedby the studies such as Lee (1999), Alam & Ahmad (2011) andArize (1998).Pakistan is confronting the problems of twin deficits such as

trade and budget deficits in addition to ever rising inflation. Thestudy recommends some policy implications. For theimprovement of demand for its aggregate exports, Pakistanneeds to develop its external competitiveness. The unfavorableeffects of exchange rate instability on exports can be moderatedby developing the forward exchange markets in currencies whichfacilitate exporters to prevaricate against the risks in internationaltransactions.Policy makers should consider both the existence and the

degree of exchange rate instability as a challenge to the tradedeficit experienced by Pakistan瀞s economy. Policy makers shouldalso take notice of effects of the exchange rate instability onevery trading transaction while implementing trade policies inorder to enhance productive capacity of the exportable industrieswhich ultimately improve the trade balance. Transparentexchange rate system should be established by policy makersunder whom the exchange rate stability can be achieved andmaintained. As part of the overall trade and economic growthstrategy, policy makers should include the policy of controllingmalpractices of speculators and manipulators of the realexchange rate.

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Baum, C. F., Caglayan, M., & Ozkan, N. (2004). Nonlinear ef-fects of exchange rate volatility on the volume of bi-lateral exports. Journal of Applied Econometrics, 19(1),1-23.

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41Kip Becker, Ibrahim Baki, Jung Wan Lee / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 41-49

Abstract

Since World War II nations have formed alliances for reasonsof security and trade. Countries have seen internationalintegration as an appropriate approach to resolving domesticand international political issues, improving their welfare by bothtransforming their infrastructures and increasing their foreigntrade. While the majority of these relationships arestraightforward d Turkey瀞s relationship with the European Unionis more complex due to differences in religion and, at times,political ideology from other Union members. As a candidatecountry Turkey has made advances towards the full membershipof the European Union with the customs union being the mostsignificant. The impact of customs union membership isdiscussed and the effects of the customs union on Turkey瀞strade and economy are examined from a perspective of differenteconomic theories.

Customs Union, Economic Integration Theory,Static Effects, Dynamic Effects, Turkey.

F13, F14, F15, F16, O57.

1. Introduction

Following the Second World War, in a search for stability,security against an increasing Soviet threat and economicgrowth Turkey decided to seek political as well as economicintegration with the Western world. This decision, a quite naturalone given Turkey瀞s long historical relations and ties with Europe,

* First Author. Administrative Sciences Department, MetropolitanCollege, Boston University [‘0‘ Commonwealth Avenue, Boston,MA 0221— United States] E-mail: [email protected]

** Co-author. The Ministry of Customs and Trade of the Republic ofTurkey, Ankara, Turkey [Dumlupqnar Bulvarq No. 1—1 Eski ehir Yolu ’.Km. 06—30 Çankaya/Ankara, Turkey] E-mail: [email protected]

*** Corresponding Author. Administrative Sciences Department,Metropolitan College, Boston University [‘0‘ CommonwealthAvenue, Boston, MA 0221— United States] E-mail: jwlee11’@bu.edu

resulted in participation in the foundation of many Westernorganizations, among which were the United Nations, the NorthAtlantic Treaty Organization and the Organization for EconomicCooperation and Development. In 1959 Turkey applied to theEuropean Economic Community to become a party to the Treatyof Rome as well as a member of that community. While theapplication was rejected on the basis of not being prepared formembership, in 1963 Turkey was offered a partnershiparrangement until such time as standards were met. Thissettlement, termed the Ankara Agreement, envisaged a three-stepprocess that would prepare Turkey for full membership. The threestages were: the preparatory stage; transitional stage and finalstage. The stages were organized as a framework agreementwith provisions for the gradual realization of free movement ofgoods, services, capital and people.As part of the framework and to reach the objective of the

free movement of goods, Article 5 of the Ankara Agreementconsidered that Turkey would secure a customs union with theEuropean Economic Community at the end of the transitionalstage. The transitional stage was completed and the customsunion with the European Economic Community (later called theEuropean Community; then the European Union (EU)) was putinto force. This relationship was idiosyncratic as it granted toTurkey customs union membership without the status of being afull member of the EU or the ability to participate in thedecision-making process of its institutions.With the advent of the customs union relationship Turkey

pursued a policy to eliminate unilateral quantitative restrictionsand tariffs, as well as seeking to apply the Union瀞s commonexternal tariff to non-member countries for imports of industrialproducts and processed agricultural goods. These policychanges had effects on the Turkish economy, as throughout thelast two decades trade volume with the EU has seen asignificant increase. However, there is some controversyregarding how this increase has affected Turkey瀞s economy.The customs union relationship between the EU and Turkey

has an interesting historical background and a conflictedcultural/political relationship, as well as contentious economicand foreign trade policy changes that have led to controversialand often debated outcomes.


The Customs Union between the European Union and Turkey and its

Impacts on Turkey�s Economy5)

Kip Becker*, Ibrahim Baki**, Jung Wan Lee***

[Received: October 22, 2015. Revised: March 2, 2016. Accepted: April 10, 2016.]

42 Kip Becker, Ibrahim Baki, Jung Wan Lee / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 41-49

2. Customs Union between the EU and Turkey

2.1. Overview of the EU and Turkey Relationship

In its more modern form, the relationship between Turkey andthe EU began when the former began to emulate the WesternEurope economic, political and social structures in thenineteenth century, which acted as a model for its secularstructure. Progress was disrupted during World War I when thewar瀞s political developments distorted the relations of Turkeywith western European countries. Relations with Western Europechanged direction again after World War II due to perceivedimpending Soviet threats and the cold war environment. Turkey,for security and stability, decided to integrate with the Westernworld both in a political and economic manner, opting to joinsuch corporative organizations as the United Nations, the NorthAtlantic Treaty Organization and the Organization for EconomicCooperation and Development (Sander, 2002).Seeking to expand on these relationships, Turkey applied for

European Economic Community membership in 1959. However,the application was rejected and instead a partnership agreementwas offered, which was eventually ratified by both sides in 1964(European Community, 1973). The Ankara Agreement, with itsArticles 2-5 and 28 three-stage process (preparatory stage,transitional stage and final stage), became the main legalframework of the relationship between the EU and Turkey. Eachstage outlined an agenda for accomplishing a specific movementtowards the four freedoms related to the free movement ofpersons, services, goods and capital. Accomplishment wouldultimately lead to full integration by establishing a legal frameworkthat would guarantee full community membership status (EuropeanCommunity, 1973).In order to address the commitments, various institutions were

established, which included: the Association Council, the topdecision-making body to solve disputes; the AssociationCommittee, whose function is to assist the Association Councilby scrutinizing details and addressing technical issues; theTurkey EU joint parliamentary commission, which consists ofPmembers of parliaments from both sides; and the CustomsCooperation Committee and Customs Union Joint Committeewhose main functions are to solve customs issues (Delegationof the EU to Turkey, 2015). In 1995, three decades after thesigning of the Ankara Agreement, the customs union betweenthe EU and Turkey was official and the final stage for fullintegration began. Candidate status was awarded in 1999 bythe European Council at the Helsinki Summit and accessionnegotiations began in 2005,accelerating the process of the EUand Turkey integration (Delegation of the EU to Turkey, 2015).Figure 1 depicts the cornerstones of the Turkey EU relationship.P

Source: AuthorsU Own CreationCornerstones of the Relationship of the EU and Turkey

2.2. Changes in Turkey瀞s Industry Policies and ForeignTrade Regime

During the period between the 1930s and the 1970s,protectionism and an inward-oriented import substitutiondevelopment strategy played a predominant role in the economicpolicies of Turkey as with most developing countries. The basisof these policies was that to achieve internal industrialization,internal operations needed to be protected by a variety of tradebarriers (such as tariffs, surcharges, import bans, quotas) andforeign exchange controls. There was an additional belief that inthe early stages of the industrialization period, rapidindustrialization could only be accomplished with the enactmentof the import substitution policies for the production ofconsumption commodities, followed by the protection of capitalgoods (Akkoyunlu, Mihci, & Mihci, 2006).From 1930 until 1980 Turkey had to deal with significant

structural and institutional problems, which were a consequenceof inadequate entrepreneurial and managerial capacity in theprivate sector, which resulted in the state intervening in manyeconomic areas and establishing a dominant role in economicdevelopment. Under the new state-led inward-lookingdevelopment strategy a number of state economic enterpriseswere established that produced agricultural, mineral, andmanufactured commodities which previously had been imported.Protectionist measures were applied to protect infant industriesfrom international competition and the quantity as well as priceof credit was controlled to allocate resources into plannedindustrial sectors. The success of these policies wasdemonstrated by the fact that during this time Turkey built awell-diversified industrial structure that produced a greater varietyof industrial commodities including intermediate and capitalPproducts than most developing countries. Of importance wasPthat during these years Turkey was successful in reducingpoverty and raising education, health, and nutritional standards,despite increasing regional income inequalities (Sahin, 2014).Unfortunately, these accomplishments were not sustainable dueto a lack of international competitiveness in terms of cost andquality of products. The reality was that most of the stateenterprises were not profitable and suffered from


overemployment. Their protected status led to inefficientresource allocation, inflexible labour markets dominated by thestate and price distortions in the economy. Throughout this era,technology, intermediate and capital goods support was providedto imports needed to sustain domestic production, resulting inimport increases and an external debt surge. To sustaindevelopment, national currency was kept overvalued viaexchange controls and fixed exchange rates (Utkulu & Ozdemir,2004).By the late 1970s the inward orientation and import-substitution

growth strategy had caused severe economic and social crises inTurkey, resulting in external debt increases, foreign exchangeshortages and negative growth rates. The exchange shortages,coupled with the monetary expansion in 1980, led to highinflation rates, soaring to 120% (Sahin, 2014). In an attempt toaddress these difficulties, in January 1980 a new economicreform program, known as the January 24th Decisions, wasenacted. The January 24 Decisions are considered to be one ofthe most important turning points in Turkish economic history.With these decisions, Turkey瀞s economic structure started tochange from the import-substitution development strategy to anexport-oriented growth strategy. With some initial successes itwas anticipated that the export-oriented growth model could bringgains to the economy in terms of more efficiency in resourceallocation, economies of scale and scope, increased competition,easier transfer of technology and increased access to inputs andintermediate goods, better education and economic growth in linewith the increase in skilled labour employment. Much of theseexpectations were actualized throughout the following years asTurkey experienced impressive transformation moving from aninward-oriented and state-led economic system to economicliberalization.

2.3. Turkey瀞s Macroeconomic Circumstances Prior to theCustoms Union

The crisis at the end of the 1970s was overcome in theearly 1980sby virtue of the orthodox stabilization policies inparallel with the structural transformation towards a liberaleconomy. As a result of these policies, the inflation ratio, whichreached three-digit figures, decreased to slightly over 30per centin the early 1980s. The early reform steps progressed into moretrade liberalization in 1984 and financial liberalization in 1989,culminating with the customs union between the EU and Turkeyin 1996 (Boratav & Yeldan, 2001).Macroeconomic developments between 1980 and the year of

customs union in 1996 are separated into one stage ending in1989 and the second post-stage starting at that time.Throughout the first phase, the government of Turkey appliedthe policies of export promotion, gradual import liberalization,floating exchange rate and restricted capital movement. Inaddition, economic policy included a depreciated nationalcurrency, supply-side fiscal policy and low wage incomes andsignificant restriction in agricultural aids (Boratav & Yeldan,2001).

Gross Domestic Product Shares by Economic Activities at1987 Price

1980 1985 1990 1995Agriculture 24.8 19.8 16.8 14.8Industry 22.0 24.9 26.4 28.0Service 52.8 54.6 53.5 54.1

Import Duties 1.2 2.3 4.1 3.9

GDP 100.0 100.0 100.0 100.0

Source: Data from Turkish Statistical Institute (201—a)

Table 1 shows some economic indicators for Turkey withinthe period between 1980 and 1995 when the Turkish exportsexperienced a significant transformation in favour of industrialproduction. As seen in Table 1, the sector ratios in GDPremained relatively stable during the period.The significant aspect of this export boom was the relative

non-existence of investment. After the mid 1980s, during thecustoms union years, public investment increased. However, theincrease was considered irrelevant to the export growth becauseof the composition of the investment. Private investment sufferedfrom unstable economic conditions during this period andexperienced a downward trend (Rodrik, 1990). The exceptionalexport boom was substantially based on the productioncapacities created throughout the years of 1960s and 1970s.As a consequence of the economic and political crisis of the1970s the capacity utilization rate had been reduced by 55 percent and remained in this condition until 1980.

3. Economic Impacts of the Customs Union onTurkish Economy

The following section examines the theory of customs union asa mechanism of integration and discusses the welfare effectexpected. According to Krueger (1999), in order for an economicintegration to stimulate welfare for the union members certainconditions must be extant. These are: high common trade volumeamong members, high external trade barriers among the memberstate prior the union, diversity in economic and industrialdevelopment level and, finally, more elastic demand-and-supplycurves in the member countries. In this context, trade creationand diversion effects and long-term dynamic effects of integrationincrease intra-union trade and eventually bring welfare increasesfor the union瀞s member countries. While some reservationsexisted, for the most part it was generally expected that thecustoms union between the EU and Turkey would increaseTurkey瀞s trade volume, and specifically exports to the EU.However, although the volume of foreign trade between the EUand Turkey increased throughout the customs union period, intotal, the ratio of trade with the EU, in terms of Turkey瀞s foreigntrade volume, experienced a slightly downward trend during thetwo decades between 1996 and 2014. To understand thisunexpected development it is necessary to analyze a variety of


dependent variables, both related and unrelated to the customsunion.In accord with Union agreements Turkey was required to

align its import policy with third countries in parallel with theEU瀞s preferential agreements. This situation created anasymmetry for Turkey瀞s foreign trade (World Bank, 2014). It isimportant to note that the EU, as a party to the customs union,is a vast and complex integrated economic area whose diverseforeign trade policies are able to affect world commodity prices.Therefore, it is necessary to evaluate the customs union瀞seffects on Turkey瀞s economy and foreign trade by separatingthe EU瀞s effects from the impacts of the world economicenvironment. In addition, Turkey has not completed its industrialand economic transformation nor stabilized trading and politicalrelationships with different regions of the world. For example,since 1996 Turkey has experienced several significant economicdisputes with Russia and some nations in Asia. In the sameperiod, Turkey had been struggling with economic problems,such as chronic inflation and economic instability and trying totransform its economy and industrial infrastructure towards morecompetitive and value-added strategies. All of thesedevelopments, as well as Turkey瀞s reaction to them, haveresulted in a diverse range of outcomes. The followingparagraphs explore some of the specific situations and resultingimpacts of customs union membership on Turkey瀞s economy,considering the scope of static and dynamic characteristics ofeconomic integration theory while taking other dependentvariables into account.

3.1. Economic Developments throughout the Period ofthe Customs Union

Table 2 depicts the figures and ratios of Turkey瀞s foreigntrade with both the world and the EU in the post-customs unionperiod. The table shows an upward trend, both in generalimport volume and in the imports from the EU, in the period ofthe customs union except during the crisis years of 1999, 2001and 2009. At the same time Turkish exports to the world, andspecifically to the EU, experienced a steady growth. What isinteresting, in spite of the increases, is that an overall tradebalance deficit persistently increased from 1996 as aconsequence of the value of imports exceeding that of exports.The increasing trade balance deficit indicates that the Turkishindustry structure had not completed its transformation, whichbegan with the 24th January Decisions in the 1980s, and as aresult industry production continued to rely on the intermediateand capital goods imports.Figure 2 shows how intermediate goods imports steadily

increased in parallel with Turkey瀞s exportation trend, except inthe crisis years, throughout the liberalization period after 1980(Sacık, 2010). This structural problem of Turkey瀞s industry hasbeen causing foreign trade and current account deficits fordecades. Over a significant period of time, to finance the deficitthe government applied fiscal policies that resulted in higherinterest rates and depressed exchange rates. These policies

resulted in the replacement of domestic inputs for imported onesin industry production, creating a kind of vicious financial circle.

Figures and Ratios of Turkey瀞s Foreign Trade(Million USD)

Total Foreign Trade with the EU Share ofthe EU

Exports Change(%) Imports Change

(%) Exports Change(%) Import Change

(%) Exports Imports

1996 23.224 43.627 12.590 24.349 54.2 55.81997 26.261 13.1 48.559 11.3 13.471 7.0 26.128 7.30 51.3 53.81998 26.974 2.7 45.921 -5.4 14.837 10.1 25.297 -3.2 55.0 55.11999 26.587 -1.4 40.671 -11.4 15.454 4.2 22.538 -10.9 58.1 55.42000 27.775 4.5 54.503 34.0 15.688 1.5 28.552 26.7 56.5 52.42001 31.334 12.8 41.399 -24.0 17.576 12.0 19.841 -30.5 56.1 47.92002 36.059 15.1 51.554 24.5 20.458 16.4 25.698 29.5 56.7 49.82003 47.253 31.0 69.340 34.5 27.479 34.3 35.157 36.8 58.2 50.72004 63.167 33.7 97.540 40.7 36.699 33.6 48.131 36.9 58.1 49.32005 73.476 16.3 116.774 19.7 41.533 13.2 52.781 9.7 56.5 45.22006 85.535 16.4 139.576 19.5 48.149 15.9 59.448 12.6 56.3 42.62007 107.272 25.4 170.063 21.8 60.754 26.2 68.472 15.2 56.6 40.32008 132.027 23.1 201.964 18.8 63.719 4.9 74.513 8.8 48.3 36.92009 102.143 -22.6 140.928 -30.2 47.228 -25.9 56.616 -24.0 46.2 40.22010 113.883 11.5 185.544 31.7 52.934 12.1 72.391 27.9 46.5 39.02011 134.907 18.6 240.842 29.8 62.589 18.2 91.439 26.3 46.4 38.02012 152.462 13.0 236.545 -1.8 59.398 -5.1 87.657 -4.1 39.0 37.12013 151.803 -0.4 251.661 6.4 63.040 6.1 92.458 5.5 41.5 36.72014 157.610 3.8 242.177 -3.8 68.514 8.7 88.784 -4.0 43.5 36.7


Source: Data from Turkish Statistical Institute (201—b)Turkey Imports Based on BEC (Million USD)

Source: Data from Turkish Statistical Institute (201—c)Changes in Current Account and Foreign Trade Deficit


As shown in Figure 3, changes in foreign trade deficits directlyaffected the current deficit of the country in the same directionand at approximately the same rate. This circle could also beobserved in the interdependency between gross domestic product(GDP) growth rates and current account deficits. As shown inFigure 3,in the years when economic growth occurred currentdeficits increased in accordance with the level of the importelasticity for GDP growth rates. It would seem, then, thatTurkey瀞s current industry structure and government fiscal policieshave actually, as its exportation increases, been creating asituation that forces the nation to increase imports over andabove that which was previously required.Even throughout the years prior to the customs union EU

countries had become the leading partner for Turkish foreigntrade, as with the implementation of the Additional Protocol in1971 Turkish industrial products benefited from zero tariff rateswhen entering EU countries. European Union countries haveexperienced high purchasing power in addition to a geographicaladvantage. In addition, the large number of Turks living inEuropean nations creates natural customers for Turkishcommodities exported to these countries. In attempting tounderstand the decreasing share of Turkey瀞s foreign trade withthe EU a possible explanation could be that the world economiccrisis of 2007 has unfavourably affected the purchasing power ofpeople in the EU, creating adverse impacts on Turkey瀞sexportation trend to EU countries. Another explanation could bethe improved access of Turkish exports to developing countrymarkets with the preferential trade agreements Turkey hassigned.

4. Static Effects of the Customs Union on TurkishEconomy

The neoclassic customs union theory postulates assumptions forsimplifying the reality, such as perfect competition, consistentreturns to scale, no technological change, homogeneous goods,and no market entry restrictions. It is important to note that thetheory does not consider regional differences with in the union.The static effects of the customs union could be explained bytheoretically plotting the demand-and-supply curves of commodities;however, while a number of econometric formulas have beensuggested there really is no accurate way to analyze theeconomic data and indicate clearly the welfare gains in terms oftrade creation and diversion effects of the customs union.

4.1. Trade Diversion Effects

With the advent of a customs union, a common external tariffapplication leads to a trade shift from non-member countries tomember countries, commonly referred to as the trade diversioneffect of a customs union. According to the assumption of theneoclassic theory, countries at similar levels of development willtrade with other countries by specializing in different industries.The outcome of this should be that all countries derive benefits

from international trade (Torelli, 2013). It would be expected,then, that a customs union between the EU and Turkey wouldresult in significant trade diversion as a consequence of pricedifferences among third countries and EU countries. However, itdoes not appear that this expectation has taken place inTurkish foreign trade since 1996.As previously noted, in the years between 1996 and 2014

both Turkish exports and imports experienced a steady upwardtrend in the trade with all member countries. Table 3 illustrates,in a detailed manner, that the increase in both the exports andimports with EU countries was remarkably less than trade withother countries. Contrary to the general expectation, the importsof Turkey from the other countries rocketed from approximately18.9 billion USD to 152.1 billion USD, while Turkey瀞s importsfrom the EU countries rose approximately from 24.3 billion USDto 88.7 billion USD. To analyze whether there had been a tradediversion towards the EU in Turkey瀞s foreign trade, Table3presents the ratios of the changes in Turkish foreign trade withselected nations during the period of the customs union.

Percentage of Imports of Turkey by Country GroupsExport Share (%) Import Share (%)

1996 2002 2005 2010 2014 1996 2000 2005 2010 2014European Union 54 56.0 56,5 46,5 43,5 56,0 52 45,2 39,0 36,7Free Zones in Turkey 2 3.0 4,0 1,8 1,4 0,2 1 0,7 0,5 0,5Other countries 44 41.0 39,4 51,7 55,1 44,0 47 54,1 60,5 62,8Other EuropeanCountries 11 7.0 7,7 9,8 9,6 9,0 11 17,4 16,2 15,0

North AfricanCountries 4 4.0 3,5 6,2 6,2 4,0 4 1,4 1,7 1,4

Other AfricanCountries 0,1 0.1 1,5 2,0 2,5 0,2 1 1,4 0,9 1,0

North AmericanCountries 7 12 7,2 3,7 4,6 9,0 8 5,0 7,1 5,7

Central America 0,1 0.1 0,6 0,5 0,6 0,1 0.1 0,2 0,3 0,5South AmericanCountries 0,1 0.1 0,4 1,1 1,2 0,2 1 1,5 1,6 1,6

Near and MiddleEastern 11 9.0 13,9 20,5 22,5 8,0 6 5,2 7,0 8,5

Other AsianCountries 8 5.0 4,1 7,5 7,4 11,0 13 17,6 21,7 23,2

Australia and NewZealand 0,1 0.1 0,4 0,4 0,4 0,2 1 0,3 0,3 0,3

Other Countries 0,1 0.1 0,3 0,1 0,1 7,0 2 4,2 3,6 5,6Total 100 100 100 100 100 100 100 100 100 100


As seen in Table 3, the EU has sustained its leadingposition in Turkish foreign trade for the years between 1996and 2014, although its position has been weakened. After theimplementation of the customs union, the ratio of the EU inTurkish export and import has decreased considerably from 54per cent to 43.5 per cent in exportation and from 56 per centto 36.7 per cent in importation. One would note, however, thatthe total share of other countries has impressively increasedrespectively from 44 per cent to 55.1 per cent in exports and44 per cent to 62.8 per cent in imports during the 1996 and2014 time period. It could be said that the trade diversion effecton Turkey瀞s foreign trade did not occur throughout the period ofthe customs union. Reviewing the table closely, it can be seen


that Turkish export rates to both North African and MiddleEastern countries steadily increased over 50 per cent in thisperiod whereas Turkish import ratios from those countriesrespectively had decreased by over 50per cent for the NorthAfrican countries, remaining rather stable for the Near andMiddle Eastern countries. Contrary to this, Turkish export rates toAsian countries slightly decreased (during the customs union)while Turkish import ratios from those countries climbedimpressively.There may be several reasons to explain this unexpected

trend of Turkish foreign trade. First, one could point towards theenlargement of the EU in the 1990s and 2000s. After theseextensions, the EU nations focused on the trade opportunitieswithin those countries. A second consideration is that in 1999,2000 and then 2001 Turkey suffered a major earthquake disasterfollowed by a major economic crisis. Then in 2007 it was theEU countries瀞time to experience financial strains resulting fromthe world economic crisis. It would be difficult not to expect thatthese events would have a strong adverse effect on the tradeenvironment between the EU and Turkey. Another factor wasthat during this 2000s time frame the Turkish governmentdecided to broaden its economic and political relations andbegan to focus attention towards diversifying its foreign trade toespecially include the Central Asian, Middle Eastern and Africancountries. In accord with this thinking, Turkey advanced along-term energy policy with the development of pipelineconnections with Russia, Kazakhstan, Azerbaijan, Iran and Iraq(World Trade Organization, 2012).

5. Dynamic Effects of the Customs Union onTurkish Economy

Economic integration creates significant impacts on the factorsof economic growth, including market size, market structure andtechnology. The dynamic effects of a customs union are directlyrelated with changes in resource allocation and long-lastingeconomic effects. Hosny (2013) has broadly defined thedynamic effects of economic integration as anything that affectsthe country瀞s rate of economic growth over the medium term.

5.1. Resources Allocation Effects of the Customs Union

According to traditional trade theories, based on the writings ofDavid Ricardo and the Heckscher Ohlin theory, relative pricePdifferences across countries ultimately end in internationalspecialization in the export of goods as a result of trade. Thisrecognizes that "the law of comparative advantages does, however,assume stable trade performance of economies" (Torelli, 2013).Under these classic economic theory assumptions, it is expectedthat with the implementation of the customs union, the commonexternal tariff policy will bring about specialization in Turkishindustries in which they have comparative advantages.When attempting to measure comparative advantages there is a

distinct problem that relates to knowing pre-relative trade prices, as

these are not easily observable. One solution proposed by Balassa(1961) is that comparative advantage could be calculated via tradedata, which are observable. The Balassa Index, known as therevealed comparative advantage index, is an accepted method toanalyze foreign trade data and to measure the comparativeadvantage of a country despite its internal limitations or restrictions.The Balassa Index does not cover state interventions, scaleeconomics or the changes in bargaining power and competition of acountry. The values in this index show trade volume changes for aspecific commodity or commodities according to the total importedand exported commodities belonging to the group (Voigt, 2008).According to the revealed comparative advantage index calculations

conducted by Voigt (2008), based on the Standard International TradeClassification (SITC) Revision 3, the revealed comparative advantageindex values had not changed notably and remained rather stable inthe period between 1996 and 2007. In this period, Turkey haddeveloped a slight comparative advantage: in capital-intensiveproducts, which include beverages and tobacco (SITC 1), electronics(SITC 35), manufactured goods like manufactured rubber (SITC 62),iron and steel (SITC 67), road vehicles (SITC 78); in labour-intensiveproducts, which include textile, yarn and fabrics (SITC 65),non-metallic mineral products (SITC 66), metal products (SITC 69),miscellaneous manufactured articles, including prefabricated buildings(SITC 81), furniture, bedding, mattress supports and cushions (SITC82), apparel articles and clothing accessories (SITC 64); and in someraw materials, which include food and live animals (SITC 0). Inaddition, in the period of the customs union, Turkey strengthened itsposition notably in plastics in non-primary forms (SITC 58), electronicmachinery apparatus and appliances (SITC 77) and other transportequipment (SITC 79). However, Turkey started to lose its comparativeadvantageous position in crude animal and vegetable materials (SITC29), travel goods, handbags and similar containers (SITC 83) andfootwear (SITC 85).Based on these calculations it could be said, in accordance with

the classic economic theory, that in the period between 1996 and2007 Turkey瀞s comparative advantage had developed to great extentin the labour-intensive production and trade with the EU countries.Taking this into account one would expect that the challenge nowfacing Turkey is that of export diversification from labour-intensiveproducts to innovative and highly technological products.

5.2. Dynamic Effects of the Customs Union on Turkey瀞sCompetitiveness

An export-oriented development strategy, based on the factorproportion theory (the Heckscher Ohlin theory), suggests thatPfree trade is the optimal way for the efficient allocation ofresources. This, however, does not consider several aspects ofdeveloping nations attempting to enter established andcompetitive markets. As such, free trade policies derived fromthe theory can at times be a trap for underdeveloped anddeveloping countries. Most now agree that relying only on freetrade will not necessarily overcome international per capitadisparities due to lack of human capital accumulation and, attimes, the adverse effects of foreign direct investments may


result in less human capital accumulation. Lohrmann (2000)notes that under conditions of fierce competition, lowtechnological exportation has often actually resulted in adeterioration of the competitiveness for developing countries瀞foreign trade. With regard to this, the 酉new growth theory瀞proposes that the three main factors of (1) imitation oftechnology, (2) innovation of technology and (3) creating one瀞sown capacity should be considered in any attempt to find asolution to overcome this problem.These three factors, however, are sufficiently broad to cover

almost all dimensions of a country瀞s economic and socialpolicies. The important consideration is that if a country does notobtain sufficient human capital accumulation the likely result isthat free trade will lead to divergence and ultimately an inabilityto catch up in the trade relationships with its partners(Lohrmann, 2000).The implications of these resolutions also point to the

development of a trade pattern movement towards intra-industrytrade rather than the one that the Heckscher Ohlin theoryPenvisaged. To analyze Turkey瀞s competitiveness in the customsunion the authors used the Grubel and Lloyd Index. According tothe Grubel and Lloyd Index, an analysis conducted by Voigt(2008) based on SITC Revision 3 in the second levelsegmentation, demonstrated that there had been a considerableincrease in the volume of intra-industry trade between the EUcountries and Turkey between 1999 and 2006. In recognition ofthese product groups, Turkey瀞s trade with the EU countries afterthe custom union showed a slight tendency towards intra-industrytrade in capital-intensive and labour-intensive products.

5.3. Dynamic Effects of the Customs Union onEconomies of Scale in Turkey

One aspect of economic integration is that economic welfareincreases occur not only as a consequence of comparativeadvantages but also as a result of scale economics. In anintegrated economic area, such as a customs union, theconcomitant increase in market size allows companies that hadpreviously produced below manufacturing capacity to increaseproduction to more optimum (profitable) levels.Lohrmann (2000) suggests, however, that trade liberalizations do

not necessarily result in convergence for the less developedcountries, as would be envisaged by the neoclassic theory. Oftentrade liberalization entices companies of more developed countriesto obtain a monopoly and thus increase market power as aconsequence of, in addition to other factors, scale economics.Prior to customs union membership many considered that Turkeywould not be in a position to compete with the more establishedEU companies as the majority of Turkish companies were smalland medium-sized. In addition, since most of the EU countrieswere members of the customs union prior to 1996, their industrieshad completed transformation and were benefiting from the derivedscale economics.Erzan & Filiztekin (1997), reviewing the effects of the customs

union on the Turkish small and medium-size enterprises in 1997,

found that those companies suffered from exchange ratevolatility, inflation, wage increases and import penetration ratherthan from competition from larger-sized companies. It was notedthat the data on the small and medium-size enterprises showthat the expected negative impacts did not occur and both thesmall and medium-size enterprises and large enterprise firms inTurkey increased production, competitiveness and foreign tradevolume. According to the European Commission Report on small(Turkish) businesses, performance increased slightly from 2008through to 2013,although there was a gap in terms of generalevaluation criteria for the small and medium-size enterprises(European Commission, 2014).

5.4. Dynamic Effects of the Customs Union on Turkey瀞sTechnological Progress

The catching-up theory envisaged that as a consequence ofgradual human capital accumulation, free trade would assist theless developed or developing countries, to close their technologygap through technology transfers resulting in convergence. Thetheory holds that increasing trade transactions, as well as fasterimplementation of technology and innovation, would result intechnology changes, which, due to spillover effects, would affect alleconomic sectors (Lohrmann, 2000). While the level of a country瀞stechnological change is not directly measurable there are a numberof indicators that would indicate the general technology level ortechnology usage capacity. These indicators include: the educationexpenditure ratios, research and development (R&D) ratios, thenumber of educated employees, engineers and scientists as wellas the number of patents. In the years since 2002, broadeconomic and social programs were initiated to strengthen Turkey瀞seconomic and physical infrastructure. As a consequence of these,as well as a favourable economic environment, the technologycapacity of the country significantly improved.According to the Turkish Statistical Institute, R&D expenditure in

Turkey tripled between 2000 and 2012. At the same time thepercentage of R&D expenditure in GDP terms doubled due to thefast-growing GDP ratios in Turkey (Turkish Statistical Institute,2012). Figure 4 provides data related to the trend of R&Dexpenditure ratios in GDP.

Source: Data from Turkish Statistical Institute (2012)Percentage of R&D in Turkey's GDP


5.5. Dynamic Effects of the Customs Union on Turkey瀞sForeign Direct Investments

Foreign direct investments tend to be significantly associatedwith the general economic conditions, value chain performanceand competencies of the countries rather than the advantagesof economic integration. This seems to be the early case withTurkey, as prior to 2005 it failed to attract important foreigndirect investment inflows (far below one billion dollars annually)due to the economic and political uncertainties combined withrepeated economic crises. In the 2000s, in the scope of broadernational programs Turkey enacted significant legislative reformsto improve the investment climate and to attract foreign directinvestment inflows. Building on the improved economic andpolitical climate in this time frame, the Turkish governmentsinitiated a program of privatization of state-owned enterprises.Political stability, improvements in the foreign direct investmentenvironment and the beginning of the EU membershipnegotiations eventually led to impressive increases in foreigndirect investment inflows in this period.Figure 5 depicts the significant trend in foreign direct

investment inflows from the EU countries in the pre- andpost-customs union period of 2005 which was the initial year ofEU membership negotiations.

Source: Data from European Commission (2013)FDI Inflows and Outflows for Turkey (Million USD)

Between 2007 and 2012, EU countries were the leadingsource of the foreign direct investments inflows to Turkey, with aratio of 46.3 per cent (European Commission, 2013). The resultsof a survey of European country investors, Turkey had animpressive potential due to its domestic market size, proximity ofneighboring markets, reasonable labour costs, skilled workforce,developed service sector, R&D capability, quality infrastructureand growth potential (European Commission, 2013). Despite bothits strengths and opportunities, during that time Turkey was notable to attract enough foreign direct investment inflow from eitherthe EU countries or the developed world compared with itspotential and economic scope. Turkey瀞s above-average (50s)ranking in the Global Competitiveness Index, both in general andin its sub-components, combined with the EU nations瀞 need to

access promising markets, could present a significant short-termwindow of opportunity for foreign direct investment in Turkey.

6. Conclusions

Turkey瀞s customs union membership has brought a variety ofpolicy alignments and changes beyond the classical concept ofbenefits envisaged by the General Agreement on Tariffs andTrade. With the implementation of the provisions of the customsunion, the requirements of the World Trade Organization havebeen achieved. This has advanced Turkey瀞s integration withinternational markets and especially with the European Union,which stands as one of the most significant world economicblocs.Turkey瀞s trade creation effects of its customs union

membership have been positive during the post-customs unionperiod, as both Turkey瀞s export to and import from the EUcountries have significantly increased. This was in spite of adownward trend in the share of the EU for the last few years.Between 1996 and 2014 it appears that the trade diversioneffect on Turkey瀞s foreign trade did not occur, as the EU瀞sexportation and importation with Turkey considerably decreasedfrom 54 per cent to 43.5 per cent in exportation and from 56per cent to 36.7 per cent in importation.In spite of the positive static effects of the custom union,

imports of intermediate goods steadily increased in parallel withTurkey瀞s exportation trend throughout the liberalization periodafter 1980. This tends to indicate that the volume of Turkey瀞sexports have been dependent on the intermediate and capitalgoods imports. Turkey瀞s trade balance deficits have steadilyincreased and the Turkish export dependency on intermediateand capital goods imports confirms that the Turkish industrystructure has not completed the transformation that began withthe 24th January Decisions in 1980.In spite of impressive technological progress in education,

increases in R & D ratios, the number of educated employeesas well as the number of patent applications, increasing foreigndirect investment, and the improving conditions of Turkey瀞s smalland medium-sized companies, one might argue that the nationhas not yet succeeded in either the production of highvalue-added or innovative technological products. Turkey瀞scomparative advantage seems to be focused on labour-intensiveproduction and trade with the EU countries, resulting in anincrease in the volume of intra-industry trade between the twoin the post-customs union period.The data seem to indicate that membership in an economic

integration does not necessarily provide members within theintegration area with increased productivity, higher qualityproduction or competency in international markets. Despite theopportunities and advantages of membership ,nations must alsoapply public policies to assist and strengthen the country瀞sinfrastructure and education system in accordance with thecountry瀞s priorities and comparative advantages, based on itsnatural and potential conditions. These policies need to focus on


innovation, technology, R&D and an adequate and functionaleducation system that is able to respond to industries瀞demands.It is clear that simply having a large market is not sufficient tostimulate growth. For Turkey to achieve growth targets andfinancial goals a reduction in the technology gap and anincrease in technology usage in production must be addressedby both the government and private sectors. To achieve abalanced foreign trade with EU nations Turkey will need todevelop a strategy that slowly substitutes goods fromlabour-intensive sectors with sectors involving innovative andvalue-added products. As private sector companies replacegovernment ones, policies will continue to need to be designedthat can attract the foreign direct investment necessary for theirfunding.

References

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trade-liberalizing or protectionist?. Journal of EconomicPerspectives, 13(4), 105-124.

Lohrmann, A. M. (2000). Development effects of the customsunion between Turkey and the EU - catching up - orthe Heckscher-Ohlin trap?. Russian and East EuropeanFinance and Trade, 36(4), 26-44.

Rodrik, D. (1990). Premature liberalization, incomplete stabiliza-tion: the Ozal decade in Turkey. National Bureau ofEconomic Research. Retrieved July 02, 2015, fromhttp://www.nber.org/papers/w3300.pdf.

Sacık, S. Y. (2010).Current account deficit of Turkey and its re-lation with state borrowing. EkonomiBilimleriDergisi, 2(2),113-120.

Sahin, H. (2014). Turkey瀞s Economy: Historical Process-CurrentSituation. Bursa, Turkey: Ezgi.

Sander, O. (2002). Political History 1918-1994. Ankara, Turkey:Imge.

Torelli, P. (2013). International Economics: Understanding theForces of Globalization for Managers. Boston, MA:Harvard Business Publishing.

Turkish Statistical Institute (2012). Science, Technology andInnovation Indicator of Turkey. Retrieved July 02, 2015,from http://www .tubitak.gov.tr/sites/default/files/tr_bty_sis-temi_performans_gostergeleri_2012.pdf.

Turkish Statistical Institute (2015a). Main Economic Indicators ofTurkey regarding with GDP by Production Approach andForeign Trade by Years and Country Groups. RetrievedJuly 02, 2015, fromhttp://www.turkstat.gov.tr/UstMenu.do?metod=temelist .

Turkish Statistical Institute (2015b). Turkish Imports based onBroad Economic Classification. Retrieved July 02, 2015,from http://www .tuik.gov.tr/PreIstatistikTablo.do?is-tab_id=629.

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Utkulu, U., & Ozdemir, D. (2004). Does trade liberalizationcause a long-run economic growth in turkey?.Economicsof Planning, 37(3), 245-266.

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World Bank (2014). Evaluation of the EU-Turkey CustomsUnion, Report No. 85830-TR. Retrieved July 02, 2015,from http://www.worldbank.org/content/dam/Worldbank/document/eca/turkey/tr-eu-customs-union-eng.pdf

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51Anel A. Kireyeva / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 51-57

Abstract

The aim of this study is to examine of the cluster approachto ensure high rates of innovation, information andcommunication enterprises of information technology cluster inorder to enhance the competitiveness of regions. Keeping withthe previous literature, the present research determined that thenovelty of the problem, concerning of the creation IT clusters asdrivers of new generation, i.e. a kind of platform of "startupaccelerators" through the creation of previously not existing inthe country high-tech industries and sectors of the economy.The study employs system approach involves to determineprospective directions of the formation of clusters of IT industry,also applies structured approach to shows relationships betweenelements of cluster systems (participants of cluster), as well asfocusing on some aspects of cluster development such asnetworking. Based on this analysis we have proposed to createclusters in regions, which can play the role of translator瀞sinnovations at the periphery of the country. This research showsthat formation of IT clusters is one of the most successful toolsto avoid of dependence of Kazakhstan from raw materials.

CLuster, Information Technology, IT Cluster,Regional Development.

O31, R11, R12.

1. Introduction

Many studies in recent years show that rapid economicgrowth usually accompanied by increased spatial inequality inCIS countries. Significant economic and currency changes thathave taken place in August 2015 in Kazakhstan will lead to theformation of a new national geo-economic space. Certainly, whatis happening in the world and in our country, the crisis ineconomic development necessitate significant innovation and

* Chief Scientist, Institute of Economics of the Ministry of Educationand Science of the Republic of Kazakhstan [2’ Kurmangazy Street,Almaty, 0—0010, Republic of Kazakhstan] E-mail: anele1’@mail.ru

technological transformations. In the period 2016-2020 years,regions of Kazakhstan will develop with the low level of globalopportunities due to objective factors and barriers ofdevelopment. Therefore, the right choice of policy priorities couldstrengthen influence of positive factors and reduce barriers todevelopment. Nevertheless, the right choice will depend on thespeed of industrialization and improve the competitiveness ofregions of Kazakhstan.The cluster approach considered as one of the measures to

confront the barriers of development. The world's leadingcountries are actively involved in the development of clusters.Cluster initiatives have become an effective way of carrying outindustrial policy, and are the leading measures for improving thecompetitiveness of enterprises and regions. The experience ofmany countries offers many ways to enhance in high-techsectors such as computing, information technology (IT),electronics and microelectronics. Thus, the world is continuouslymoving towards the information society and the world economytowards global updates quick. Therefore, the interest to ITclusters s, which can play the role of clusters "future economy",i.e. a kind of platform of "startup accelerators".This research have based on the achievements of advanced

foreign and domestic economic thought. The most well-reasonedopinions and reflections on the theoretical approaches of theformation of clusters presented in scientific works Romer (1986),Krugman (1991), Porter (1998) Edquist (1997) and Malerba(2000). Some basic researches have focused on the theoreticaland practical approaches of the creation of clusters of newgeneration (Pittaway et al. 2004; Bergman et al. 2013;Vardarher & Rana Cakır, 2015), including studies that involvedvarious widely used conceptual views on the formation anddevelopment of IT clusters (Bramwell, et al., 2010; Boschma &Fornahl, 2011; Kireyeva, 2015).In the previous studies on the theory of the structure and the

efficient organization of economic space based on model of"core-periphery", agglomeration effect, which can play the role ofthe mechanism of transfer of innovations from the center to theperiphery (Friedman, 1966; Christaller, 1966). From the point ofview of the theory of industrial and regional developmentclusters, which implies optimal conditions for the creation ofhigh-tech products it is possible to note research Solow (1987),Scott (1990) and Storper (1992). Special attention in the study


The Formation of Information Technology Clusters in Kazakhstan:

System and Structured Approaches1)

Anel A. Kireyeva*

[Received: February 29, 2016. Revised: March 20, 2016. Accepted: April 10, 2016.]

52 Anel A. Kireyeva / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 51-57

will be given to network formation clusters, which continuouslyexchange explicit and implicit knowledge, coordinating theirdecisions in order to experience on shared vision (Castells, 2001;Chamam & Pierre, 2009; Kireyeva, 2015).Today clusters of different industries are an effective tool of

development of regions and countries near and far abroad, whichthey use to increase competitiveness. Particular importance for thedevelopment of the regions and the national economy is thecreation of clusters to promote innovation. Especially the creationof scientific-technological and high-tech clusters in modernconditions it is expedient to consider as a special regime offunctioning of regional economy, focused on the positive dynamicsof parameters of level and quality of life of the population. In ourcountry, the problem of the formation of IT clusters in the regionsof Kazakhstan until now poorly designed. This is due to low levelof development of fundamental researches in the field of effectiveinteraction of organizations, related with geographically closelocation in IT sector, as well as expanding access to innovativeinfrastructures, information and communication platforms byreducing the level of digital divide at the level of its regions. Forsolving tasks on formation of new cluster projects requires thedevelopment of scientifically based approaches to the formation ofa regional policy aimed at the formation of a new model of theregion through the creation IT clusters.The aim of the study is the conceptual justification of the

cluster approach to ensure high rates of innovation, informationand communication enterprises of IT cluster in order tostrengthen the trend of innovative industrialization and toincrease competitiveness of regions of Kazakhstan. The studydivided into the following sections. The Section 2 proposes toconsider the theoretical review of the formation of IT clusters.Section 3 sets the methods of research: system and structuredapproaches. Section 4 is a concluding part.

2. Theoretical Review of the Formation of ITClusters

To ensure accelerated industrial and innovative developmentof Kazakhstan to increase the competitiveness of regions and toimprove the sustainability and profitability require adequatelydeveloped integration structures supported by state andself-developing. The way to innovative industrialization ofKazakhstan economy involves the solution of some fundamentalproblems by giving the national economic system of high-techdevelopment. Innovation is the only way of solution to achievesustainable growth, social welfare and employment in a country,and to that end, a climate that would foster innovation mustcreate in the country (Vardarher & Rana, 2015). Especially indeveloping countries like Kazakhstan, Kyrgyzstan, Belarus,Ukraine, Russia and other.Since the beginning of the XXI century in Kazakhstan at all

levels of public administration have become increasinglysupported new effective methods aimed at identifying, analyzingand resolving issues in order to enhance the competitiveness of

regions including one of its promising and globally competitiveindustries information technology (IT). IT sector can be toPdivide broadly into telecommunications, other IT services,electronics and microelectronics, software and hardwaresegments. So, in Kazakhstan approved the Concept of formationof prospective national clusters until 2020 (CFPNC, 2013). Themain goal of this national program is to identify key institutional,methodological, and institutional bases of cluster development. Inone of the directions of innovative development programrequired the formation of clusters in the sectors of "futureeconomy". We think that IT clusters can be drivers of newgeneration, i.e. a kind of platform of "startup accelerators"through the creation of previously not existing in the countryhigh-tech industries and sectors of the economy.In Kazakhstan clusters formed, as a rule, based on the old

industrial specialization of regions or by levelling policy of thestate. We believe that for effective implementation of clusterpolicy should be looking for new effective creative ways aimedat improving the competitiveness of regions. Thus, it shouldcreated conditions for the formation of successful clusters,capable of ensuring stable innovation development in the longperiod. Cluster initiatives are only successful when theydesigned for a longer period and when they include a differentset of measures (Cooke, 2006). For the development ofeffective policy is important to study the conceptual foundationsof the formation of IT clusters. Thus, our study will attempt toexpand the conceptual views as regards the three main ideasof cluster development. We will allocate these three ideas:First idea core periphery theory of spatial development,P

created by Friedman. He noted that the centers of differentlevels, always pulling together resources (human, financial,natural, production) with its periphery, the concentration ofresources creates opportunities for innovative changes in thecenters themselves, and then those innovations are translated tothe periphery (Friedman, 1966). According to him, core andperiphery at any spatial level related information flow. Thegeneric title for these areas are agglomeration economies basedon the observations of Marshall and Schumpeter who suggestedthat firms locate together to reduce transaction costs, toincrease flexibility and to achieve maximum information flow(Marshall, 1925; Schumpeter, 1934). In the middle of the XXcentury, the theory of core periphery developed and addedChristaller (1966). He introduced the concept of "central places".In his scientific works, portray the analysis of the location anddistribution of the periphery relative to the center eventuallysetting the quantitative method and model, characterizingsocio-economic relations of center and periphery.In our opinion, the use of a core periphery model is of

special relevance that can be solved problems of formation ofIT clusters. For example, the use of this model led to thedevelopment of the most important mechanisms of formation ofcluster policy in IT industry developed in USA and EuropeanCommunity. The experience of these countries shows that theyassociate the main tasks of regional management with theorganization of certain areas of interaction between differentlevels of spatial theory of core periphery development.


Second idea industrial and regional theory created byPStorper (1992). He was studied the causes of highcompetitiveness, and comes to the conclusion about existenceof special technological regions, which can be had optimalconditions for the creation of high-tech products. According toStorper (1992), companies set up their regional context, thuscreating its own economic environment that is adapted tospecific local conditions and an increase in the territorialconcentration of production that receives its own dynamics.Thus, the strong impact of benefits from the centers, which arefunctionally, connected with one industry (Storper, 1997). Thus,growth model Solow (1987) contributes to the furtherdevelopment of industrial and regional idea. Relatively highercost of resources in a particular area or in any industryencourages flow and provides economic growth (Solow, 1987).This statement reflected in numerous studies and strategies onimproving the competitiveness of individual areas through theformation of cluster structures of high-tech manufacturing suchas IT clusters (Bramwell, et al., 2010; Boschma & Fornahl,2011; Kireyeva, 2015).Generally, industrial and regional development are the second

type of cluster under consideration here. This idea tend beknowledge-based that is they often have a high proportion ofPcompanies in high-tech sectors such as IT industry. Like almostno other industry, IT characterized by innovation. They tend tobe located on the fringe of urban areas or even at somedistance from them examples include Silicon Valley inPCalifornia and Motorway Corridor in Britain (Hall, et al. 1987;Scott, 1990; Storper, 1993). In a knowledge, intensive businessas IT industry the access to external knowledge is crucial forthe success of companies (Pittaway et al., 2004).Third idea theory of new regional development created byP

Harris (1954). The new model of regional developmentacknowledges the dependence of economic development of theterritory from the indicator on "potential market". Anotherapproach to the theory of the new regional development modelis the "base multiplier" regional income Pred (1966). Krugman(1991) proposed to create clusters not as a fixed flow of goodsand services, but as a dynamic structure based on knowledgecreation and innovation. The cluster approach is part of thegrowing family of innovation systems approaches (Edquist, 1997;Malerba, 2000). Krugman's theory based on cluster concept ofPorter, which described idea of competitive advantage and theconcept of a regional cluster (Porter, 1998). Then, new regionaltheory developed by Romer (1986). According to him, the mainfactor of the development in theory of "innovative growth" is theaccumulations of productive activities in certain regions, whichcan united by a certain sphere of activity.In this regard, we have concluded that clusters formed at the

level of a specific region or industry and requires thedevelopment of specific actions to a specific cluster project.Theoretical review of the cluster development leads to theconclusion that the bulk of scientific research gives a greaterdegree of spatial view of the conceptual aspects to theformation of IT clusters. Theoretical review was as first part of awider research of clustering of IT sector and serves as a pre

study for this paper. The structure of the cluster model ofdevelopment of IT industry should contain a science-basedmethodological scheme. Any cluster project implemented basedon certain methodological approaches of specific industry orregion. Therefore, we proceed to the next section of thisresearch methodology.P

3. Methods

The proposed study aimed to systematize of process of theformation IT clusters considered with the use of scientificmethods of research, taking into account generalization andsystem analysis of the existing theories and models, similaritiesand differences of their structure and development of the clusterapproach. This study will attempt to use methods that canessentially enrich the theory and practice of clusterdevelopment, especially in conditions where global trendsdominate the information market and interactive innovations. Inparticular, to supplement understanding of cluster theory withnew content and to explore features of the organization ofcluster development based on networks. In particular, thisresearch used the following methods:System approach this specific method involves determinationP

of properties of a whole object by identifying the differentrelationships. Thus, approach means identifying the constituentcomponents of a system and the relationships between them thatensure purposeful functioning of the whole object (Ritchey, 1991).This method can be used to determine prospective directions ofthe formation of clusters of IT industry, i.e. to determine the setof elements a cluster system.Structured approach this universal method involves the studyP

of the object through the development and construction of thestructure. The structure shows relationships between elements inthe system, necessary and sufficient to ensure that the systemhas achieved its goal (Rittel & Webber, 1972). The structureacts as a kind of instrument of knowledge of its specific traitsand characteristics (Vedenov, 1988). This method can be toexplore and to determine the characteristics, and to study ofcluster systems (participants of cluster), as well as focusing onsome aspects of cluster development such as networking.

3.1. System Approach of the Formation of IT Clusters

In the era of digital revolution IT sector has considerableinnovative and production potential. In many cases, ITstimulated economic growth, created opportunities and increasedthe efficiency of service delivery. In IT sector are manydirections of development: electronics, microelectronics; nan├electronics; virtualization etc. In addition, development of ITindustry is one of strategic directions of innovative economy.The modern innovative economy implies taking into accountregional specificity, active involvement of the regions in theprocesses of formation and implementation of mechanisms ofstimulation of innovative activity (Foray et al., 2009).


The formation of IT clusters should be as a special regime ofregional economy. This regime must focused on the positivedynamics of parameters of level and quality of life, securesustainable, balanced and multi-factorial reproduction of social,innovative, resource and environmental potentials of the territory.With innovative regional development we mean the capacity ofterritory to innovate, especially business model, product andprocess innovation has become imperative for manyorganizations especially in industrial sectors where theenvironment is changing constantly and rapidly like in IT sector(Prajogo & Ahmed, 2006). IT companies can develop a capacityto innovate stimulated by a conducive environment supportingthe process cheaper and current an order of magnitude faster.Actually, there are many different examples of how to use of

IT clusters which give a real benefit. We have highlighted SiliconValley, Seattle, Austin, Washington DC and Boston, which hascome to be as a center for semiconductor work. Metropolitanareas emerge as highly ranked centers of employment in IT:New York, Los Angeles, Chicago and Philadelphia. Spanish ITclusters, one telecommunication based cluster-surrounding Madridand electronics cluster in the Catalan region (Chaminade, 2001).Flemish IT clusters, for example, this resulted in differentspecialized in IT and microelectronics valleys (Larosse et al.,2001). Korean IT cluster Gumi, located inland in GyeongbukProvince, developed for the electronics industry (ICCPK, 2010).Therefore, for the future development of IT industry inKazakhstan, it is important that IT projects must do domesticcompanies, and it is not just an issue of security and prestige,this is a unique opportunity to grow a large number of highlyqualified IT specialists.In this regard, it is very important the creation of specialized

areas, which can be used to implement the national IT projectsand to bring to the region investments, new technologies, creativeresources and world-famous trends. We think that IT clusters canplay the role of such specialized areas, i.e. a kind of "startupaccelerators" a modern innovative platform for startup companiesPwhere the ideological inspirer and motivated professionals andexperts from IT industry can be worked together on the creationand development of new products and services. Therefore, basedon system method we have identified the perspective directions ofinnovative infrastructure development of IT cluster (Figure 1).Thus, we identified as promising areas of development of

innovative infrastructure of the IT cluster can lead to theformation of self-developing environment. It will give a chance toconsider major regions of Kazakhstan as growth poles, aimed atthe transfer of IT products and services for a broad periphery ofthe country. In the near future, IT sector closely interwoven withmany other activities: computational linguistic; artificialintelligence; robotics; 3D-design; cloud technology; electronics;bio informatics. Therefore, the formation and functioning of ITcluster can change the face of the region and create a numberof potential opportunities, the use of which can improve theefficiency of management and operation. This puts the task ofensuring the establishment of IT industry in regionaldevelopment, the purpose of which is to attract to the territoryof new investments and businesses.

Perspective directions of innovative infrastructuredevelopment of IT cluster

3.2. Structured Method of the Formation of IT Clusters

Theoretical review shows that the transition of economicsystems to a new growth model begins with identification at thelevel of a specific region or industry and requires thedevelopment of specific actions to a specific cluster project. Thiswill provide an impetus to the creation of effective cluster modelbased on networks. Interaction networks between firms toincrease innovations and lead to a rapid development ofclusters. Therefore, Krugman (1991) proposed to create clustersnot as a fixed flow of goods and services, but as a dynamicstructure based on knowledge creation and innovation.Krugman's theory was the basis of the cluster concept of Porter(1998), based on the idea of competitive advantage and theconcept of cluster.Definitely, an important variable that often makes clusters so

different from one another is the considerable variation innetworks. Effective cluster based on networks not only requiresa certain level of trust and preparedness but also the ability todefine common goals, to engage in partnerships acrossindustries to engage in relationships with research and publicinstitutions, and as well as establishing networks with end users.Networking within a cluster enhances the competitive advantageand creates a powerful impetus to exchange explicit and implicitknowledge, coordinating their decisions in order to experienceon shared vision (Castells, 2001; Chamam & Pierre, 2009).Romanainen (2001), discussing about the Finnish approachtowards cluster policy, lists as the major benefits of the clusterapproach, the help it provides in identifying networks andlinkages between industries.The experience of Silicon Valley demonstrates the operations

of the network platforms, which promoted development throughthe integration of networks, implementing the principles of "triple


helix" (Etzkowitz, 2008). Multi-stakeholder partnership ofcompanies, inventors, and other organizations have made SiliconValley a global center in the field of electronics, microelectronics,semiconductors and computing. As it becomes clear that suchsynergistic effect of cluster development improves the conditionsfor the spread of innovation in spatial context (Kireyeva, 2015).Certainly, as we note earlier, IT clusters can be drivers of newgeneration, i.e. a kind of "startup accelerators" through thecreation of previously not existing in the country high-techindustries and sectors of the economy. It should be to allocatethe following types of networks operating in IT cluster:1) production networks captures the interaction of clusterP

participants which have technological and organizationalcommunications, and jointly implement various goods andservices;

2) information networks represent the interaction betweenPcluster participants within the intellect, knowledge and newinformation technologies as the main renewable resourcefor sustainable socio-economic development;

3) infrastructure networks interaction between clusterPparticipants, representing a range of conditions providing afavorable economic development and meeting the needsof the whole population (transportation networks, financialand institutional networks);

4) socio-economic networks captures the interaction ofPcluster participants which have sustainable contacts orsimilar social relations between individuals or groups;

5) innovation networks represent the cooperation aimed atPthe process of creation, dissemination and implementationof innovations and advanced technologies.

As a result, above-mentioned extensive networks within ITcluster form a structure as shown in figure 2.

Structure of extensive networks in IT cluster

We think that the activation of networks in IT cluster willcontribute to the diversification of production, in order to avoidfurther dependence on the oil sector. As a result, innovativedevelopment of the regions of Kazakhstan based on IT cluster,which can be used to implement the national IT projects and to

bring to the region investments, new technologies, creativeresources and world-famous trends. Kazakhstan's accession tothe WTO puts the country in front of the urgent need to takeaction innovative and technological character. Thus, the clusterscan be drivers of innovation development of Kazakhstan. Thus,overcoming information barriers, increasing production resourcesand changing the nature of the products, IT clusters can bemore integrated, effective and innovative (Figure 3).

Scheme of networks effect to the structure of IT cluster

It is reasonable that we have highlighted the followingbenefits from the formation of IT clusters:Firstly, IT clusters have a sustainable system of dissemination

of new technologies and knowledge, which based on a jointinformation base, so-called networks aimed to the integration.Secondly, companies fully automated within the IT cluster, and

thereby contributed to the effective provision of products andservices.Thirdly, participants of IT cluster can help to scale up

innovations. Companies of IT cluster have competitive advantagesdue to the possibility to carry out an internal specialization andstandardization and to minimize the cost of implementation ofelectronic, analog and digital technologies.Fourthly, IT clusters are extremely important for the

development of small business: they provide small firms a highdegree of specialization in servicing specific business niches, asthis will facilitate the access to capital IT companies, but alsoactively, exchange ideas and knowledge transfer from experts tothe entrepreneurs.

4. Conclusions

This work marks a starting point for further research in thefield of the formation of IT clusters as drivers of newgeneration, i.e. a kind of "startup accelerators" through thecreation of previously not existing in the country high-techindustries and sectors of the economy. It provides somesuggestions for improvement of future studies dealing with thissubject. Based on this research finding of this paper, thepractical implications listed below:


Firstly, cluster approach is an important factor in increasingthe competitiveness of the national economy to the CIScountries. For effective implementation of cluster policy shouldbe looking for new effective creative ways aimed at improvingthe competitiveness of regions. It should be to create conditionsfor the formation of successful clusters, capable of ensuringstable innovation development in the long period. Therefore, wepropose that IT clusters can be drivers of new generation, i.e. akind of platform of "startup accelerators"through the creation ofpreviously not existing in the country high-tech industries andsectors of the economy.Secondly, theoretical review shows that the content and

structure of cluster concepts had influenced common economic,innovation and spatial development. In particular, we haveidentified three ideas, which affected for the formation ofclusters: center-periphery theory; industrial and regional theory;new regional theory. Theoretical views on the theory of clustersis not straightforward, giving rise to many disputable issues ininnovative and spatial development. However, this does notpreclude wide use of cluster approaches, as in the world, andin Kazakhstan, which once again proves the effectiveness andcontrollability of the processes of clustering.Thirdly, role of the IT cluster is the ability to make the process

cheaper, faster and more creative. Based on a system method wehave identified the perspective directions of innovativeinfrastructure development of IT cluster, including electronics,mobile communications, robotics, computing,e-Commerce, internet services, etc. The formation of IT clustercan change the face of the region and create a number ofpotential opportunities, the use of which can improve the efficiencyof management and operation. Thus, forthcoming exhibition"EXPO-2017"in Astana region can be as growth pole, which toaim at the intelligent transfer of technology and knowledge on thebroad periphery of the country. Objects erected within"EXPO-2017", will allow in the future considering Kazakhstan as amajor international information and communication platform for ITclusters. Already built in Astana region major projects ofinnovative, information and communications infrastructure (industrialparks, techno polis, research laboratories and business incubators).Fourthly, world practice shows that successful IT clusters,

offer unique opportunities for ownership markets in the era ofdigital revolution. Therefore, activation of networks in IT clusterwill contribute to the diversification of production of Kazakhstan,in order to avoid further dependence on the oil sector. Thisstudy showed that the formation of IT clusters that will enhancethe integration, efficiency and innovation. As a result, innovativedevelopment of the regions of Kazakhstan based on IT cluster,which used to implement the national IT projects and to bringto the region investments, new technologies, creative resourcesand world-famous trends.

Acknowledgements

This study have supported by Institute of Economics of the

Ministry of Education and Science of the Republic ofKazakhstan.

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59Seisembay Jumambayev / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 59-66

Abstract

Dynamic changes in the field of labor relations have becomea general trend in the world practice. These changes are duethe impact of globalization and technological innovation above all.Concept of "precarization of employment" appeared due the newemerging labor relations. This term has been used for more thanthirty-five years, but there is still no generally accepted definitionof it. A wide range of authors瀞 viewpoints on problem ofprecarization makes it vague and impossible to strictly to identifyits borders. Features of its manifestations in different countriesalso complicate the problem. Kazakhstan is a country withexport-oriented economy of raw materials. At the same timegovernment try to solve the problem for the industrial-innovativedevelopment of the economy. These two factors bring additionalspecific features in the manifestation of the precarization ofemployment in the country. The aim of the paper is to identifythe features of "precarization of employment" concept inKazakhstan's practice, based on the proposed definition.

Employment, Economic Crisis, TechnologicalInnovation, Labor Market, Informal Employment,Labourcode.

J23, J60, E24.

1. Introduction

Precarization employment problem draws an increasingattention of many researchers. Aggravation is due to globalizationand technological progress, and affecting every country.However, this is different in different countries because ofspecific historical and economic characteristics of its developmentand mentality of people. Therefore, the overall picture of theprecarization of employment can not be complete if it is notsupplemented by the results of study in different countries,

* Professor. Department of Management and Marketing, The HigherSchool of Economics and Business, Al-Farabi Kazakh NationalUniversity. [71 Al-Farabi Avenue, Almaty 0—00–0, Republic ofKazakhstan] E-mail: [email protected]

including emerging markets. Sociologists are more engaged thaneconomists with theme of precarization employment in thescientific literature. This, in our view, significantly worsens thestudy of this very complex phenomenon. It is impossible tosuccessfully deal with those consequences without a clearspecification of definition of employment precarization. For suchpurposes, it is important to identify the dominant factors ofinfluence on employment in each country, and to determine inwhat part of employment is subject to the precarization. It isnecessary to supplement existing data with new statisticalindicators, but it is already possible to estimate the scale ofemployment precarization. The improving mechanism of labormarket regulation should be given to the central smoothing laborrelations, especially between employers and employees. In thisissue of the precarization of employment objectively will be thesubject of negotiations.


The concept of "a precarization" has been used from the 80sof the last century. Sociologists are mainly engaged in theproblem of precarization. Apart from them, this is also thesubject of research of psychologists, lawyers and evenphilosophers. Economists stood aside from this discussion untilrecently. There are many definitions of precariat and employmentthe precarization of. However, there is still no a generallyaccepted definition. A number of definitions offered bywell-known specialists can support this statement.The term "precariat" was first used by Ulrich Beck in 1986.

Under "precariat", he understood unstable, impermanentemployment, and people who were imposed this form ofemployment. He connects this term with the risk society, whereany guarantees disappear under the influence of the emergingpostmodernism and globalization. Castel (2009) also linked theoccurrence of precariat with the processes of economicglobalization, which made people who made up the core ofemployees vulnerable. Bourdieu (2003) has defined precariat asthe unstable and unprotected social layer. Bizyukov (2013)referred to the Friedrich Ebert Foundation瀞s report identifiedprecariat as a growing group of those who are below thepoverty line or even cut off from the civilized communityaspirations. Evans & Gibb (2009) characterized precarious work


The Precarization of Employment: A Case of Kazakhstan

Seisembay Jumambayev*1)

[Received: February 29, 2016. Revised: March 28, 2016. Accepted: April 10, 2016.]

60 Seisembay Jumambayev / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 59-66

as untypical employment contracts, limited social benefits andlegally defined rights, a high degree of job insecurity, shortduration of work, low wages and high risks of occupationalaccidents and diseases while Bobkov & Veredyuk (2013) believethat the instability of employment is due to the economic andlegal deregulation of labor relations and the increasing size offorced labor, at the same time refusing social guarantees toreduce the costs of wage and increasing employment flexibility,including those not executed by employment contracts.Standing (2011) distinguishes five groups in modern westernsociety based on working status: elite, salari at professionals,

core workers, and precariat, socially unsettled people who donot have full job security. Precariat is located in the lower partof the "pyramid" of society and represents a diverse group ofworkers and the unemployed, live in conditions of social andeconomic insecurity. They have a minimal relationship with thestate and the employer in terms of stability and security. Theirrepresentatives limitedly identify themselves with the professionalcommunity, in which they probably are. They are characterizedby three features: no job security; rely only on the direct cashrewards for work; most of them do not have the same rightsthat other citizens have. Due to the loss of rights, guaranteesand professional identity, they suffer from anxiety, alienation,and anomie.International Labour Organization (ILO) introduced the term

"precarization" in 2011 and considered it as apart of thespreading flexible forms of employment, as opposed to thesystem of unemployment. According to the ILO definition,employment can be considered as precarious if it is in theformal or informal economy, which is characterized by variousdegree of objective characteristics (legal status) and subjective(feeling) of uncertainty and insecurity. In this case, precariousemployment is determined by the uncertainty of the duration ofemployment, lack of access to social protection, benefits andthe availability of legal support. As a result, they are exposed topractical obstacles to joining workers瀞 unions.It should be noted that the ILO approached comprehensively

to address the problem of the precarious employment andclearly identified some main issues: Analysis of the economicfactors that support the unstable employment; Identify gaps andshortcomings in the legislation, which contribute to the spread ofprecarious employment; Consideration of communication betweenworkers瀞union rights and unstable employment; Exchange ofviews on strategies and approaches to combat precariousemployment; Determination of the main directions of interventionpolicy to precarious employment, both at national andinternational level and Development of a commonanti-precarization program. Even this small survey provides awide range of authors瀞 views on the essence of precarization. Ifanyone tries to find something in common in their definitions ofemployment precarization, it is likely to be the recognition of theunsettled labor relations and lack of full legal and socialguarantees of employment. In other words, the precarization isunstable, temporary employment; and precariat is asocio-professional group of people, who is experiencing thisform of employment.

Precarization of employment is characterized by untypicalemployment contracts, limited social benefits and legally definedrights, a high degree of job insecurity or a short period of job.In practice, this is manifested in the imposition of temporarywork, termination of employment by the employer at any time,deprivation of choice freedom, employee leasing, deriving it fromthe staff. The consequence of the unstable, precarious forms ofemployment are low wages, lack of protection against dismissal,lack of social protection systems and the ability to defendworker's rights and interests. It is suggested to considerprecariat as socio-professional group in the structure of theeconomically active population (EAP), which occupies anintermediate position between the standard employment andunemployment systemic. Moreover, the boundaries betweenthem may change due to strong labor market fluctuations. Inour view, unemployment can not be considered as a specialform of precarization as offer individual authors. This leads toconfusion because of the unclear and vague distinctionsbetween precarium who are temporarily or partially employed,and the unemployed, between employment and unemployment.

Place of Precariat in the Structure of the EconomicallyActive Population

The main sign of belonging to precariat is considered as alack of legalized working relationship with the employer. Theyare temporary workers with part-time job and without anemployment contract, employee out of permanent staff (outstaffing, staff leasing); working part-time employees. And, as aconsequence, they do not have solid social and labor warranty,such as a limited-time, paid leave, sick leave and pension andsocial deductions.The proposed approach to the precarization of employment,

in our opinion, will allow achieving unity in the study of theproblems of employment instability in one country and creatinga basis for cross-country comparisons.


2. Data and Methodology

Precarization of employment, being a complex problem,requires a search for answers to many questions. What is theessence of this phenomenon? Is precariat dangerous as someresearchers瀞瀞claim? Should focus on full employment be apriority? Is the topic of precarization the top issue of employmentand social security? What are some real prospects for newlyacquired employment and / or social security? Series of questionscan be further expanded.It is important to note that in terms of methodology, the study

of problems of employment precarization requires aninterdisciplinary approach. For example, you need the activeinvolvement of economists in a study of this problem. Insociological research of precarization narrative description of thephenomenon is prevailing, but the numerical data is almost notgiven. It is also obvious value in use of methodological tools ofbehavioral economics, which made it possible to analyze thebehavior of the subjects in the conditions of unstableemployment. Identification of the root causes of this phenomenonwould have contributed to the adoption of effective solutions inthe field of employment.In discussing the problems of precarization issue of precarious

employment is usually associated with a lack of social security.This is understandable, since the first normal-time employmentsare traditionally characterized by a reliable social security. But itmust be noted that today the employees are not distinguished bytheir uniformity. In addition to employees with stable legalizedemployment, there are informal workers in the informal sector ofthe economy, in the shadow economy and informally employedworkers in the formal sector. It is necessary to decide on how tocome up with a methodological point to quantitative calculationsin order to describe the numerical characteristics and assess therisk extent of precarious employment. This research studyextensively analyzes and discuss some extended and narrowapproaches. In narrow approach, category of precariousemployment includes part-time job in the formal economy; thenumber of workers with fixed-term employment or civil contracts;the number of employees involved in the scheme of contract laborand informal employment. In the extended approach, it alsoincludes the unemployed group; the working "poor"; employedunder civil law contracts; people who have arrears of wages;employed in conditions that do not meet hygienic standards;seeking other or additional work due to the lack of wage ormismatch of specialty and illegal immigrants.On the basis of previously stated point, the author prefers a

narrow approach to the study of precarization problems, since itallows people to clearly define the boundaries of this phenomenonand give it a quantitative characteristic. An important area ofresearch in the field of conceptual provisions of the employmentprecarization is differentiated understanding of precarization as aspecial form of flexibilization or as a systemic risk for the entireemployment sector (Sankova, 2014). This is important for tworeasons: first, it is important in choosing of emphasis in thedevelopment of social policy in general and the decent work

programmes; and secondly, it is essential for situational analysisand forecasting.Obviously, the precarization of employment as a form of

flexibilizationis determined by the demand for labor in anaccelerating innovative economy. The latter requires new, moreflexible forms of employment such as temporary employment,self-employment, agency work, and freelance than the other one.The current and future changes are characterized by both positiveand negative consequences. For example, the positive effects ofnew forms of employment are voluntary choice of temporary workby the individual, possibility to ensure the full protection of socialand labor rights of workers in temporary contracts. In real life, asignificant number of people with a good education also preferpart-time work in the offices. However, current practice gives morereasons to discuss the negative consequences of new forms ofemployment for the employee: a low level of guarantees andwages, under investment in human capital, lack of careerprospects, the psychological state of depression and anxiety.Precarious work bears the risk of loss of social protection ofworkers. In our opinion, it is important to shift the focus ofresearchers to find ways to overcome the current asymmetries inrelations between the employee and the employer, and establish anew balance between stability and instability of employment.Finally, an important theoretical and methodological issue in the

field of employment precarization is the ability to detect realprospects newly acquired employment. Keynesian theory predicts ahuge reduction of part-time labor wage, apparently coming true andtherefore the question of full employment is not as relevant assearching for the social security system, corresponding to thechange coming into production and social life.In our opinion, it is advisable to move from generalities to

analysis of concrete problems of employment precarization. Thiswill provide an opportunity to move away from the descriptivenature of the problem, which is mostly typical in sociologicalresearches. In this article, the author makes a modest attempt toconsider precarious employment, as a phenomenon, occupying anintermediate position between typically employed and unemployedin the structure of the economically active population. On thisbasis, it becomes possible to make a clear distinction betweenthese components of the EAP. This creates a basis for aquantitative assessment of the phenomenon瀞s extent to identifyspecific factors which affect it. Available statistical data can beused here, but it is important to complement it with correspondingindicators. Also, it is important to keep the right balance betweenthe statistical data and the results of representative sociologicalresearch. Trends in employment in different countries are different,but it is important to highlight that part of employees, which aresubject to the precarization. Identifying at least approximate scaleof precarization can create some basis for appropriate measures ofeconomic and social policy.Official statistics do not provide data to reliably quantify workers瀞

exposed precarization. Workers engaged in temporary work are notlisted separately. Therefore, we used a simple indirect method inorder to give at least a rough quantitative estimate precariouswork. Its content is the comparison of statistical data on hiredworkers and listed number of employees who are recruited by an


employment contract, regardless of its term. According tocalculations carried out by the author, the proportion of personswho are not covered by agreements, amounted to 37.3% in 2013and 37.6% in 2014. This can give us an idea about the scale ofprecarious employment in Kazakhstan. If we adjust the figures toshare of informally self-employed, it turns out that about a third ofthe economically active population in Kazakhstan is in a state ofemployment instability.

3. Main Part

3.1. The Impact of Globalization and Industrialization

Modern conditions of globalization and the economic crisisgave sociologists basis for the division of society on the basisof economic stability/instability, security/insecurity. The EU andthe US are talking about the emergence of a new "dangerousclasses" i.e. precariat. It is not integrated into any of theexisting socio-structural systems. According to Standing (2011),precariat must be understood in the context of globalization, thatis, the opening of labor markets around the world. As a result,a flexible labor market is replacing the traditional relationshipbetween capital and labor, people increasingly have to changejobs and skills, and they increasingly lose touch with each otherand with the corporate culture. They lose their social security;their professional identity weakens, and an anxiety about thefuture born.An important factor affecting the nature of employment is an

accelerated life cycle of innovation and asynchrony. It produces avariety of risks in the labor market affecting certain categories ofworkers. Innovative economy naturally leads to increased flexibilityof employment and labor market, extend the scope of temporarycontracts, the development of non-standard forms of employment.Thus, according to specialists of Kelly Services, 80% of peoplearound the will be working on temporary contracts after 45 years.This forecast was made by specialists of American headquartersof the company in 2005 (Litoshik, 2005).At the last Davos economic forum, participants paid great

attention to radical breakthroughs in recent years瀞 technologiessuch as robotics, the Internet of things, financial technologies,IT-systems and intelligent production which are able to makedecisions without human intervention. It was emphasized thatthe Fourth Industrial Revolution has the potential to raise thestandard of living of all earthlings. Technological innovations willlead to long-term increase in efficiency and productivity. This willopen up new markets, and impetus will be given to the growthof the economy. However, demand for highly skilled workers willdramatically increase on the one hand, but robots will replacepeople on the other hand as a result of technologicalinnovation. According to some forecasts made by WorldEconomic Forum (2016), 47% of the jobs of the modern worldwill be automated in 20 years. During the period from 2015 to2020, trends mentioned above will lead to a loss of 71 millionjob places across 15 countries, most of which will be happened

in office and administrative positions.The development of artificial intelligence widen the gap

between rich and poor, reducing the competitiveness of low-and medium-skilled workers and the need for workers with lowskills. At the opening ceremony of forum, Joe Biden (2016)talked about how the digital revolution can destroy the middleclass in developed countries. Displacement of people from thelabor pool by robots will increase uncertainty, anger, irritation,which can lead to a social explosion. Large-scale introduction of"cyber-physical systems" (CPS) in the leading developedcountries, may harm developing countries who rely moreon production. The emergence of autonomous transport,enhancement of artificial intelligence and machine learningtechniques, superior materials and printing methods canadd 100 million to the 200 million current unemployedpeople in the world by 2017. And most of all, it will affectdeveloping countries since return to automation ofindustries may shift production to developed countries.According to WEF (2016), enhancement of gender inequality

in the labor force is predicted: one new will appear for threelost "male" positions; one new will appear on five lost womenpositions. The new industrial revolution entails a radical changein concepts such as "normal working day". Instead, they putforward the concept of "Flexibility" of social and labor relations,implying flexibility in working time and employment policies onthe one hand, and the variety of worker瀞s skills and the abilityof workers to adapt to changes on the other. Flexible system ofemployment will become a norm and gradually replace stabilityof the eight-hour day and five-day working week. This will leadto increased power of employers who are interested in thetransition on short-term labor contracts, reducing wages andlowering the level of social security of workers. For employees itmeans possible unstable employment. Excessive labor flexibilityhas a devastating impact on the worker, making it lessresourced oriented, more vulnerable and less resilient(Eurofound, 2010).

3.2. Precarization of Employment in Kazakhstan

The problem of employment precarizationin Kazakhstan hasnot been directly addressed by any of the works of nationalor foreign researchers in a modern term. Problems ofprecariat as a group in the social structure is almost notdiscussed. The term "employment precarization" only comesinto use in the scientific environment. As a result, it has notreceived proper theoretical coverage and a correspondingreflection in Kazakhstan's socio-economic policy, legislation,and statistics; not raised the question of the need for themechanism of their regulation at the state level. Nowadays,no one can reliably say how many employable Kazakhstanisare in precarious employment situation. The employmentrelationship between employers and employees are on anurgent basis which does not correspond to their formal contentor formalized. Therefore it creates additional difficulties inassessing the scale of employment instability.Meanwhile, phenomenon of employment precarization itself has


already taken place in our country regarding the change of thesocial system after the collapse of the USSR, and thesubsequent sharp drop in production. In the following conditions,there were a layer of entrepreneurs, but the majority of citizenslost their job security. If we assume understanding of theemployment relationship as a system that adequately reflect theprinciples, the content and form of participation of the workingpopulation in social production for a certain period, then anyviolation of existing labor relations to the downside will stand foremployment precarization thereafter.During the Soviet period, social protection of workers was at a

high level, full employment has been achieved by socially usefulwork. Another issue is that this type of employment wasineffective and inefficient. Social and labor relations in the countryradically broken in 90 years: many social benefits were abolished.Unemployment has reached its peak of 13.5% in 1999. Theemployment rate has been growing steadily since 2000, due tothe dynamic growth of the economy up to 2008,during the globalcrisis of 2008-2009, in the post-crisis period "during" 2010-2014,albeit with different rates <Table 1>.

The Dynamics and Structure of Employment According toILO in Kazakhstan

2000 2005 2010 2011 2012 2013 20142015III

quarter

The employmentrate, in % to

the economicallyactive population

87,2 91,9 94,2 94,6 94,7 94,8 94,9 95,0

The share ofhired workers in

employedpopulation, in %

56,5 63,9 66,7 67,2 68,3 69,4 71,8 72,9

The share ofself-employedworkers among

employedpopulation, in %

43,5 36,1 33,3 32,8 31,7 30,6 28,2 27,1

The share ofthe number ofindependents

amongself-employed,

in %

J J J 92,0 93,7 94,2 96,4 94,7

Note: Compiled by the author based on the source(Statistical yearbook,201–; Committee on Statistics, 201—)

According to official statistics, the share of employed inorganizations and enterprises amounted to 88.4% (5.7 million people)for the third quarter 2015. The number of self-employed personsamounted to 2.3 million people. A significant part of theself-employed carried out its activities in agriculture (50.2%) and tradesector (22.4%), construction (9.1%) and transport services (8.5%).Self-employment is one of the clearest manifestations of theemployment precarization. According to Table 1, self-employed

amounted to 28% out of all employees in 2014, which reflects asignificant positive shift in the structure of employment. But on theother hand, we can see a negative trend in which the proportion ofindependents among self-employed has tended to rise. A highproportion of self-employed workers indicate not only the archaicstructure of the economy, but also the presence of the essentialemployment issues. Not only working time is under utilized in thearea of self-employment, but also the creative potential of the people.In this regard, the share of self-employed is an important indicator ofsocial, economic and technological development of the country.Two factors give special relevance of employment precarization

in Kazakhstan. Firstly, it is a current economic crisis. Thedynamics of economic growth is the dominant feature in theimpact on employment. The author studied the influence of variousfactors on employment in Kazakhstan for two periods: from 1992to 2014, and from 2000 to 2014. As a result, the highestcorrelation was found between the change in the gross domesticproduct (GDP) and the number of employees <Table 2>.

Initial Data for the Calculation of the Correlation Coefficient

YearThe volume indexof GDP to theprevious year

GDPgrowth - ┣

Employed asa percentage

to theprevious year

Employmentgrowth rate - y

1992 94,7 -5,300 98,2 -1,8001993 90,8 -9,200 91,9 -8,1001994 87,4 -12,600 94,5 -5,5001995 91,8 -8,200 99,5 -0,5001996 100,5 0,500 99,5 -0,5001997 101,7 1,700 99,3 -0,7001998 98,1 -1,900 94,7 -5,3001999 102,7 2,700 99,6 -0,4002000 109,8 9,800 101,6 1,6002001 113,5 13,500 108,0 8,0002002 109,8 9,800 100,2 0,2002003 109,3 9,300 104,1 4,1002004 109,6 9,600 102,8 2,8002005 109,7 9,700 101,1 1,1002006 110,7 10,700 102,0 2,0002007 108,9 8,900 103,1 3,1002008 103,3 3,300 103,0 3,0002009 101,2 1,200 100,6 0,6002010 107,3 7,300 102,7 2,7002011 107,5 7,500 102,3 2,3002012 105,0 5,000 102,5 2,5002013 106,0 6,000 100,7 0,7002014 104,3 4,300 100,9 0,900


The coefficient of pair correlation of K. Pearson calculated inExcel according to the known formula:

ゲヴ @iヰヴゾヰ@ゾ@iヰヴダヰダヰ@ダ

iヰヴゾヰ@ゾダヰ@ダ

The coefficient of correlation between these indices during1992-2014 amounted to 0.83 ( =0.68). In the period from2000 to 2014, when the economy had only a positive growthtrend, the correlation coefficient between these figures were 0.72( =0.52). Thus, the primary determinant of employment statusis the overall economic dynamics. For comparison, thecoefficient of correlation between the rate of growth ininvestment and employment was equal to 0.30 ( =0.09),between the growth of foreign trade and employment amountedto 0.34 ( =0.12), between the rate of growth of exports andemployment amounted to 0.36 ( =0.13), between the rates ofM2 and employment growth amounted to 0.07 ( =0.00).Kazakhstan's economy is one-side focused on the export of

raw materials, and a sharp decline in the prices of the mainexport product i.e. oil, had a negative impact on economicgrowth <Table 3>.

Dynamics of the GDP of Kazakhstan for 2011-2015.

2011 2012 2013 20142015

Iquarter

IIquarter

IIIquarter

Index of physicalvolume GDP, asa percentage tothe previous year

107,2 104,6 105,8 104,1 102,3 101,7 101,2

Note: Compiled by the author based on the source(Committee onStatistics, 201—)

Decline of prices in the oil industry can lead to a sacking of40 thousand workers. The number of personnel involved in oilproduction decreased by 1141 people only in the third quarterof 2015 compared to the fourth quarter of 2014 (Akhmetov,2015).In addition to the reduction of employment, crisis is likely to

cause a transition from stable system of full-time to theperturbed system with unstable employment. Now businessesand organizations have to think about the application of variousnon-standard forms of employment as a transition to the 4-dayworking week; some companies introduced the program "Stop"inrelation to the admission of new workers. The number of laid-offworkers was greater than the number hired workers <Table 4>.

The Movement of Labor in Large and Medium-sizedEnterprises in Kazakhstan

2011 2012 2013 20142015

Iquarter

IIquarter

IIIquarter

IVquarter

Recruited 104.1780 1.112.471 941.916 968.601 163.869 178.760 193.184 152.228

Dismissed 903.042 983.905 886.320 907.848 172.877 186.673 209.631 181.743

Thereplacement

rate1.15 1.13 1.06 1.07 0.95 0.96 0.92 0.84

Note: Compiled by the author based on the source (Committee onStatistics, 201—)

Ratio of substitution of labor is defined by the formula:ﾙザﾝゲﾝギカﾙﾛﾝケﾝヴザザ｀ﾝヴジケﾚﾝゲガﾞﾜヰゴケヰゴゴﾝﾜﾜジゲヰヴﾟザ｀ﾝギﾝゲヰガﾜ

｀ﾝヴジケﾚﾝゲガﾞﾝケギカガダﾝﾜヰヴザ｀ﾝギﾝゲヰガﾜ

Increasing scarcity of work places and tensions in the labormarket reduce an opportunity to work by standard employmentcontract. Employers get rid of excess labor and prefer fixed-termcontractual relationships with employees. Most experts predicteda prolonged crisis for countries whose economies are based onoil exports. In this case, there is a real threat of furtherdeterioration in Kazakhstan's labor market, an increase ininstability of labor relations, reduction of the working life quality.Secondly, the task of becoming one of the 30 highly developedcountries makes the problem employment precarization relevant.The successful solution of this problem requires the mandatoryformation of an innovative economy, development of high-techindustries. A content analysis of the second phase of the StateProgram of Forced Industrial-Innovative Development (SP FIID)in terms of its impact on employment shows that it mainlyrefers to the creation of additional jobs by increasing the shareof manufacturing sector (MFA, 2015). It does not pay dueattention to the problems of technological transformation. This isevidenced by the results of Kazakh scientists瀞 research whichindicates that technological profile of the country is far from themodern requirements and changing very slowly.The share of the fifth technological mode in the country's

economy is less than 1%, the fourth is around 35%, the third isaround 65%. According to the authors, the first results of SPFIID have not improved the ratio of technological structures(Dnishev & Alzhanova, 2014). Meanwhile, the introduction ofnew technologies leads to cost-effective and efficient economyin the long term, which is one of the main features of highlydeveloped countries. A new technology usually results in thereduction and elimination of previous old jobs, and appearanceis really new, requiring a high level of knowledge, expertise,and skills. Therefore, it is advisable to review content of SPFIID toward strengthening its focus on the introduction of newtechnologies, and at ths same time to search for potentialproblems of employment precarization solutions.Precarious work in Kazakhstan is temporary work above all,

i.e. job on temporary labor contracts, subcontracts. Practiceshows that the contracts between employee and employer are


often oral. Employees often do not give due importance to thecontracts, since they do not guarantee a job in reality, theemployer may terminate employment contract for any reason.Informal employment i.e. any kind of labor relations based on

an oral agreement has gained a large scale in Kazakhstan.There are ILO (2013) recommendations on which workers toinclude in informal employment. Essentially, there are twocategories of informal employment of workers: one is workers inthe informal sector who are unregistered and the other one ispaid workers having in formal jobs in the formal sector. Theyreceive a salary, but receive no other benefits, which aregenerally assumed to be on official work: they can not count ona pension, insurance and other social guarantees. Sinyavskaya(2005) points out a positive aspects of informal employment. Forinstance, the opportunity to receive the current labor income withgreater regularity, and often at a higher amount than in formalemployment. And it turns out to be beneficial not only to theself-employed and entrepreneurs, but also to employees (2005).Nevertheless, the negative aspects of informal employment areobvious. The absence of a written employment contract increasesthe infringement risk of labor rights and social security ofworkers; and labor relations instability deprives employee careerprospects as well.Given the complex nature of labor relations of people in the

informal sector, the real volume of informal employment is difficultto estimate. According to the Committee on Statistics (2015) ofthe Ministry of National Economy, more than 59% of allemployees work in formal sector enterprises, 37% in theenterprises of the informal sector, and 4% in households.Furthermore, 24% out of the total workforce were informallyemployed in the national economy, and 44.5% of those areself-employed workers while 55.5% are informally employed.

4. Results and Findings

It should be noted that precarious work in Kazakhstan istypical not only to low-skilled workers; it is also observed ineducation sector, activities of office workers and lower-level civilservants. Their work is heavy loaded but not compensated byproper wages. In this case, a specialist often has to do the jobbelow his or her skill level. He or she spends a lot of time for ajob that does not considered and not paid.A significant part of migrants is also subject to the

precarization of employment internally and externally since theyare cheap labor force. As a result, this labor force reduces laborcosts for employers. Thousands of citizens in the country movefrom the rural area to the urban cities the most attractive interms of employment are the cities like Almaty, Astana,Mangystau, Karaganda and Atyrau region. In most cases, they donot find a worthy use of their talent and skill. Many of them arewilling to work for low wages, without signing employmentcontracts, compliance with working hours or provision of adequatesocial guarantees.A feature of precarization in Kazakhstan, in contrast to the

practice in developed countries, is the fact that every employeecan get into the precarium regardless of age, gender ornationality. In addition, Kazakhstani employment precarization ischaracterized by followings: the ceszation of work by theemployer with or without prior notice to the employee changes inthe length of working time and the functions performed by theemployer's wish carrying out works without filing an employmentcontract. Adequate social policies should be developed to preventundesirable effects of employment precarization. It should bebased on professional analysis of the existing practice ofemployment instability in the country and taking into account thebest precarious labor management practices in developedcountries.Kazakhstan has taken certain steps to establish a new type

of labor relations. The new Labour Code of the Republic ofKazakhstan simplified procedures for changing the conditions ofthe employment contract, the state will now take a minimumparticipation in these processes. There are measures tointroduce a system of self-management of labor collectives; andthe role of collective bargaining of workers and employers isstrengthened. It is assumed that the liberalization of laborrelations will help eliminate obstacles to the innovativedevelopment of the economy, increase flexibility of the labormarket, create new jobs and productive employments.The main role in the formation of labor relations will belong

to workers and employers. This will require measures toimprove the work culture and legal awareness of workers, theirunderstanding of the role and functions of the main institutionsof social and labor relations. This applies equally to Kazakhemployers are not characterized by high culture and law-abiding.The degree of maturity of the social and labor relations willdepend on the understanding of both sides of regularities ofprocesses in the area of employment, especially employmentprecarization. For example, in the new conditions, workersshould be able to respond correctly to plans taken by theemployer aiming restructure the company. Relations based onsocial partnership should be established between them for thispurpose. Timely and keen exchange of information betweenthem will greatly facilitate the solution of problems related toemployment. Informed workers are likely to manifest theirinterest in retraining, improving their skills to meet the demandsof the new job, understand the need for continuous learningthroughout their working lives. Therefore, this kind ofcommunication between employer and employees will create agood basis for the elimination of the causes leading toprecarious work.The transition from strict regulation to minimized state

regulation of labor relation parties瀞 rights and obligations willrequire active workers union activities. Unfortunately, they havenot become equal partners so far. It is sufficient to say that thetotal amount of collective agreements in the country is around30%, whereas in small and medium-sized businesses, they arevirtually none.Given the novelty of the problems of employment

precarization in our country, it is necessary to intensify researchin this field, and to achieve recognition of the relevance of this


issue by all levels of government. This will allow identifying thespecific features of labor precarization in our country, due to thelevels of economic development, social justice, the mentality ofthe people, and the inertia of the old socialist thinking. And thushelp establish a society with a flexible labor market, civilizedlabor relations.

5. Conclusion

Precarization of employment problem is becoming increasinglyimportant for many countries. In these circumstances, it isessential, on the one hand, to achieve a common understandingof the phenomenon, on the other, to explore the features of itsmanifestations in different countries. In Kazakhstan, employmentprecarization is actualized in connection with experiencing aneconomic crisis. Proper implementation of industrial andinnovative development may further exacerbate the problem ofemployment precarization. There is a growing differentiation oflabor market segments, and all non-standard forms ofemployment are more distributed. There is a labor markettransformation towards increasing its flexibility, decentralizedcollective-contractual regulation of labor relations.In this regard, it is necessary to establish real partnerships

between employers and employees as key stakeholders in thenegotiations on the formation of the employment relationship.One of the main points of the process will inevitably becomethe question of the development of prevention and controlmeasures precarious labor.

References

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Beck, U. (1986). Risikogesellschaft: Auf dem Weg in eine an-dere Moderne. Frankfurt am Main: Suhrkamp, Verlag.

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67Jung Wan Lee, Kip Becker, Rajasekhara Mouly Potluri / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 67-76

Abstract

The paper explores determinants of corporate adoption ofsocial media and the role of technology acceptance model inthe path. This paper assimilates some components of thetechnology acceptance dimension and social expectation theoriesto determine corporate intentions to use social media. Sixhundred and forty-eight samples collected from hotel staff inKorea are analyzed using factor analysis, structural equationmodel techniques and one-way analysis of variance. The resultsshow that corporate needs, social expectations, ease of use andusefulness should be viewed as important antecedentsexplaining the firm瀞s behavioral intention to use social media.The study also finds that the ease of use and usefulness of thetechnology acceptance model have positive directional mediationeffects in the path diagram.

Social Media, Public Relations, CorporateCommunication, Technology Acceptance,Social Orientation.

M14, M15, M31, M39.

* [This paper is a revised and expanded version of a paper entitled"Antecedents of Corporate Adoption of Social Media and the Roleof the Technology Acceptance Model in the Path" presented atthe Twenty Fourth World Business Congress of The InternationalManagement Development Association, Famagusta, North Cyprus,May 27-31, 201—.]

** First Author. Administrative Sciences Department, MetropolitanCollege, Boston University[‘0‘ Commonwealth Avenue, Boston,MA 0212—, USA] Email: jwlee11’@bu.edu

*** Administrative Sciences Department, Metropolitan College, BostonUniversity [‘0‘ Commonwealth Avenue, Boston, MA 0212—, USA]Email: [email protected]

**** Corresponding Author. Associate Professor, School of Business &Entrepreneurship, American University of Nigeria [Lamido ZubairuWay, Yola Township By-Pass, PMB. 22—0, Yola, Adamawa State,NIGERIA] Email: [email protected]; prmouly2–@gmail.com

1. Introduction

With increasing trend of popularity of online socialcommunities, it is quite evident that companies need to takecautionary measures in protecting reputation with respect to thecompany and its brands. In this process, every company shouldindulge in enhancing their company and brand瀞s image throughsocial networking that fortifies the bonding nature among them.The always-on nature of social networks has contributed to theirphenomenal communication power and has altered the balanceof power between consumers and firms. Social networks areused by hundreds of millions of people to communicate about awide range of topics, including personal interests, activities,social events, and even public issues (Becker, Lee, & Nobre,2010). Searching for any topic on Twitter leads to new contacts,networks and information. One resulting change is thatconsumers can communicate instantly and directly withcompanies, bypassing the traditional media filter (Becker et al.,2010; Lee, 2011).Social media refers to the particular consumption of digital

media or Internet that has little to do with traditional informationalmedia use, in that provide a mechanism for the audience toconnect, communicate, and interact with each other and theirmutual friends through instant messaging or social networkingsites. While Internet and social networks have become animportant mean of interpersonal communication, they havedeveloped into a major threat because of the ability to rapidlyconnect with consumers. This is highlighted by such recentevents the Mc Donald瀞s Twitter ad campaign, Wall Street bankJP Morgan's "#Ask JPM" campaign, and UK瀞s leadingsupermarket Tesco瀞s "#Tesco Tweets" campaign, which backfiredcausing consumers to express anger through social media(Burn-Calander, 2013). The occurrence results in a significantimpact on the company瀞s brand image and serves as a reminderof the nature of a consumer relationship, and how it isdeveloped or maintained can directly affect whether it willwithstand long or short-term disruptions.One environmental threat to the equilibrium of image not

being adequately addressed by firms relates to the new Internetsocial media, which includes such platforms as Facebook,Twitter, blogs as well as online reviews and rating sites. It isclear that in less than a decade advanced technologies have


Antecedents of Corporate Adoption of Social Media and the Role of the

Technology Acceptance Model in the Path*1)

Jung Wan Lee**, Kip Becker***, Rajasekhara Mouly Potluri****

[Received: December 23, 2015. Revised: March 28, 2016. Accepted: April 10, 2016.]

68 Jung Wan Lee, Kip Becker, Rajasekhara Mouly Potluri / Journal of Asian Finance, Economics and Business Volume 3 Issue 2 (2016) 67-76

redefined social interaction. Previously, complaints spread byconsumer瀞s word of mouth activities were conveniently isolatedto a few close contacts making these lone singular voicesineffective. With the aid of social networks, however, thesevoices now have the ability to quickly garner the attention ofmillions. Social media has not only ended the age of one-waymessaging but also put extreme pressure on businesses toengage constituents in unprecedented ways. One thing is clearthat Internet and social media have changed the balance ofpower in the consumer瀞s favor, and this change has cameabout quickly. In the present situation, many firms in differentsectors have failed to grab the opportunity that comes from theuse of social networking sites. For this, aplenty of reasons likepoor networking facilities, lack of awareness on usage of socialnetworks, computers, tablets, Smart phones and its peripheralcosts are not in a position to afford by many people in thecountry.In this regard, the popularity of social media increases the

need for companies to take ever increasing cautionary measuresin protecting reputations and brands becomes essential. Jones,Temperley and Lima (2009) pointed to an expanding activeonline consumer defining new roles such as consumerwatchdog, investigative journalist and opinion influencer. Throughthese new groups of consumers, an incidence of bad servicecan be echoed around social networks reaching thousands ofother consumers within minutes. In summary, a betterunderstanding of organization瀞s behavioral intention to use socialmedia is an important and timely area of research. The successof using social media by companies would depend not only oncorporate needs but also on their behavioral intention of usingit. In contrast with the present research in the field of socialmedia, this paper attempts to integrate the technologyacceptance dimensions with social expectation theories byconsidering both social and corporate needs.


2.1. Public Relations Marketing and Use of SocialMedia

The addition of social media into the traditional perspectivehas significantly altered marketing瀞s focus and strategy. Deightonand Kornfeld (2009) noted that the flow of information about abrand has become multidirectional, interconnected and difficult topredict. They state that marketers have lost control over theirbrands and now participate in a conversation about the brand.While social media facilitate companies to conversant with theircustomers, in a nontraditional sense, they enable customers tonatter directly to one another. The control, timing and frequencyof the social media-based conversations occurring betweenconsumers and outside managers. Through those managers,they can influence the buying decisions of consumers.Hennig-Thurau et al. (2010) provided a model of consumer

interaction that depicts the relationship between company brand,

the consumer瀞s attitude towards the brand-company and theinfluence of consumer through social media. The model depictsmany factors of the new media that serve to place manyaspects of consumer company relationships beyond thePcompany瀞s control. How bonds are established and maintainedcan ultimately determine the degree of success that a firm willhave when attempting to mitigate the potentially damagingeffects of negative social media campaigns. Aaker, Fournier andBrasel (2004) suggested that brand personality significantlyinfluences relationship瀞s strength and can help in predicting thestrength of consumer-brand relationships. The importance in thesocial media context is that sincere brands tend to facilitatestrong and stable relationships based on trust but are moresusceptible to the transgression effects that may be irreversible.Social networks obtain their power much in the same manner

that interconnected networks do, through the value of eachadditional member to that network. Robert Metcalf瀞s law statesthat the value or power of a network increases in proportion tothe square of the number of nodes on the network (Hendler &Golbeck, 2007). This means that as the number of people in anetwork increases, the value of the content they share growsexponentially. Kozinets, Valck, Wojnicki & Wilner (2010) calledattention to that conversations among buyers were moreimportant than marketing communication in adoption. One mightargue that in spite of this early observation, companies havedone little to alter their communication patterns with consumers.Companies traditionally have had a one-way communicationmonologue channel to their consumers. These one-waycommunications, however, directed toward consumers arebecoming increasingly ineffective. Therefore, companies mustmove to establish an interactive dialogue communication withmany social platforms that consumers use to exchange ideas,cooperate and seek advice from consumers in what isconsidered as social casting (Jones et al., 2009).The use of social media with some types of businesses end

portends several different objectives for corporate versesindividual usage. Individuals use social media for networkingopportunities, business research, business knowledge, contactsand product knowledge. Businesses are theorized to use socialmedia for increasing exposure or awareness, client contacts, asa funnel to sales and revenues, access to a potential employeepool and public relations (Kaplan & Haenlien, 2010; Wander,2007). In particular, using social media, as a part of anorganization瀞s social media strategy is likewise foreseen toenhance these underpinning goals. Understanding the use ofsocial media by different kinds of firms including non profits willfacilitate in understanding the theoretical underpinnings of anorganization瀞s social media strategy.Given the aspirations and resources of different size

organizations, it seems likely that small firms and non profitswould find resources like social media financially appealing(Hills, Hultman, & Miles, 2008). This is especially true sincesmall businesses are more apt to spend money on social mediatype endeavors. The need for small firms and non profits tohave word of mouth referrals also bends these companiestoward social media use (Trusov, Bucklin, & Pauwels, 2009).


These marketing touch points help organizations integrate theirmessages into the rhythm of their customers瀞daily lives andenter a more personal dialogue with them (Martin & Todorov,2010). They also provide a less expensive channel for reachingtargeted customer segments, primarily those who choose toparticipate in organization瀞s online activities that could benefitorganizations with limited resources, such as non profits andsmall businesses (Daniasa, Tomita, Stuparu, & Stanciu, 2010).One would assume that large companies, by virtue of their

resources, would be ahead of curve compared to smaller ones.According to a recent study (Becker, Kanabar, & Nobre, 2011)reviewing small, medium and large firms on two world stockmarkets, it was determined that while many companies had socialmedia sites, the number of firms actually monitoring activities onthose social media remained mite. Becker and Lee (2012)reported that in the United States and Europe the average timeto reply for the large firms was 7.14 hours while the small firmsreplied in 5.35 hours. It is interesting that when small firmsresponded, they did more quickly than large firms did. Withoutproviding for consumer interaction, one could questionif mostcompanies瀞 social media is not merely extensions of the firm瀞sstatic web pages. It seems that while many large firms haverecognized the need to establish social media, they do not knowwhat to do with them. Mangold and Faulds (2009) noted thatsocial media communication paradigm now requires manyimportant changes in a company瀞s attitudes and assumptionsabout how to manage communication strategy, as consumers areresponding to social media in ways that directly influence allaspects of consumer behavior, from information acquisition topost-purchase expressions of satisfaction and dissatisfaction.

2.2. Corporate Communication Strategy and Use ofSocial Media

Over the past decade, the Internet and social media havebecome a prevalent source of information changing the way thatbusinesses and consumers connect and communicate (Mangold& Faulds, 2009). Businesses are beginning to realize that theyneed to engage in social media, where their consumers areinteracting, and change their strategies of communication (Smith,2009). As businesses recognize the advantages of using socialmedia as a marketing tool, key benefits arise such as brandawareness, engagement, consumption and loyalty. Businessescan build a community around their brand through social mediato engage in discussion on social media. According toMurugesan and Ebrary (2010), with social media services theweb 2.0 has opened the digital realm to user-generated content,allowing everyday people to connect, express their identity,share opinions, and influence consumer behavior. This new formof social interaction is reshaping the way businesses andconsumers communicate and access information.Social media is becoming the alternative, preferred resource

to seek information to make purchasing decisions, it isconsidered as a more trustworthy source than traditionalcorporate-sponsored advertising (Mangold & Faulds, 2009).

Businesses need to understand and respond to this shift in theway that audiences want to communicate with them. Consumersare now highly educated, historically affluent and increasinglyskeptical (Mangold & Faulds, 2009). Learning to listen to theconversations that are taking place, responding to feedback andrequests directly, and providing a venue for storytelling, as wellas social interaction are just some ways that businesses havelearnt to engage followers. Providing a dedicated networkingspace, such as social media for fans to interact and help eachother to consume a brand, is another powerful mechanism toempower followers and turn fans into loyal advocates.Consumer ability to communicate directly with one another

limits the amount of control that companies have over thecontent and dissemination of information. Vollmer and Precourt(2008) underscored this in their book, Always On. They noted,in the era of social media "consumers are in control; they havegreater access to information and greater command over mediaconsumption than ever before" (p.5). Companies should consideronline social media strategies that call for implicit collaborationbetween a company and the social media environment in orderto shape and protect their image. Accordingly, it is clear thatboth small firms and large firms are increasingly aware of thepower of social media with varying degrees of sophistication.They are incorporating these tools in their communicationportfolio.One aspect of certainty would be the understanding of the

most important constructs supporting a brand reputation, andhow those constructs can be used to overcome threats comingfrom social media communication. Regarding this stage,Kozinets et al. (2010) recognized the attempts of one consumerto influence another瀞s attitude toward a product or servicewithout direct prompt, influence, or measurement by marketers.Fogel and Nehmad (2009) found that the continuous monitoringof today瀞s highly interactive social media environment now mustbe added to the list of threats to a firm瀞s image. Managing thesocial media environment is essential to stay relevant and builda loyal fan base. Those firms that have designed systems toreact to social media threats have found that often their brandimage and consumer relationships have strengthened (Becker etal., 2011; Becker & Lee, 2012).

2.3. Technology Acceptance Model and the Adoption ofSocial Media

The technology acceptance model assesses end-useracceptance of a technology for a professional communicationpurpose. The success of professional communicationinterventions via Internet based and other communicationtechnologies is dependent on the use of technology by targetaudiences for intended purposes. The technology acceptancemodel provides a valid and reliable measure that predicts theacceptance or adoption of new technologies by end users(Davis, 1989; Davis, Bagozzi, & Warshaw, 1989). It is acommonly used model to measure technology acceptance (King& He, 2006). The technology acceptance model predicts the


acceptance based on the end user瀞s perceived usefulness andperceived ease of use of the technology for a specific purpose.Davis (1989) applied the model to work settings and definedperceived usefulness as the degree to which a person believedthat using a particular system would enhance his or her jobperformance. For example, a perceived useful goal or job of abusiness information provider in posting and sharing businessinformation hypothetically is to identify highly qualifiedinformation. In this circumstance, social media based informationis useful to the extent of helping in achieving the latter goal.Davis (1989) defined perceived ease of use as the degree towhich a person believed that using a particular system wouldbe free of effort.The technology acceptance model has been integrated with

motivational theory (Davis, Bagozzi, & Warshaw, 1992), andresulted in an extended model in which perceived usefulness ispaired with external motivation (Venkatesh, Speier, & Morris,2002). The model has been used extensively to measure:tourism firms瀞 acceptance of social media (Sigala, 2011), firms瀞use of social media for marketing communication (Kaplan &Haenlein, 2012; KirtiZ & Karahan, 2011; Weinberg & Pehlivan,2011), consumer acceptance of online travel information (Xiang& Gretzel, 2010), consumer acceptance of blog usage (Hsu &Lin, 2008), consumer acceptance of wireless mobile dataservices (Lu, Liu, Yu, & Wang, 2008), consumer acceptance ofmobile commerce (Lee & Mendlinger, 2011), and consumeracceptance of online learning (Kim & Lee, 2011; Lee, 2010;Lee, Becker, & Nobre, 2012). The model has been evaluatedwithin broader behavioral theories such as the theory ofreasoned action (Legris, Ingham, & Collerette, 2003). Someextensions of the model include the technology acceptancemodel version 2 (Legris et al., 2003) and the unified theory ofacceptance and use of technology. These extended modelsinclude additional explanatory variables. Among the variablesbeing added to these extended models, subjective norms areincluded in the technology acceptance model version 2 andsocial influence in the unified theory of acceptance and use oftechnology (Yi, Jackson, Park, & Probst, 2006).In extending and integrating the previous studies on this

topic, the current research aims to address the followinghypotheses:

<Hypothesis 1> Social expectations have a positive effect onthe ease of use of social media.

<Hypothesis 2> Social expectations have a positive effect onthe usefulness of social media.

<Hypothesis 3> Corporate needs have a positive effect onthe ease of use of social media.

<Hypothesis 4> Corporate needs have a positive effect onthe usefulness of social media.

<Hypothesis 5> Social expectations have a positive effect on

corporate adoption of social media.<Hypothesis 6> Corporate needs have a positive effect on

corporate adoption of social media.<Hypothesis 7> Perceived ease of use has a positive effect

on corporate adoption of social media.<Hypothesis 8> Perceived usefulness has a positive effect on

corporate adoption of social media.

3. Research Methods

3.1. Survey and Sample Characteristics

A web-based survey was conducted with the Korea HotelAssociation. The questionnaire was electronically mailed to 3,000recipients from an email list of the Korea Hotel Association,(1253 member hotels are registered to the Association as ofDecember 31, 2011). 984 recipients filled in questionnaires inthe web-based survey, 336 cases were removed from thedataset because they have missing data or out liers. The finalsample size was 648 cases that had no missing data and theywere used for this study. The concern that the web-basedsurvey might induce a self-selection bias would be less seriouson this sample because in the web-based survey, in this kind ofinstitutional email surveys participants would be more likely torespond.Given that the model embeds complex relationships of

corporate acceptance of social media, this study collectedself-reported hotel staff瀞s perceptions using a questionnaire. Aninitial structured questionnaire was developed based on a studyof existing literature (e.g., Davis, 1989; Davis et al., 1989; Lee,2010) and the model瀞s hypotheses with 11participants of focusgroup interviews. The initial questionnaire included 23 itemsrelated to various constructs discussed in this study and 6 itemsthat capture information pertaining to respondent gender, age,hotel location, and job position title, work experience in the hotelindustry and experience of using social media.The sensitivity of data in measuring employees瀞perceptions

and their behavioral intention in many different cultural contextsposes a problem for the adoption of a single superior scale dueto limited data comparability (Bartoshuk, Fast, & Snyder, 2005;Dawes, 2008). For this reason, different researchers haveemployed different scales in their measurement ofemployees瀞perceptions and behavioral intention as one size doesnot fit all. Therefore, a five-point Likert type scale is used inthis study to be consistent with research in different culturalcontexts. Hence, the response options in this research areranging from (1) strongly disagree, and (3) neutral, to (5)strongly agree.


Survey and Sample Characteristics

Characteristics Classifications Frequency* Percent

GenderMale 345 53.2

Female 303 46.8

Hotel location

Metropolitan city (Seoul) 529 81.6

Metropolitan city (Busan) 50 7.7

Large city (Kwangju) 33 5.1

Large city (Daejeon) 3 0.5

Jeju island 33 5.1

Position title

Staff, low level 98 15.1

Associate, middle level 273 42.1

Manager 239 36.9

Director 38 5.9

Age group

Under 30 years old 206 31.8

31 - 40 years old 326 50.3

41 -50 years old 113 17.4

over 51 years old 3 0.5

Work experience in the hotel industry

Under 5 years 319 49.2

6 10 yearsP 163 25.2

11 -15 years 120 18.5

More than 16 years 46 7.1

Experience using social mediaYes 648 100.0

No 0 0.0

* Sample size = 6–‘

3.2. Factor Analysis and Internal Consistency ReliabilityTest

Evidence of the effectiveness of a scale for its purpose isexamined. Bartholomew (1996) and Basilevsky (1994) provideda comprehensive description of scale development andvalidation. Many methods of validation rely heavily on theanalysis of inter-item or inter-scale correlations. Construct validityembraces a variety of techniques for assessing the degree towhich an instrument measures the concept that it is designed tomeasure. This may include testing dimensionality andhomogeneity. Construct validation is best seen as a process oflearning more about the joint behavior of the items, and ofmaking and testing new predictions about this behavior. Factoranalysis is an often used key technique in this process. Inorder to ensure the construct validity of the measurementinstrument, factor analysis was employed in a two-stageprocess. First, exploratory factor analysis with a varimax rotationprocedure was employed to identify underlying predictors basedon an eigenvalue cut-off of one. Second, confirmatory factoranalysis using structural equation modeling techniques wereemployed to confirm that the identified predictors fitted the itemscorrectly and reliably.

To identify underlying predictors of social media acceptance,a factor analysis with a varimax rotation procedure wasemployed. The component factor analysis was used to uncoverthe underlying structure of a large set of items and identifiedfive components: component one with five items (eigenvalue =4.083), component two with five items (eigenvalue = 4.005),component three with four items (eigenvalue = 3.230),component four with three items (eigenvalue = 2.602),andcomponent five with three items (eigenvalue = 2.252). Thisresulted in the retention of 20items out of 23, which representedthe five components. Afterward, the five components were usedfor the following analysis.To test the appropriateness of the factor analysis, two

measures - the Kaiser-Meyer-Olkin and the Bartlett瀞s test - wereused. For the Kaiser-Meyer-Olkin, overall measure of samplingadequacy of 0.913 falls within the acceptable significant level atp < 0.01. For, the Bartlett瀞s test of sphericity of 10982.632 at190 degree of freedom shows a highly significant correlationamong the survey items at p < 0.01. The sums of squaredloadings from the five components have the cumulative value of80.875percent in explaining the total variance of the data. Theresults of exploratory factor analysis using the principalcomponent analysis extraction method are reported in Table 2.


Results of Factor Analysis for Survey Items

Item Code Factor Loadings Eigenvalue Extracted Variance Construct Name Item-total Correlation Cronbach瀞s ﾙ

X101 0.822 4.005 20.026% Ease of Use 0.808 0.926

X102 0.808 0.765

X103 0.814 0.795

X104 0.852 0.819

X105 0.834 0.848

X106 0.758 4.083 20.415% Usefulness 0.793 0.931

X107 0.824 0.835

X108 0.848 0.845

X109 0.864 0.844

X110 0.765 0.803

X111 0.802 3.230 16.151% Corporate Needs 0.805 0.919

X112 0.846 0.852

X113 0.813 0.786

X114 0.844 0.826

X115 0.892 2.602 13.024% Social Expectations 0.789 0.906

X116 0.919 0.848

X117 0.876 0.801

Y201 0.825 2.252 11.258% Social Media Acceptance 0.821 0.899

Y202 0.688 0.755

Y203 0.811 0.830

Internal consistency reliability is a measure of how well a testaddresses different constructs and delivers reliable scores. Amore comprehensive description of scale development andreliability is given in Dunn (1989). Three main reliability testsare split in halves, Kudar Richardson and Cronbach瀞s alphatests. These tests check that the results and constructsmeasured by a test are correct, and subject, size of the dataset, as well as responses dictate the exact type used. However,the most common method for assessing internal consistency isCronbach瀞s alpha. This form of intra-class correlation is closelyrelated to convergent validity, i.e. the extent to which the itemsin a scale are all highly inter-correlated. For example, in aseries of questions that ask the subjects to rate their responsebetween one and seven, Cronbach瀞s alpha gives a scorebetween zero and one, with 0.7 and above being reliable. Thetest also takes both the size of the sample and the number ofpotential responses into account.The Cronbach瀞s alpha test is preferred in this study due to

the benefit of averaging the correlation between every possiblecombination of split halves and allowing multi-level responses.For example, the survey items are divided into the fiveconstructs. The internal consistency reliability test provides ameasure so that each of these particular constructs is measuredcorrectly and reliably. The results of internal consistencyreliability tests of the five constructs of social media

communications acceptance are reported as follow: ease of use(5 items, = 0.926), usefulness (5 items, = 0.931), corporateﾙﾙneeds (4 items, = 0.919), social expectations (3 items, =ﾙﾙ0.906), and social media acceptance (3 items, = 0.899). Theﾙdetailed results of internal consistency reliability tests includeitem-total correlation coefficient values which are reported inTable 2.The confirmatory factor analyses using structural equation

modeling techniques were employed to confirm that theidentified predictors fit the items correctly and reliably. Theresults of confirmatory factor analyses indicate that a singlefactor solution fit the items acceptably, and the correcteditem-total correlation value of each item to the construct ispresented in Table 2.

4. Results

4.1. Structural Equation Model Estimates and PathDiagram

The analysis of moment structures was used for an empiricaltest of the structural model. The maximum likelihood estimationwas applied to estimate numerical values for the components in


the model. In the process of identifying the best fit model,multiple models were analyzed because the researchers weretesting competing theoretical models. From a predictiveperspective, we determine which model fits the data best, butsometimes the differences between the models appear small onthe basis of the fit indexes. When comparing non-nestedmodels, the Akaike information criterion fit index is used as ourfirst choice because the difference in the Chi-square valuesamong the models cannot be interpreted as a test statistic(Kline, 2005).Our second choice is the root mean square ofapproximation fit index, and then the goodness of fit index asour third choice.The results of the analysis of moment structures generally

achieve acceptable goodness-of-fit measures, see Table 3. Forexample, the index of the goodness of fit index (= 0.936)indicates that the fit of the proposed model is about 94% of thesaturated model (the perfectly fitting model). The index of thenormed fit index (= 0.916) indicates that the fit of the proposedmodel is about 92%. Table 3 displays the estimates of socialmedia acceptance using the structural equation model. Thedetails of model fit index and the goodness of fit index are asfollow:Model fit summary: The minimum value of the sample

discrepancy, CMIN (= 930.962), degree of freedom, DF(= 163), CMIN/DF (= 5.711).

Model fit measures: The goodness of fit index, GFI (= 0.936),the adjusted goodness of fit index, AGFI (= 0.913), theparsimony goodness of fit index, PGFI (= 0.895), theroot mean square residual, RMR (= 0.043), the rootmean square of approximation, RMSEA (= 0.036).

Baseline comparisons measures: The Bentler-Bonett normedfit index, NFI (= 0.916), the Bollen瀞s relative fit index,RFI (= 0.902), the Tucker-Lewis coefficient index, TLI(= 0.918), the comparative fit index, CFI (= 0.930).

Parsimony-adjusted measures: The parsimony ratio, PRATIO(= 0.905), the parsimony normed fit index, PNFI

(= 0.872),the parsimony comparative fit index, PCFI(= 0.895).

The estimate of the non-centrality parameter, NCP (=767.962),the Akaike information criterion, AIC (=1024.962), theBrowne-Cudeck criterion, BCC (=1028.115) and theBayes information criterion, BIC (=1235.235).

In testing hypotheses 1 and 2, there are relationshipsbetween social expectations and ease of use, and betweensocial expectations and usefulness, Table 3 shows that thereare positive relationships between the latent variables andstatistically significant at a 95% confidence level (p < 0.01). Thissuggests that social expectations have a positive and directeffect on both ease of use and usefulness.The hypotheses 3 and 4 test relationships between corporate

needs and ease of use, and between corporate needs andusefulness. Table 3 shows that there are positive relationshipsbetween the two latent variable sand statistically significant at a95% confidence level (p < 0.01). This suggests that corporateneeds have a positive and direct effect on both ease of useand usefulness.In testing hypotheses 5, 6, 7 and 8 that there are

relationships between social expectations, corporate needs, easeof use, usefulness, and social media acceptance, each pair inTable 3 shows that there is a positive relationship between thelatent variables and statistically significant at a 95% confidencelevel ( p < 0.05 or p < 0.01). This means that all of socialexpectations, corporate needs, ease of use and usefulnessdirectly influence corporate acceptance of social media.Figure 1 displays a path diagram of corporate acceptance of

social media. Overall of social expectations, corporate needs,ease of use and usefulness serves as important antecedents ofcorporate acceptance of social media. In the path diagram, thetwo latent variables of ease of use and usefulness playamediating role of corporate acceptance of social media ingoverning the path relationship.

Structural Equation Model Estimates

Independent Variable Dependent Variable Regression EstimatesStandardized Effects

Total Direct Indirect

H1: Social Expectations Ease of Use 0.635*** 0.857 0.635 0.222

H2: Social Expectations Usefulness 0.189*** 0.296 0.189 0.107

H3: Corporate Needs Ease of Use 0.239*** 0.239 0.239

H4: Corporate Needs Usefulness 0.517*** 0.517 0.517

H5: Social Expectations Social Media Acceptance 0.112** 0.250 0.112 0.138

H6: Corporate Needs Social Media Acceptance 0.116** 0.519 0.116 0.403

H7: Ease of Use Social Media Acceptance 0.119*** 0.119 0.119

H8: Usefulness Social Media Acceptance 0.547*** 0.547 0.547

Note: Numbers in the cells are standardized coefficient values.Probability values for rejection of the null hypothesis of zero coefficient are employed at the 0.0— level (** p < 0.0— and *** p < 0.001).


In testing hypotheses 1 and 2, there are relationshipsbetween social expectations and ease of use, and betweensocial expectations and usefulness, Table 3 shows that thereare positive relationships between the latent variables andstatistically significant at a 95% confidence level (p < 0.01). Thissuggests that social expectations have a positive and directeffect on both ease of use and usefulness.The hypotheses 3 and 4 test relationships between corporate

needs and ease of use, and between corporate needs andusefulness. Table 3 shows that there are positive relationshipsbetween the two latent variables and statistically significant at a95% confidence level (p < 0.01). This suggests that corporateneeds have a positive and direct effect on both ease of useand usefulness.In testing hypotheses 5, 6, 7 and 8 that there are

relationships between social expectations, corporate needs, easeof use, usefulness, and social media acceptance, each pair inTable 3 shows that there is a positive relationship between thelatent variables and statistically significant at a 95% confidencelevel ( p < 0.05 or p < 0.01). This means that all of socialexpectations, corporate needs, ease of use and usefulnessdirectly influence corporate acceptance of social media.Figure 1 displays a path diagram of corporate acceptance of

social media. Overall of social expectations, corporate needs,ease of use and usefulness serves as important antecedents ofcorporate acceptance of social media. In the path diagram, thetwo latent variables of ease of use and usefulness playamediating role of corporate acceptance of social media ingoverning the path relationship.

Coefficient is statistically significant at a ’—% confidence level(** p < 0.0— and *** p < 0.01)

Path Diagram of Corporate Acceptance of Social Media

4.2. Demographic Differences in Acceptance of SocialMedia

One-way analysis of variance was conducted to comparemeans of the five constructs by job position titles of hotel staff.

Table 4 reveals statistically significant mean differences betweenjob position titles in the perceived corporate needs (p < 0.01)and social media acceptance (p < 0.05) whereas it showsinsignificant mean differences (p > 0.05) in terms of perceivedsocial expectations, perceived ease of use, and usefulness.Further more, the result shows that hotel employees with higherposition titles have a negative propensity in perceiving highlycorporate needs and their acceptance of social media.

One-way Analysis of Variance by Job Position Titles

Variables Staff Associate Manager Director F-statistic

Ease of Use -0.024 -0.055 0.014 0.375 2.192

Usefulness -0.049 0.055 -0.091 0.302 2.113

Corporate Needs 0.365 0.037 -0.131 -0.149 6.280***

SocialExpectations 0.135 0.032 0.028 -0.294 1.865

Social MediaAcceptance 0.103 0.080 -0.064 -0.435 3.723**

Probability values for rejection of the null hypothesis of no meandifference are employed at the 0.0— level(** p < 0.0— and *** p < 0.01).Note: Numbers in the cells are standardized mean values.

5. Discussion and Managerial Implications

The results from an empirical analysis support all of thehypotheses. This study reveals that social expectations andcorporate needs exert an imperative influence on their behavioralintention to use social media. The positive impact of socialexpectations and corporate needs on organizations瀞behavioralintention of using social media is a unique interest. The resultsindicate that social expectations and corporate needs should beviewed as important antecedents besides job position titledifferences in terms of perceived corporate needs and behavioralintention to use social media for business communication. Theresult expounds that hotel staff with higher position title has anegative propensity in perceiving the needs and benefits of usingsocial media in their work and their behavioral intention to usesocial media for their business communication.Although the number of companies using social media is

increasing, they often refuse to use social media for theirbusiness communication with their customers and sharingbusiness information because of the tendency that social mediamight not provide confidence and trust toward their businesscommunication. In addition, social expectations towardorganizations瀞use of social media affect its service evaluation bycustomers and their future behavior of using the service. Becauseof the direct and significant impact of the two, social andcorporate needs, organization瀞s using social media for theirbusiness communication should develop a lucrative and congenialenvironment for better delivering the service and for bettercommunicating with their customers.


The result of this study also shows that the perceived easeof use and usefulness of social media directly influenceorganizations瀞behavioral intention to use social media. Theperceived reliability, capability and customization ability of staffclearly determines service provider瀞s levels and skills, in order toprovide trusted communication and promised service delivery.Therefore, staffing of suitably qualified and experiencedpersonnel should remain stable to meet consumer needs in anefficient and timely manner. In addition, consumers should berest-assured that they would receive business information in atimely manner from a candid source.

6. Conclusion and Future Research

Social media is rapidly emerging as a popular source ofbusiness information, especially for teens and young adults.Social media marketing carries the advantages of low cost,rapid transmission through a wide range of communities,increasing opportunities of customer involving marketingcommunication and customer interaction. Businesses shouldrecognize the importance of social media and their potentialefficacy for communicating with their customers. The best wayof using social media should be found in order to achievemarketing promotion outcomes. In this regard, a betterunderstanding of organizations瀞 behavioral intention to use socialmedia as a business communication channel is an importantand timely area of research.The findings of this research pave the way for the success of

organizations using social media for their business communication,which depends on not only corporate needs but also theirbehavioral intention of using it. This paper integrate somecomponents of the technology acceptance dimensions and socialexpectation theories couple with the recently developed constructof social expectations and corporate needs to determineorganizations瀞behavioral intention to use social media. Thisresearch article is the initial research that has unique benefitwhich contributes to both the world of academia and mostsignificantly to corporate world.Future research should generalize these findings and may

examine additional business sectors from different countries aspotential sources of variation in the determinants of behavioralintention to use social media as a business communicationchannel. Therefore, further research is required to determinewhether there is a consistent pattern or not. For example,extensions of this research may employ a more fine-grainedapproach to exam how business sectors in different businessenvironments, industry characteristics, and organizationalenvironments accept new information technology and intend touse social media or engage in a range of activities with thenew technology. In addition, further studies should validateselected survey items elucidating social expectations andcorporate needs of using social media.

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Appendix 77

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While no maximum length for manuscripts is prescribed,authors are encouraged to write concisely. As a guide, regulararticles should be between 5,000 - 7,000 words in length.

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3) Font type should be 12-point Times Roman throughout thedocument.

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Divide your article into clearly defined and numbered sections.Subsections should be numbered 1.1. (then 1.1.1., 1.1.2., ...),1.2.,etc. (the abstract is not included in section numbering). Usethis numbering also for internal cross-referencing: do not justrefer to "the text". Any subsection may be given a briefheading. Each heading should appear on its own separate line.

State the objectives of the work and provide an adequatebackground, avoiding a detailed literature survey or a summaryof the results.

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Provide sufficient detail to allow the work to be reproduced.Methods already published should be indicated by a reference:only relevant modifications should be described.

Provide sufficient detail to allow the results to be meaningfuland informative.

This should explore the significance of the results of thework, not repeat them. A combined Results and Discussionsection is often appropriate. Avoid extensive citations anddiscussion of published literature.

The main conclusions of the study may be presented in ashort Conclusions section, which may stand alone or form asubsection of a Discussion or Results and Discussion section.

If there is more than one appendix, they should be identifiedas A, B, etc. Formulae and equations in appendices should begiven separate numbering: Eq. (A.1), Eq. (A.2), etc.; in asubsequent appendix, Eq. (B.1) and so on. Similarly for tablesand figures: Table A.1; Fig. A.1, etc.

Appendix80

Define abbreviations that are not standard in this field in afootnote to be placed on the first page of the article. Suchabbreviations that are unavoidable in the abstract must bedefined at their first mention there, as well as in the footnote.Ensure consistency of abbreviations throughout the article.

Present simple formulae in the line of normal text wherepossible. In principle, variables are to be presented in italics.Use the solidus (/) instead of a horizontal line, (e.g., X p /Y m).Powers of e are often more conveniently denoted by exp.Number consecutively any equations that have to be displayedseparate from the text (if referred to explicitly in the text).

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Indicate each footnote in a table with a superscript lowercaseletter.

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Number tables consecutively in accordance with theirappearance in the text. Place footnotes to tables below thetable body and indicate them with superscript lowercase letters.Avoid vertical rules. Be sparing in the use of tables and ensurethat the data presented in tables do not duplicate resultsdescribed elsewhere in the article.

Per JAFEB瀞s "Citation and Reference Style Guides" authorsare expected to adhere to the guidelines of APA (AmericanPsychological Association).

Citations in the text should follow the referencing styleused by the American Psychological Association. You are referredto the Publication Manual of the American PsychologicalAssociation, Sixth (6th) Edition, ISBN 978-1-4338-0561-5. Detailsconcerning this referencing style can also be found athttp://linguistics.byu.edu/faculty/henrichsenl/apa/apa01.html.

references should be arranged first alphabeticallyand then further sorted chronologically if necessary. More thanone reference from the same author(s) in the same year must beidentified by the letters 'a', 'b', 'c', etc., placed after the year ofpublication.

As a minimum, the full URL should begiven and the date when the reference was last accessed. Anyfurther information, if known (DOI, author names, dates,reference to a source publication, etc.), should also be given.Web references can be listed separately (e.g., after thereference list) under a different heading if desired, or can be

Appendix 81

included in the reference list.

Please ensure that every reference cited in the text is alsopresent in the reference list (and vice versa). Any referencescited in the abstract must be given in full. Unpublished resultsand personal communications are not recommended in thereference list, but may be mentioned in the text. If thesereferences are included in the reference list they should followthe standard reference style of the journal.

All citations in the text should refer to:: the author's name (without initials, unless there

is ambiguity) and the year of publication;list all authors' last names with "and" in the text

or 惇&敦 in parentheses separating the two authors and the yearof publication;

at first citation list allauthors' last names with "and" in the text or 惇&敦 in parenthesesseparating the last two authors and the year of publication; Ifmore than six authors, list the first six authors followed by et al.and the year of publication. In subsequent citations use the firstauthor et al.

Groups of references should be listed first alphabetically, thenchronologically. For example, Kim and Lee (2008) suggest ..., orKim, Lee and Cormier (2009) find that ..., or Kim, Lee, Cormierand Youn (2007) have shown that ...'When citing a list of references in the text, put the list in

alphabetical order and separate authors by semicolons; forexample, Several studies (Kim & Lee, 2008; Kim, Lee &Cormier, 2009; Kim, Lee, Cormier & Youn, 2007; Youn & Kim,2003) support this conclusion.To cite a direct quotation, give pages after the year,

separated by a comma and a space. For example: "Smithargues that for something to happen it must be not only'favorable and possible but also wanted and triggered' (2008,p.38)".

References should be arranged first alphabetically and thenfurther sorted chronologically if necessary. More than onereference from the same author(s) in the same year must beidentified by the letters "a", "b", "c", etc., placed after the yearof publication.

Kim, P.-J. (2009). A study on the risk management of Koreanfirms in Chinese market. Journal of Distribution Science,7(2), 5-28.

Lee, J. W., & Cormier, J. F. (2010). Effects of consumers瀞 dem-ographic profile on mobile commerce Adoption. Journalof Distribution Science, 8(1), 5-11.

Youn, M.-K., Kim, Y.-O., Lee, M.-K., & Namkung, S. (2006).Domestic restrictions on the opening of retail stores.Journal of Distribution Science, 6(2), 121-160.

Greenberg, P. (2001). CRM at the speed of light (5th ed.).Emeryville, CA: Lycos Press.

Youn, M.-K. (2010). Principles of distribution. Seoul, Korea:Doonam Publishing.

Kim, Y. M. (2001). Study on factors of introduction of supplychain management of Korean companies. Seoul, Korea:Thesis for Doctorate in Jungang University.

Burton, R. R. (1982). Diagnosing bugs in a simple procedureskill. In D. H. Sleeman & J. S. Brown (Eds.), IntelligentTutoring Systems (pp.120-135), London, UK: AcademicPress.

Lee, J. W., & Kim, Y. E. (2007). Green distribution and its eco-nomic impact on the distribution industry. Proceedings ofthe Second International Conference of KODISA(pp.12-32). Seoul, Korea: KODISA.

Youn, M.-K. (2010, July). Distribution science in medicalindustry. Medical Distribution Today, 39(4), 86-93.

Kim, Y.-E. (2011). New challenges and opportunities for tradi-tional markets. Korea Distribution News, 21 January,Section 3-4. Seoul, Korea.

Korea Distribution News (2011). Future of traditional markets.Korea Distribution News, 21 January, Section 3-4. Seoul,Korea.

Kim, D.-H., & Youn, M.-K. (2012). Distribution knowledge, re-search, and journal. Proceeding of 2012 SummerInternational Conference of KODISA (pp.73-78). Seoul,Korea. Retrieved August 30, 2012, from http://kodis-a.org/index.php?mid=Conferences&document_srl=8862.

China National Petroleum Corporation (2009). 2009 AnnualReports. Beijing, China: CNPC. Retrieved September 30,2010, from http://www.cnpc.com.cn/resource/english/im-ages1/2009.pdf

Concise and informative. Maximum 15 words. Titles are oftenused in information-retrieval systems. Avoid abbreviations andformulae where possible.

Appendix82

Where the family name may be ambiguous (e.g., a doublename), please indicate this clearly. Present the authors'affiliation addresses (where the actual work was done) belowthe names. Indicate all affiliations with a lower-case letterimmediately after the author's name and in front of theappropriate address. Provide the full postal address of eachaffiliation, including the country name, and, the e-mail addressof each author. Note: This information should be provided on aseparate sheet and authors should not be identified anywhereelse in the manuscript.

Clearly indicate who will handle correspondence at all stagesof refereeing and publication, also post-publication. Ensure thattelephone (with country and area code) are provided in additionto the e-mail address.

A concise and factual abstract is required. 150 200 words inPtotal are recommended. The abstract should state briefly 1) thepurpose of the research, 2) research design and methodology,3) the principal results, and 4) major conclusions. An abstract isoften presented separately from the article, so it must be ableto stand alone. For this reason, non-standard or uncommonabbreviations should be avoided, but if essential they must bedefined at their first mention in the abstract itself.

Immediately after the abstract, provide a maximum of 5keywords. These keywords will be used for indexing purposes.

Immediately after keywords, provide a maximum of 5 JELClassification codes. These codes will be used for indexingpurposes.

Collate acknowledgements in a separate section at the end ofthe title page and do not, therefore, include them on the maindocument (manuscripts) or otherwise. List here those individualswho provided help during the research (e.g., providing languagehelp, writing assistance or proof reading the article, etc.).

It is hoped that this list will be useful during the finalchecking of an article prior to sending it to the journal's Editorfor review. Please consult this Guide for Authors for further

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- The title page must contain 惇Submission DeclarationStatement敦 in its cover letter as follows:

Every effort should be made to ensure thatsubmission material outside of the title page file contains noclues as to author identity. Footnotes containing informationpertaining to the identity of the author or institutional affiliationshould be on separate pages. The complete title of the articleand the name of the author(s) should be typed only on the titlepage file to ensure anonymity in the review process.Subsequent pages should have no author names, but may carrya short title at the top. Information in text, citations, references,or footnotes that would identify the author should be maskedfrom the manuscript file. These may be reinserted in the finaldraft. In addition, the author's name should be removed fromthe document's Properties, which in Microsoft Word is found inthe File menu. When submitting a revised version of amanuscript, please be sure to submit a blind version of yourresponse letter detailing changes made to the manuscript asthis is letter can be accessed by reviewers.

The text of the paper, including abstract, text, references andnotes, tables, figure captions, figures, but without the names ofauthors, or any acknowledgements. Check that you haveremoved all author identification (names and affiliations) and anyacknowledgements from the main document that you are goingto submit. Please make sure that authors' names are notincluded in the document/file properties.

1) All information about all figure captions and all tables(including title, description, footnotes) has been provided

2) Manuscript has been "spell checked" and "grammar checked"3) References are in the correct format for this journal

Appendix 83

4) All references mentioned in the Reference list are cited inthe text, and vice versa

One set of page proofs (as PDF files) will be sent by e-mailto the corresponding author (if we do not have an e-mailaddress then paper proofs will be sent by post) or, a link willbe provided in the e-mail so that authors can download the filesthemselves. The author(s) may list the corrections (includingreplies to the Query Form) and return them to the Publisher inan e-mail. Please list your corrections quoting line number. If,for any reason, this is not possible, then mark the correctionsand any other comments (including replies to the Query Form)on a printout of your proof and return by fax, or scan thepages and e-mail, or by post. Please use this proof only forchecking the typesetting, editing, completeness and correctnessof the text, tables and figures. Significant changes to the articleas accepted for publication will only be considered at this stagewith permission from the Editor. We will do everything possibleto get your article published quickly and accurately. Therefore, itis important to ensure that all of your corrections are sent backto us in one communication: please check carefully beforereplying, as inclusion of any subsequent corrections cannot beguaranteed. Proofreading is solely your responsibility. Note thatthe Publisher may proceed with the publication of your article ifno response is received .

The corresponding author, at no cost, will be provided with aPDF file of the article via e-mail. For an extra charge, paperoffprints can be ordered via the offprint order form which is sentonce the article is accepted for publication. The PDF file is awatermarked version of the published article and includes acover sheet with the journal cover image and a disclaimeroutlining the terms and conditions of use.

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Although such instances are very rare, you should be awarethat in the event that a co-author has included content in his orher portion of the article that infringes the copyright of anotheror is otherwise in violation of any other warranty listed in theagreement, you will be the sole author indemnifying thepublisher and the editor of the journal against such violation.The journal will permit the author to use the article elsewhereafter publication, including posting the final post-acceptancemanuscript version on the author瀞s personal web pages or in aninstitutional repository maintained by the institution to which theauthor is affiliated, in other works or for the purposes of theauthor瀞s teaching and research, provided acknowledgement isgiven to the Journal as the original source of publication.

In consideration of the undertaking set out in section 2, and upon acceptance by the Editorfor publication in the Journal, the author(s) grants to KODISA ('the Publisher'), subject to Section 4, theexclusive right and license to publish the Article entitled:

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The Author warrants that the Article is the Author瀞s original work, has not been publishedbefore, and is not currently under consideration for publication elsewhere; and that the Article containsno libelous or unlawful statements and that it in no way infringes the rights of others, and that theAuthor, as the owner of the copyright, is entitled to make this assignment.

The Publisher, KODISA, reserves the right to refuse to publish your Article where itspublication creates legal liability, or where circumstances come to light that were not known to theEditor, including prior publication, conflict of interest, manifest error etc. The Publisher is the ultimatecustodian of academic quality and integrity, and will ensure that this will be done only in exceptionalcircumstances and on reasonable grounds. In such circumstances the Article will be returned to theAuthor together with all rights in it.

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