Third Asian Business Research Conference

15-16 September, 2014

held at
INSEAD Business School
Abu Dhabi, United Arab Emirates

FULL PAPER PROCEEDINGS

Editors:
Dr Atiq ur Rehman
Usman Ehsan

Volume 2, Number 1
ISSN 2227-7935

i
Quaid-e-Azam
(Founder of Pakistan)

ii
Conference Co-Chair’s Welcome Note

It is my great pleasure to welcome all of you in the Third Asian Business Research Conference (ABRC) being
hosted by INSEAD Business School, Abu Dhabi, UAE.

ASMMR is a humble endeavor to provide a platform to the researchers and

academia for promoting research culture in the areas relating to business and
management and for fostering internationalization and integration of research
conducted at various institutions. We are people-centered and our goal is to help
researchers in Asia in general and Pakistan in particular, to learn, to conduct, to
apply creative interdisciplinary research and outreach to solving management,
business and marketing problems. We will ultimately transform into a cutting-
edge research center.

In this Third Asian Business Research Conference (ABRC), we have experienced an overwhelming response
from researchers. This year conference objective was to improve the quality of papers to be presented. In this
conference we limit the papers so that we can focus on improving the quality. For this conference we selected
only 25 papers for presentation representing 23 institutions (universities, research centers and companies) from
17 countries. We are confident that researchers will be able to explore some new dimensions to their research.

Finally, on behalf of whole team of ASMMR, I am privileged to welcome speakers at Third Asian Business
Research Conference and wish you a great learning and sharing experience.

“Dreams, hope and attitude brings success”

Sincerely,

Dr Azhar Mansur Khan

Founding President ASMMR

Faculty SKEMA Business School France
BMC (USA) Consultant

iii
Welcome Note
It is indeed great pride, pleasure and privilege to welcome all of you in the
Third Asian Business Research Conference, of the ASMMR, being hosted
by INSEAD Business School, Abu Dhabi; UAE on 15-16 September,
2014.

ASMMR organizes its Asian business research conference annually, where

participants from different parts of world participate and present their
research. 1st Asian Business Research Conference was organized at Islamia
College University Peshawar in Pakistan was attended participants from 9 countries. 2nd Asian Business
Research Conference was organized at at Burj Al Arab Dubai was attended participants from 11
countries. Sponsors of previous conferences were Emerald Group of Publishing and Case Centre (UK).

In the pursuit of its mission, ASMMR is organized this 3rd Asian Business Research Conference at INSEAD
Abu Dhabi (ranked 6th Business School globally) on 15-16 September, 2014. Conference will have 25+ high
profile speakers (HODs, Directors, Deans etc.) representing 25+ universities from 15+ countries. We are
confident that we the participants of the conference will be able to explore many new dimensions to our research
endeavors. The authors presenting their research articles will be bringing lot of fresh insights into the current
literature on marketing and management. Their valuable contributions in knowledge dissemination are highly
appreciated. It would be an opportunity for them too to reflect on their research and make improvements for
publishing in reputed journals.

I am sure, we all will not only take away a wealth of knowledge presented in the conference but we will also be
able to strengthen our professional networks. If you are aspiring to publish your research work in reputed
journals, comments on the presented articles will be of immense significance and importance for you.

Finally, on behalf of whole team of ASMMR, I am privileged to welcome speakers at Third Asian Business
Research Conference and wish you a great learning and sharing experience.

Dr. Atiq ur Rehman

Vice President ASMMR
Training Consultant at PIFRA (A Project of World Bank)
Adjunct Faculty at AIR University & SZABIST

iv
Asian Business Research Conference (ISSN 2227-7935)

The Asian Business Research Conference (ABRC), a regional and scholarly outlet, is published by Asian
Society of Management and Marketing Research (ASMMR).

Online Access: The Asian Business Research Conference (ABRC)can be accessed online FREE from the
official website (www.asmmr.com) of Asian Society of Management and Marketing Research (ASMMR).
Subscription: For printed copy and annual subscription, please contact Managing Editor of Asian Business
Research Conference (ABRC) at [email protected].
Important Note: All rights reserved. No portion of the contents may be reproduced in any form without
written permission from the publisher.

Disclaimer: ASMMR will make all possible efforts to ensure the originality of all the information (the
“Content”) published in the Asian Business Research Conference (ABRC). However ASMMR, its team,
members and reviewers make no representations or warranties whatsoever as to the accuracy, completeness or
suitability for any purpose of the Content and disclaim all such representations and warranties whether express
or implied to the maximum extent permitted by law. Responsibility for the contents of a paper rests upon the
authors and not upon the editors, reviewers or the publisher. Furthermore, if any article will be found
plagiarized, even after publication, it will be discarded from the issue and author(s) will be banned for lifetime
to publish in ABRC. Any views expressed in this publication are the views of the authors only and are not
related to ASMMR in any capacity.

v
Asian Business Research Conference (ISSN 2227-7935)

Scope and Coverage:

Asian Business Research Conference (ABRC) invites scholarly manuscripts from a wide range of categories in
the field of business and management. The journal broadly covers following areas of business and management
research but not limited to:
 Accounting & Finance  Knowledge Management
 Brand Management  Management Information System
 Business Ethics  Marketing
 Change Management  Organizational Development
 Consumer Behavior  Services Marketing
 Economics  Social Marketing
 General Management  Supply Chain Management
 Human Resource Management  Training & Development

Target audience
Asian Business Research Conference (ABRC)overall targets the following audience:
 Academicians
 Practitioners
 MS and PhD Scholars

vi
About ASMMR
Introduction:
The Asian Society of Management and Marketing Research (ASMMR) started voyage of promoting and
developing the quality of research in the world of academics in January 2012. Society's mission is to make
significant contribution in the research field of business administration, by developing theory and humane
practice of these fields in Asia and beyond. In pursuit of its objectives, ASMMR collaborates with regional and
international organizations to organize conferences, awards, scholarships, case competitions, workshops under
academic writing and publishing program. In addition to that Society has several publications including journal,
conference proceedings and case studies series. For further details, visit www.asmmr.com.
Conferences:
The ASMMR organizes its annual conferences in different parts of world. Every conference has its panel of
experts and high profile keynote speakers (renowned researchers, editors etc.) to ensure and improve the quality
of research. Scholars from around the globe participate and present their types of research including papers, case
studies etc. Accepted papers published in conference proceedings (ISSN – 2227-7935) and sponsored journals.
Globally acclaimed publishers and societies, partner in each conference to exhibit their portfolios. For further
details, visit www.asmmr.com/conference.html.
Academic Writing and Publishing Program:
The ASMMR has established an Academic Writing and Publishing Program (AWPP) to equip researchers with
knowledge, skills and tools that are pivotal to become a reasonably good researcher. Under this program,
ASMMR is organizing several workshops on diversified training modules in collaboration with leading
publishers, societies and institutions. For further details, visit
www.asmmr.com/seminars.html.
Publications:
The ASMMR publishes a variety of publications including journals, case studies, conference proceedings and
newsletters. For further details, visit www.asmmr.com/publications.html.
Awards & Scholarships:
In order to promote research and case studies writing, ASMMR launched initiatives like MS-PhD scholarships,
case study competitions and travel grants. For further details, visit www.asmmr.com.
Global Partners:
The ASMMR believes in strengthening the relationships with international and regional research associations in
the globe. In order to do so ASMMR has joined hands with globally acclaimed publishers and societies. For
further details, visit www.asmmr.com/partners.html.

vii
Editorial Team
As per policy of double blind; peer-review JABR has well qualified editorial team.

Editor in Chief
Dr Atiq ur Rehman (Vice President ASMMR)

Managing Editor
Usman Ehsan (Director ASMMR)

Advisory Board
 Dr. Azhar Mansur Khan (President, ASMMR)
 Dr. Nicholas J. Ashill (American University of Sharjah, UAE)
 Dr. Sajid Khan (American University of Sharjah)

Members of Review Board

 Dr. Annibal Scavarda (Associate Professor at American University of Sharjah, UAE)
 Dr. Atiq ur Rehman (Visiting Faculty at SZABIST, Pakistan)
 Dr. Azhar Mansur Khan (Adjunct Professor at SKEMA Business School, France)
 Dr. Cleopatra Veloutsou (Senior Lecturer at University of Glasgow, United Kingdom)
 Dr. Deepak Deshmuk (Assistant Professor at American University of Sharjah, UAE)
 Dr. Fabrizio Rossi (Adjunct Professor, University of Cassino and Southern Lazio, Italy)
 Dr. Miguel Sousa Lobo (Director INSEAD, Abu Dhabi Campus, UAE)
 Dr. Nadeem Ahmed Bashir (Assistant Professor at King Saud University, Saudi Arabia)
 Dr. Nicholas J. Ashill (Professor at American University of Sharjah, UAE)
 Dr. Sajid Khan (Associate Professor of Marketing at American University of Sharjah)
 Dr. Sareer Badshah, (Assistant Professor at Islamia College University, Pakistan)
 Dr. Tom Johns (Professor at NASA Academy, USA)
 Dr. Usman Mustafa (Professor at PIDE, Pakistan)
 Dr. Wagner Udo (President EMAC and Professor at University of Vienna, Austria)
 Dr. Wong Ming (Associate Professor, Shantou University, China)
 Mr. Muhammd Kashif Saeed (Assistant Professor at GIFT University, Pakistan)

To join us as a reviewer, please write to us at [email protected]

viii
Third Asian Business Research Conference

Volume 3, Number 1
ISSN 2227-7935

INSEAD Business School

Abu Dhabi
United Arab Emirates

ix
Table of Contents

The Relation between Economic transition & Political Transformation: Egypt in the Light of EECs
experience............................................................................................................................................................................ 2

The Impact of Big Five Personality Traits, Leadership and Risk taking Ability on Social
Entrepreneurial Dimensions ......................................................................................................................................29

Non-performing loans in the Czech Republic: A VECM analysis.....................................................................45

Efficient or Inefficient Markets: A Behavioral Finance Perspective .............................................................54

Determinants of Dividend Payout Ratio: Evidence form MENA region .......................................................65

Profitability Determinants of Commercial Banks in UAE- A Sure Model Approach ...............................74

Job Attribute Preferences of Marketing Employees in Turkish Banking Sector .....................................88

Using social Media Channels to Enrich Learning in Business Education ................................................. 105

Mobile Marketing: The Invincible So-Lo-Mo Driver ........................................................................................ 125

Internet-Mediated Market Orientation and Its Determinants: Empirical Evidence from Sri Lanka
............................................................................................................................................................................................. 155

Empirical investigation of Internet usage by Bank customers in the UAE .............................................. 167

The Relationship between Organizational Culture and Business Excellence: Case of United Arab
Emirates ........................................................................................................................................................................... 178

Do the characteristics of construction companies have effect on innovation adoption and creation?
............................................................................................................................................................................................. 189

Market Orientation & Innovation: A Moderating Role of Intellectual Capital ....................................... 198

Work-Life Balance, Perceived Stress, & Locus of control: A Chain of Interrelated Predicaments . 215

1
 The Relation between Economic transition & Political Transformation: Egypt in the
Light of EECs experience

By:
Suzanna El Massah
Zayed University, UAE

Ola Al-Sayed
Cairo University

Abstract:
The study investigates the relation between economic transition and political transformation both in theory and
practice. Special focus is given to analyze the economic transition experience of EECs with comparison to
Egypt in the light of political transformation role in economic performance. This research has four main
objectives. First; find out the relation between economic and political transformation in in theory and practice.
Second; determine the factors promoted similarities and created differences among EECs experiences of
economic transition. Third; realize the difference between EECs transition and the Egyptian one Fourth;
discover the role of political transformation in the Egyptian economic transition. In order to achieve the goals of
this study, several methodologies are adopted; analysis of theoretical foundation literature in economic
transition and political transformation, in addition to comparative analysis throughout comparing between EECs
experience in implementing economic transition to stand on the similarities and differences among them. Also
comparative analysis is adopted to compare between Egypt`s economic transition from one side and the EECs
experience from the other side. Moreover, some qualitative and quantitative economic data are utilized and
analyzed to find out the relation between economic and political transformation across the countries and over
years. For the purpose of the study, we have adopted the UN regions classification for EECs (UN, 2013);
Belarus, Bulgaria, Czech Republic, Hungary, Poland, Moldova, Romania, Russia, Slovakia, Ukraine. Though
most of EECs have started from similar points of economics status and followed the same dream of economic
transformation, yet they didn’t all reach the same levels. EECs have proved that countries, which start transition
process with democratic institutions and civil liberties, are able to achieve faster economic transition. The reason
behind this is based politically on the capability of democratic governments to implement unpopular economic
reforms that may have negative effect on citizens in the short run. The paper concluded a relation between
economic transition and political transformation, though subject to democracy consolidation. However, the
causal path is still debatable, whereas both transformations could be driven by deeper structural factors. Egypt
has showen bad performance in all economic transformation indicators; the worst of all were the level of socio
economic development and welfare regime. This could be understood in the light of artificial political
transformation prior 2011, followed by security and public order absence in addition to immersing the
successive governments and general deterioration of economic conditions in the wake of January 2011 events.
The lack of strong government with legitimate institutions and law enforcement to protect property rights, leads
more quickly to chaos rather than to successful market economy. Therefore, the challenge for Egypt is bi-
dimensional; political transition will not be consolidated without the support of the economic performance,
otherwise people will prefer going back to the authorized rule even with corruption, this is already seen
considerable segment of the Egyptians now. Unexpectedly, the correlation between economic and political
transformation was negative, this could be explained in two ways first; the political transformation is not yet
consolidated, second, Egyptian executives are vulnerable to popular pressure, thus they will be very reluctant to
take any reform policies that may put pressure on the citizen even temporarily. Egypt has strong potential for a
dynamic economy, including a youthful workforce, gorgeous tourist places, excellent access to technology, and
an exclusive geographic location. The right combinations of policies are very critical for Egypt to avoid the risk
of being trapped in a vicious cycle of economic sluggishness and persistent sociopolitical conflict. A clear view
of the political economy and with the support of the international community is highly required. We hope that,
this piece of work will be of use to policy makers and stakeholders for countries in transition, especially those in
the Middle East, who are experiencing large fundamental changes in their political regimes, so that they can
respond proportionately with the hopes and aspirations of their citizens. This study results call for more future
research investigating on; the process by which Political transformation is associated with economic
transformation, to what extent could international stakeholder/organizations influence political transformation?
Does decentralization have influence on the relation between political transformation and economic
performance success? What is the roles social capital and transaction costs can play to affect both economic and
political transition in the Middle East?

2
Keywords: Economic transition – Political transformation- Democracy- Egypt- Economies in transition-
Eastern Europe

Introduction

Economics and Politics are the most important topics to any state for the role they play in people’s life and
future, and there is consensus in literature that mutual effects exist between politics and economics. During the
last five decades, several countries around the world have adopted an agenda for economic transition. Some of
them started very early; like China and Egypt in the 70s and Vietnam in 80s (Ahrens, 2006), while others started
in the 90s like Eastern Europe countries (EECs) who began their transition towards market economy after the
fall of Soviet Union. The downfall of communist rule has presented series of endeavors that stimulates scholars
from different fields to test many ideas and theories.
Economic transition refers to the process of shift from centrally planned economy to market economy aimed at
improving the economic performance of the country. While political transformation interpreted as a move from
dictatorial authorized rule to democracy (V´ıctor and Rull, 2001). It appears that Political transition towards
democracy became internationally widely accepted in the last seven decades. Although 81 countries have taken
serious steps for democracy, many countries are still stuck in the incomplete political transformation. EECs have
implemented simultaneous economic and political transformation, though it is still a matter of question whether
political transformation is a prerequisite to pave the way for economic transition success!
Undoubtedly that democracy produces many positive benefits for societies as proven in most of developed
countries as it promotes the rule of law, empowerment, justice, freedom of choice and expression and limits
corruption and political monopoly. Though there are many literatures that support the role of political
liberalization in enhancing economic transition, there are strong counter-arguments that have backing empirical
evidence like China, Taiwan and South Korea (Marija Džunić, 2006).
On the other hand, it is still unproved in the least developed countries that such political transformation would
trickle down to achieve good performance of growth and welfare for their societies, or the standing of economy
would determine their success in political transformation towards democracy.
The political transition in Egypt has created an opportunity for economic transformation. The political landscape
is changing and new stakeholders have become active, while old vested interests standing in the way of reform
may have been weakened. This setting provides a historic opportunity to rethink the economic reform agenda
and tackle longstanding economic issues that were previously difficult to approach
We hope that, this piece of work will be of use to policy makers and stakeholders for countries in transition,
especially those in the Middle East, who are experiencing large fundamental changes in their political regimes,
So that they can respond proportionately with the hopes and aspirations of their citizens.

Objective and Methodology:

The main proposition of this study is as follows: "Most of EECs have achieved better results of economic
transformation than those of Egypt; though the later has started the economic transition way earlier. This is
because low profile of political transformation in Egypt".
The study investigates the relation between economic transition and political transformation both in theory and
practice. Special focus will be given to analyze the economic transition experience of EECs with comparison to
3
Egypt in the light of political transformation role in economic performance. By that the study projects the
possible futures for transforming countries; whether they would all follow the same path or it would be a
country specific journey.
This research has four main objectives. First; find out the relation between economic and political
transformation in in theory and practice. Second; determine the factors promoted similarities and created
differences among EECs experiences of economic transition. Third; realize the difference between EECs
transition and the Egyptian one Fourth; discover the role of political transformation in the Egyptian economic
transition.
In order to achieve the goals of this study, several methodologies are adopted; analysis of theoretical foundation
literature in economic transition and political transformation, in addition to comparative analysis throughout
comparing between EECs experience in implementing economic transition to stand on the similarities and
differences among them. Also comparative analysis is adopted to compare between Egypt`s economic transition
from one side and the EECs experience from the other side. Moreover, some qualitative and quantitative
economic data are utilized and analyzed to find out the relation between economic and political transformation
across the countries and over years. For the purpose of the study, we have adopted the UN regions classification
for EECs (UN, 2013); Belarus, Bulgaria, Czech Republic, Hungary, Poland, Moldova, Romania, Russia,
Slovakia, Ukraine. All theses countries are very similar in regard to their initial structure of institutions, law
economic and social development (Tomas Kostelecky, 2004)
This paper is organized as follows. It first describes the fundamentals and definitions of “Economic Transition”
and “Economic Transformation” in Section 2. Then, Economic transition and political transformation in nutshell
throughout section 3. Economic Transition Experience in EECs will be analyzed with focus on political
transformation in Section 4. In section 5, the study analyses Economic Transition in Egypt with relation to
political transformation. Section 6, Discusses the transition outcomes, in a comparative way, and accordingly
judging if political transformation is a prerequisite for successful economic transition. Finally, section 7
concludes the paper.

Literature Review
Fundamentals in Economic Transition:
“Transition” is defined as; a “process aiming at achieving efficiency through restructuring and reallocation of
resources” (Jurajda & Terrell, 2003). Reallocation refers to “the movement of production away from state to
private ownership”, and also defined by “reallocating capital and labor from the post-communist firms to new
start-up private ones” (Jurajda &Terrell, 2003), while restructuring refers to “changing the level and technical
composition of labor and capital in search of higher production efficiency” (Blanchard & Kremer, 1997 cited by
Konings & Walsh, 1999), or “restructuring of enterprises that were created during central planning (e.g. by
privatization)” (Jurajda &Terrell, 2003).
Economic literature considers transition by three main dimensions that are; microeconomics including
privatization in addition to market creations and price signaling, development on the macroeconomic level via
policies and institutions, and other policies related to finance and trade. Identifying correct strategy for
economic transition is important and challenging at the same time, because there is nor established theory of

4
development and transition. However, historical role model analysis could guide policy makers to some extend.
Transition consists of changing the relationship between enterprises and the state and the reform process is
concerned by the change in the form of state intervention, as much as with a reduction in the overall level of
intervention imposed on firms. (Hellman & Schankerman, 2000). Liberalization is, as well, a fundamental
element of transition; privatization and market liberalization are considered to be complementary reforms in
transition economies.
Since in the planned system the whole economy is controlled, the first step in the transition to a market economy
is usually to abolish these controls i.e. liberalizing the economy. Planned economies set domestic as well as
international controls, this is why transition involves liberalization on these two levels (domestically and
internationally). Domestic liberalization means “lifting price controls and providing economic agents freedom
of enterprise.” External liberalization means “the lifting of controls on trade, unifying the exchange rate, and
allowing the exchange rate to achieve its proper level, either through devaluation or by gradual adjustment”
(Ickes, 2005). Planned economies set arbitrary prices which are source of inefficiency in the economy.
Therefore it is crucial to liberalize prices in a market economy (Ickes, 2005). It is in fact said that the nature of
price behavior in a transition economy is an important measure of the transition process itself (Gluschenko,
2003). According to Kaminski,Wang and Winters (1996) cited by Barlow (2006) opening up trade to developed
economies was a way to rapidly remove the price distortions of the communist era. But this meant that domestic
producers had to face serious competition from imported products. That’s why Barlow stated that external and
internal reform had to be implemented both at the same time. Furthermore, in most countries transition to
market economy was accompanied by another one in the sphere of division of responsibly among different
government tier of administration, which is named “decentralization”.
Certainly, achieving success in economic transition obliges multi dimensional coordinated efforts with focus on
steering the political economy and communication strategy to deal with the adverse conditions related to such
complex task. There is an extensive consensus in regard to the influential role played by institutions and
governance for a successful market oriented policy reform, knowing that government remains the central actor
for institutional construction and law enforcement (Joachim Ahrens, 2001). The next section will analyze the
relation between institutional decentralization, marketization and economic performance.

Economic transition and Political transformation in a nutshell:

Several empirical and theoretical studies analyzed the importance of political transformation to reach economic
transition success. Many of them have proved the vital role of political transformation in the process of
economic transformation. Freedom House proved that growth rates in democratic countries are higher than for
other countries with incomplete political transformation. On the same track, a study by De Malo and others in
1996 found out high correlation between political and economic liberalization. Nevertheless, all these studies
were on countries with good initial economic conditions; where higher standard of living enhances
democratization (Marija Džunić, 2006).
Malo et. al. claim that “frequent - but peaceful - government turnovers strengthen democratic values, and even
though it is necessary to search for compromise all the time, there are potentials for competing interests to
involve in the policy-making process and prevent power abuses. That is why, compared to authoritarian system,

5
at existing levels of political instability and economic problems, democracy delivers superior results of
economic transformation” (Malo et al, 1996).
Though democracy could play such positive role only if it is perfectly consolidated, which considered
completed if; there is supporting behavioral dimension where no significant actors who exert resources to
achieve their self-interests through violence or authorized regime or foreign intervention; accompanying
attitudinal dimension where the public majority believes in democratic benefit for the society; furthermore, the
existence of constitutional dimension when governmental and non-governmental forces are to settle their
conflict by fair and just laws, procedures, and institution (Linz and Stepan, 1996). By that, the consolidated
democracy is to empower civil rights and liberties, which build, trust and reduces uncertainties in the economic
system, also transparent political practice decreases corruption and power misuse. Moreover, democracy – as a
participatory regime- has high potential to establish good institutions that support equality and justice that
empower economic performance.

Egypt’s Economic transition in the light of EECs experience:

Economic Transition Experience in EECs: EECs have their own experience transforming the economy form a
centrally planned one to market economy. Their practice attracted many scholars to investigate on the factors for
successful economic transition, and identify whether a fruitful transition recipe does exist or it is each country
case by all means. We have adopted the UN regions classification for EECs (UN, 2013); Belarus, Bulgaria,
Czech Republic, Hungary, Poland, Moldova, Romania, Russia, Slovakia, Ukraine. All theses countries are very
similar in regard to their initial structure of institutions, law economic and social development (Tomas
Kostelecky, 2004), thus they share almost the same economics staring point. The transition process in EECs
branched to three main sub-policies; privatization, market liberalization and decentralization. Each policy
includes a package of laws and procedures. The following analysis highlights the similarities and differences
between the EECs policies for economic transition.
Figure (1): Components of Economic Transition

Economic
Transition

a.
b. Market c.
Privatizati Liberization Decentralization
on

i-Price ii-Trade iii-Other

liberization liberization pakages

6
 a- Privatization Policies and framework in EECs:
Privatization is one of the three tools to achieve economic transition goal; privatization aims at improving
economic efficiency, competitiveness and strengthening private sector 1, moreover, privatization is believed to
eliminate political monopoly and power abuse (Badulescu, 2012). There are a number of common features of
privatization program in the EECs; since early nineties, almost all these countries have initiated well governed
legal and institutional framework for privatization process in order to attract investments efficiently. Bulgaria
has passed privatization law in 1992 and then started a mass privatization program after establishing an
independent privatization agency for selling state owned enterprises. Moldova has put its privatization law in
1991 to transfer state property to private property, and later in 1997 another law was issued to ensure good
governance of the process by setting the procedures, methods and restrictions framework. Romania has
encouraged privatization strongly; started by establishing a national privatization agency in 1991 to monitor and
implement the process as well as announcing a privatization law for various market methods of privatization.
Later in 1995, Romania has passed a law to accelerate privatization; by issuing free vouchers to all Romanian
adults to buy shares2. While Russia has started privatization in 1991 with consecutive presidential decrees to
privatize state enterprises, it conducted a mass privatization between 1994 and 1995 by giving all Russian adults
free property certificates to exchange for shares, consequently, four million citizens became shareholders in
1994. In early 1990s Ukraine had a privatization law to govern the privatization process and implementation in
addition to a privatization agency established by the parliament in 1992. However, Ukraine witnessed slow
privatization process between 1992 and 1994; where state enterprises' property was moved only to employees
and management, but mass privatization was achieved during 1995-1997; where citizens could obtain
certificates to own shares of state companies, further large scale privatization stage was accomplished between
1997 and 2002. As for Czech Republic, privatization considered the cornerstone of the economic transition
program, transition was successful due to the focus on transforming the inefficient state-owned enterprises, and
by 1995 80% of all assets have been privatized. Hungary, had initiated a ministry of privatization for setting the
unified regulation before, during and after the privatization process, in addition to establishing a state property
agency to support the ministry and protect state interest besides to promoting and evaluating the whole
privatization procedures. Moreover, Hungary had a specialized agency for asset management for state-asset
management and restructuring process.
On the other hand, neither Czech-Slovakia nor Poland has issued a privatization-specific law. Though, Czech-
Slovakia dismantling of state paternalism-reduction of state subsidies to enterprises, breaking up of large state
owned enterprises in order to reduce the degree of industrial concentration preparing for coming privatization,
also Slovakia has used many privatization methods (auctions, vouchers, mass privatization, management-
employee buyouts) before and after independence from Czechoslovakia. Czech had introduced a ministry of
privatization for government control and setting rules in addition to establishing the National Property Fund as a
specialized agency for state-asset management and restructuring process. On the other hand, privatization was a
major component of institutional restructuring in Poland, where it has privatized a bulk of state-owned

1
Considering that the return on capital invested in the public sector is about one third compared to that invested in the private sector
(PACALA and BADULESCU, 2012)

2
Same as proposed by the former Egyptian Minister of Investment Mahmoud Mohlidien , and was publicly rejected.

7
 companies via commercial – social model that used market mechanism and society participation in the process
of ownership transformation (Lis, 2013). On the other side, Belarus was completely out of this harmonized
track of privatization. It started way later in 2008, with neither mass privatization nor an agency. In 2011 the
government announced several decrees to privatize only 300 of state companies, with plans to privatize more
companies but in September 2012 scraped the list and the credibility of privatization steeped back especially
after October 2012 when the government nationalized two enterprises that were privatized in 1990. Currently,
the state still dominates 70% of the country`s production3.
b- Market Liberalization/opening in EECs
Liberalization is considered a corner stone in transition economies; where liberalizing the economy aims at
achieving efficiency by all means. Market liberalization is applied on both levels; domestic and international
through price liberalization, trade liberalization and monetary-fiscal reform policies.
i. Price Liberalization & subsidy removal
Price Liberalization is a key element of transition; because it is a vital tool to introduce market mechanism.
Since the objective of liberalization is to improve resource allocation, achieving efficiency is a crucial
dimension of price liberalization. Since such liberalization will create winners and losers, redistribution
dimension also appears in the picture, therefore price liberalization is considered as a political decision at the
first place (Roland, 2000). The general pattern is that price liberalization is important element though not full
price liberalization early on transition. In many EECs prices remained under central control for long time due to
possible political limitations. By the end of 1990, Romania has launched the step-by-step program for price
liberalization, VAT4 system, consumer subsidies removal; all targets were almost achieved by 1993. As for
Russia; 90% of state retail prices and 80% of state-administered wholesale prices, in January 1992, were legally
released from government control by federal decree. However, local governments kept allowed to abolish price
ceilings on a broad set of basic goods. In early 1992, the Ukrainian government introduced a partial
liberalization of prices that accompanied by increases included, at the producer level, prices of coal, crude oil,
natural gas, and electricity, and at the retail level, gasoline, diesel oil, coal, gas, electricity, municipal services,
and rents which press the parliament and trade unions to roll back, and put limits 25%- 40% on the profitability
on the deregulated goods. Though agricultural prices were liberalized in the same year, the practice of maximum
procurement prices continued to apply, which made the state the only purchaser of agricultural produce. Later in
May 1992, the government has removed subsidies for gasoline and diesel oil. Price liberalization was a part of
the Economic Transformation Program (the Balcerowicz Plan) in Poland; microeconomic liberalization (the L
policy). However, Act on Taxation of Excessive Wage Rise, introduced the so-called Popi-Wek tax that has
limited the wage increase in state-owned companies to limit hyperinflation. On 1 January 1991, Czech Republic
government has launched a major set of reforms, consisting of liberalizing 85 % of producer and consumer
prices. While Slovakia inherited the restrictive monetary and fiscal policies continued at the start of reform in
1990 and led to a rapid fall in inflation after the initial one-time jump caused by price liberalization. On the
other hand Hungary has applied gradual price liberalization (Swaan, 1998), the share of regulated prices became
16.5% from the consumer price basket. In 1998-1999, the newly elected government made strong efforts to curb

3
European Bank, (2013), P. 15.
4
value added tax

8
 inflation by eliminating explicit or implicit indexation in wages and other compensations (János Gács 2000).
Bulgaria was a completely different case; it has started price liberalization in the early 90s but was forced to
reverse its price liberalization between 1994 and 1996 due to political constraint (Roland, 2000).
ii. Trade liberalization
Almost all EECs have signed agreements for trade liberalization. Bulgaria signed an asymmetric agreement for
trade liberalization with the EU in 1995 in the context of its accession schedule. In 2002 trade on industrial
goods was fully liberalized, while trade on agricultural goods reached significant level of liberalization.
Bulgarian exports to the EU increased by 63% between 1995 and 2002. Moldova has joined the World Trade
Organization in 2001. On accession, the country accepted a fairly liberal trade regime; its import tariff is one of
the lowest in the world according to the World Bank’s MFN Tariff Trade Restrictiveness Index (TTRI) 5. Since
Romania has joined the EU in 2007, it became a part of the Generalized Preferential System of EU (foreign
trade). Romanian exporters apply the principle of freedom to export towards third parties 6. Since early 1992 and
after the 1991 presidential decree; Russia started drastic import liberalization with overtime reduction of tariffs
and non-tariff barriers on trade. On the other hand, in early 1990s, Ukraine has organized its trade by bilateral
agreements signed with all FSU countries and implemented through the mechanism of quotas and highly
appreciated official rate. While Poland has adopted microeconomic liberalization (the L policy) included
quantitative restrictions removal on exports and imports. In Czech Republic has opened its international trade
as a part of its stabilization program's microeconomic side. Hungary has lowered its trade barriers after 1991
trade agreement with the EU.
iii. Other Liberalization policies: Reform package, Business, monetary, and fiscal policies
The analysis of the nine EECs showed other liberalization policies adopted by some of these countries as an
integrated/complementary to the previous mentioned polices. The Russian Federation has adopted business
liberalization during 2001-2004 by issuing laws to encourage the private businesses; law on inspections
stipulated that each inspecting agency is allowed to conduct a maximum of one regular (or so-called “planned”)
inspection of each firm in a two year period. If no violation is found during the inspection, the next visit can take
place no earlier than in two years, another law is the de-licensing law reduced the list of business activities
which require licenses from 250 to103 activities, moreover the registration law introduced a so-called “one-stop
shop” rule for registration and formalized the list of required documents. Previously, any start-up had to obtain
authorizations with several different government agencies (Yakovlev, 2011). While Ukraine did not follow
Russia's reform example so neither privatization nor serious institutional reforms were adopted in 1990s. In
1991-1993 Ukraine conducted a very populist macroeconomic policy, which led to hyperinflation by 1993. In
1994 the newly elected president began to implement a new package of reforms. As for Belarus, it chosen the
gradual transition approach since 1991; where in 1991-1993 - a ‘Preserving the status quo’ policy as a substitute
for reform was taken, and society was assured subsidized supply of oil and gas. In 1994-1995 fragmentary
market reforms were made which included liberalization of the domestic financial market; positive real interest
rates and the allocation of about 80 % of short-term loans through market credit auctions in the Interbank

5
Moldova ranks 11 out of 125 countries

6
Non-EU members.

9
Exchange Stock, tightened monetary expansion and reduced reserve requirements. Though the announced
number of structural reform government initiatives in 2010 banking, large-scale privatization, and price
liberalization, but unfortunately the balance-of-payment crisis, setbacks the reform include re-introduction of
price controls, tolerance of multiple exchange rates during spring-summer of 2011 and temporary limits on
exports of some goods (European Bank, 2013, P. 15).
In 1st of January 1990 the first post-communist Polish government has introduced an unprecedented economic
reform plan known as the Economic Transformation Program (the Balcerowicz Plan). The overall transition is
considered as having three elements; macroeconomic stabilization, liberalization of prices, markets and entry,
and deep institutional changes. Additionally other integrated policies were taken; modification in the wage
control mechanism, the establishment of a stock exchange, a new liberal foreign investment law, and
devaluation of the currency and pegging it to a basket of currencies instead of a previous peg to the US dollar.
On the other hand, Hungary was close to an economic collapse in 1994, caused partly by the transformational
crisis, and partly by the mistaken economic policy pursed by the first freely elected government. This crisis was
solved with the introduction of – the extremely strict and unpopular stabilization program - Bokros Package on
March 1995; the fiscal policy was restrictive by changing of the one-tier banking system into a two-tier banking
system, the introduction of a new tax system, and the approval of the new economical law including an act about
companies. A mechanism of gradual devaluation of the currency (called crawling peg) was adopted to cope with
the looming deficit in the balance of action, along with cutting social benefits, and reducing real wages. The
Czech Republic has started a Strategy of Economic Reform 1990 and launched a Shock Therapy stabilization
program in 1991. On the macroeconomic front, a strict anti-inflationary policy was adopted; restrictive
monetary and fiscal policies and strict wage controls. On the microeconomic front, price liberalization of goods,
opening to international trade, extensive tax reforms, in addition to devaluing koruna and pegging it to a basket
of five Western currencies, introducing internal convertibility of the koruna together with a 20% import
surcharge. Slovakia is a special case; its objective of fulfilling the Maastricht criteria7 (Euro convergence
criteria) for Euro Zone entry became the guiding mantra of economic policy-making of mid-2000s. Within the
two years of its independence, Slovakia decided to abandon its tight macroeconomic policy and adopting an
expansionary fiscal policy by increasing expenditures through extensive infrastructural investment and real
wage increase in order to stimulate the economy. Bulgaria has started integrated plans for regional development
and regional statistics on a large territorial scale to enhance efficient decentralization.
c- Decentralization Policies and framework in EECs
The decentralization is a complex process of handing decision-making rights over into the lower part of
organizational hierarchy (Czerminski et all. 2002). Decentralizing public sector is supposed to achieve efficient
and rational management. Full decentralization should be consider three dimensions; political, administrative
and financial decentralization (Iwona Otola , 2008).
Each of EECs had a specific package of laws and procedures in regard to decentralization. Most of them had
supported the decentralization through enforcing local autonomy in decision-making and fiscal budgeting.

7
Maastricht criteria required that inflation rate be no more than 1.5 percentage points higher than the average of the three lowest inflation
rates among member states of the EU, that government deficit as percent of GDP not exceed 3 percent, that candidate country joins the
exchange rate mechanism of the European Monetary System.

10
Several countries have taken serious actions like Bulgaria; where the Republic of Bulgaria- by the
1991constitution - is a unitary state with local self-governance, and the territory is divided into municipalities
and regions. Bulgaria is subdivided into 28 regions and 265 municipalities. The Local self-government and
Local Administration Act (adopted in 1991), regulates the implementation of local self-government in
municipalities and the functions of local administration, also the council and mayor are elected by the
population. Such framework supports local decision making autonomy. Moreover, Local Taxes and Charges Act
(adopted in 1997) that regulates the municipal finances and taxes, in addition to the Municipal Budgets Act
(adopted in 1998) that regulates the financial resources of municipalities; both support local financial autonomy.
As for Romania, the constitution ensured two levels of decentralized government; central government &
authorities and local administrative units. In 2006, it carried out fiscal decentralization through the public
finance Law 273/2006 that arranges fiscal matters and supports local governments access to credit markets and
thus allows for more local fiscal autonomy. On the same track, Russia has succeeded to transform from a highly
centralized system into a highly decentralized system. The 1993 Constitution states that "The local self-
government bodies shall independently manage municipal property, form, adopt and implement the local
budgets, introduce local taxes”. Those reforms have allowed local governments to levy taxes. However, looking
at 2001, the central revenue was 63.7%, regional was one 24.0 % but local was only 12.3% which shows that the
higher levels of government have much more spending autonomy than the local government. The Ukrainian
Constitution of 1996 has defined administrative-territorial organization that has 3 tiers structure. In 1997,
Ukraine government enacted administrative-territorial reforms through reorganizing the work of government
and functions of local government (districts, cities and towns authorities), this followed by public finance reform
management and fiscal decentralization which enforced both decision making and financial autonomy of local
governments. Hungarian experience of local autonomy was significant. After transition in 1988, Hungary
began to decentralize; the new 1989 constitution maintained unitary system but brought in the Local Self-
Government Act in 1990. Municipalities were divided into villages, towns, towns with county rank, and the
capital city and its 23 districts; each is governed by a mayor–council system with mayors elected directly or
indirectly depending on municipal size. Decentralization of Hungary is considered strong; where the scope of
local authority is restricted only by constitutional provision or parliamentary law - not by central government-
and local governments may decide to increase their functional competence, or Parliament may independently do
so, additionally, local governments are responsible for a wide range of functions, including housing, education,
health care, cultural activities, and protection of minority rights. Poland has implemented three mechanisms in
this regard; handing over tasks on the government administration to organs of the local government; moving
rights and tasks to units of the lower level of government administration; excluding certain matters from the
regulation of the public administration and handing over them to nongovernmental institutions (Potoczek 2001):
On the other hand some of EECs have shown moderate/weak decentralization performance. Belarus has
experienced widespread use of informal methods for financing subnational governments 8; such methods are
usually most prevalent in countries where local governments enjoy little or no formal revenue autonomy and
where standards for financial disclosure and control remain weak. The Constitution of Moldova as well as the

8
Belarus has seven regional units and seventy local.

11
Law of Local Public Administration, allow local public administration authorities for decision-making,
organizational, financial managing autonomy, also the ratification of the European Charter in 1997 signified an
important step towards the assurance of an efficient, real budgetary autonomy. However, there had been noted
limited fiscal autonomy regarding the local taxes, the local authorities have no important income sources,
besides the budgetary dependence of each level of the public administration towards the immediately upper one.
Therefore, local authorities cannot independently decide or solve many of the emerging problems. Slovakia is
one of the least decentralized. In June 19909, autonomous local governments were created by law, where local
governments are obliged to provide basic services and the first municipal elections took place in November
1990. Although local governments became self-governing and each regional has the authority to prepare and
submit its own budget, but they still had much more limited powers compared to other countries like Hungary
and their expenditure dwarfed by that of the central government, which maintains 8 regional offices and 79
district offices.

Open Door Policy and economic transition in Egypt

During the 1960s, Egypt used to adopt a centrally planned economy following the socialist paradigm, where the
state was controlling the means of production, employing the new entrants in the labor market, controlling
prices and subsidizing the main commodities and food stuff. In the relation with the outer world, import-
substitution characterized the trade policy during that time. Following the 1973 war the October Paper issued in
April 1974 provided the guidelines or the economic philosophy for what is called Open Door Policy (Infitah), at
its inception Infitah was more a state of mind than a coherent set of policies. The goals of that policy were;
attracting Arab investment capital to Egypt from the oil-rich states, attracting western technology and
investment through joint ventures with Egyptian public or private enterprises, promoting Egyptian exports and
to stimulate the private sector, promoting the rejuvenation and competitiveness of public sector enterprises, and
easing the physical movement of labor, both internally and externally in order to free the setting of wages and to
liberalize the movement of currency and funds from abroad.
The general framework for “Open Door Policy” was drawn by law 43 of 1974 and its revision through Law 32
of 1977, governing foreign and Arab investment in Egypt; the liberalization and partial privatization of foreign
trade; the "own exchange" system to finance private sector imports; moves toward multiple and periodically
adjusted exchange rates; the streamlining of the Egyptian banking sector; reorganization in 1975 and again in
1983-84 of the public sector; and, finally, Law 159 of 1981 extending to the Egyptian private sector many of the
privileges granted foreign investors under Laws 43 and 32 (Waterbury 1985). In the early years of the open
door policy, the government allowed the sale of shares of the public sector firms in addition to the restructuring
state-owned enterprises as managerially autonomous firms like holding companies in private sector. The
government had also taken serious measures to reorganize the agrarian sector and to free the purchase and sale
of land as the reclamation of land and crop exportation was of the government's goals from foreign investment.
Also, open door policies included measures to encourage commercial activities, particularly importing advanced
technology and stimulating exportation (Ateş, Duman and Bayraktar 2006).

9 Czechoslovakia

12
Generally speaking the Open-door policies followed a gradualist approach of economic transition throughout the
1970s with its economic boom and even in the 1980s after the economic troubleshoot. The gradualist approach
continued till 1991 when the structural adjustment and reform program (ERSAP) was adopted in cooperation
with the IMF turning to a fully liberal economic policy (Ateş, Duman and Bayraktar 2006). Another round of
economic reform was adopted in 2004. The reform policies are classified into tree main pillars; Liberalization
and marketization, privatization and decentralization.
a. Liberalization & Marketization
Though trade liberalization was one of the main pillars of the ERSAP profound trade liberalization efforts were
only applied after joining the WTO agreements in 1994/5 and the signing of several multi and unilateral trade
agreements in the mid-1990s3. Accordingly, significant developments in tariff structure have been made. These
developments included tariff reductions, restructuring customs procedures, implementation of WTO-based
customs valuation rules, and the removal of all customs service fees and charges on imports. In 1998, most
tariffs were lowered by 5 to 10 percent and the maximum tariff rate was reduced from 110% at the end of the
1980s to reach 40% in the end of 1990's.
"The second wave of liberalization was introduced by the reform of 2004. This wave aimed at first, to reduce
tariffs and rationalize the tariff structure; and second, to reduce the number of products subject to non-tariff
barriers. A new tariff structure was applied, cutting the number of tariff brackets from 27 to 6, with rates ranging
from 0 to 40 percent depending on the degree of processing. The weighted average tariff rate was also reduced
from 14.6 to 9.1 percent. This new structure lowered tariff dispersion measured by standard deviation from 16.1
in 2000 to 12.7 in 2004. Additionally, to ensure compliance with international standards, the government
replaced its 10-digit tariff structure with a 6-digit structure and tariff lines were reduced from 8,000 to 6,. All
those measures should in turn simplify procedures, minimize tariff evasion, and remove possibilities of
discretion and corruption." (Nazir 2012)
Furthermore, ERSAP came to decontrol the prices and allow the market forces to set the clearing prices. Oil
prices were to be raised annually in order to match their international equivalent by June 1995. Electricity prices
were to increase annually to reach 100% of their long-run marginal cost also by June 1995. In addition to
reforming energy prices, an important measure to liberalize prices in agriculture was manifested by Agricultural
Land Law No.96 of 1992, which raised the rent on agricultural land to 22 times the land tax. In housing, the
government was to eliminate rent control (New Rent Law). Concerning the monetary policy, ERSAP included
imposing a credit ceiling in the banking system and allowing banks to set their own lending and deposit rates,
guided by interest rate on treasury bills (Korayem 1997). Moreover, exchange rate was unified and allowed to
adjust till it floated in 2004.
b. Privatization
Since early 1980s there were a number of privatization initiatives. But the public sector remained a dominant
force in the economy constituting around 37% of GDP, was responsible for about 55% of the industrial
production, controlled over 80% of import/export and about 90% of the banking and insurance sectors. Egypt’s
Privatization Program (the Program) started in earnest with the passage of Law203, in June 1991 (a number of
subsequent laws, amendments and decrees directly and indirectly facilitated implementation of the Program).
The law, among others, stipulated that “holding companies”(HC) would replace the “organizations” of the

13
public sector. The numbers of public sector companies to be privatized were determined as 314 affiliated with
27 holding companies (HC), allocated on the basis of specialization or industry sector. A total of 85 public
companies were excluded from privatization in the first stage of the program. The 314 companies to be
privatized had approximate assets of LE104 billion and 1.08 million employees.
The pace of privatization up to 1993 was slow because time was needed to introduce the necessary legislative
and regulatory arrangement. Also, the socio-economic culture of the country had not been yet ready to accept
the concept of privatization. Once the enabling mechanisms were in place, the Program gained momentum in
the second half of 1990s, after a favorable ruling by the constitutional court upholding the government’s right to
privatize the public sector. Since the 1999, the Program has made slow progress for a number of reasons among
them: down turn in the economy and the Egyptian stock and capital markets, and to some degree, the less
attractive investment opportunities in the remaining companies in the Law 203 portfolio. Since September 2002,
it became possible for the government to sell state-owned shares in joint-venture companies. In addition to
SOEs and government stakes in joint ventures – which were sold under the Asset Management Program (AMP)
operated by the Ministry of Investment – other companies can be privatized, too. These are referred to as “non-
law 203” companies and they are dealt with by their line ministries, rather than the Ministry of Investment.
Essentially, non-law 203 companies are so-called “strategic” companies in sectors such as electricity, telecoms,
aviation, banks, all companies under the Suez Canal Authority, and large companies like the Arab Contractors.
Since 2004, the privatization program was revived and brought under Ministry of Investment. In 2005-6 and
2006-7 privatization receipts represented 2.5% and 1.9% of GDP respectively. This increase was primarily due
to the two large non-law 203 privatization: the sale of a state-owned bank, the Bank of Alexandria, and the part-
privatization of Telecom Egypt, which alone accounted for 0.9% and 1.3% of GDP respectively. However, the
privatization program stalled in 2008, against the backdrop of the mounting international financial crisis. The
program was halted, pending the reformulation of the government’s privatization strategy, and this has brought
some confusion to the investor community. A scheme to distribute, free of charge, a number of shares to Egypt’s
adult citizens, was shelved in late 2009. A new strategy is under formulation and a new draft law, which maps
out the responsibilities of the Asset Management Fund and the new Fund for Future Generations, was made
public in late 2009 (Steering Groups of the MENA-OECD Initiative 2010).
c. Decentralization
Decentralization in Egypt has begun quit recently. Since the times of Pharaohs, Egypt is a unitary country with
one of the strongest centralized traditions. Even local councils (Diwans) set up by the French in 1798 were not
elected and played a purely consultative role. In modern Egypt, the regime introduced by the revolution of 1952
has remained quit attached to a centralized form of government. Throughout the economic transition processes
that Egypt witnessed, decentralization was the missing aspect. Some believe that there was an attempt declaring
a new policy for "democratization and local governance" in the 1970s with elected local governments and
appointed governors serving only as representatives of the center. The subsequent backtracking might be
explained by the fact that, according to the language of the 1971 constitution and entrenched political culture, all
local administration structures are the arms of the central government. (Martinez-Vazquez and Timofeer
December 2008)

14
The vertical structure of Egypt's government is composed of 27 governorates at the first sub-national level.
Governors who are appointed by the President and in practice are largely drawn from the Ministry of Interior or
the military lead Governorates. The central ministries (Ministry of Education, Ministry of Health Affairs, and so
on) have directorates in each of the country’s 27 Governorates. Although the Governor is the administrative
head of the Governorate and in that role has considerable administrative power, the Governorate line
directorates retain a technical relationship to their respective line ministries. Below the Governorate level, there
are additional levels of local administration, notably the Markaz or district level (or metropolitan cities in urban
areas), and local administrative units, such as villages, towns, and city neighborhoods. Thus, the local
government system in Egypt is made up of six levels, namely the local unit of the governorate, the local unit of
the department, or the markaz, the local unit of the governorate, the local unit of the district, and the local unit of
the village. Each level reports up to the next level, from which it receives its instructions and resources. In
addition to the executive departments, each local entity is composed of an elected local council.
It should be noted that the area of sub-national government has experienced a lot of administrative and
legislative changes over the last several decades. Thus, since 1960 eight laws has been issued and the national
agency responsible for the local government has changed its name and organizational form numerous times. The
basic features of the current Egyptian local government have been identified by; Law No. 43 of 1979 and
amended by Law No. 50 of 1981, Law No. 145 of 1988, and Law No. 9 of 1989. However, the substantive
changes that have occurred didn't result in a stronger status of the sub-national governments. The most symbolic
manifestation of that was the change of the name of law 43 from the initial "On Local Government" to "On
Local Administration" in the 1988 amendment. (Martinez-Vazquez and Timofeer December 2008). In addition
to the subnational administrative structure, the national budget structure further reflects the centralized nature of
Egypt’s public sector. The national budget is divided between central administration and local administration,
where local administration signifies spending and revenues that take place at the Governorate level and below.
In accordance with the hierarchical structure of the budget system, any need or spending request identified at the
lowest level must be passed from the village to the district to the Governorate level, before it can be included in
a budget request prepared by one of the 11 directorates at the Governorate level. (Boex February 2011)
In the context of incorporating complete support for the global action plan of sustainable development LA21,
Egypt has enacted and issued number of policies, legislations and laws in the context of regulating and
governing the development process. These actions were undertaken with the recognition of the importance of
the local level practices. In this regard, The National Environmental Action Plan (NEAP; "2002-2017")
published in the year 2002, shed the light on the "need to build the capacities of local administrations to be able
to formulate and implement Local Agenda 21 for their settlements. This will require training administrators,
developing new cadres capable of planning and updating plans for the sustainable development of their
communities. Capacity development will also encompass institutionalizing participatory structures for decision-
making, building partnerships between stakeholders and enabling the locals to control their destiny". (Suzanna
El-Massah 2011)
Year 2004 has witnessed a stepping towards fiscal decentralization through transferring the competences of the
departments and ministries to the governorates, and boosting the power of the governors in administrating the
utilities and appointing the senior officials, with giving the governorates more flexibility in deciding its

15
development requirements and participating in preparing public budget of the state, and delegating them in
managing expenses of certain items of the budget, which are linked to operation, maintenance and services.
Afterwards, the principle of "Decentralization for Democracy" was included in the Presidential Manifesto of
2005 and was also part of the National Democratic Party (NDP) platform for the parliamentary elections of
2005. (Martinez-Vazquez and Timofeer December 2008). In 2009, the Minister of finance has delegated his
authority in the local council budget to the elected president of the local council in addition to decentralizing the
local development sector. By December 2010, the Ministry of Local Development (MOLD) was in the final
stages of preparing a new Local Administration Law that would have introduced significant changes in the
subnational governance structure. The draft law would have put the elected representatives of the people—the
Local Popular Councils—in charge of the subnational jurisdictions at the Governorate and Markaz levels. Under
the draft law, Governors would no longer be the head of the executive branch at the subnational level; instead,
the role of Governors would be revised for them to become the representatives of the center within each
Governorate, in charge of monitoring the performance of public service delivery, rather than being in charge of
public service delivery.
As part of the broader decentralization effort, the Ministry of Finance set up a permanent intergovernmental
fiscal committee in February 2010 to liaise with line ministries to move a greater share of public resources
closer to the people and had taken major steps toward adopting a ministerial fiscal decentralization strategy.
Furthermore, the Minister of Finance had taken the initial step of instructing the centrally run General Authority
for Educational Buildings (GAEB) to de-concentrate its budget to the Governorate level." (Boex, 2011)

Results of Economic transformtion in comparison:

The European Bank for Reconstruction and Development (EBRD) has started in early 90s to assess European
countries progress in economic reform, through a set of transition indicators progress on a scale from 1 (little
change from the command economy) to 4+ (developed market economy), with realization of non existence of a
“pure” market economy or an end-point for economic transition. Improvement is measured against benchmarks
of the industrialized developed market economies. The types of reform include large privatization, small
privatization, trade liberalization, price liberalization, corporate governance reform, bank reform, securities
market reform, and competition policy reform.
Over time economic transition path - shown in the below figure - tells a remarkable story; all countries were
developing towards market economy but with different performance reached. Slovak, Poland and Hungary
proved best path practice; they applied extensive economic reform and established a highly liberal economy
after long history of command economy. While Russia has started very active steps to liberalize but it had a
reversal in 1998, latter in 2000 it Russia has struggled again to empower the rule of markets, and finally it
managed to follow up other leading countries. Nevertheless, Belarus has followed a gradual path of economic
reform and demonstrated the worst economic transition role in the EECs.

16
 Figure (2):

EECs Economic Reform Score

1989-2012 SLOVAK
HUNGARY, SLOVAK
HUNGARY,
SLOVAK HUNGARY,
HUNGARY,
SLOVAK
SLOVAK
HUNGARY,
MOLDOVA REPUBLIC,
REPUBLIC,
2005,
REPUBLIC,
2004, 2010,
2011,
2012,
REPUBLIC,
REPUBLIC,
2006,
2007,
2008,
2009,
HUNGARY,
HUNGARY,
HUNGARY, HUNGARY,
1996, HUNGARY,
1997,
SLOVAK 1998,
HUNGARY,
SLOVAK 1999,
HUNGARY,
SLOVAK
SLOVAK 2000,
REPUBLIC, HUNGARY,
SLOVAK
2001,
REPUBLIC, REPUBLIC,
2002,
REPUBLIC, REPUBLIC,
2003, Poland, 2010,
2011,
2012, 4.0
HUNGARY, 1995,
SLOVAK
SLOVAK REPUBLIC,
REPUBLIC, Poland,
Poland,
2001,
Poland,
2002, Poland,
Poland,
2004,
Poland,
3.8 3.9
2003,
3.8 3.9
2004,
3.8 2011,
2012,
Poland,
2005,
BULGARIA,
2005,
4.02006,
2007,
2008,
2009,
2010,
4.0
BULGARIA,
BULGARIA,
ROMANIA,
3.8 4.1
2006,
3.9
4.0
4.04.1
2007,
2008,
2009,
3.9
4.0
2006, 3.9
2008,
2009,
2010,
2011,
2012,
2011,
2012,
2007,
HUNGARY,
SLOVAK SLOVAK
SLOVAK 1994,
REPUBLIC, REPUBLIC,
3.8
Poland,
REPUBLIC, 3.9
Poland, 3.9
1998,
Poland, 3.9
1999,
3.7 3.9
2000,
3.7 2002,
3.9
3.7 BULGARIA,
2003,
3.9 3.9
BULGARIA,
BULGARIA, 2003, ROMANIA,
ROMANIA,
2004,
Poland 2005,
ROMANIA, 2010,
2006,
2007,
2008,
2009,
3.7
Poland, 3.8
Poland,
1996,1997,
1997,1998,
3.6 1999,
3.6
3.72000,
3.8
BULGARIA,
3.7 2001,
3.8
BULGARIA,
2000,3.8
BULGARIA,
2001,2002,
ROMANIA,
ROMANIA, 2004,2005,3.7
3.7 3.7
SLOVAK
HUNGARY, REPUBLIC,
Poland,
Poland,
1994,
3.6
1993, 1996,
1995,
3.4 3.6
3.4 ROMANIA,
ROMANIA,
ROMANIA,
BULGARIA, ROMANIA,
1999, ROMANIA,
2000,2001,2002,2003,
3.6 3.6
MOLDOVA,
3.6
MOLDOVA, 3.6
3.6 2008,
2009,
2010,
2011,
2012,
2007,
Poland, 1994,
1993, 1995,
3.5
3.3 3.5
ROMANIA,
BULGARIA,
BULGARIA,
RUSSIAN, 1997,
1997, 1998,
MOLDOVA,
1998,
3.2 3.4
MOLDOVA,
3.4 3.4 3.5
2001,
RUSSIAN, 2002,
RUSSIAN,3.4
2003,RUSSIAN,
MOLDOVA,
MOLDOVA,
3.4
UKRAINE,2005,
RUSSIAN,
2004,
3.2 3.2 2012,
2006,
2008,
2009,
2010,
2011,
2012,
2011, 3.3
3.3
3.2
1993, 3.3 ROMANIA, MOLDOVA,
1997, 2000,
MOLDOVA,
3.3
RUSSIAN, MOLDOVA,
3.3 3.3
2002, 2003,2004,
ROMANIA
UKRAINE,
UKRAINE,
UKRAINE,
RUSSIAN,
3.2
RUSSIAN,
RUSSIAN,
2005, 2007,
2006,
2008,
2009,
2010,
3.2 3.2
3.2
average score

SLOVAK REPUBLIC,
HUNGARY, 3.2 RUSSIAN,
MOLDOVA,
1992, MOLDOVA, MOLDOVA,
MOLDOVA,
1995, MOLDOVA,
1996,
1996,3.1
1997,1998,
3.2 1999,
3.3
RUSSIAN, UKRAINE,
2001,
UKRAINE, UKRAINE,
3.1
2002,2003,
3.12004,
3.1 3.3
3.1
3.2
RUSSIAN, 1995, 3.1
2.9 3.2
RUSSIAN,
3.1 2000,
UKRAINE,
3.1 3.1 3.0
3.1
2001, 2.9 3.2 3.2
HUNGARY,
1992,
Poland, 3.0
1992, 2.8ROMANIA,
BULGARIA,
2.9 ROMANIA,
RUSSIAN,
1991,
ROMANIA, UKRAINE,
1994,
2.9
BULGARIA,
1994,
1994,2.9
BULGARIA,
1995,
2.7
3.1
RUSSIAN,
2.9
UKRAINE,
1996, UKRAINE,
3.0 1998,
UKRAINE,
RUSSIAN,
1997, 3.0
1998, 2.9
2.81999, 2.8 2.9 3.1 3.1RUSSIAN
2.82000,
SLOVAK
Poland,
Poland,
1990, REPUBLIC,
1991,
RUSSIAN,
2.6 2.6 1993,
UKRAINE,
2.6 1996, 2.6
2.6BULGARIA,
ROMANIA, 2.7
1993,
UKRAINE,
1993,
2.6 2.6 1995,
2.6 2.4
1991,
BULGARIA,
RUSSIAN, MOLDOVA,
2.5 1992,
1992, 2.3 1994, UKRAINE
BULGARIA,
HUNGARY, 1990,1991,2.3
BELARUS,
2.3 1995, 2.2 2.1 BELARUS,
BELARUS, 2010,
BELARUS, 2008, 2.2
2009,
2012,
2011, 2.2
2.1
ROMANIA,
MOLDOVA,
2.2 1992, 2.2
BELARUS, 1996,
1993,
2.0 2.1
MOLDOVA, 1992, BELARUS, 1997, 1.8 BELARUS,
BELARUS,
BELARUS, BELARUS,
2001, BELARUS,
2002,
1.82003,
BELARUS,
BELARUS,
1.82004,
1.92005,
HUNGARY 1.9
2006,
2007,
1.9 1.9
1.9
1.9
BELARUS,1.91993,
BELARUS,
UKRAINE, 1994,
1.7
1994, 1.7
1.6
BELARUS, BELARUS,
1998, 1.62000, 1.7
HUNGARY, 1989,
ROMANIA, 1991,
1.7 BELARUS, 1999, 1.6
Poland, 1989, 1.4
BULGARIA,
1.4 UKRAINE,
1990, 1993, 1.3 BULGARIA
ROMANIA,
BULGARIA,
MOLDOVA,
SLOVAK
ROMANIA,
MOLDOVA,
SLOVAK 1.4
BELARUS,
RUSSIAN,
UKRAINE,
MOLDOVA,
REPUBLIC,
1989,
1989, 1991,
REPUBLIC,
1990,
1990, 1992,
1992,
1991, 1.2
1.2 1.2
UKRAINE,
RUSSIAN,
BELARUS, 1.21990,
UKRAINE,
RUSSIAN,
BELARUS,
UKRAINE,
BELARUS,
1989, 1.01991,
1.0 1.0
1989,
1.0
1.0
1990,
1.0
1.0 1.0
1.0 BELARUS
SLOVAK REPUBLIC

Source: European Bank for Reconstruction and Development (EBRD), Transition Reports.

Though most of EECs have started from similar points of economics status and followed the same dream of
economic transformation, yet they didn’t all reach the same levels by the year 2012. The below table shows
what have EECs reached by year 2012 in regard to economic reform. The first column in Table 1 shows the
average economic reform scores computed by EBRD cross six dimensions; which reveal significant
improvement in the EECs during the last 25 years. Hungary, Poland and Czech/Slovakia have accomplished
noticeable steps developing their institutional framework to establish a well-developed market economy. Other
countries, like Romania, Bulgaria, Moldova, Russia and Ukraine have tried to realize economic reform in some
parts with modest results, while they succeeded to achieve progress in other parts. On the other hand, Belarus
has proved relatively bad results in comparison to other EECs; the country still having elements of central
planned economy, high levels of protections and regulations in addition to big state-owned sector. Moreover, the
table displays variation in the rate of progress of economic reform dimensions; all EECs –except Belarus- have
liberalized their prices and trade, while less improvements were noticed in regard to competition, governance
and privatization.

17
 Table (1): EECs Economic Reform Score by 2012

Average Large Small scale Governance Price Trade & Competition

Economic scale privatizatio and liberalizatio Forex Policy
Reform privatizati n enterprise n system
Score (2012) on restructurin
g
Hungary 4.1 4 4.3 3.7 4.3 4.3 3.7
Czech/Slovak 4.1 4 4.3 3.7 4.3 4.3 3.7
ia
Poland 4 3.7 4.3 3.7 4.3 4.3 3.7
Romania 3.7 3.7 3.7 2.7 4.3 4.3 3.3
Bulgaria 3.7 4 4 2.7 4.3 4.3 3
Moldova 3.3 3 4 2 4 4.3 2.3
Russia 3.3 3 4 2.3 4 4 2.7
Ukraine 3.3 3 4 2.3 4 4 2.3
Belarus 2.2 1.7 2.3 1.7 3 2.3 2
Sample mean 3.7 3.7 4 2.7 4.3 4.3 3

Std. dev. 0.6 0.8 0.6 0.77 0.42 0.65 0.67

Source: European Bank for Reconstruction and Development (EBRD), Transition Reports.

The Bertelsmann Stiftung’s Transformation Index (BTI) analyzes and evaluates whether and how developing
countries and countries in transition are steering social change toward democracy and a market economy. It
takes a value between 1 and 10, the highest, the better performance. The BTI aggregates the results of
comprehensive studies of transformation processes and political management into two indices: the Status Index
and the Management Index. The Status Index, with its two analytic dimensions, one assessing the state of
political transformation, the other the state of economic transformation identifies where each of the 129
countries stand on their path toward democracy under the rule of law and a market economy anchored in
principles of social justice. Since 2003, the number of countries surveyed has increased from 116 to 129. They
are divided into seven regional groups: South and East Africa (20 countries), West and Central Africa (18), Asia
and Oceania (21), Middle East and North Africa (19), Latin America and the Caribbean (21), Post-Soviet
Eurasia (13) and East-Central and Southeast Europe (17). The BTI is published every two years.
The state of political transformation (democracy status) is measured in terms of five criteria, stateness, political
participation, rule of law, and stability of democratic institutions. The state of economic transformation (market
economy status) is measured in terms of seven criteria, level of socioeconomic development, organization of the
market and competition, currency and price stability, private property, welfare regime, economic performance
and sustainability. If Egypt put into comparison with good performing EECs, a huge gap would be observed, the
below figure for 2014 index, shows Egypt in rank number 88, very close to the worst example of EECs, whilst
countries like Czech and Poland managed to find places in the world top five countries in economic
transformation.

18
 Figure (3):

RankRank
, Belarus, 90
of Economic Transformation Index 2014
Rank , Egypt, 88

The lower the better

Rank , Moldova, 67
Rank , Ukraine, 62
Rank , Russian
Federation, 48
Rank , Romania, 18
Rank , Bulgaria, 17
Rank , Hungary, 14
Rank , Poland, 4
Rank , Czech
Republic, 2
Source: Transformation Index BTI 2014, http://www.bti-project.org/index/status-index/

The below figure (4) puts Egypt in comparison with the EECs according to the index components in 2014. It
shows that Egypt was bad performing in all index components; the worst of all were the level of socio
economic development and welfare regime. These could be understood in the light of security and public order
absence in addition to immersing the successive governments and general deterioration of economic conditions
in the wake of January 2011 events. The lack of strong government with legitimate institutions and law
enforcement to protect property rights, leads more quickly to chaos rather than to successful market economy.
Strong governments existance is quite connected to political situation. The following part will analyze the role
of polical transformation in both EECs and Egypt economic transition.

Figure (4)

Economic Transformation Index Decomposition

Economic OrganizationLevel of of
Sustainability,
Welfare Regime,
Private Property,
Performance, Curerncy 2014 and Price
Market and Index Value
Socioeconomic Index
Economic
Belarus, 5.5 Belarus, Organization of of Value,
Sustainability,
Welfare
Belarus, Regime,
5
Private
5.5 Competition,
Belarus,
Stability,
Property,
Curerncy
2.5
Belarus,
and 3 Level
Development,
Price
Performance,
Economic
Egypt, 4Egypt, 3Egypt, Market
Organization and ofValue,4.68
Belarus,
Socioeconomic
Index Egypt,
Sustainability, Curerncy
7 Belarus,
Stability, and
Egypt, 4.3
Price Level7of
Belarus,
6
Welfare
Egypt, 4
Performance, Regime,
Private Property,Competition, Egypt,
Development,
Market and 4.71 Level of
Socioeconomic
ofIndex
of 3 Value,
Economic
Moldova, 5 Moldova,
Moldova,
Sustainability,
Welfare
Moldova, 5 4.5
Curerncy
Regime,
Private 6.5Organization
Stability,
Property,
Moldova,
and Level
Price6Development,
Egypt,
Competition, Socioeconomic
Economic
Performance, Organization
8Market ofMoldova,
Level
and of Value, 5.5
The higher the better

Sustainability, Socioeconomic
Index
Ukraine, 5.5
Welfare
Private
Ukraine,
Performance,
Ukraine, 5 6Stability,
Regime,
Property,
Curerncy
Ukraine, Ukraine,
5.5and Moldova,
Price
Market 6.5
Moldova,
and
Socioeconomic
Competition, 3 Development
Russian Federation,
Russian Federation, 5.5 Development,Index Value,
Ukraine, 5.68 Organization of
Economic
Russian Russian
Federation, Federation,
Stability, Organization
Russian
Competition,
Ukraine, of of6Federation,
Level
6.3
Development,
Sustainability,
4.5 Private
Welfare Curerncy
Regime, and Price Russian
Ukraine, Market and
Performance, 4Property,
77.5 5.5 Stability,
Federation, Market
Russian and
9Federation,
Socioeconomic
Russian Index
Federation,Value,
Economic
Romania, Romania,
Sustainability, 7
Romania, 9 Organization
Romania, of
Level of6.07 Competition
Welfare
Romania,
Performance, 7 Regime,
Private Property,
Curerncy Competition,
and Development,
6.5
Price
9 Market Romania,
6
andofIndex Value, 7.89 Curerncy and Price
Economic
Bulgaria, 7.5 Socioeconomic
Organization Level of 7
Bulgaria,
Sustainability,
Welfare
Bulgaria, 7Curerncy
Bulgaria, 9
Stability,
Regime,
7Private Romania,
and Price
Bulgaria, 8.8
Romania,
9
Competition, Stability
Performance, Property, Market Development,
and ofBulgaria,
Socioeconomic 7.93
Economic
Hungary, 8
Hungary, Stability,
8 Organization
Hungary,
Bulgaria, Level
9 Index
of Value,
Sustainability,
Welfare Curerncy
Hungary,
Regime, 9.5 and Price
Organization Bulgaria,
Level
of of 7
Hungary,
Performance,
Economic
Poland,
7Private
8Poland,Poland,
Property,7Competition,
Stability, Market Development,
andHungary,
Socioeconomic
Poland,
8.14
Index Value,
Private Property
Sustainability, Curerncy
8.5 10 and Price
Market
Hungary,Socioeconomic
and
9.5
Hungary, 8
Welfare
Poland, 9 Regime,
Private Property, Competition,
Development,
Poland,
Performance,
Czech Republic, 9.5CzechDevelopment,
Stability,
9 Republic, Competition, Index
Czech Value,8.96
Czech
CzechCzech Republic,
Czech
Republic, 8 9.5
Republic,10Poland,Poland,
Republic,
Czech 10
9.5
9.8
Republic, 8 109.43
Republic,
Source: Transformation Index BTI 2014, http://www.bti-project.org/index/status-index/

19
Role of political transformation for economies in transition:
The study has shed some light earlier on the relation between political and economic transition in the literature.
Empirically this appeared to be proved by a high computed correlation coefficient for 129 countries10 for the
years; 2006, 2008, 2010, 2012 and 2014. Based on the BTI index for 129 countries, correlation coefficient is
0.8, indicating worldwide strong positive relation between democracy and market economy, which indicates that
countries with highest political transformation have realized the highest economic transformation.

Figure (5):

Correlation Coefficient bet. Economic & Political

Worldwide
Transformation
Worldwide Worldwide Worldwide Worldwide
correlation, n= 129 countries
correlation, correlation,correlation,
correlation,
2006, 0.79 2008, 0.74 2010, 0.75 2012, 0.75 2014, 0.76
Correlation Coef.

years

Source: correlation coefficient is calculated based on the Status Index, Transformation Index BTI 2014,
http://www.bti-project.org/index/status-index/

Though nothing could be said about the causality, whereas democracy- as a participatory regime- has high
potential to establish good institutions supporting equality and justice that would empower market economy, at
the same time, positive economic performance in market economy would generate positive effect on political
transformation towards democracy, though economic deterioration would increase the likelihood for rejecting
authorization from the citizens’ side, like what happened in Egypt in 2011.
The termination of communism in the EECs, brought transition models to the whole world. By mid 90s, Central
and Eastern Europe have enjoyed perhaps two thirds of the political freedom in the world. EECs have proved
that countries, which start transition process with democratic institutions and civil liberties, are able to achieve
faster economic transition. The reason behind this is based politically on the capability of democratic
governments to implement unpopular economic reforms that may have negative effect on citizens in the short
run, bearing in mind that a well-developed civil society has a vital role in accepting the transformation by all
means.

10
The number of countries is subject to change based on data availability.

20
Remarkably, EECs have shown stronger correlation value compared to the worldwide correlation, as shown in
the below figure. Were the correlation coefficient computed based on BTI index for EECs is higher than the
universal correlation coefficient for the years; 2006, 2008, 2010, 2012 and 2014.

Figure (6): Correlation coefficient Economic Transformation and Political Transformation

EECs in comparison with worldwide

Worldwide
EECs WorldwideEECs WorldwideEECs WorldwideEECs Worldwide
EECs
correlation,
correlation, correlation,
correlation, correlation,
correlation, correlation,
correlation, correlation,
correlation,
bet.eco & Poli transformation

2006,
2006,
0.79
0.952008,
2008,
0.740.882010,
2010,
0.750.912012,
2012,
0.750.912014,
2014, 0.89
0.76
Correlation coefficient

Worldwide
correlation
EECs correlation

Year

Source: correlation coefficient is calculated based on the Status Index, Transformation Index
BTI 2014, http://www.bti-project.org/index/status-index/

Generally, most of EECs have beaten several economic difficulties that were jeopardizing their democratic
consolidation. None of EECs experienced any problems with any of the three dimensions of democratic
consolidation previously explained. In fact, the relation between political and economic transformation was seen
to be mutually dynamic; where positive economic development in the EECs have backed public support for the
consolidation of democratic reforms as happened in the most advanced reformists among transition countries
Czech Republic, Poland and Hungary, where economic stabilization and recovery after initial recession
contributed to strengthening democratic institutions and their reputation in the eyes of people (Dethier et. al,
1999).
If we consider the relation between political and economic transformation in Egypt, the computed correlation
coefficient between both is (-0.37). The negative sign reflects the negative relation based on 2011 political
events. The following figure shows the value of democracy status index goes up in year 2014, while the value of
market economy status index falls.

21
 Figure (7): Economic Transformation and Political Transformation in Egypt

Democracy status Market economy status

6
5
Index value
4
3
2
1
0
2006 2008 2010 2012 2014
Year

Source: Transformation Index BTI 2014, http://www.bti-project.org/index/status-index/

Following the sub-indexes of both democracy status and market economy status in Egypt across years from
2006 to 2014 indicates that, some of these sub-indexes improved while the others record bad performance (table
2), especially after the revolution of 2011.

Table (2): Sub-indexes of democracy status and market economy status in Egypt

Improved sub-indexes Sub-indexes with bad record

Organization of market and competition Socio-economic barriers
Anti-monopoly policy, Liberalization of foreign trade Market-based competition
Banking system Currency and price stability
Private property Anti-inflation policies
Property rights Macro stability
Private enterprise Welfare regime
Sustainability Output strength
Environmental policy Social safety nets
Educational policy and R&D Equal opportunity
Economic performance
Source: the classification of sub-indexes is based on the Status Index, Transformation Index BTI 2014,
http://www.bti-project.org/index/status-index/
Even though political transformation was announced by the previous regime before 2011 events, but democratic
consolidation was never realized, as Egypt has shown political forces opposing democratization, which
indicated no progress in regard to the behavioral dimension. On the second dimension, decreased Egyptians’
political participation reflected their alienation from the political process. Additionally Egyptian institutions
were very weak to support democracy consolidation by all means.
The 2011 events were calling for democracy and that was reflected in a slightly better political transformation
index for years 2012 and 2014 compared to the previous ones, although democracy is not yet consolidated. As
there are still domestic and international political forces opposing democratization in pursuit of their personal
interests, additionally, a significant portion of public opinion feel like returning to the previous regime because
the current situation turned out to be pretty painful for them, this considered a normal issue during times of
market reform stagnation, because of endogenous institutional and political problems (Linz et. al, 1996).
Moreover, the constitutional dimension did not support the political transformation, but it became worse after
22
2011 events, due to lack of security and law enforcement in addition to the informal sector exaggeration. Since
January 2011, Egypt faces difficulties applying macroeconomic and structural reforms with challenging socio
political environment. Policy makers are having hard times making any steps for economic transition agenda.
The political transitions are complex with new constitution and succession of interim governments. In addition
to institutional risks related to lack of clear relationships between different institutions who appear to be weak in
most times. Moreover, the interim governments have no incentives to undertake reforms that have high political
costs in the short run, though with high potential benefits in the long run. Such as, removing subsidies, currency
depreciation..etc. Whereas such reforms would have distributional impact may provokes public opinion.
No doubt that the changing political regime in Egypt could present a historic opportunity to set in motion the
targeted economic transformation, in the light of EECs experience. However being on the right track of political
transformation is a pre-requisite for success. The main political challenge of economic transformation is to
create institutions that would allow reform-oriented politicians to stay in power through the “valley of tears”
until the economy began to rebound to their political benefit (Przeworski 1991). Egypt has strong potential for a
dynamic economy, including a youthful workforce, gorgeous tourist places, excellent access to technology, and
an exclusive geographic location. The right combinations of policies are very critical for Egypt to avoid the risk
of being trapped in a vicious cycle of economic sluggishness and persistent sociopolitical conflict. A clear view
of the political economy and with the support of the international community are highly required, especially if
we appreciated how Europeanization of post-Communist countries and the EU enlargement process had quite an
ambiguous effect in supporting the success for EECs. Such actions would help realizing this potential and
deliver on the aspirations of the Egyptian people.

Concluding remarks
Economic transition is not an easy task, thus it requires a coordinated effort. The complexity of the task under
adverse conditions necessitates a heightened focus on navigating the political economy and a strong
communication strategy. The study has investigated the role of political transformation to practice a successful
economic transition. EECs have 25 years of experience since they started their transition in 1989, for all of
them, economic transition was branched with three main sub-polices, though different speed, depth and
sequencing. Though most of EECs have started from similar points of economics status and followed the same
dream of economic transformation, yet they didn’t all reach the same levels. EECs have proved that countries,
which start transition process with democratic institutions and civil liberties, are able to achieve faster economic
transition. The reason behind this is based politically on the capability of democratic governments to implement
unpopular economic reforms that may have negative effect on citizens in the short run, bearing in mind that a
well-developed civil society has a vital role in accepting the transformation by all means.
The paper concluded a relation between economic transition and political transformation, though subject to
democracy consolidation. However, the causal path is still debatable, whereas both transformations could be
driven by deeper structural factors (Timothy 2006). Whereas countries; Hungary, Poland, Czech, Bulgaria and
Romania who high profile of economic transition, have also experienced consolidated democracy, and they
managed to join the European Union in 2004 and 2007. While other EEC countries, Moldova, Ukraine, Russia
and specially Belarus that applied fragmented and reluctant economic policies, have experienced low economic

23
transformation profile as well. Undoubtedly, EU membership was a buffer zone for the transition countries that
managed to join it. Such experience shows the importance of careful sequencing of reforms, well-coordinated
and stepped-up support from the international community is also essential.
Egypt showed bad performance in all economic transformation indicators; the worst of all were the level of
socio economic development and welfare regime. This could be understood in the light of artificial political
transformation prior 2011, followed by security and public order absence in addition to immersing the
successive governments and general deterioration of economic conditions in the wake of January 2011 events.
The lack of strong government with legitimate institutions and law enforcement to protect property rights, leads
more quickly to chaos rather than to successful market economy. Therefore, the challenge for Egypt is bi-
dimensional; political transition will not be consolidated without the support of the economic performance,
otherwise people will prefer going back to the authorized rule even with corruption, this is already seen
considerable segment of the Egyptians now. Democratic consolidation can be realized only after a successful
regime shift, after the first democratic multiparty elections, when elected government starts functioning (Dethier
et. al, 1999). Whereas, there is a strong relationship between effective economic policy that responds to citizens’
expectations and consolidation of young democratic regimes that are usually fragile in transition countries.
(Marija Džunić, 2006).
Unexpectedly, the correlation between economic and political transformation was negative, this could be
explained in two ways first; the political transformation is not yet consolidated, second, Egyptian executives are
vulnerable to popular pressure, thus they will be very reluctant to take any reform policies that may put pressure
on the citizen even temporarily.
Egypt has strong potential for a dynamic economy, including a youthful workforce, gorgeous tourist places,
excellent access to technology, and an exclusive geographic location. The right combinations of policies are
very critical for Egypt to avoid the risk of being trapped in a vicious cycle of economic sluggishness and
persistent sociopolitical conflict. A clear view of the political economy and with the support of the international
community is highly required.
Many lessons from transition will remain controversial for long time. Though many important lessons have been
learned, many of them are humbling for policy makers and researchers. Most importantly is that political
regimes can only attain survival with stability, if citizens are satisfied with their standard of living due to good
economic performance.
This study results call for more future research investigating on; the process by which Political transformation is
associated with economic transformation, to what extent could international stakeholder/organizations influence
political transformation? Does decentralization have influence on the relation between political transformation
and economic performance success? What is the roles social capital and transaction costs can play to affect both
economic and political transition in the Middle East?

24
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The Impact of Big Five Personality Traits, Leadership and Risk taking Ability on Social
Entrepreneurial Dimensions

By:
Samra Chaudary
Lahore School of Economics, Pakistan

Nida-e-Fatima
Lahore School of Economics, Pakistan

Abstract:
The study tests the big five personality traits, leadership and risk taking ability on the social entrepreneurial
dimensions. This paper concludes that all the personality traits have a strong influence on the social
entrepreneurial dimensions. Structural equation model (SEM) was used to test the model. A strong relationship
was observed between social entrepreneurial dimensions and personality traits (agreeableness with sustainability
and social vision, extroversion and conscientiousness with social network and innovation and neuroticism with
social vision). It was found that gender was a moderator for the relationship of agreeableness and social vision
however only males moderated the relationship of extroversion and social network. The policy makers could
introduce education policies inculcating the personality traits posing a positive influence on social
entrepreneurship and polish them, if present, to produce social entrepreneurs who could improve society.

Keywords: Social Entrepreneurial Dimensions, Big Five Personality Traits, Leadership, Risk Taking Ability.

Introduction

Today, Entrepreneurship has turned into a crucial part for all economies and is acknowledged as a standout
amongst the most urgent exercises for the development and improvement of any economy. Excuse for why
Entrepreneurship has picked up its significance so rapidly is that the development of entrepreneurial exercises
prompts the making of some chances to maintain a solid economy incorporating formation of job and other
investment profits. This happens on the grounds that such entrepreneurial exercises are determined from
inventiveness and risk taking capacity. In this way such exercises prompt new organizations offerings with
imaginative items and administrations, which in the end expedite a significant, impart to the improvement of the
economy. Therefore there is a rationalized interest to promote entrepreneurship.
It took many centuries for the economy of the world to shift from Asia to Europe but in the recent
times the world’s concentration is increasing on the South Asian region. It is reported that it will only take a few
years for the gravity to shift back to Asia (Tencer, 2012). Also with these shifts in the population are favourable
for a country like Pakistan where the number of young people is very large and increasing. With time if these
job seekers would adopt entrepreneurship and become job providers the economy would boom. This would
eventually play a vital role in changing the picture of Pakistan. The use of internet is escalating over time,
leading to an increase in online businesses. The study from this research aims to furnish useful implications
which can be utilized by educational institutions within the field of entrepreneurship and business management,
and for government policy makers.

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This study is unique as no other study has been done in this context within Pakistan. The research related to
entrepreneurship is much needed by today’s Pakistani economy as it is facing downturn. The graduates have a
greater tendency to become job seekers rather than job providers that is to become an entrepreneur. The
conditions prevailing in our society today requires not only entrepreneurs but social entrepreneurs who work for
not only their own profits but for the betterment of the people as well. This would create a win-win situation and
help Pakistan develop as a nation. The example of such society is America a nation that is built by the
entrepreneurs who worked for their personal goals but the economy moved with them.
This study will have many contributions to the society in the Pakistani context. Firstly, it would establish and
substantiate the personality traits having a positive influence on the social entrepreneurial dimensions. Secondly,
these traits when identified should be promoted by the individuals and managers so the individuals would be
utilized to their full potentials. Also, the entrepreneurial education participation could be encouraged and these
individuals would be provided with facilities to start social entrepreneurial ventures. Along with this the present
study fills the gap that no such study has been conducted in Pakistan taking students as sample under study.
Section one introduces the topic followed by section 2 which is the Literature Review highlighting different
aspects covered by former researchers in related to the topic; creating links between the progress on the topic of
entrepreneurship and present topic. Section 3 shows methodology and section 4 is based on the analysis and
discussion of the results obtained through this study. Finally the paper concludes in section 5.

Literature Review

The concept of entrepreneurship gaining recognition as the issues like employment and unemployment are
rising. The meaning of entrepreneurship continues to be broad (Nga & Shamuganathan, 2010). Original studies
about personality traits of entrepreneurs were done in 1961 by McClelland (1961). A developing country like
Pakistan is in need for such studies as the economic conditions require entrepreneurs to create ventures. The
social entrepreneurs are defined as ‘individuals,’ ‘visionaries,’ and ‘role models’ (Ashoka, 2012).

Social Entrepreneurial dimensions: In contrast to for-profit entrepreneurs, social entrepreneurs are

determined towards providing vital human necessities and aid the influential feature of life development within
society (Austin et al., 2006; Ridley-Duff, 2008). Societal tycoons work to make the society self-sustainable
rather than providing a charity. Every social entrepreneur has a vision, an idea to help society and he/she is
committed to it; they are always searching for innovative solution despite of resource constraints (Nga &
Shamuganathan, 2010).

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Social Vision: The social ambitious person usually motivated through a convincing societal vision that
summarizes a robust wisdom of responsibility and fate towards providing an essential human necessity (Brooks,
2009). The affiliation with social vision is usually due to a traumatic experience of childhood (Barendsen &
Gardner, 2004). This study defines social vision as the idea by social entrepreneur to solve a social problem.
Sustainability: Sustain originated from sustinere, a Latin word which means to keep up. A social entrepreneur
has to look for means to keep up with both aspects- environmental and the economy aspect of the business
(Lovins et al., 2007). Sustainability is about looking at the profit maximization. The role of a social entrepreneur
in society is to enhance the standards of human life along with fulfilling the responsibility towards ecological
balance of the world (Hawken, 1992). Long term development through the use of natural capitalism practises
improves the value of life of the community (Nga & Shamuganathan 2010).
Innovation: Innovation is a way to look at the world from a different perspective; rediscovering new
dimensions/aspects of the same old routine things. Entrepreneurs tend to have this innate capability to find new
opportunities that can create “creative destruction” in the economy as nothing remains still and is constantly
evolving (Schumpeter, 1942). An Entrepreneur is someone that commercializes his or her innovation (May,
2013).Social entrepreneurs do it primarily for the sake of elevating the standards of human life. It was social
entrepreneurs who decided to look at the unprivileged as a market that was to be utilized. This was previously
neglected by for profit entrepreneurs as the investment risks were high and returns could not be seen (Hart,
2005).
Social Networks: Social networks are a precious source of guidance, monetary capital, human capital, creative
thinking and emotional support. This approach is of the view that social networks helps in the flow of
knowledge to introduce novel and creative answers to societal problems (Nahapiet & Ghoshal, 1998). The
relational approach focuses on networks as basis of combined understanding of the societal needs and help
entrepreneurs to come up with solutions specific to the problems of the society rather than the manifestation of
entrepreneur’s mind. Third view is the cognitive view concerns with common goals (London, 2008). Its impact
is further intensified by the trust that leads to enhance the relationship of group members (De Carolis &
Saparito, 2006).
Financial Returns: The financial view stems from the perspective that entrepreneurs and business people need
to get hold of and effectively exploit limited resources to generate financial returns. According to the economic
view, the goal of an entrepreneur is to maximize financial wealth, where an entrepreneur acts as an agent to the
principal. The results of financial returns are measured in quantitative terms by means of profitability metrics. It
is an innate ability of all humans to think of self-interest and one’s own profits more than the benefits of the
society (Machan, 1999). Social entrepreneurs work towards bridging the gaps between the needs of the deprived
and the financial returns (Haughton, 2008).

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Personality Traits: The personality qualities are expected attributes of a person’s behavior which aid in
clarifying the differentiation of individual actions in comparable circumstances (Llewellyn & Wilson, 2003). It
has been found that personality traits have a significant impact on the start-up intentions of entrepreneurs (Crant,
1996; Frank et al., 2007).

Openness: Openness, exhibited in a moderate value structure where person’s logical inquisitiveness and
similarity to originality of fresh understandings are embraced (Abu-Elanain, 2008). The people who score more
on openness aspect are expose themselves to new experiments, are creative and flexible (Llewellyn & Wilson,
2003). But all this comes with the ability to get easily bored and highly curious thus usually perceived as
individualistic. It can be established that openness impacts the start-ups positively (Abu-Elanain, 2008) as
entrepreneurs are high on openness as they have the ability to utilize the limited resources (Nordvik & Brovold,
1998).
H6: Openness has a positive relationship with social networks
Extroversion: Extrovert individuals demonstrate outgoing, optimistic and self-assured characteristics
(Llewellyn & Wilson, 2003). Extroversion play a part towards the upbeat quality requisite in stimulating the
sense and motivating the enigmatic idea of the social entrepreneur (Crant, 1996). Social entrepreneurs are
normally extroverts as they have to communicate with different publics and stakeholders (Nga &
Shamuganathan, 2010). The need for achievement in extroverts helps to widen social vision which is a much
needed attribute in a social entrepreneur. The attribute would then lead for an individual to be determined on his
goals (Crant, 1996). Males are thought to be more voluble hence more socially networked (Brescoll, 2011).
Males tend to engage in the positions of social and political power relative to women (Basow, 1986) Hence
gender seems to have moderating effect between extroversion and social network.
H 5: Extroversion has a negative relationship with social network.
H 8: Extroversion has a positive relationship with innovation.
H11: Gender moderates the relationship of extroversion and social network.
Agreeableness: Agreeableness is related to the capability to promote social agreement while safeguarding
common understanding and faith (Llewellyn & Wilson, 2003). It also relates to the characteristics like
interpersonal skills, good listening skills and patience. This ability of entrepreneur helps to create a co-operative
environment and helps with the sustainability of the venture. Developing a supportive atmosphere and faith in
the relationships help to assist in collecting finance for the venture and eases the process of information
exchange (Ciavarella et al., 2004). When an entrepreneur is working for the social goals it must be considered
that the goals would actually help develop the society. The two dimensions of social entrepreneurship that are
most likely to be influenced by agreeableness are social vision and sustainability (Nga & Shamuganathan,
2010). The mean of the data of Bergeman et al. (1993) showed that female showed more agreeableness than
men. It is commonly believed that females are more emotional and sympathetic towards people and society as a
whole. Hence it is yet to see if gender is likely to have moderating effect between agreeableness and social
vision.
H2: Agreeableness has a positive relationship with social vision
H4: Agreeableness has a positive relationship with Sustainability
H12: Gender moderates the relationship of agreeableness and social vision.

32
Neuroticism: Neuroticism is the level of emotional steadiness of the person (Llewellyn & Wilson, 2003). This
is characterized by mood fluctuations, are impulsive in nature, self-awareness, low self-esteem and despair
(Zhao & Seibert, 2006) mentioned in (Nga & Shamuganathan, 2010). Entrepreneurs are low on this trait as they
have to deal with limited resources and negotiate with numerous stakeholders. A person high on this trait would
be likely to have a negative influence on the social networks and sustainability as the emotions could affect the
decision making ability of a person (Nga & Shamuganathan, 2010). Thus following hypotheses are to be
investigated as these are most likely to be influenced by neuroticism.
H3: Neuroticism has positive relationship with social vision
Conscientiousness: The conscientious attribute associates to a person’s diligence, conformity with laws/actions
and the ceaseless passion in sustaining high-level degrees of performance (Llewellyn & Wilson, 2003). The
people high on this trait are characterized by sense of responsibility and achievement. The individuals who score
high on these dimensions are more likely to sustain the business ventures for a longer time period (Nga &
Shamuganathan, 2010). Thus following hypotheses would be investigated:
H7: Conscientiousness has a positive relationship with social network
H9: Conscientiousness has a positive relationship with innovation
Leadership: Leadership refers to the art of instilling confidence in others and motivating them to act in a
particular manner to achieve something. One form of leadership is known as Transformational Leadership,
which involves boosting motivation and organizational performance by giving incentives such as individual
attention, inspiration, idealized influence and stimulating one’s intellect (Felício et al., 2013).Leadership
qualities are indispensable for entrepreneurs as they often come across situations where they have to motivate
others, which usually involve individuals over whom the former have absolutely no authority (Chan et al.,
2012).
H1: Leadership has a positive relationship with social vision
Risk Taking Ability: Risk-taking ability – also known as risk propensity – refers to a person’s inclination
towards taking risks. The risk taking firms are most likely to succeed as they are ready to accept new challenges
(Curseu et al., 2010) so are the individuals. This trait is essential for entrepreneurs due to that fact that
entrepreneurship requires individuals to take risks and make decisions when faced with uncertain situations. The
willingness of individuals to take risks is a significant determinant of success for start-up ventures (Frank et al.,
2007) which is different from the risk-propensity of entrepreneurs who have already surpassed the start-up
stage.
H10: Risk taking ability has a positive relationship with financial return

33
 H11
H12

Fig 1: Theoretical framework – Adapted from Nga & Shamuganathan (2010)

34
Data and Methodology

Measures: The study used self-administered questionnaire as a main source of data. The questionnaire is a
modified version of Nga and Shamuganathan (2010). Also two new variables are added that
are leadership and risk taking ability. The constructs for these variables are taken from Chan et al. (2012) and
Curseu et al. (2010) respectively. The items for the other variables were are taken from Nga and Shamuganathan
(2010). To measure the constructs five point Likert scale is used.
Data: An adequate convenient and snowball sampling of210 respondents was chosen as an adequate sampling is
necessary to generalize results. The population under this study is students from different universities across
Pakistan lying in the age bracket 18-26 years of age. The university students are chosen because after this point
in their life they would have to choose between entrepreneurship and job seeking. The universities could be
either government or private. There are no existing studies that have done such study in Pakistan especially
using students as a sample.
Methodology: The statistical tests are done in two parts. The initial part was to measure the validity and
reliability of the constructs by using confirmatory factor analysis (CFA) and the later part was to test the
hypothesis developed above using path analysis(Shah & Goldstein, 2006). The constructs need to be reliable i.e.
consistent in what they are measuring and valid i.e. measure the items they are being employed to measure
before testing their relationships in the structural model.
Gender moderation was also performed on the two of the proposed hypotheses that is on the relationship
between agreeableness and social vision and extroversion and social network. In order to analyze the expected
heterogeneity cluster analysis was performed on the sample; exhibiting the preferences that each cluster attach
to different attributes and how these attributes could be differentiated.
Pilot test: After the construction of Questionnaire, pilot study test was done on 30 respondents. It was held to
judge the understand ability and reliability of the items that were in the questionnaire. This is important so that it
could be evaluated if the items are understood in the same way and the meaning does not vary.

Results

Sample Descriptive: Among 210 respondents, 77 were male and 133 were female respondents; all enrolled in
some level of education either in universities, colleges and schools. The highest frequency of sample belonged
to a university that is 70 percent of the sample. Correspondingly72 percent of populations belongs to the age
group of 20-25 years. The skewness and kurtosis witnessed deviation for the current status due to the sample
size characteristics that students were the sample under study and all participants had to be students to be
considered as a part of the sample. The benchmarks are defined by Arbuckle (1997) explains in his study that
the deviation from the normal distribution could be significant but the effect could be not hurtful.
The Harman’s one factor test was conducted to test for the presence of common method variance. This test is to
test that no one single variable explains more than 50 percent of the variance of the model. The highest variance
explained was 18.138 percent and lowest was 3.407 percent.
35
Measurement Model: The measurement analysis is used to check the validity, reliability and unidimensionality
of constructs. These are the three stages involved in the measurement model suggested by Shah and Goldstein
(2006). A repeated process was conducted to drop the items having a lower factor loading than the cut-off point
of 0.4 (Hair et al., 2006). The analysis was conducted for all the variables involved in the study (see table 1).
The Cronbach alpha for openness was 0.965 which is significant as it is above 0.6 as mentioned by Yusoff
(2011). The highest reliability was achieved for 0.952 for social vision and the lowest was for risk taking ability
of 0.687.

All values for the factor loadings were obtained using standardized estimates. The factor loading below 0.4 were
deleted. After these factor loadings were obtained the reliabilities were calculated. The composite reliability
having values above 0.6 are considered to have a good internal consistency (Fornell & Larcker, 1981). The
composite reliability for openness was highest with 0.966 and the lowest reliability was for risk taking that came
out to be 0.691. This shows that the data has internal consistency and is reliable.
The next step in the measurement model is to test the items for the validity. There are two types of validities,
discriminant and convergent.
AVE value of above 0.5 is acceptable. AVE for all variables was above 0.5. The second type of validity was
discriminant validity (Hult et al., 2004). This test says that discriminant validity holds if the AVE is greater than
the squared correlations of all constructs. All constructs have discriminant validity.
The next step was to test the data for unidimentionality. The model with 30 items representing 12 variables was
then studied and revealed a good fit with the latent constructs with X2/df to be 1.486, GFI = 0.869, AGFI =
0.820, RMSEA = 0.048, NFI = 0.884, RFI= 0.851, TLI= 0.946 and CFI = 0.958. All these model fits were
improved by using Modification indices.
Variables No. of Items Factor loading (min-max) CR AVE Cronbach Alpha

Openness 2 0.991-0.941 0.966 0.934 0.965

Extroversion 4 0.446-0.863 0.803 0.578 0.785
Social Network 2 0.871-0.917 0.889 0.8 0.888
Agreeableness 3 0.644-0.964 0.832 0.63 0.858
Neuroticism 3 0.842-0.907 0.924 0.803 0.907
Conscientiousness 2 0.941-0.953 0.953 0.872 0.945
Innovation 2 0.721-0.853 0.893 0.807 0.76
Financial Returns 2 0.649-0.786 0.964 0.934 0.859
Sustainability 3 0.625-0.846 0.793 0.564 0.786
Risk-Taking ability 2 0.679-0.773 0.691 0.529 0.687
Leadership Skills 2 0.625-0.837 0.774 0.537 0.766
Social Vision 2 0.941-0.965 0.952 0.908 0.952
Table 1: Factor Loading, Validities and Reliabilities

36
Structural Model: The path analysis show that six of ten hypotheses were accepted were statistically
significant and were accepted as their p-value was less 0.05 (Küster& Vila, 2011) and the beta had the same sign
as proposed in the hypothesis (see table 2).

Dependent Variables Independent Variables Beta Estimate p-value Decision

Social Vision (R2=0. 88) Leadership 0.024 0.60 Reject

Agreeableness 1.489 *** Accept

Neuroticism 0.137 0.00 Accept

Sustainability (R2= 0.01) Agreeableness 0.111 0.13 Reject

Social Network (R2 = 0.17) Extroversion 0.302 *** Accept

Openness 0.12 0.06 Reject

Conscientiousness 0.214 0.00 Accept

Innovation (R2= 0.55) Extroversion 0.658 *** Accept

Conscientiousness 0.166 0.00 Accept

Fin. Returns (R2= 0.01) Risk Taking Ability 0.185 0.09 Reject

Table 2: Results of hypothesis testing

H1 was accepted as it was highly significant relationship having positive relationship between agreeableness and
social vision meaning they are positively related. H2 is also accepted having a p-value 0.002 and a positive
relationship with neuroticism indicating a positive direct relation. H3 (social vision and leadership) was rejected
as the p-value was 0.609. The relationship is positive but insignificant. Overall the dependent variable social
vision has R2 of 0.88. This determines that social vision explains 88 percent variance in the model and so is a
very important variable.
H4 was rejected as the p-value came out to be 0.137 between sustainability and agreeableness. Although the beta
is positive but as the relationship is statistically insignificant, the hypothesis is rejected. Sustainability has R2 of
0.01.
H5 was accepted as the p-value was 0.00 and the relationship was positive indicating a direct positive
relationship between extroversion and social network. H6 was rejected as the p-value came out to be 0.068
between social network and openness. Although the beta is positive but as the relationship is statistically
insignificant, the hypothesis is rejected. H7 was accepted and thus the relationship between conscientiousness
and social network as the p-value was 0.002. Social network has R2 of 0.17.

37
The relationship between innovation and extroversion had a p-vale below 0.05 and a positive relationship hence
H8 was accepted. The relationship between innovation and conscientiousness had a p-vale below 0.05 and a
positive relationship hence H9 was accepted. The R2 for the variable innovation was calculated to be 0.55
indicating that the variable explains 55 percent of the variance in the model.
H10 was rejected as the p-value was 0.094. Although the beta was positive the hypothesis is rejected. The R 2
value indicates that the variable explains only 1 percent of variance in model.
The model fits for the final model showed a good fit for the entire model as the values for the indices were
above the cut-off points for a good model. According to Rafferty and Restubog (2011), GFI above 0.7
represents a good model fit whereas it is reported byKüster and Vila (2011) that a CFI above 0.8 represents a
good model fit. Segars and Grovers (1998) have reported that a value above 0.80 for TLI represents a good
model fit and CMIN/df should be between 3 and 5 to indicate a good model fit. The X 2 /DF was 2.226, the GFI
= 1, NFI= 0.798, CFI= 0.876, TLI= 0.864 and RMSEA = 0.077. The statistical model fits represent a good
model fit especially (see table 3).
Model-Fit indices X2 /df p-value GFI NFI CFI TLI RMSEA
Measurement Model 1.486 0.00 0.869 0.884 0.958 0.946 0.048
Structural Model 2.226 0.00 1 0.798 0.876 0.864 0.077

Table 3: Model fits for Measurement and Structural Model

Moderation

Gender was introduced as a moderator in the model on the relationship of agreeableness and social vision and
extroversion and social networks. For H11only males moderated the relationship of extroversion and social
network with an increase in beta magnitude. For H12 it was found that gender was a moderator for the
relationship of agreeableness and social vision as the presence of the moderator did not alter or affect the
relationship. The relationship was significant before the introduction of moderation and with a positive beta.
Although the direction is the same but the magnitude of the relationship changes as the moderator is introduced.
Females are found to increase the magnitude of relationship of agreeableness and social vision. Generally it is
found that females are more emotional and sympathetic towards people and society as a whole. Females are also
supported in Pakistan to begin social entrepreneurial ventures rather than for profit businesses. Thus impact of
gender as a moderator was observed in the present data. It is thus right to conclude that gender is a moderator
that can alter the magnitude but its effect on the direction could be explored by using it to test more variables.
The model fits of moderation model also met the benchmarks (see table 4 and 5).
Dependent Variables Independent Variables Estimates p-value Label
Social-Vision Agreeableness 1.41 *** Male
Social-Network Extroversion 0.63 *** Male
Social-Vision Agreeableness 1.56 *** Female
Social-Network Extroversion 0.12 0.168 Female

Social-Vision Agreeableness 1.49 *** No moderation

Social-Network Extroversion 0.31 *** No moderation

Table 4: Gender as a moderator

38
 Model indices X2 /df p-value GFI NFI CFI TLI RMSEA

Structural Mosel for moderation 1.841 0.00 0.754 0.754 0.958 0.862 0.045

Table 5: Model fit for moderation model.

Cluster Analysis

The data was analyzed and clusters were formed using the cluster analysis suggested by Hair et al. (1998).
Using the twelve variables model two clusters were formed using K-means cluster. This divided the sample into
two clusters one with 117 members and the other with 93 members. To analyse the difference in the perception
of the two clusters of entrepreneurship one-way ANOVA is performed (Yen et al., 2008).
The first cluster is named as “neurotic risk takers” as the members of this cluster are high on the traits of
neuroticism and are risk takers. They have highest average for neuroticism, leadership and risking taking
propensity. They are people who have a social vision and believe in just doing what they have decided. They are
people with leadership qualities. They are not very innovative but like to take risk which could imply that they
work well in a job environment. Thus it could be concluded that they do not have much acceptability to new
ideas unlike entrepreneurs. This cluster has 56 percent of the sample (see table 6).
The second cluster is named as “innovative extroverts” as the members of this cluster are high on openness and
extroversion and are innovative individuals. They have the highest average for openness, extroversion,
innovation, conscientiousness and social networks. This cluster has 93 members that is 44 percent of the sample.
This shows that this cluster is not only outgoing but prefers to try innovative ideas. They are high on the trait of
agreeableness and easily establish social networks. They are the people who are usually called “people’s
people”. But they are not more of leaders as they would move forward once all others agree with the decisions
they take whereas leadership sometimes require an individual to move ahead regardless of disagreements. This
cluster has more capabilities to be a social entrepreneur rather than the neurotic risk takers. The ANOVA results
shows all the variables are statistically different among the two clusters having a significance of 0.00.
Variables Cluster 1: N=56% Cluster 2: N= 44%
Openness 2.65 4.09
Extroversion 2.65 3.74
Conscientiousness 2.71 4.12
Agreeableness 3.9 3.99
Neuroticism 4.08 3.9
Social Vision 3.88 3.85
Social Network 2.75 4.01
Innovation 2.55 3.89
Financial Returns 3.69 3.76
Sustainability 3.71 3.9
Leadership 3.61 3.44
Risk Taking Ability 3.72 3.66

Table 6: Means Responses of Two Clusters

39
Discussion
The results of the research propose that personality traits like extroversion, agreeableness and conscientiousness
have a positive effect on the social entrepreneurial dimensions. The results that were observed can be somewhat
attributed to the culture of Pakistan and its present conditions. People especially the students are becoming more
risk takers and so even those without a business background are launching their new ventures. Similarly students
are starting small non-profit organization but need of the present conditions is to develop sustainable social
entrepreneurial ventures which provide viable solutions to the problems they address.
Agreeableness is observed to have a positive significant relationship with the social vision. According to Nga &
Shamuganathan (2010) a healthy dialogue promote understanding which could help to promote the social vision
and aid for the development of goals for the betterment of the society. Social entrepreneurial belief appeals
agreeableness as a trait that helps to work with people around. The ability helps them to listen and understand
concerns regarding the social distresses and shape the social vision accordingly keeping the business intellect in
mind (Krueger, 2007). This is true in the context of Pakistan where people with this trait are desirable leaders
who are ready to listen to the involved personnel and are flexible.
The relationship of leadership and social vision was insignificant; neuroticism and social vision was significant.
The relationship between neuroticism and social vision can be explained as the people high on the trait of
neuroticism have an impulsive behaviour and tend to face mood swings (Zhao & Seibert, 2006). With this
behaviour they tend to deviate but become stubborn when they are challenged so they work hard to proof
themselves. People having leadership qualities tend to have a social vision that they follow. They have a certain
path they follow. The entrepreneurs are risk takers and so, are called entrepreneurial leaders. In their research
Painoli and Losarwar (2012) mention that Entrepreneurial leadership is given a new, integrative definition as
“leadership that creates visionary scenarios that are used to assemble and mobilize a “supporting cast” of
participant who become committed by the vision to discovery and exploitation of strategic value creation”. The
relationship should be studied in the context of Pakistan.
Agreeableness has an insignificant positive relationship with sustainability although a similar study conducted in
Malaysia by Nga & Shamuganathan (2010) uncovered a positive significant relationship between sustainability
and agreeableness. The trait of agreeableness has been seen to exert a significant relationship but in the context
of Pakistan this relationship has been observed to be insignificant.
Financial returns have an insignificant relationship with risk taking ability which is against the rule of
investments that higher risk higher returns. But this hypothesis is especially affected by the current economic
conditions of Pakistan as there is uncertainty in the market and businesses are moving out of the country to
prosper in the environment with lower uncertainty. This relationship could become significant if the people
become risk takers and the economic conditions become stable. The financial returns are especially important
for the social entrepreneurial ventures to sustain it (Machan, 1999). But risk of exploring new ideas and being
innovative is essential for social entrepreneurs to bring about the change in society.
Innovation is an important variable and is affected by the traits of extroversion and conscientiousness. Both the
relationships are statistically significant. This relationship is being tested by Nga & Shamuganathan (2010) and
was observed to be significant as well. Extroverts are outgoing people who are often exposed to new ideas and
people making them more open minded; thus open to new and innovative ideas (Crant, 1996).It is a valuable

40
trait for entrepreneurs because they need to spend a lot of time interacting with investors, employees, and
customers, and have to sell all of them on the value of the business (Shane, 2000).
This is important for social entrepreneurs to come with novel ideas which are sustainable. Similarly people high
on conscientiousness are aware of themselves and their surroundings which is important as awareness is
essential to be a social entrepreneur. Being aware of the society and distress that it faces would be the first step
to resolve societal issues.

Limitations and Future Research Directions

This study is a quantitative study based on personality traits and social entrepreneurial dimensions but
entrepreneurship is a very subjective topic and thus qualitative research should be incorporated in the future
studies. Another limitation is lack of different capital resources to administer research in an effective way and
short time frame.
Case studies and interviews could be a useful mean to derive data. Current study is done under the assumptions
that the students have given correct information but this is not necessarily a case. The response bias is high as
the students or individuals at any stage are unwilling to accept their weaknesses. Thus this research falls short on
the in-depth analysis of the entrepreneurial dimensions. The future studies could incorporate the social
resistance that social entrepreneurs face from different social forces including family. Using those results
present frame work could be redefined. In the future studies, a longitudinal study could be conducted collecting
data at different points in time and this could be done for students in different regions of Asia for
generalizability of the results. The future studies could use a more qualitative approach.

Managerial Implications
Pakistan is facing many social dilemmas and it is the need of the hour that institutions train the personnel
equipped with characteristics that would help them start-up social entrepreneurial ventures. The insight gained
from the current study would help the policy makers identify the key characteristics and include them in the
curriculum of the business and management schools. Also indicate that cooperating entrepreneurial studies in
the early stages of education help motivate the students to identify social entrepreneurship as a viable career
path especially in Pakistan where students aim to be either doctors or engineers. They are encouraged to become
job seekers rather than job providers. The people with leadership qualities and innovation should be motivated
to take up entrepreneurial courses, this early training would help them gain an experience and start up
entrepreneurial ventures.

Conclusion
Social entrepreneurs are the only sustainable solutions to the crisis Pakistan is facing. The need of the hour is to
incorporate the personality characteristics into the curriculum so that the traits like agreeableness, extroversion
and conscientiousness could influence the social entrepreneurial dimensions like social vision, innovation and
social networks. The present situations of Pakistan require job providers rather than job seekers who are leaders,
open to new ideas and have the ability to take risks to establish new start-ups that are profitable and sustainable
with the ability to distress social concerns.

41
Many social entrepreneurs are emerging throughout the world and Pakistan is in dire need for these leaders that
could provide them solutions to the problems including poverty, corruption, water shortages and health issues.
Pakistan requires social entrepreneurs to provide a platform for sustainable solution rather than charity. This
study unfolds the relationship between these social entrepreneurial dimensions and personality traits that should
be inculcated into the students in their early life so they opt for entrepreneurship as a viable career option.

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44
 Non-performing loans in the Czech Republic: A VECM analysis

By:
Ales Melecky
Technical University of Ostrava
Abstract
The Global Financial Crisis which began in 2007 hit the Czech Republic in 2008 as the macroeconomic
fundamentals weakened. As a consequence, the credit risk in the Czech banking system has increased. The
paper examines the sensitivity of credit risk of banks, measured by the ratio of non-performing loans to total
loans granted (NPLR) to changes in the main macroeconomic drivers of NPLR suggested by empirical
literature. The author uses quarterly data from 2002 to 2013 and estimates the sensitivity of the NPLR to GDP
growth, PPI inflation, companies’ lending interest rates, households’ lending interest rates and to change of real
effective exchange rate of the Czech Crown (CZK). In the empirical analysis author uses Vector error correction
model (VECM) which allows distinguishing long run relations and short run dynamics. To my knowledge there
is not a published paper applying VECM on the Czech data in this area and there is only one paper on this topic
using VAR approach but limited on precrisis period. The lag length selection is however limited due to
employed method and available data span. The author finds that macroeconomic variables are significant
determinants of NPLR both in the long run and in the short run. Estimated VECM reveals high and significant
impact of change in the households´ lending rate on change of NPLR in the Czech Republic. The results may
help central authorities to improve preventive action to limit accumulation of credit risk in the Czech economy.
Future research could closely examine the situation in households’ sector which might be a potential source of
risk hidden in aggregated variables.

Keywords: Credit risk, Non-performing loans, Czech Republic, Vector error correction model.

Introduction
Regulatory authorities responsible for financial stability and for banks’ management should carefully monitor
determinants of credit risk. Non-performing loans (NPLs) are broadly used in the empirical literature as an
indicator of credit risk materialization, see e.g. Buncic and Melecky (2013), Louzis et. al. (2012) or Festic et. al.
(2011). Increase in credit risk can limit credit supply and reduce investment activity and as a consequence
constrain economic activity. However it is possible to analyze both macroeconomic and microeconomic
(banking) determinants of the non-performing loans, majority of the empirical studies focus only on one of this
two. In the Czech Republic the macro and micro data are usually not publicly available in the same frequency or
their data spans are different. The macroeconomic determinants influence an amount of NPLs and are result of
the macroeconomic imbalances. These determinants are systemic and affect every institution in the financial
sector. The aim of this paper is to use Vector error correction model (VECM) to analyze the sensitivity of the
credit risk in the Czech economy, measured by the non-performing loans ratio (NPLR)11 to changes in
macroeconomic fundamentals.

11
Non-performing loans ratio is calculated as non-performing loans to total loans granted by the banking
institutions. Czech Nation Bank follows the definition of NPLs published by the IMF in the Financial Soundness
Indicators Compilation Guide of March 2006 (IMF, 2006). According to the guide loans should be classified as
NPLs if (1) payments of principal and interest are past due by three months (90 days) or more, or (2) interest
payments equal to three months (90 days) interest or more have been capitalized (re-invested into the
principal amount), refinanced, or rolled over (i.e. payment has been delayed by arrangement).

45
Most of the empirical papers confirmed the inverse relation between non–performing loans and economic
growth, see e.g. Podpiera (2006) or Babouček and Jančar (2005). In economic booms demand of the economic
agents for products and services increases due to their better financial position and also credit supply increases
which cause decrease of NPLs. On the other hand, in economic bust an amount of NPLs rises due to difficulties
of agents to repay their debts on time. NPLR could be further influenced by slowdown of credit growth. In the
case of loans with floating rate an increase of interest rates leads to higher debt service costs (increase in the
interest payments). Due to the higher debt burden of economic agents the amount of non–performing loans rises.
The positive correlation between NPLs and interests rates is well-established in the empirical literature, see
Podpiera (2006), Louzis et al. (2012) and for the Czech Republic case Festić and Bekő (2008). There is no
uniformed opinion about impact of inflation on the non–performing loans. This is probably result of different
economic conditions in individual countries or different research methods used by the authors. On one hand
inflation can improve borrowers’ ability to meet their obligations by eroding the real value of repayment, see
e.g. Shu (2002). On the other hand, inflation can worsen the decision making process of economic agents and
weaken an economic activity with the consequence of higher credit losses, see e.g. Podpiera (2006) or Babouček
and Jančar (2005). Also the relationship between the exchange rates and NPLs is not clear. The effect of
depreciation of domestic currency depends on whether positive impact of improving competitiveness and
international trade (income effect) outweighs negative impact on asset quality due to unhedged positions of
debtors in foreign currencies (balance sheet effect), see e. g. Babihuga (2007).

Development in the Czech Republic during more than last decade is captured in the following graphs. Figure 1
presents annual growth rates of non-performing loans and total loans granted in the banking sector. During this
period there was a similar development of the volumes of NPLs and total granted loans with the correlation
coefficient of 0.76, but as figure 1 shows the dynamics of their growth rates was quite different. Growth of total
loans granted was more stable over time whereas the growth of NPLs undergone dynamic development
especially during on the onset of the global financial crisis. Situation was serious especially during the 2008Q4
– 2010Q3 period when the growth rate of NPLs constantly exceeded 30% (even 50% in 2009Q1-2010Q1
period).

80
60
40
in %

20
0
-20
-40
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3

Y-Y growth NPLs Y-Y growth Loans

Figure 1 Annual growth rates of non-performing loans and total granted loans (2003-2013)
Source: Self-elaboration based on the Czech National Bank’s data.
46
Figure 2 describes progress of NPLR calculated as a share of NPLs to total loans granted. In the beginning of
2000s NPLR decreased over time until the global economic crisis hit the Czech economy. NPLR then started to
rise and peaked in the third quarter of 2010, since then NPLR stabilized around 6% with the minor improvement
in the last 3 years. The value of NPLR at the peak of 2010Q3 was 2.25 times higher than on the onset of the
crisis in 2008Q1.

14
12
10
8
in %

6
4
2
0
2002Q1
2002Q3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
Figure 2 Non-performing loans ratio in the Czech Republic (2002-2013)
Source: Self-elaboration based on the Czech National Bank’s data.

Data and Methodology

Data: The empirical analysis in this paper is based on the quarterly data for the Czech Republic. Time series
start from the first quarter of 2002 and end in the fourth quarter of 2013. Primary characteristics of the data and
their sources are provided in table 1. Potential credit risk is measured by non-performing loans ratio. For the
pricing of lending in the economy I use companies´ lending rate and households’ lending rate (the correlation
between the two is 0.58).

Dynamics of the exchange rate captures annual growth rate of the real effective exchange rate of the Czech
Crown as suggested by Mojon and Peersman (2001) or Babouček and Jančar (2005). Development of the output
in the economy was measured by the real GDP growth (the original GDP series are seasonally adjusted and
expressed in 2005 prices). Since macroeconomic variables are quite volatile annual growth rates are calculated
as year-on-year changes rather than quarter-to-quarter changes multiplied by four as suggested by Buncic and
Melecky (2013).

Variable Characteristic Source

Non-performing loans Calculated as a share of non-performing loans to total volume

ARAD, CNB
ratio of nominal loans

Calculated as annual percentage change of the PPI index

Inflation ARAD, CNB
(2005=100)

Lending rate – Companies Nominal lending rate for companies ARAD, CNB

47
 Lending rate –
Nominal lending rate for households ARAD, CNB
Households

Real effective exchange Calculated as annual percentage change of the real effective
ARAD, CNB
rate growth exchange rate of the Czech Crown

Calculated as annual percentage change of the real gross

Real GDP growth CSO
domestic product, seasonally adjusted, in 2005 prices

Table 1 List of variables and their sources

Table 2 provides abbreviations and basic descriptive statistics of the data used for the empirical analysis id est.
mean, median, minimum, maximum and standard deviation of respective time series.

Abbreviation Variable Mean Median Max. Min. Std. Dev.

NPLR Non-performing loans ratio 5.49 5.74 11.88 2.65 2.07
INFL Inflation 2.05 1.73 7.85 -5.43 2.97
LRC Lending rates – Companies 4.43 4.31 6.32 3.07 0.74
LRH Lending rates – Households 7.19 6.97 9.08 5.79 0.81
REER Real effective exchange rate growth 1.81 0.46 14.59 -7.82 5.33
RGDP Real GDP growth 2.59 2.91 7.59 -5.47 3.42
Table 1 Descriptive statistics

Methodology: The survey of relevant literature revealed only few papers that use vector error correction model
(VECM) to analyze non-performing loans, see Zeman and Jurca (2008), Rinaldi et al. (2006) or Badar and Javid
(2013) and none of them concentrated on the Czech economy. Therefore in this paper the VECM is employed to
estimate effects of macroeconomic determinants on NPLR in the Czech Republic. The paper focuses on short
run dynamics described by the error correction part of the model. The VECM is described by equation 1:
p
Yt   0Yt 1   B0, j Yt  j  ut
j 1 , (1)
B0, j  j  1,..., p 
Where Yt  Yt  Yt 1 , Yt is an m-dimensional vector,  0   0 0 has rank 0  r0  m ,

are
m m (transient) coefficient matrices and ut is an m-vector error term with mean zero and nonsingular


covariance matrix u . The rank r0 of  0 is an order parameter which measures the cointegrating rank or the
number of cointegrating relations in the system, for more details see e.g. Zhipeng and Phillips (2010). The
vector of variables Y includes non-performing loans ratio, companies’ lending rate, households’ lending rate,
and inflation, growth of real effective exchange rate of the Czech Crown and real GDP growth.
The lag order p characterizes the transient dynamics in the system. However Johansen cointegrating test
indicated up to 5 cointegrating vectors, the loss of explanatory power of the model in the case of using 1
cointegrating vector is very small. The economic interpretation of the long run relations is much easier with the
one cointegrating vector therefore this specification is preferred and discussed in the following section.

48
Estimation Results: This section summarizes estimation results of the VECM specified above based on the
Czech data. Table 3 provides results of the long term relations described by the cointegration vector as well as
the short-term dynamics of the VECM in the second part of table 3. Last two parts of the table includes main
statistics describing explanatory power of the short term dynamics equations and model as a whole. The model
contains one cointegrating vector and lagged variables up to lag 4. The model was tested for the stability as well
as autocorrelation and normality of residuals. Residual tests can not reject the null hypotheses that residuals are
not serially correlated and are multivariate normal at 5% significance level. All inverse roots of AR
characteristic polynomial lie inside the unit root circle except ones imposed by the VECM specification. Table 3
presents estimated coefficients, standard deviations in the parenthesis and t-statistics in the square brackets.

Table 3: Co-integration Equation

Cointegrating equation
NPLR(-1) C LRH(-1) LRC(-1) RGDP(-1) INFL(-1) REER(-1)
1 -4.932 -3.1863 6.9879 -2.5284 -1.9206 2.6475
(-2.426) (-4.458) (-0.488) (-0.784) (-0.646)
[-1.314] [ 1.568] [-5.183] [-2.448] [ 4.097]
Short-term dynamics of the vector error correction model
Error Correction: D(NPLR) D(LRH) D(LRC) D(RGDP) D(INFL) D(REER)
CointEq1 -0.0325 0.0038 -0.0065 -0.0184 -0.0764 -0.1494
(0.006) (0.001) (0.006) (0.038) (0.041) (0.104)
[-5.320] [ 2.903] [-1.171] [-0.489] [-1.882] [-1.435]
D(NPLR(-1)) -0.3526 -0.0073 0.1161 0.6426 -0.9236 2.1307
(0.125) (0.027) (0.114) (0.775) (0.834) (2.137)
[-2.811] [-0.272] [ 1.016] [ 0.829] [-1.108] [ 0.997]
D(NPLR(-2)) -0.1789 -0.0811 -0.1433 0.1176 0.3540 0.0217
(0.101) (0.022) (0.092) (0.626) (0.674) (1.727)
[-1.765] [-3.724] [-1.552] [ 0.188] [ 0.525] [ 0.013]
D(NPLR(-3)) 0.2323 -0.0085 0.2512 0.3251 0.6428 -0.4524
(0.122) (0.026) (0.111) (0.756) (0.814) (2.085)
[ 1.898] [-0.322] [ 2.253] [ 0.430] [ 0.790] [-0.217]
D(NPLR(-4)) 0.3449 0.0432 -0.1813 -0.3261 -0.3384 -0.3855
(0.117) (0.025) (0.107) (0.725) (0.780) (1.999)
[ 2.939] [ 1.713] [-1.696] [-0.450] [-0.434] [-0.193]
D(LRH(-1)) 2.6801 0.2301 0.2907 -1.2494 3.3255 -4.7522
(0.608) (0.131) (0.554) (3.755) (4.041) (10.35)
[ 4.409] [ 1.763] [ 0.525] [-0.333] [ 0.823] [-0.459]
D(LRH(-2)) 1.8197 0.2572 -0.2086 -4.7065 7.1748 -0.2659
(0.685) (0.147) (0.624) (4.234) (4.556) (11.67)
[ 2.655] [ 1.747] [-0.334] [-1.112] [ 1.575] [-0.023]
D(LRH(-3)) 0.7366 -0.2777 -0.3578 4.3827 3.2681 11.572
(0.710) (0.152) (0.646) (4.384) (4.718) (12.09)
[ 1.038] [-1.821] [-0.554] [ 1.000] [ 0.693] [ 0.957]
D(LRH(-4)) 1.1227 0.3917 -0.0779 0.0613 -3.7011 5.2654
(0.592) (0.127) (0.539) (3.657) (3.936) (10.08)
[ 1.897] [ 3.080] [-0.145] [ 0.017] [-0.940] [ 0.522]
D(LRC(-1)) -0.3662 0.0512 0.3942 0.0868 1.3749 4.4401
(0.249) (0.054) (0.227) (1.540) (1.658) (4.247)
[-1.469] [ 0.956] [ 1.736] [ 0.056] [ 0.830] [ 1.046]
D(LRC(-2)) -0.0224 0.0248 -0.1209 0.9530 0.0456 5.6544
(0.241) (0.052) (0.219) (1.487) (1.601) (4.100)
[-0.093] [ 0.480] [-0.551] [ 0.641] [ 0.029] [ 1.379]
D(LRC(-3)) 0.2132 0.1340 -0.0448 -2.0659 -2.5484 -0.8653
(0.220) (0.047) (0.200) (1.356) (1.460) (3.739)
49
 [ 0.971] [ 2.842] [-0.224] [-1.523] [-1.746] [-0.231]
D(LRC(-4)) -0.2780 0.1049 0.2820 -1.7659 -0.9429 2.2105
(0.234) (0.050) (0.214) (1.449) (1.559) (3.994)
[-1.186] [ 2.082] [ 1.321] [-1.219] [-0.605] [ 0.554]
D(RGDP(-1)) -0.0525 0.0014 0.012345 0.187057 0.307183 0.594811
(0.039) (0.008) (0.03509) (0.23805) (0.25618) (0.65632)
[-1.364] [ 0.174] [ 0.35179] [ 0.78578] [ 1.19910] [ 0.90628]
D(RGDP(-2)) 0.0181 0.0043 -0.028269 0.029889 -0.334237 -0.828508
(0.039) (0.009) (0.03583) (0.24305) (0.26156) (0.67011)
[ 0.459] [ 0.511] [-0.78899] [ 0.12297] [-1.27786] [-1.23637]
D(RGDP(-3)) -0.0574 0.0119 -0.013605 0.106186 0.346013 0.761596
(0.043) (0.009) (0.03918) (0.26582) (0.28606) (0.73288)
[-1.334] [ 1.284] [-0.34720] [ 0.39946] [ 1.20958] [ 1.03918]
D(RGDP(-4)) -0.0350 -0.0034 0.008605 -0.291685 -0.004841 -0.302947
(0.040) (0.009) (0.03642) (0.24710) (0.26591) (0.68126)
[-0.874] [-0.394] [ 0.23624] [-1.18045] [-0.01821] [-0.44469]
D(INFL(-1)) -0.0873 0.0368 0.0466 -0.1020 -0.2950 0.4497
(0.038) (0.008) (0.034) (0.232) (0.249) (0.639)
[-2.329] [ 4.566] [ 1.365] [-0.441] [-1.184] [ 0.704]
D(INFL(-2)) -0.1149 0.0038 0.0051 -0.1560 0.1765 -0.0513
(0.030) (0.006) (0.027) (0.182) (0.196) (0.502)
[-3.896] [ 0.596] [ 0.191] [-0.857] [ 0.901] [-0.102]
D(INFL(-3)) -0.0795 -0.0035 -0.0003 0.0150 0.0838 0.2745
(0.030) (0.006) (0.027) (0.1830) (0.197) (0.504)
[-2.688] [-0.554] [-0.010] [ 0.082] [ 0.426] [ 0.545]
D(INFL(-4)) -0.0787 -0.0129 -0.0148 0.1307 -0.3901 0.3055
(0.026) (0.006) (0.024) (0.160) (0.172) (0.439)
[-3.051] [-2.326] [-0.630] [ 0.820] [-2.275] [ 0.695]
D(REER(-1)) 0.0633 -0.0131 -0.0036 0.1617 0.1923 -0.1324
(0.016) (0.003) (0.014) (0.096) (0.104) (0.266)
[ 4.057] [-3.913] [-0.251] [ 1.676] [ 1.853] [-0.498]
D(REER(-2)) 0.0489 -0.0127 0.0021 0.1043 0.0406 -0.2087
(0.014) (0.003) (0.013) (0.086) (0.092) (0.237)
[ 3.515] [-4.254] [ 0.163] [ 1.214] [ 0.439] [-0.881]
D(REER(-3)) 0.0498 -0.0056 0.0003 -0.0116 -0.0626 -0.3058
(0.013) (0.003) (0.012) (0.080) (0.086) (0.220)
[ 3.856] [-1.997] [ 0.027] [-0.145] [-0.728] [-1.389]
D(REER(-4)) 0.0344 -0.0033 0.0060 -0.0552 -0.0442 -0.7306
(0.013) (0.003) (0.012) (0.082) (0.088) (0.225)
[ 2.607] [-1.164] [ 0.498] [-0.677] [-0.503] [-3.250]
C 0.3825 -0.0125 -0.0350 -0.2633 0.5608 0.9082
(0.067) (0.015) (0.061) (0.416) (0.448) (1.147)
[ 5.681] [-0.863] [-0.570] [-0.633] [ 1.253] [ 0.792]
Adj. R-squared 0.8191 0.7896 0.3149 0.2278 0.5137 0.2923
Log likelihood 30.158 96.290 34.182 -48.143 -51.298 -91.752
Akaike AIC -0.1934 -3.2693 -0.3806 3.4485 3.5953 5.4768
Schwarz SC 0.8715 -2.2044 0.6843 4.5134 4.6602 6.5417
Log likelihood 13.920
Akaike information criterion 6.8875
Schwarz criterion 13.523
Table 2 Estimation results - VECM

Table 3 includes complete estimation results gained from the VECM. In the following interpretations I will
focus only on the most relevant results with respect to the goal of the paper id est. how the differences of the
main macroeconomic determinants influence differences of the NPLR. The results for the NPLR short-term

50
dynamics are provided in the second column of the table 3 called D(NPLR). P-values calculated from the
presented
t-statistics suggest that households’ lending rate, inflation and real effective exchange rate are statistically
significant determinants in the short run dynamics of NPLR at 5% significance level. Concretely, the most
influential determinant of the NPLRs’ short run dynamics is the change of households’ lending rate and is
estimated to be significant at lags 1 and 2 (estimated coefficients 2.68 and 1.81 respectively). The result for the
households’ lending rate is in line with the economic theory. Increase of interest rates leads to the higher debt
service costs and due to the higher debt burden of economic agents the amount of non–performing loans
increases and cause rise in NPLR. On the other hand changes in companies’ lending rate are not found to be
significant determinant of the change of NPLR at conventional statistical significance levels. The estimated
coefficients for the change of real GDP growth are in line with the economic theory (implies decrease of NPLR
in the case of increase of the economic growth), but their statistical significance is low. According to estimation
result the effects of inflation and real effective exchange rate of the Czech Crown are relatively small compared
to households’ lending rate and are statistically significant at 5% level. Positive value of estimated coefficients
of the real effective exchange rate indicates prevalence of the balance sheet effect over the income effect in the
Czech economy. Finally, the elasticity between inflation rate and NPLR is estimated to be negative probably
due to eroding of the real value of debt repayment.

Conclusion
The Czech economy experienced successful decrease in non-performing loans ratio in the beginning of 2000s.
The symptoms of global financial crisis came to the Czech Republic in the 2008, caused sharp increase in
non-performing loans and reduced the growth of loans granted by the banks. Because of these two effects
the non-performing loans ratio in the Czech Republic returned back to the levels from the beginning of 2004.
The aim of this paper was to use Vector error correction model (VECM) to analyze the sensitivity of the credit
risk in the Czech economy, measured by the non-performing loans ratio (NPLR), to changes in macroeconomic
fundamentals. Concretely, the paper focused on dynamics of non-performing loans ratio which was explained
by 5 macroeconomic determinants id est. inflation, companies’ lending rate, households’ lending rate, growth of
real effective exchange rate of the Czech Crown and real GDP growth. The results of the estimated vector error
correction model identified households´ lending rates to be most influential factor of the short-term dynamics of
the non-performing loans ratio. On the other hand companies’ lending rates does not play significant role in this
dynamics. Real GDP grow has only minor and statistically not significant impact on the decrease of the credit
risk measured by the NPLR. Vector error correction model identified that positive impact of the real
depreciation of the Czech Crown leads to improvement in the NPLR. Also increased inflation helped to reduce
accumulation of credit risk in the Czech economy during examined period.
The accumulation of credit risk should be closely watched by the authorities in order to prevent potential
worsening of the situation in the Czech Republic. Such an unwilling development could be harmful for fragile
economic growth that was recently recovered. As the estimation results of households’ lending rate suggest,
future research could concentrate on the household sector of the Czech economy. This sector might be potential
source of future risk and should be therefore closely monitored by the authorities.

51
Acknowledgements

This paper has been elaborated in the framework of the project No. CZ.1.07/2.3.00/30.0016 supported by
Operational Programme Education for Competitiveness and co-financed by the European Social Fund, and the
Czech Science Foundation grant No.13-20613S.

References

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Working Paper, WP/07/115, IMF, Washington D. C. [online]. [cit. 21. 4. 2014]. Available at:
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Babouček, I. and Jančar, M. (2005), “A VAR analysis of the effects of macroeconomic shocks to the quality of
the aggregate loan portfolio of the Czech banking sector”, Czech National Bank Working Paper Series
1. Czech National Bank, Prague. [online]. [cit. 5. 9. 2012]. Available at:
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53
 Efficient or Inefficient Markets: A Behavioral Finance Perspective

By:
Dr. Soha Khan
Prince Mohammad bin Fahd University, Alkhobar, KSA
Abstract:
Behavioral finance doesn’t go with the strict rationality assumption of traditional economic models and studies
the effect of human biases and irrationalities on individual decision making. Behavioral Finance started
emerging somewhere in late 1980’s to account for the major anomalies that had challenged the efficiency of
markets. This paper aims to bring the major researches in the field of market efficiency. This paper also
highlights the major anomalies which question the basic tenets of efficient market and move to behavioral
factors in explaining these anomalies. The paper is a review paper, evaluating all the major researches on
efficient markets and behavioral finance. The two schools are at odds with each other. Several cases of
irrationality have been there which highlight the role of behavioral factors in explaining the stock market
movements. But the role of arbitrageurs in driving the markets back to efficiency cannot be ignored altogether.
Certain empirical issues in testing of market efficiency also lead to markets being categorized as inefficient.
Ideas in this paper have some important implications for the proponents of efficient markets as well as
behavioral finance. The role of arbitrageurs has been highlighted. The debate on efficiency or inefficiency of
markets is very much limited by the tests that are used in testing the efficiency. Development of such asset
pricing models which may capture investor’s decision making biases can be a move further in this direction.

Keywords: Efficient markets, Anomalies, Behavioral finance.

Introduction
Efficient market theory which is the cornerstone of modern finance claims, that security prices reflect all
information i:e: the current price of the stock reflects all relevant information (Fama, 1970). If a market is
efficient then the best estimate of the true value of a security is it’s current market price. Any deviation from the
true value would lead to mispricing and arbitrageurs would play their role driving the market prices
instantaneously towards the true value of the security.

Eugene Fama, who is considered to be the father of this theory, divided market efficiency into three forms
depending on the type of information that is available at a particular time. Tests of the market efficiency are
essentially tests of whether the three general types of information – past prices, public information and inside
information – can be used to make above average returns on investments. If the market is efficient, it is
impossible to make above average returns regardless of the information available, unless abnormal risk is taken.
According to weak form of EMH, the current prices of stocks fully reflect all the information that is contained in
the historical sequence of prices. Everyone has access to past prices, even though some people can get them
more conveniently than others. Liquidity traders (traders who do not investigate before investing) may sell their
stocks without considering their intrinsic value and may cause prices to fluctuate. Buying and selling activities
of the information traders (they analyze properly before buying and selling) lead the market price to align with
the intrinsic value. In this form of market efficiency traders may earn by the naive buy-and-hold strategy while
some may incur loss, but the average buy and hold strategy cannot be beaten to earn abnormal returns. The semi
strong form professes that the current prices of stocks not only reflect all informational content of historical
prices, but also reflect all publicly available knowledge about the corporations being studied. Thus the effort by
analysts and investors to acquire and analyze public information is not going to yield consistently superior

54
 returns. In contrast to the proponents of the semi-strong form of EMH, there are investors who think they can
profit from a careful study of the publicly available data. These investors practise fundamental analysis and use
the information in financial statements and other public sources to identify mispriced securities. The third form
of efficiency is the strong form. This form states that current prices already reflect all public and private
information. In this form of market efficiency any information that is available be it public or ‘inside’, cannot be
used to earn consistently superior investment returns. It represents an extreme hypothesis which most observers
do not expect to be literally true.

Early researches provide evidence in favor of markets being weak form efficient. Kendall (1953), Roberts
(1959), Osborne (1959), Granger and Morgenstern (1963), Fama (1965, 1965a, 1970) all supported efficiency
in it’s weak form. Despite evidence in support of weak form, there were instances of anomalous price
behaviour, where certain series appeared to follow predictable pattern. DeBondt and Thaler (1985) testified
whether there is reversal effect, in which losers turns winner and winners fade back over long horizon. Poterba
and Summers (1988) and Fama and French (1988a and 1988b) discuss the linkage between short-horizon
positive serial correlation in stock returns, accompanied by negative correlation over longer intervals. Poterba
and Summers suggest that their findings are indicative of a market inefficiency. Jegadeesh and Lehman (1990)
also gave evidence in favour of short term return reversals (contrarian strategies). Jegadeesh and Titman (1993)
provided evidence in favour of return continuation i:e: momentum strategies. Barman and Samanta (2001)
divided their analysis into two sub-periods, first ending in March 1992.Data from both sub periods did not
support efficiency in the Indian stock market. Similarly Pant and Bishnoi (2001), Poshakwale (2002), Chander
and Maiyo (2003), Khan et al. (2006) all rejected weak form efficiency in the Indian stock market.

Market anomalies
As more and more researches tested EMH, some rather controversial evidence began to appear. An unexpected
blow came in 1980 in the form of Grossman Stiglitz paradox; published in their article in 1980 “On the
impossibility of informationally efficient markets” They argued that if all relevant information were reflected in
market prices market agents would have no incentive to acquire the information on which prices are based.
Also Shiller (1981) examined variation in stock prices and found that that the fluctuations were too large to be
justified by the subsequent variation in dividend payments.

EMH became more controversial especially after the detection of anomalies in the capital markets. Anomalies
are chance events that are not anticipated and offer investors a chance to earn abnormal profits. Some of the
main anomalies are summarized below.

A. The January effect: Rozeff and Kinney (1976) were the first to document evidence in favour of january effect,
also known as turn-of-the-year effect. Their results showed higher mean returns in january as compared to other
months. Later studies of Keim (1983), Bhardwaj and Brooks (1992), Eleswarapu and Reinganum (1993),
document that the effect persisted. Bhabra et al. (1999) documented a November effect, and also found that the

55
 january effect is stronger since 1986. Recently Booth and Keim (2000) have shown that turn-of-the-year
anomaly is not reliably different from zero over the period 1982 to 1995.
B. The weekend effect (or Monday effect): French (1980) analysed returns of stocks for the period 1953-1977
and found that there is a tendency for returns to be negative on Mondays, whereas they are positive on other
days of the week. He further said that “these negative returns are caused by the weekend effect and not by the
general closed market effect”. A trading strategy which would be profitable in this case would be to buy stocks
on Monday and sell them on Friday. Internationally Agarwal and Tandon (1994) founnd significant negative
returns on Monday in nine countries and on Tuesday in eight countries and large and positive returns on Friday
in 17 out of the 18 countries studied.
C. Other seasonal effects: Holiday and turn-of-the-month effect have been well documented across time and
across countries. Lakonishok and Smidt (1988) showed that the U.S .stock returns are significantly higher at the
turn of the month, which is defined as the last and first three trading days of the month. Ariel (1987) also
showed that returns tend to be higher on the last day of the month. Ariel(1990) and Cadsby and Ratner (1992),
all provided evidence to show that returns are on average higher the day before a holiday as compared to other
trading days. Gultekin and Gultekin (1983), Jaffe and Westerfield (1985) also identified seasonal patterns.
D. Small firm effect: Banz (1981) was the first one to document the small firm effect also known as the ‘size
effect’. He showed that small firms outperform large stocks even after adjustment for systematic risk.
Supporting evidence is provided by Reinganum (1981) who found that the risk adjusted annual return of small
firms is greater than 20% as compared to high capitalization firms. If the market is efficient, one would expect
the prices of the low capitalization stocks to go up to a level where the risk adjusted returns to future investors
would be normal. But this did not happen, and this anomaly could be used to earn abnormal profits.
E. P/E ratio effect: Sanjoy basu (1977) showed that the stocks of companies with low P/E ratios earned a
premium for investors during the period 1957-1971 which clearly contradicted EMH. Campbell and Shiller
(1988b) showed that P/E ratios have reliable forecast power. Also Fama and French (1995) found that market
and size factors in earnings help explain market and size factors in returns.
F. Value line enigma: The value-line organization divides the firm into five groups and ranks them according to
their estimated performance based on publicly available information. Over a five year period starting from
1965, returns to investors correspond to the rankings given to firms. That is higher ranking firms earned higher
returns. Several researchers (eg. Stickel, 1985) found positive risk-adjusted abnormal (above average) returns
using value line rankings, to form trading strategies, thus challenging EMH.
G. Overreaction/ underreaction of stock prices: There is substantial evidence on both over and under reaction.
DeBondt and Thaler (1985, 1987) reported positive (negative) abnormal stock returns for portfolios that
previously generated inferior (superior) returns and earnings performance supporting overreaction. Lehman
(1990) also identified reversal effects. Underreaction to stock prices was documented by Jegadeesh and Titman
(1993). They focussed their attention on relative strength strategies (momentum strategies) i:e: buying past
winners and selling past losers. They select stocks based on their past six month returns and hold them for six
months, which realise a compounded excess return of 12.01% per year on average. Long term performance
reveals that these profits dissipate within a period of two years from the date of portfolio formation.

56
H. Weather: Very few people would argue that sunshine puts people in a good mood, and people in good mood
make more optimistic choices and judgements. Saunders (1993) shows that NYSE index tends to be negative
when it is cloudy. More recently Hirshleifer and Shumway (2001) analyze data for 26 countries from 1982-
1997 and find that stock market returns are positively correlated with sunshine in almost all of the countries
studied. Also they find that snow and rain have no predictive power.
The phenomena discussed above have been referred to as anomalies because the returns cannot be explained by
risk based models (CAPM and Fama-French model) and are beyond the existing paradigm of EMH. It clearly
suggests that information alone is not moving prices (Roll, 1984). These anomalies have led researchers to
question the very basic concept of EMH, and investigate alternate models of market behaviour. This has given
birth to new theory behavioural finance which lays emphasis on investor’s psychology in interpreting
information.

Are the markets really inefficient: Issues in empirical tests of market efficiency?

The tests that are carried out for market efficiency and their interpretation is a difficult task. There are some
common pitfalls in testing and unless research is carefully conducted it is possible that inefficiencies that
emerge may simply be due to a faulty asset pricing model or faulty research. There are several reasons that
prevent us from interpreting that the markets are inefficient.

First, any test of market efficiency is a joint test of efficiency and the model that explains normal returns (Fama
1991). If the model is misspecified, then it will not estimate the correct normal returns, and the so called
abnormal returns that emerge are not evidence of market inefficiency, but only a bad model.

Second, many anomalies arise in the context of some specific models and tend to disappear when exposed to
different models or different methods to adjust for risk or when different statistical approaches are used to
measure them. This is rightly referred as specification searches. If one is to rightly decide whether markets are
efficient or not, then one should test the model in different sample periods.

Third, many anomalies have disappeared after their publication, such as size effect.

Fourth, there is a distinction between statistical and economic significance. Most of the markets studied
concluded markets as inefficient only on statistical basis. To be economically significant profits must be
calculated after the transaction costs. Jensen (1978) insisted that if for eg. The transaction costs are 1%, then
abnormal returns up to 1% can be considered within the bounds of efficiency. Lesmond et. al (2001) found that
standard “relative strength” strategies are not profitable because of trading costs involved. A market can be
considered inefficient only if there is both statistical and economical proof of inefficiency.

Fifth, there is problem of inappropriate portfolio weightings. Mostly equally weighted abnormal returns are
reported with the results being driven by small firms. The research concludes the market to be inefficient, when
in fact only pricing of small, illiquid stocks are inefficient (Barberis and Thaler, 2003).

57
The inefficiency that appears may be due to these errors. There are weaknesses in the testing of efficient market
theory. But while theoretical models of efficient markets have their place in the ideal world, one cannot maintain
them in their pure form in the actual world (Shiller, 2002). Off late the role of human psychology has been
documented in literature. There are several instances where market prices are not set by rational investors, but
psychological considerations play a role in this. These are some irrefutable cases of market efficiency eg. In the
October crash of 1987, the stock market lost about one-third of it’s value with essentially no change in the
general economic environment. Similarly the pricing of internet stocks in early 2000 could only be explained by
the behavior of irrational investors. Such instances question the very basic premise of efficient market theory.
This irrational behavior and unexpected returns have found explanation in behavioral finance to some extent.

Behavioral Finance

“Behavioral Finance is simply a moderate, agnostic approach to studying financial markets” Thaler, 1999.

“Behavioral Finance is application of psychology to financial behavior-the behavior of practitioner”, Hersh

Shefrin, 1999.

“Behavioral economics (Finance) is the combination of psychology and economics that investigates what
happens in markets in which some of the agents display human limitations and complication” Mullainathan and
Thaler, 2000.

The common thread in all these definitions is the application of psychology to understand human behaviour.

The basic premise of behavioral finance is that changes in the future prices occur because of the inherent biases
in the way individuals interpret information. The field merges the concept of finance and psychology to
understand the role of human behavior in financial markets and to form winning investment strategies.

Established finance theory has assumed that investors are fully rational and have little difficulty making
financial decisions and are well informed. Investors are not swayed away by their emotions. But in reality this
assumption always does not hold true. Behavioral finance has been growing over the last so many years
specifically because of the observation that investors rarely behave according to the assumptions made in
traditional finance theory. Supporters of behavioral finance cite various cases where reality seems to be at odds
with rationality of investors. The excess volatility of 1980’s raised questions on whether this volatility is the
same as predicted by the efficient markets model. Shiller (2002) observed that anomalies are small departures
from the fundamental truth of market efficiency, but if most of the volatility is unexplained then it would
question the basic principle of efficient market theory. Price movements are much greater than what an efficient
market would allow. Similarly the dividend puzzle poses a challenge to EMH. MM argued that investors should
be indifferent between dividend and capital gains. But in real world investors prefer capital gains to dividends
because of taxes. Companies prefer repurchase to dividend. But companies do pay dividends and also stock
prices increase with dividend announcement. Thus dividends have an information content in them which sends
signals to the investors about the prospects of the company. Similarly the equity premium puzzle, which is much
greater than can be explained by risk alone. These are various irregularities challenging EMH.
58
Many economists interpret the anomalies as consistent with several ‘irrationalities’ individuals exhibit in
making decisions. These irrationalities results from two main premises; first, that investors do not always
process information correctly and second, that even given a probability distribution of returns, investors often
make inconsistent and sub optimal decisions. (Thaler, Handbook of economics of finance)

Some of the common information processing errors and behavioral irrationalities which may have a role to play
in explaining the anomalies are discussed below.

Information Processing Errors

If there are errors in information processing then it can lead investors to misestimate the true probabilities of
events. Some of the most important biases have been discussed below.

Forecasting Errors

Sometimes people give too much weight to recent experience compared to prior beliefs when making forecasts,
and tend to make forecasts that are too extreme given the uncertainty inherent in their information. DeBondt and
Thaler (1990) argue that P/E effect can be explained by earnings expectations that are too extreme. When the
recent performance of a firm is favourable, forecasts about firm’s future earnings are too high relative to the
objective prospects of the firm. The result is a high initial P/E followed by a poor subsequent performance,
when investors recognize their errors.

Overconfidence

Overconfidence means that investors tend to overestimate their predictive skills and believe they can ‘time’ the
market. The result of this is that investors and also financial analysts are sluggish to revise their previous
assessment of a company’s future performance, even when there is clear cut evidence that their existing
assessment is not true.

Conservatism

Conservatism states that investors are too slow and conservative in updating their prior beliefs in response to
recent evidence. As a result of this investors may initially react to news about a firm partially so that the new
information is fully reflected only gradually. Such a bias would lead to momentum in stock markets.

Sample size neglect

It is very important to take into account the size of the sample when making decisions. People often make the
mistake of considering a small sample just as representative of a population as a large one. They may quickly
infer a pattern based on small sample and extrapolate the trends too far into the future. For eg. a short lived
report of good earnings would lead investors to revise their assessment about the future performance. This
would generate buying pressure and lead to price run-up. When the large gap between price and intrinsic value
of the stock becomes large enough, the market corrects it’s initial error
59
Representativeness

It is the tendency of the decision makers to make decisions based on the patterns where none exist. People try to
seek closest match to a past pattern or the degree to which an evidence is similar to a recently observed event.
For example an investor may conclude that past earning of a company is representative of underlying earnings
growth potential. In financial markets this can lead investors to buy ‘hot’ stocks and to shun stocks that have
performed poorly in the recent past.

Disposition effect

A pattern where people are less willing to recognize losses, but are more willing to recognize gains. If investors
make loss, then ideally they should sell those assets which have fallen in value, to exploit tax reductions on
capital gains.

Behavioral Biases

Sometimes it is possible that individuals make less-than-fully rational decisions, even when information
processing is perfect. Most common behavioral biases are discussed below.

Mental Accounting

It is the tendency of individuals to organize their worlds into separate ‘mental accounts’. Each investment has its
own file and interactions among the assets in different folders are often ignored. It is a specific form of framing
in which people segregate certain decisions. This can lead to inefficient decision making. Statman (1997) argues
that mental accounting is consistent with some investors irrational preferences for stocks with high cash
dividends, and with a tendency to hold losing stock positions far too long (since ‘behavioral investors’ are
reluctant to realize losses). Mental accounting effects also help explain momentum in stock prices.

Regret Avoidance

Psychologists have observed that individuals who make decisions that turn out to be bad have more regret
(blame themselves more) when that decision was more unfamiliar. For e.g. buying a blue chip portfolio that
turns down is not as painful as experiencing the same losses on lesser known firm. Any loss on blue chip stocks
can be easily attributed to bad luck rather than bad decision making and cause less regret.

Shefrin (2000) argues that that irrational information processing and behavioural biases cause market prices to
deviate from fundamental values. DeBobdt and Thaler (1985) argue that because investors rely on
representativeness heuristic, they can be overly optimistic about past winners and pessimistic about past losers
and this bias can cause prices to deviate from their fundamental values and give rise to anomalies. There can be
opportunities for investors to earn abnormal returns in this case and thus the credibility of EMH is undermined.

60
Can there be a compromise between the two schools: Evaluating the behavioral approach and counter
arguments of traditional financial theorists.

Market efficiency implies that prices are right and that there are no easy profit opportunities. It is possible that
anomalies may arise not because of the behavioral issues, but because of mis-specified systematic risk (through
the use of incorrect asset pricing model) or because of data snooping. Fama (1998a) argues that “apparent
overreaction of stock prices to information is about as common as underreaction” and suggests that this finding
is consistent with the market efficiency hypothesis that the anomalies are chance events. Also the EMH does not
require that all investors act in a rational manner. The principles of arbitrage would quickly drive prices to their
correct level if only one of the parties were rational. To talk about efficiency, it is good to divide events into two
categories ------- high frequency events and low frequency events. High frequency events occur very often and
low frequency events occur rarely and may even take a long time to recover from, High frequency events have
recurrent misvaluations and so trading strategies can reliably make money and the market is relatively efficient
for these assets. Low frequency events however do not support market efficiency. For them it is impossible in
real time to identify the peaks and troughs until they have passed.

The question is do the efforts by arbitrageurs to make money in practice really makes the market more efficient.
As Sheilefer and Vishny (1997) argue in “Limits to arbitrage” article, the efforts of arbitrageurs to make money
will make some markets more efficient but they won’t have any effect on other markets. It is indeed difficult to
find trading strategies that make money. This does not mean that financial markets are informationally efficient;
however low frequency misvaluations may be large without presenting any opportunity to reliably make money
(Ritter, 2003). Behavioral factors do play a role in decision making and also explain anomalies, but this is not a
sufficient condition to determine that markets are inefficient. It also doesnot mean a clear and unquestionable
blank check for behavioral finance proponents. Critics have pointed out that behavioral finance is not unified
theory but instead a collection of tools, ideas and interesting theories. The proponents of behavioral finance
counter this by pointing out that as behavioral finance is in it’s infancy, absence of standard taxonomy and
modeling is not surprising (Ansari Valeed, 2006).The tools currently available for econometric studies are not
powerful enough to distinguish market inefficiency from bad asset-pricing models. Consequently the claims of
both traditional and behavioral theorists cannot be disproved conclusively, but the advent of behavioral finance
can definitely be considered as a fresh air throwing new and invigorating insights on many aspects of academic
finance.

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 Determinants of Dividend Payout Ratio: Evidence form MENA region

By:
Dr Walid Elgammal
Lebanese American University
Abstract
This paper studies the determinants of the dividends payout ratio. The factors affecting the dividends payout
ratio are to be identified. The study focuses only on the cement and construction industry within the MENA
region in an attempt to isolate any incoherent behavior. The factors under consideration are: Sales Growth,
ROE, ROA, ROS, Debt to Equity Ratio, Firm Size, and Free Cash Flow. Data were collected from official stock
exchange markets in addition to annual reports. The study considered all firms that paid dividend in each of the
three consecutive years starting from 2010 till 2012. Out of the 123 listed firms that work in cement and
construction industry in MENA region, only 19 paid dividends in the three consecutive years 2010-12. Our
sample consists of the 19 firms (57 observations) is selected according to purposive sampling. Moreover, the
study uses the homogeneous subcategory within the purposive sampling since only similar firms in construction
industry had been examined. The outcome of the study provides a vital insight into the determinants of
dividends payout ratio of companies in MENA region. The results showed that the Dividend Payout Ratio has a
strong and positive relationship with Return on assets and strong but negative relationship with Return on
Equity. On the other hand, the results detected weak relationships between Dividend Payout Ratio and Sale
Growth, Debt to Equity Ratio, Firm size, and Free Cash Flow. The study suggests that board of directors tend to
compensate shareholders and minimize the agency cost by distributing a high portion of profits in form of
dividends whenever return on equity decreases. Also, when the performance of the firm improves, and hence
return on assets increases, boards of directors are more generous in distributing profits.

Introduction

Dividends have been regarded as one of the most important indicators both to managers and shareholders since
the late 1950’s (Linter & Gordon). However, Ciaccia (2012) states that in recent years Apple and Google among
other successful companies have opted for not paying dividends. Thus, dividend payout presents a major
paradox. Dividend payout ratio of companies is one of the most important financial research topics debated
nowadays to the extent that this topic has been called the unsolved dividend puzzle (Black, 1976). Recent
research has been focusing on determining factors affecting dividend payout ratio. Researchers believe that
firms should pay dividends in accordance to profit as profit is considered as one of the most important factors
found in financial statements (Amidu & Abor 2006; Anil & Kapoor 2008). However, the profit has a major
drawback which is its characteristic of being industry specific. This study will overcome this drawback by
focusing primarily on the cement and construction industry in the developing MENA region because this
conglomerate follows the same equity’s and asset’s investment structure. By focusing only on this group in the
MENA region, this study will avoid unnecessary distortion from external industries.
Alongside profit, free cash flow is another determinant according to which firms should pay dividends (Jensen,
1986). Moreover, Miller and Rock (1985) considered the determinant of growth. Another determinant examined
by Needles & Powers (2010) is leverage (Debt to Equity Ratio). Firm size does take part in explaining the
dividend payout ratio according to Vogt (1994).

Objective and Purpose

The aim of this research is to test the relationship between the dividends payout ratio with respect to Growth,
Profitability represented by Return on Equity (ROE), Return on Assets (ROA), Return on Sales (ROS),
65
Leverage, Firm Size, and Free Cash Flow. Extensive research has been conducted to study the determinants of
dividend payout ratio but none has concentrated on the cement and construction industry in the developing
countries of the MENA region. Studying a group of industries together would distort the image of uniformity
since each industry has its own homogeneously directed behavior independent from the others. The current
study aims to identify the determinants of dividend payout ratio of only the cement and construction industry.

Literature review
The first study of dividends distribution was done by the pioneer Lintner who in 1956 came up with “the Bird in
The Hand” theory. This theory shows a positive and strong correlation between dividends and a company’s
value since investors prefer dividends. Thus the expression “a bird in the hand is worth more than two in the
bush”. Gordon (1962) supported the aforementioned theory alongside with other researches saying that what is
available today is more important than what may be available in the future as the time and the risk level are
correlated. The more the company retains its earnings, the more the investors are unwilling to invest in it, thus
decreasing the company’s value. Petty and Scott (2007) argued against the bird in the hand theory by showing
that distributing dividends does not decrease the risk of the company, instead it shifts the risk for the new
shareholders.
Miller and Modigliani (1961) propose that in perfect markets, dividends are irrelevant and do not affect a firms’
value. They argued that the earning power is the solo determinant of a firm’s value. Moreover, investors are
capable to sell part of their share and replicate dividend payment. However, contrary to this theory, many firms
set a clear dividend policy which is an evidence for the importance of dividend distribution on firm’s value
(Brav, Graham, Harvey, & Michaely, 2005).
Bhattacharya (1979) showed that distribution of dividends is a sign of future projected cash flow. The increase
of dividends infers that managers are expecting an increase in cash inflow in the coming period. This theory was
based on two assumptions. The first is that those external investors have information asymmetry regarding
future cash flow. The second is that dividends subjective to taxes more than capital gain. Baker (2009) agrees
with Bhattacharya (1979) that external investors have imperfect information and managers could send a
significant signal about their anticipated future cash flow either by increasing or decreasing dividends payments.
On the other hand, Petty (1972) and Black (1976) showed that dividend distribution is a very expensive way to
send signals about future cash flows and there are other ways which managers can use to send information for
shareholders.
Agency theory has been widely argued among many researches. Jenses and Meckling (1976) showed that there
is a disagreement between decision makers and the shareholders who want to maximize the value of their
equity. Decision makers act as agents and try to pursue their own interest which may not be in favor of the
shareholders. Easterbrook (1984) connect the agency cost problem with dividend payment and the results have
been supported by two other studies conducted by Jensen (1976) and Rozeff (1982). Furthermore, Easterbrook
(1984) showed that paying dividends to shareholders could reduce agency conflict. Jensen (1986) showed that if
there is an excessive cash flow, shareholders would want to prevent managers from engaging in risky

66
investment. Jensen stated that in this case managers should get rid of excessive cash flow by distributing it to
shareholders in the form of dividends.
Several studies were conducted to test the dividends payment with respect to the growth of the firm. Rozeff
(1982), Higgins (1981) and Holder, Langrehr, & Hexter (1998) showed a negative relationship exists between
growth and dividend payment as managers prefer to retain earnings for future investment. Moreover, Rozeff
(1982) and Lloyd (1985) showed also a negative relationship between dividend’s payment and risk; whenever
risk increases, external financing becomes more expensive, thus managers tend to preserve earnings to avoid
external financing. As long as firms don’t vary its investment visions, shareholders are not worried about getting
their money in the form of dividend or as capital gain. Under these conditions, the dividend payout ratio of the
firm shapes their free cash flow. In consequence, whenever a cash flow becomes positive, firms will distribute
its dividends, and whenever a cash flow becomes negative firms choose to issue shares. Moreover, they
conclude that distributing dividends can send signals for shareholders about the firm’s future cash flow.
Miller and Modigliani suggest that distributing the dividends will have no effect on the firm’s value. This
contradicts the findings of many researches; mainly because Miller and Modigliani based their assumption only
on perfect market which does not exist in a real world. In addition, researches start to search for empirical
evidence to contradict Miller and Modigliani’s findings and to build a competing hypothesis and test it in an
imperfect market. Therefore, according to Gordon (1956) and Linter (1956) firms must distribute its profits in
form of dividends to maximize its share price.

Methodology
Research Approach and Data collection
This study follows the objectivistic approach since it relies on historical scientific data especially that the
conclusions will not be based on any subjective assumption. The research aims to test the relationship between
dividends payout ratios and a number of indicators within the company. Indicators such as Growth, Profitability
(ROE, ROA, and ROS), Leverage, Firm Size, and Free Cash Flow, are considered to determine whether they
affect the dividend payout positively or negatively. Data were collected from the official stock exchange market
in addition to annual reports. The study considered all firms that paid dividend in each of the three consecutive
years starting from 2010 till 2012. Out of the 123 listed firms that work in cement and construction industry in
MENA region, only 19 paid dividends in the three consecutive years 2010-12. Our sample consists of the 19
firms (57 observations) is selected according to purposive sampling. This kind of sampling allows answering the
research question according to Saunders (Saunders et al., 2009). Moreover, since we study only similar firms in
cement and construction industry, we will use the homogeneous subcategory within the purposive sampling.
Since MENA is such a diversified region, each firm operating in the region publishes its financial statement in
compliance with host country rules and regulations. Some annual reports are published in English, while other
are published in Arabic or even in French. The seven factors under consideration are: Growth, Profitability
(ROE, ROA, and ROS), Leverage, Firm Size, and Free Cash Flow. Numerical data for these factors were
extracted without any subjective influence. Growth, Profitability, and Leverage, were calculated. The time
frame used is from 2009 till 2012. The sales figures of year 2009 were used to calculate the sales growth of year
2010.

67
Description of Variables
Sales Growth: Many firms tend to retain cash and don’t pay dividends when they have an opportunity of growth.
This is because it is easier for firms to use internal sources to finance future projects than to acquire new
external ones. Thus firms cut dividends and stop migrating large amount of cash. Based on what was mentioned
before, the study expects a negative relationship between dividend payout ratio and growth. Growth is
calculated using:

Growth= (Sales Y1 – Sales Y0) / Sales Y0.

Based on this discussion the first hypothesis can be stated as:

H1: There is a negative relationship between dividends payout ratio and growth.

Profit (ROE, ROA, and ROS):

One of the most significant aspects of the financial business is profit. It has been widely regarded as a strong
factor in paying dividends (Anil &Kapoor 2008; Linter, 1956). Many studies have shown a positive correlation
between profits and dividends payout. These studies used different measurement of profit. Some used return on
equity (ROE), while others used return on sales (ROS) or return on assets (ROA). This study examines all three
measurements in an attempt to determine how each affects the dividend payout ratio. Earnings Before Interest
and Tax (EBIT) as a return factor is used to eliminate differences in taxation. Kuwari (2009) affirms that return
on equity is among the greatest determinants of a firm’s profit. ROS also has a significant importance especially
when firms in the same industry are compared. ROS gives an image of the operation efficiency of a firm, while
ROA has a draw back since it differ dramatically between industries. For instance, firms in the service industry
have a minimum investment in asset, and hence a high return on asset. On the other hand, firms in the
construction industry rely heavily on plant and equipment. Thus their ROA will be much lower. Such a
drawback is eliminated firms in the same industry are examined. In this case, ROA is considered to be a useful
measurement. This leads us to the following hypotheses:

H2: There is a positive relationship between dividends payout ratio and profitability represented by ROE.
H3: There is a positive relationship between dividends payout ratio and profitability represented by ROA.
H4: There is a positive relationship between dividends payout ratio and profitability represented by ROS.

Debt to Equity Ratio:

Debt to equity ratio corresponds to the proportion of debt with respect to equity in financing the total assets of
the firm. It is also called leverage, risk, or gearing ratio. Al Shabibi & Ramesh (2011) showed no relationship
between dividend payout ratio and leverage. On the other hand, Al-Kuwari (2009) found a strong and negative
relationship between the two. These contradictory results make it necessary to study the effect of leverage on
dividends distribution in the construction industry. Thus we have the following hypothesis;

H5: There is a negative relationship between Leverage and payout ratio.

68
 Firm size:
According to Lloyd (1985) and Vogt (1994), firm size is considered as one of the major factors that affect
dividend payout ratios. Daunfeldt (2009) used the number of employees as an indicator of the size. Al-Kuwari
(2009) used market capitalization which relies totally on current market conditions. Lloyd (1985) used the sales
volume as a measurement of the firm’s size. This measurement has a drawback as it differs from an industry to
another. Although this study examines one industry, sales volume will not be used as a measure of the firm size.
Instead the total assets will give a better measure of a firm size. The hypothesis to be examined is:

H6: There is a positive relationship between the firm size and payout ratio.

Free Cash Flow:

The free cash flow is the excessive cash after managers exhaust all projects with a positive net present value
(Jensen, 1986). As increase cash flow increases, decision makers may follow actions that results in their own
benefits regardless of maximizing the wealth of the shareholders. To reduce the agency cost, firms tempt to pay
higher dividends for shareholders as many of prior studies suggested (Jensen, 1986; Holder et al 1998; La porta
et al., 2000). Moreover, a weak liquidity situation will result in a less generous in dividend payment as a result
of shortage in cash (Alli et al., 1993). Therefore, free cash flow should have a positive relation with dividend
payout ratio. The hypothesis is:
H7: There is a positive relationship between free cash flow and payout ratio.
The current study used in calculating the Free Cash Flow Fabozzi’s formula (Fabozzi, 2009) is:
Free Cash Flow= Net Cash Flow form Operation – Capital Expenditures

Results
Statistical analysis was conducted to test the above hypotheses. A summary of the descriptive statistics for the
dividend payout ratio and the seven factors is shown in the below table.

Table 1 Statistical Analysis

Debt to Firm
Dividend Sales Equity size in Free Cash
payout ratio Growth ROE ROA ROS Ratio M Flow in M
Count 57 57 57 57 57 57 57 57
Mean 66.4% 12.8% 18.7% 12.5% 31.5% 0.81 $840 $169
Standard deviation 23.0% 27.1% 8.2% 7.4% 19.1% 0.95 $701 $177
Minimum 7.8% -28.2% 4.0% 2.2% 2.9% 0.08 $27 ($12)
Maximum 119.7% 149.2% 37.5% 31.6% 56.9% 3.97 $3,528 $731
1st quartile 48.9% -0.7% 13.5% 6.5% 11.7% 0.16 $477 $41
Median 68.0% 7.8% 18.0% 11.6% 34.5% 0.44 $687 $124
3rd quartile 82.5% 18.3% 22.6% 16.1% 49.5% 1.07 $1,081 $236

Descriptive statistics shows that on average construction firms in the sample distributed 66.4% of its profits in
form of dividends to the shareholders. Dividends distribution varies between 7.8% and 119.7% of the total year
profits. In addition, 75% of firms tend to distribute at least 48.9%, half of the firms distribute at least 68% of its
profit in the form of dividend, and only 25% tend to distribute 82.5% or more. The results suggest that cement
69
and construction firms in the MENA region who paid dividends for the three consecutive years 2010-12 tend to
distribute high dividend payout ratio. The descriptive analysis for the seven factors can be interpreted in a
similar manner. It is worth noting that

Next, a multiple regression model is developed to determine the effects of the seven factors (independent
variables) on the dividend payout ratio (dependent variable). The results of the model are shown in Table 2. The
p-value of the overall model is 0.0000349 which is considerably less than 0.01. One can conclude that the
overall model is highly significant. In addition, the overall module resulted in an R-square value of 0.468.
Hence, 46.8% of the variability in Dividend Payout Ratio is explained by the seven independent variables.

Table 2: Regression output

Debt to Free
Sales Firm
Variables Intercept ROE ROA ROS equity Cash
growth Size
ratio Flow
0.5518 0.164 -2.205 3.9578 0.1083 0.0792 -0.0088 -0.0077
Coefficients
p-value 6.05E-07 0.0833 0.0071 0.0027 0.6639 0.0877 0.1697 0.7938

The results indicate that return on equity and return on assets are significant at a level of significance of 0.01.
ROE has a negative significant coefficient of -2.205. Hence, one can conclude that there is a strong negative
relationship between ROE and dividend payout ratio. This gives evidence to hypothesis H2. The coefficient of
ROE indicates that, when all other factors are kept the same, an increase in ROE by 1% will result in a decrease
in the dividend payout ratio by 2.2%. The result is aligned the findings of Al-Kuwari (2009) and Gill et al.
(2010).
Similarly, ROA has a positive and significant relationship with the dividend payout ratio. This supports
hypothesis H3. Also, when all other factors are kept the same, an increase in firm's the ROA by 1% will result in
an increase of 3.8% in the dividend payout ratio. As mentioned before, many researchers avoid using ROA as a
determinant due to differences in assets investment among industries. However, our results are totally reliable as
we are testing only the construction industry in one particular market, the MENA region.
The regression output gives some evidence that sales growth and debt to equity ratio have positive relationship
with dividend payout ratio, p-value of 0.0833 and 0.0877, respectively. This sales growth result is aligned with
the signaling theory (Battachrya, 1979) stating that future growth is a determinant of dividend payment. On the
positive relationship between leverage and dividend payout ratio contradicts previous findings (Lloyd et.al,
1985; Rozeff, 1982). The positive relationship can explained that firms with high risk tend to attract investors by
paying higher dividend.
The other factors, return on sales, firm size and free cash flow, are not significant when the overall model is
considered. This does not necessarily mean that these factors are not significantly related to dividend payout
ratio. To settle this matter, we perform stepwise regression for this model. The results are shown in Table 3.

70
 Table 3: Stepwise Selection displaying the best model of each size
Number of Sales Debt to free Cash
Variables growth ROE ROA ROS equity ratio Firm Size Flow R² p-value
1 .0002 .223 .0002
2 .0000 .0026 .344 1.13E-05
3 .0053 .0000 .0051 .404 4.32E-06
4 .1039 .0060 .0000 .0048 .433 4.70E-06
5 .0591 .0022 .0001 .0909 .0045 .465 4.23E-06
6 .0823 .0066 .0020 .6566 .0850 .0044 .467 1.24E-05
7 .0833 .0071 .0027 .6639 .0877 .1697 .7938 .468 3.49E-05

The last row of Table 3 represents the overall model. It contains the individual p-values, the coefficient of
determination, and the p-value for the overall model. Considering all models with six factors only, the best
model is the one that eliminates the free cash flow factor. This model is still highly significant, p-value of
0.0000124, and has a coefficient of determination of 0.467, which is 0.1% less than that of the overall model. It
is worth noting that three variables are highly significant, ROE, ROA, and the firm size, for this model.
Examining the coefficients of this model, we have significant evidence supporting hypothesis H6.
The best model with five factors removes return on sales and fee cash flows. The model is highly significant, R-
square is slightly lower, by 0.2%, and has ROE, ROA, and the Firm Size as significant variables. As for the best
model with four factors, debt equity ratio is further eliminated. This result in 3.4% decrease in the R-square
value. It is still a high percentage even though it started to decrease. Note that this model is more significant, p-
value = 0.0000047, than the best models with 5, 6, and seven factors. The significant variables remain the same.
These variables constitute the best model of size 3.
It is interesting to note that the best model with two factors is the one having ROS and Firm Size as independent
variables. This model confirms hypothesis H4. In this model ROS, previously undetected as significant, is most
significant in this model. Moreover, ROS is the independent variable for the best model with one variable only.
This variable, ROS, is considered as one of the most important indicators to measure operational performance
between firms. Many firms tempt to compare its ROS with other firms to overcome the differences in size or in
turnover.

Conclusion and Recommendations

This study examine the effects of seven factors, Sales Growth, ROE, ROA, ROS, Debt to Equity Ratio, Firm
Size, and Free Cash Flow, on dividend payout ratio. Evidence from the cement and construction industry in
MENA region confirmed all but one of the hypotheses under consideration. Data collected from companies that
paid dividend in the three consecutive years, 2010 till 2012, were analyzed. The results showed that these
factors determine to a high extent the dividend payout ratio. Among the factors examined, the results revealed
that the dividend payout ratio has a strong and positive relationship with return on assets, return on sales, and
firm size. Also, a strong but negative relationship exists with return on equity. In addition, the results indicated
some evidence of a positive relationship with sales growth and debt to equity ratio. On the other, no significant
relationship was found between free cash flow and dividend payout ratio.

71
The results suggest that whenever return on equity decreases, decision makers tend to compensate shareholders
and minimize the agency cost by distributing a high portion of profits in form of dividends. In addition, the
study found that decision makers are more generous in distributing profits when the performance of the firm
increases; in other words, when return on assets increases.
This research has been conducted only on industrial listed companies in MENA region so findings cannot be
generalized to other industries neither other areas. Moreover, this study examined companies that paid dividend
in three consecutive years, thus it is possible that the same market in the same industry would behave differently
in different time frame. Furthermore, this study examined only seven factors, but it is possible to find other
factors with a high influence on Dividend Payout Ratio.
This study opens the opportunity to examine the same industry within different market or testing different
industries within the same market. Moreover, we suggest prolonging the time frame of the study period to more
than three years as well as conducting the study in a different time frame.

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 Profitability Determinants of Commercial Banks in UAE- A Sure Model Approach

By:
Dr. Rachna Banerjee
Business Faculty, Department of Business, Higher Colleges of Technology

Dr. Sudipa Majumdar

Middlesex University, Dubai

Abstract:
This study aims to examine the effect of microeconomic and macroeconomic factors on the profitability of
commercial banks in the United Arab Emirates during the post crisis period. Using SURE model technique, a
balanced panel data from the period 2009-2013 was analyzed and our results suggest that the bank-specific
factors as well as the macroeconomic variables play a significant part in explaining the bank profitability
parameters. All the bank specific variables with the exception of liquidity affect bank profitability significantly.
As for the impact of macroeconomic factors, we conclude that GDP and interest rate has a significant negative
impact on profitability whereas the impact of debt-GDP ratio is significantly positive. Results also showed that
inflation has no significant impact on profitability.

Keywords: Commercial Bank, UAE, ROA, ROE, GDP, interest rate

Introduction
Over the last few years, many significant challenges faced the banking sector around the globe, especially in the
wake of the credit crunch of 2008-2009. The United Arab Emirates (UAE) banking sector's profitability suffered
in the post-crisis years, 2009 onwards, as the global economic crisis impacted the region more significantly in
the years that followed. Increase in the cost of funding put pressure on bank net interest margins with the
negative impact of decline in trade finance and operating income on the fee and commission income, eventually
impacting banks’ profitability.
Changes in the environment and economic conditions have an impact on the performance of banks. According
to UAE National Bureau of Statistics (2012) the GDP growth rate which touched an all-time high of 9.8 percent
in December of 2006 fell to a record low of -4.8 percent in December of 2009. Although it has shown a marked
improvement from 1.7 percent in 2011 to reach 4.6 percent in 2013 but it is still way below the pre-crisis levels.
According to KAMCO Research (2011), the contributions of the financial services sector to the Gross Domestic
Product (GDP) of UAE fell from 7.1 percent in 2007 to 6.7 percent in 2008 consequent to decline in their
profitability levels and reduction in liquidity. Stagnating loans and advances together with rise in the non-
performing loans (NPLs) severely affected the profitability of UAE banks for the period 2009- 2012.
Although the UAE economy has rebounded in 2013 with increase in the GDP with robust earnings being
declared by most of the local banks, many banks, particularly in Dubai, are still trying to overcome the impact
of debt restructuring of government related entities. In the light of the above changes that have occurred in the
operating environment of the banks, it is imperative to examine the impact of the internal and external factors on
the banks’ profitability and understand the implications of the above developments for the UAE banking sector.
Determinants of bank profitability have been well explored in the developed countries of U.S and Europe with a
stream of studies on the impact of internal and external factors (Kosmidou et al., 2006; Abreu and Mendes,
2002; Neely & Wheelock, 1997). Most of them considered only the banking characteristics, whereas others
included the financial structure and macroeconomic factors as well. In all these studies, contributions had been
made in determining the factors that shape the profitability of banks. The internal variables are a proxy of
74
microeconomic or bank-specific determinants such as size, asset quality, capital adequacy, liquidity ratios,
operations ratios, and leverage, while the external determinants reflect macroeconomic indicators such as
inflation, GDP, and interest rates (see Rhoades, 1985; Bourke, 1989; and Demirguc-Kunt and Huizinga, 1999).
There have been a few studies on the impact of internal-external factors on bank profitability in middle-eastern
and GCC countries too (Ayadi and Boujelbene, 2012; Masood and Ashraf, 2012; Ben Khadiris, 2009; Ben
Naceur and Goaied, 2001). The studies on the impact of the above mentioned factors on the bank profitability in
UAE have been conducted either before or until 2008 when the impact of the crisis just started to unfold (see
Al-Tamimi, 2010; and Mirzae’s, 2011). The results of this study are expected to be different from other studies
conducted in UAE due to the regulatory developments and the macro-economic changes that have occurred in
the recent past.
The purpose of this paper is to empirically assess the impact of bank-specific and macroeconomic factors on the
profitability of local banks in UAE, during the period 2009 -2013. The internal factors selected in this study
include capital adequacy, asset quality, management efficiency, liquidity and sensitivity to market risk. The
macroeconomic factors included are GDP per capita, average annual inflation rate, the lending interest rate of
banks and ratio of government Debt to GDP.
The rest of the paper is structured as follows. The following section presents literature review of related studies.
The research methodology is described in section 3 and section 4 discusses the data analysis and findings. Our
conclusions are presented in the section 5 and the last section summarizes the limitations of this study and future
research.

Literature Review

Profitability determinants of banks

Most of the recent studies on profitability determinants of banks have analyzed the effect of both internal and
external factors on the profitability of banks (Ameur and Mhiri, 2013; Ahmed et al., 2012; Ramadan et al.,
2011). Their findings suggest that while the bank-specific factors explain most of the bank profitability, the
macroeconomic variables do not have a significant effect on bank performance. In contrast, a study by Gul et
al., (2011) of top fifteen Pakistani commercial banks, showed strong evidence that both internal and external
factors have a strong influence on the profitability. Obamuyi (2013) investigated the effects of bank capital, size,
expense management, interest income and the economic condition on profitability of Nigerian banks from 2006-
2012 and concluded that all these factors contribute to higher bank profitability. Some studies have examined
combinations of three categories of factors effecting on bank performance, namely bank-specific, industry-
specific, and macroeconomic factors (Micco et al., 2007; Pasiouras and Kosmidou, 2007; and García-Herrero et
al., 2009).

Short (1979) and Bourke (1989) were among the first who examined the internal and external determinants of
bank profitability. Bourke (1989) found a positive relationship between capital ratios, better quality
management, long term interest rates, liquidity risk and profitability, while negative relationship between credit
risk and profitability.

75
Al Tamimi, (2010) investigated some influential differences in UAE's Islamic and conventional national banks
using a set of internal and external factors such as GDP per capita, size, financial development indicator,
liquidity, concentration, cost and number of branches. The results indicated that liquidity and concentration were
the most significant determinants of conventional national banks' performance while cost and number of
branches were the most significant determinants of Islamic banks' performance. In yet another study, the author
examines the impact of bank-specific and macroeconomic factors on bank profitability in the Middle Eastern
banking systems using both the OLS and the GMM techniques and concludes that capital strength, liquidity, and
efficiency are the main determinants of profitability.

Bank Performance Indicators (Earnings) - ROA and ROE

In banking literature, the profitability of commercial banks have been measured using a variety of ratios, of
which Return on Asset (ROA) and Return on Equity (ROE) are most widely used.

ROA-
ROA indicates the efficiency with which the assets of an organization are utilized for generating
income. A higher ROA not only shows a higher efficiency of a company in using its resources but also
indicates the efficiency of the management of a company in generating net income from all its real
investments resources (Wen, 2010 and Khrawish, 2011).

ROE-
ROE refers to how much profit a company earned compared to the total amount of shareholder equity
invested. A high ROE shows a higher capability of generating cash internally and the better the
company is in terms of profit generation (Ongore and Kusa, 2013).

Bank’s specific (internal) factors

The internal factors are bank specific variables which influence the profitability of a specific bank and they
differ from bank to bank. The most popular bank-specific factors that have been used widely in several research
studies are called a CAMELS framework (Banerjee and Hazarika, nd; Mayes and Stremmel, 2012;
Christopoulos et al., 2011; Dash and Das, 2009; Nurazi and Evans, 2008; Said and Saucier, 2003)
Capital Adequacy (C) –
Capital adequacy may be defined in as capital-deposit ratio because the primary risk is depository risk
derived from the sudden and considerably large scale deposit withdrawals (Karlyn, 1984). The two
important ratios observed by banks to determine their capital adequacy are, capital-risk weighted assets
ratio (CAR) and tier I capital ratio.In this study, the capital adequacy ratio (CAR) which is also
referred to as the regulatory capital is used as proxy for capital adequacy of banks.
Asset Quality (A) –
According to Frost (2004), asset quality indicators highlight the use of non-performing loans ratio
(NPL) which are the proxy of asset quality, and the allowance or provision to loan losses reserve.

76
 NPLs may include sub-standard, bad or loss loans. These are loans which in full or in part overdue for
90 days. In this study asset quality is proxied by NPL to gross loans ratio.
Management Efficiency (ME) –
Management efficiency is considered to be the most important internal factor because it plays a
substantial role in measuring a bank’s success.
Cost to income ratio (CIR) which is also referred to as efficiency ratio has been normally considered as
an indicator of management’s ability to control costs - lower the ratio, it shows that management has
good ability to handle the bank’s operations (Baral, 2005).
Liquidity Management (L) –
Bhunia, (2010) observed that a study of liquidity is of major importance to both the internal and the
external analysts because of its close relationship with day-to-day operations of a business.
Loans-to-deposits ratio (LDR) is the only liquidity indicator currently observed by the Central Bank of
UAE where the regulatory limit is set at 100%, therefore this ratio has been used in the present study to
analyze liquidity.
Sensitivity (S) –
This refers to sensitivity to market risk (Federal Deposit Insurance Corporation, U.S., Bohn et al.,
2003). It refers to the extent to which potential changes in interest rates, exchange rates, commodity
prices or equity prices can affect the bank's profits.
In this study, we have considered the sensitivity or the equity price risk through the Price Earnings
(PE) Ratio.

Macroeconomic (external) factors

Real GDP growth rate

Several studies have included the real GDP growth rate as an important independent variable to analyze
bank profitability (Ali et al., 2011; Masood and Ashraf, 2012; Valverde and Fernandez, 2007). GDP
growth is a pivotal economic condition that can change the demand and supply of loans and deposits in
the country. As the high GDP attract the investor to invest in country that increase the business of
banks, low GDP decreases the return of banks and affect the loan portfolio of banks.
Inflation
Inclusion of the inflation rate in our analysis allows us to see whether monetary policy affects bank
profitability. As Bourke (1989) argues, if the assumption of the faster growth of wages and other non-
interest costs in comparison with inflation is the case then the consumer price index annually growth
could be used as an independent variable of banks profitability (see also Perry, 1995 and Jiang et al.,
2003).
Interest rate
The impact of real interest rate as a macroeconomic determinant of bank profitability have been
analyzed by many authors (Anwar and Herwany, 2006; Aburime, 2008; Vong and Chan, 2009). It was
found to be significant in explaining bank profitability.

77
Government debt
After the recent financial crisis and the consequent sovereign debt events in the euro regions, the inter-
linkages between sovereign debt crises and banking crises have been recognized. Reinhart and Rogoff
(2010) presented ample empirical evidence that banking crises most often either precede or coincide
with sovereign debt crises.

Research methodology
Our research contributes to the existing body of literature on bank performance in the UAE by assessing the
impact of internal and external factors on bank profitability after the financial crisis. The research questions
addressed in this paper are:

 Whether the bank specific factors can explain the changes in bank profitability
 Whether the macroeconomic factors have an impact on bank profitability
 Which are the bank specific and macroeconomic factors that most impact bank profitability during the
period 2009-2013?

Research design
This study is based on secondary data obtained from the audited annual report of 18 commercial banks in the
United Arab Emirates that are listed on the two stock exchanges, namely the Abu Dhabi Securities Market and
the Dubai Financial Market. Secondary data was obtained from individual annual reports of companies, the
Arab Stock market Analysis database, Zawya database and various press releases by each bank. The data for
macroeconomic indicators was accessed from the International Monetary Fund and the World Bank websites.
As explained earlier, this study included the data from 2009 to 2013 since the objective was to study the
performance indicators for the banks in the post-crisis years. The data was analyzed using Econometric Views
(EViews) software. In the estimation procedure, we use Seemingly Unrelated Regression (SURE) system.

Model Specification
In this paper, we analyze the link between bank performance and internal-external factors. The SURE system
comprises several individual relationships that are linked by the fact that their disturbances are correlated
(Zellner, 1962). In panel data the use of SURE leads to efficiency in estimation by combining information from
the different equations in the system.
The SURE framework developed by Zellner (1962) has been used by Schipper and Thompson (1983),
Thompson’s (1985), Eyssell and Arshadi (1990). The benefit of using SURE is that sometimes OLS technique
can give inconsistent results, thus SURE method aims to correct this problem by estimating all equations
simultaneously.
Given the theoretical considerations discussed in the previous section, we specify the following empirical model
to study the relationship between bank performance, bank-specific factors and macro-economic factors:

pit = a0t+ a1t bsfit + a2t mefit + uit (1)

78
Where the performance ‘p’ of bank ‘i’ at time ‘t’ is the dependent variable. The independent variables are the
bank specific factors ‘bsf’; the macro-economic factors ‘mef’ and the error term u.

In the vector form, the equation system can be written as

𝑝1 𝑎01 𝑏𝑠𝑓1 𝑎11 𝑚𝑒𝑓1 𝑎21 𝑢1
𝑝2 𝑎02 𝑏𝑠𝑓2 𝑎12 𝑚𝑒𝑓2 𝑎22 𝑢2
. . . . . .
. = . + . + . . + . (2)
. . . . . .
. . . . . .
(𝑝𝑛) (𝑎0𝑛) ( 𝑏𝑠𝑓𝑛) (𝑎1𝑛) (𝑚𝑒𝑓𝑛) (𝑎2𝑛) (𝑢𝑛)

We have used a combination of two equations, as follows:

ROEi,t = α0+ α 1* bsfi,t + α 2 mefi,t + ui,t

ROAi,t = β0+ β1* bsfi,t + β2 mefi,t + vi,t (3)

Where, ROE and ROA represent the bank performance measures, Return on Assets and Return on Equity,
respectively. α and β terms represent coefficients to be estimated. ‘u’ and ‘v’ are the error terms.
At first glance, the above equations may seem unrelated, but the equations are related through correlation of the
error terms. Elements of uit may be contemporaneously correlated to elements of vit due to the common
dependent variable, which means that the cov (u,v) ≠0. Hence, in empirical tests, it would be incorrect to use
only Ordinary Least Squares (OLS) for the analyses, because the OLS estimators might be consistent but they
will not be efficient. Seemingly Unrelated Regression (SURE) is a technique used for analyzing a system of
multiple equations with cross-equation parameter restrictions and correlated error terms (Greene, 2008). In our
system of simultaneous equations with panel data, we therefore used the SURE model in order to get efficient
estimates of the coefficients and the SURE estimates obtained from the cross section of banks was more
efficient than the OLS equation-by-equation estimates.

Findings and Discussion

Descriptive Statistics
As it can be seen from the Table 1, all the variables are asymmetrical since skewness is positive for all the
variables except ROE, indicating the long tails on the right-hand side of the distribution. Only ROE has a
negative skewness. Kurtosis value of all variables also shows data is not normally distributed because values of
kurtosis are deviated from 3. Based on the calculated Jarque-Bera statistics and the corresponding p-values, the
null hypothesis of normality is rejected.

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 Table 1: Descriptive statistics of the bank-specific variables
ROA ROE Capital Asset Management Liquidity Sensitivity
Adequacy Quality Efficiency
Mean 2.98 11.74 21.64 7.33 34.72 95.16 10.93
S.D 4.46 6.50 5.05 5.43 10.36 12.07 7.15
Skewness 3.8 -0.85 1.102 1.30 0.90 0.77 3.95
Kurtosis 13.7 7.25 3.75 3.76 4.31 4.14 24.58
Jarque-Bera 568.33 74.36 16.59 26.07 17.64 4.69 1870.5
Probability 0.0000 0.0000 0.00025 0.0000 0.00015 0.09596 0.0000
Observations 85 85 85 85 85 85 85

The correlation coefficient between the bank specific factors can be used to test for multicollinearity.
Correlation above 0.8 between independent variables indicates the existence of the problem of multicollinearity
(Gujarati, 2003.) As can be seen from the Table 2 all the correlation coefficients between the independent
variables were less than 0.8. This shows that there was no problem of multicollinearity in our analysis.

Estimation results
Our estimation results have been reported in Table 3. The values of adjusted R Square (0.713 and 0.876) suggest
that model serves its purpose in determining the effect of bank specific and macro-economic variables on bank
profitability since 71.3% and 87.6% variability of the ROE and ROA respectively can be explained by the
independent variables. Further, the Durbin-Watson (DW) shows us the serial correlation of residuals - as a rule
of thumb, the DW statistic is expected to be approximately 2 in order to rule out evidence of serial correlation.
The DW statistic in our model confirms that there is no serial correlation. With computed F-values of 9.35
(p<0.000) and 142.06 (p<0.000), we reject the null that all coefficients are simultaneously zero and accept that
the regression model is significant overall.

Table 2: Correlation coefficient of the variables

ROE ROA Capital Asset Management Liquidity Sensitivity
Adequacy Quality Efficiency
Capital 0.0552 0.0221 1
Adequacy
Asset -0.4409 -0.3320 -0.3542 1
Quality
Management -0.2162 -0.1015 0.2181 0.3006 1
Efficiency
Liquidity 0.2981 0.1486 -0.0232 -0.1653 0.0100 1
Sensitivity -0.2894 -0.1007 -0.0914 0.1634 0.1653 -0.1731 1

Interest Rate -0.0744 -0.0176 0.0577 -0.1663 0.0085 0.0904 0.1243

Inflation 0.0208 -0.0200 -0.0669 -0.2333 -0.0118 0.0737 0.1495
Rate
Debt-GDP -0.0823 0.0098 0.0907 0.1484 0.0174 -0.0328 -0.0059
ratio
GDP growth 0.0055 0.0192 0.0147 0.2439 0.0104 -0.0860 -0.1240
rate

Capital adequacy ratio has a significant positive impact on ROA. It reveals that UAE banks are able to increase
their earning due to the cushion provided by the high capital adequacy levels. This finding is consistent with

80
some earlier studies (see Goddard et al., 2004; Staikouras & Wood, 2003; Abreu & Mendes, 2002). The
capitalization of UAE banks is 20% on an average, which is much higher than the key international prudential
regulation of Basel II. In this regard Vong and Chang (2009) opined that a well-capitalized bank is perceived to
be of lower risk and such an advantage will be translated into higher profitability. However there have been
studies which found that higher capitalization is negatively associated with profitability (Dietrich and
Wanzenrid, 2009 and Sharma and Gounder, 2012).
The impact of non-performing loans is negative. This indicates that the increase in NPLs results in decline in
profitability for the UAE banks. However the impact of asset quality is not significant. This can be explained by
the fact that although the average NPAs of the banks have increased dramatically from 2.5% in 2009 to 9.8% in
2012, it has not adversely affected profitability of the banks due to the buffer provided by increased capital
adequacy ratios of UAE banks after 2008 (from an average of 13% in 2008 to 20% in 2013).
Management efficiency proxied by cost to income ratio has a negative impact on the profitability. The impact is
significant on ROE which indicates that the increased operating expenses for the UAE banks during and post
crisis period has resulted in reduced earnings for the shareholders. This is consistent with the results of previous
studies on factors determining bank performance (Reviera-Solis et al., 2006; Jiang et al., 2003). Kwast and Rose
(1982) found that those banks experiencing high profitability also experienced lower operating costs. Therefore,
controlling operating expenditure remains the most important task for bank management.

Table 3: Regression Output of Bank Specific and Macro Economics Factors

VARIABLES ROE ROA
32.5348 5.2813
Constant (6.2***) (6.91***)
0.02744 0.1621
Capital Adequacy (CAR) (0.75) (3.23***)
-0.0432 0.0021
Asset Quality (NPLR) (-0.15) (0.06)
-0.2081 -0.0415
Management Efficiency (CIR) (-2.67***) (-1.51)
0.0399 0.0073
Liquidity (LDR) (0.81) (0.51)
-0.2081 -0.0256
Sensitivity (PE) (-2.24***) (-2.98***)
-0.8262 -0.244
Real GDP growth (-2.107) (-5.29***)
-3.4516 -0.9633
Interest Rate (-3.06***) (-7.08***)
0.7336 -0.0111
Inflation Rate (0.712) (-0.091)
0.3642 0.1309
Government Debt-GDP ratio (1.88*) (5.29***)
Observations 85 85
R squared 0.798 0.883
Adjusted R squared 0.713 0.876
F- statistic 9.35 (0.000) 142.06 (0.000)
Durbin Watson statistic 2.028 2.11
*1% significance
**5% significance

81
Liquidity has shown a positive and insignificant impact on the earnings of the banks. The positive liquidity ratio
indicates that the banks have sufficient cash reserves. The low loan to deposit ratio of banks in UAE, following
the 2009 crisis, has also contributed to the excess reserves. Our finding on liquidity is in line with the conclusion
by Owolabi et al., (2011) and Bourke (1989) who found a weak positive relationship between the liquidity and
the profitability of the listed banks, whereas it is contradictory to the studies where a negative relationship was
found between liquidity and bank performance (Guru et al., 1999 and Molyneux and Thornton, 1992).
The finding on negative impact of sensitivity to market risk is contradictory to the findings of Zaki et al. (2011).
The PE ratios of most of the banks in UAE have dropped since 2009-2012, rising again from 2013 onwards.
Firms with low PE are expected to report positive residual profits but falling earnings.
On the impact of macroeconomic factors, GDP, inflation and debt to GDP are statistically significant with
atleast 95% confidence. We found that the impact of GDP on ROA is significantly negative. The significance is
stronger with the ROA. Our result is consistent with Staikouras and Wood (2003) while it is contradictory with
Pasiouras and Kosmidou (2007) who concludes that GDP growth affect positively bank’s profitability.
Athanasoglou et al. (2008) in this regard state that the effect of the business cycle is asymmetric since it is
positively correlated to profitability only when output is above its trend.
On the other hand, our results show weak significance of the impact of inflationary conditions in the economy
on bank performance. However, its impact on ROA is negative which indicates that an increase in inflation
results in decrease in income. In this regard, Demirguc-Kunt and Huizinga, (1999) suggest that banks with high
capital ratio in developing countries tend to be less profitable in inflationary environments (see also Abreu and
Mendes, 2002; Ayadi and Boujelbeni, 2012). Contrary to this, some studies have found appositive relationship
between inflation and profitability (see Sufian and Chong, 2008 and Debali, 2011).
The negative impact of interest rate is significant with both ROA and ROE. Haron and Azmi (2008) in their
study proved statistically indirect relationship of real interest rate on ROA. Anwar and Herwany (2006) and
Sufian and Habibullah (2010) also found significant relation of real interest rate with ROA at 1% level but not
with ROE.
Contrary to our expectation, the impact of government debt to GDP has a significant positive impact on bank
profitability. It is commonly held that State, through government bonds, is a competitor to the private banking
sector. Higher interest rates of government bonds will push up banking interest rates and make banks less
competitive. Further, the higher level banking interest rates will be off-putting for entrepreneurship to invest. In
short, any financing of government debt by means of government bonds will be an obstacle to banking sector,
especially if government debt keeps on rising as a percentage of GDP. It is then expected that government debt
has a negative impact on banking return to equity (Goodhart, 2012). Although the Debt-GDP ratio of UAE has
gone up since 2009, it has not resulted in fiscal sustainability issues for the government. Further the UAE
government has injected ample liquidity to the banking system following the crisis to enable the banks to bolster
their capital adequacy and protect their earnings from being severely affected.

Conclusion
In light of the major transformations in the global banking sector, and the few challenges faced by the UAE
banking sector, it is imperative to study and analyze the determinants of profitability of UAE banks. In this

82
paper, the SURE model has been used to analyze the effect of bank specific and macroeconomic determinants
on the profitability of UAE banks in the post crisis period.
Based on the results of the empirical analysis, we conclude that both bank-specific as well as macroeconomic
variables are able to explain significant part of bank profitability in UAE. As regards the bank specific factors, a
major outcome of this study is that the impact of capital adequacy is significantly positive. This implies that
UAE banks, due to their high capital adequacy ratio, are able to enhance their earnings through translating the
safety advantage into profit. We also find that management efficiency as measured by cost to income ratio has a
significant negative impact on ROE. This indicates that the high operating costs of UAE banks results in
lowering the shareholders earnings. Further, sensitivity to market risk is found to have a significant negative
impact on both ROA and ROE implying that the UAE banks need to manage their risk sensitivity well to lower
their exposure to market risk.
Macro-economic variables such as GDP growth, interest rate and government debt-GDP, clearly affected the
performance of the banking sector in UAE from 2009-2013.We find that GDP and interest rate have a
significant negative impact on both ROA and ROE. Although banks cannot directly influence the impact of
macroeconomic factors but with prudent policies and effective utilization of its resources, the negative effects
on profitability in times of economic slump may be minimized. Finally, debt-GDP has a significant positive
impact on ROA.

Limitations and Future Research

This analysis focused exclusively on the UAE, which is a relatively small economy in the MENA region.
Relevant data for other financial institutions in the MENA region were not available; their availability would
have made the analysis more region-specific. Further research could evaluate the profitability determinants of
banks by including data on the pre-crisis and post crisis period for comparing the robustness of explanatory
variables studied in this paper. Future research may also take a wider view by exploring inter-relationships
between internal, external and industry factors, banking, insurance and investment banking.

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 Job Attribute Preferences of Marketing Employees in Turkish Banking Sector
By:
Bilge Baykal

Abstract:
Satisfaction of employees is one of the prime purposes of organizations. During the last decade, Turkish banks
increased their efforts by using various benefits and priviliges to hire and retain the best workforce for reaching
higher productivity and overall organizational growth. Recognizing the importance of job satisfaction, this study
aims to investigate the factors affecting job satisfaction and job attribute preferences from banking employees’
perspective. Conjoint Analysis is a research technique used to estimate or determine how respondents develop
preferences and to measure the trade-offs people feel when making a decision (Hair, 1998). It is a
decompositional technique, because a subject’s overall evaluation (preference) is decomposed to give utilities
for each predictor variable and for each level of a predictor variable. This study uses a policy capturing approach
with conjoint analysis technique with research questions of: 1- Which job satisfaction dimensions make jobs
more appealing and satisfactory for bank employees? 2- Which job attributes take priority over others in job
preferences and satisfaction for bank employees? The results indicate that “pay”, “interpersonal relations” and
“promotion” attributes are the three most important factors affecting employee satisfaction while “career
advancement” and “recognition of job done” are considered as the least important factors. “Pay” and
“promotion” are existed in literature in many studies as significant factors affecting job satisfaction but
“interpersonal relations” is a more interesting finding by having the second highest importance in overall
ranking. Consistent with prior literature, “job content” is also found significant in achieving job satisfaction,
followed by “status” and “responsibility taking”, “supervisor” and “flexible working conditions”. This research
introduces a different methodology to understand employees’ perceptions and motivations about job attributes
towards the achievement of job satisfaction with a contribution to human resource management literature and
important implications for human resource practitioners. This study addresses both employee and organizational
level factors from literature and analyzes the effects of these factors that influence the level of satisfaction and
preferences of Turkish banking employees by use of conjoint analysis which is an appropriate technique to
uncover hidden preferences. This study is conducted to understand the main attributes and priorities affecting
job satisfaction of bank employees which is of prime importance because only satisfied and happy employees
can achieve synergy and success for the organization. There are some limitations of this study. First, the
demographic characteristics of the sampling group consisted of 40 middle and/or high level banking employees
is a limitation which might create some bias in the perception of some job attributes like pay, career
advancement, promotion or status as mentioned in the discussion part. So, a replication of this study with
younger employees at different working status might give additional insights to the issue. Personality traits of
respondents can also play roles in their priority rankings of attributes such as a social personality might favor a
job description with a dynamic social environment more. This study provides a number of avenues for future
research areas and may be extended in a number of ways. Further research might be conducted with a broader
sampling base from different age, experience and status groups.

Keywords: Job Attribute Preference, Job Satisfaction, Turkish Banking Sector, Human Resource
Management, Conjoint Analysis

Introduction
Employees are described as the life blood for organizations and every activity is directly or indirectly backed by
human efforts in today’s environment. Changing business trends have made labor force the most vital asset and
more satisfied employees are demand of time in almost all industries including banking sector.
Job satisfaction is an important construct that has been widely studied in industrial and organizational
psychology (Spector, 1997). Job satisfaction is considered to be an important construct because of its perceived
influence on productivity, job and organizational performance, intentions to turnover and actual turnover.
Satisfied workers are less likely to quit their jobs and retention of employees saves the organizations from
expenses on selection, training and loss of production due to the turnover of the employees (Smith, 1992).

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Positive attitude (job satisfaction) of an employee towards his job has significant relationship with increased
effectiveness, reduced absenteeism and reduced turnover of the employees in the organization (Robbins, Millett,
Cacioppe & Waters-Marsh, 1998).
In Turkey, the importance of job satisfaction is increasingly realized in banking sector as Turkish banks gained
more intuition to attain a dynamic structure through automation by providing interactive banking services to
decrease their costs and increase the efficiency of banking transactions.
(http://www.tbb.org.tr/Dosyalar/Arastirma_ve_Raporlar/The_Financial_System_andBanking_Sector_in
_Turkey.pdf). These developments strengthened the competitiveness of the sector while reducing the profit
margins generated from credit marketing activities and increased the importance of qualified, effective and
satisfied employees as the key to sustainability of success (Azash and Safare, 2011). Although job satisfaction
construct is heavily investigated in literature, there is little empirical knowledge about the satisfaction criterias
of marketing employees in banking sector. So, this paper believes that it will be an important contribution to
explore the priority of job satisfaction dimensions from the eyes of marketing employees working in Turkish
banking sector.
In addition to the significance of job satisfaction construct; employees’ preferences of job attributes are also
important for organizations in order to attract the best employees to their companies. In order to attract qualified
job applicants, managers need to identify and improve the job attributes and organizational characteristics that
are important for job seekers. In literature, there is some empirical evidence regarding the importance of job
attributes on job choise decisions and job satisfaction consequently (Barber, 1998). Numerous studies have been
conducted to investigate what people want in a job (Field, 2002; Jones, 2001; Ramsey, 2002). Many different
lists of preference have been examined in literature. In a study of 57,000 job applicants in a 30 year period using
a list of ten items, Jurgensen (1978) has found that job security, advancement and type of work were most
important to men, whereas type of work, company and security were most important to women. For men, pay
was ranked as fifth and benefits eighth while for women pay was ranked as seventh and benefits tenth. In a
survey of young people in the former Soviet Union, the most important factors to people were interesting work,
work in a friendly place and good pay, consecutively. Money was not always ranked as the most important
factor on the list. Yet, there is no definitive picture of what job attributes are more important to employees. So,
the objective of this research will cover the aim of understanding which job attributes are more appealing for job
preferences and satisfaction for bank employees in order to give an additional contribution to the area.
Most researchers have used either a direct estimation or policy capturing methodology to investigate job
attribute importance (Brooks, 2005). Direct estimation approach requires that participants state what factors or
attributes are important to them in choosing a job and asked to either rank the importance of attributes or to rate
the importance of different job attributes using a Likert type scale (Boswell, Roehling, Lepine & Moynihan,
2003). In studies using a policy capturing methodology, researchers attempt to infer the importance of job
attributes from individuals’ choises resulting from a sequential evaluation of hypothetical-multi attribute jobs.
This study will use policy capturing approach with conjoint analysis technique which will be further explained
in the methodology section. So, the research questions of this study will be: 1- Which job satisfaction
dimensions make jobs more appealing and satisfactory for bank employees? 2- Which job attributes take priority
over others in job preferences and satisfaction for bank employees?

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Theoretical Background
Job satisfaction: The term job satisfaction has been given different connotation by different authorities on the
subject. (Hoppock, 1935) was the first industrial psychologist to provide a logical definition to the concept of
“job satisfaction”. He defined job satisfaction as “any combination of psychological, physiological and
environment circumstances that cause a person truthfully to say, “I am satisfied with my job”. According to
Smith (1955) job satisfaction refers to feelings or affective responses to facets of the situation, associated with
perceived differences between what is expected and what is experienced. According to (Locke, 1976), job
satisfaction is a pleasurable or positive emotional state resulting from the appraisal of one’s job or job
experience. Vroom (1964) viewed job satisfaction as the positive orientation of an individual towards all aspects
of the work situation. Davis (1977) described job satisfaction as the favorableness or unfavourableness with
which employees view their work. It results when there is a fit between job characteristics and wants of
employees. It expresses the amount congruence between one’s expectations of the job and rewards that the job
provides. According to Blum (1968), job satisfaction is the result of many attitudes possessed by an employee.
McShane and Von Glinow (2003) defined job satisfaction as a person’s evaluation of his or her job and work
context. Kinicki and Kreitner (2006) defined job satisfaction as an affective or emotional response to one’s job.
In sum, the job satisfaction is an attitudinal variable how the employees feel, believe, and behave about various
aspects of the job and work environment (Weiss, 2002).
Antecedents of Job Satisfaction The job satisfaction is the feeling of employees about the expected outcomes
from the job, such as, pay, social environment, autonomy in performing job duties, participation in decision
making process, professional effectiveness, fair and judicious organizational procedures in dealing with
employees promotions, performance evaluation and its relationship with the job outcomes (economic, social &
psychological), professional development opportunities, positive organizational climate for performance of job
regarding organizational communication, formal chain of command (organizational structure), and empathetic
attitude of organizational management for welfare of the employees (LePine, Erez & Johnson, 2002).
Interpersonal relationships, moral values and adjustment to the job have significant effect on job satisfaction or
job dissatisfaction of the employees (Maier, 1967).
Consequences and Significance of Job Satisfaction Most studies have shown a positive relationship between
job disssatisfaction and behavioural responses such as absenteeism and turnover (Wagner and Hoolenbeck,
2005). The contemporary researchers have found moderate relationship between job satisfaction and job
performance (Judge, & Bono, 2001). Davis (2006) showed general job satisfaction to be strongly and negatively
related to turnover intentions. These previous findings show that organizations that have satisfied employees
have lower turnover that lead monetary savings which is an important issue for banks who are trying to
compensate low profit margins generated from their core banking operations.
Theories of Job Satisfaction Numerous theories of job satisfaction have been developed by behavioral
scientists. These theories give various determinants of job satisfaction ranging from internal or implicit factors
to external or explicit factors.
Job Characteristics Theory of Job Satisfaction Job Characteristics Theory of Job Satisfaction concluded that
job satisfaction is outcome of some uncontrollable factors those are beyond the control of employee. According

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to this theory, job satisfaction is affected by the job characteristics, such as skill variety, task identity, task
significance, autonomy at work, and feedback of the job (Hackman & Oldham, 1976). This theory mostly relies
on external or explicit factors that influence the attitudes of the employees and their behavior at work positively
or negatively (Fried & Ferris, 1987).
Affect Theory of Job Satisfaction Affect Theory of Job Satisfaction was developed by Silvan Tomkins in early
thirties with the premise that emotions have positive and negative effects on the individual behavior.
Satisfaction is effect of positive emotions and dissatisfaction is an outcome of negative emotions towards the job
and place of job (Weiss & Cropanzano, 1996). So, this theory concentrates more on internal or implicit factors
affecting the attitudes of employees at work.
Dispositional Theory of Job Satisfaction Dispositional Theory of Job Satisfaction is also another theory that
considers implicit individual factors as source of employee satisfaction level. Judge (2000) offered guidance for
future theoretical development that the job satisfaction level of an employee was determined by the disposition
of the person, irrespective of the job outcomes. The disposition of an employee towards his job satisfaction is
generally determined by the factors: self-esteem, general self-efficacy, locus of control, and emotional stability
as proposed by Judge (2000) in his model Core Self-Evaluations.
Facet Job Satisfaction Theory While some researchers give dominance to either implicit or explicit factors,
some others have given the view that there should be combination of both implicit and explicit factors in the
process of determination of employee job satisfaction. One of these theories is Facet Job Satisfaction Theory
developed by Lawler (1973). This theory assumes that an employee feels satisfaction with the perceived desired
outcomes as pay, promotion, and recognition on the basis of their personal characteristics like skills, education
and experience and the perception of outcomes actually received.
Social Learning Theory Another theory which again considers both internal and external factors of job
satisfaction is Social Learning Theory. This theory addresses that individuals learn from their
society/surrounding/workplace. The consideration given by supervisor/leader influences the behavior of
employees, which in return makes them satisfied or dissatisfied. The theory was outcome of various experiments
as Weiss and Cropanzano (1996) while conducting experiments found that people use information for selecting
appropriate job related behavior. The workers copy and reflect the attitudes of their co-workers who they feel
successful and powerful. This theory maintains that job satisfaction is not only determined internally but is also
determined externally.
Locke’s Value Theory In parallel with balanced implicit-explicit theories, Locke’s Value Theory was developed
by Locke in 1976. Locke (1976) claimed that to find out level of satisfaction or dissatisfaction needs/wants and
values should be matched, the more they are consistent with one another greater will be level of job satisfaction
and vice versa. Employees also look at what the job is providing them in the terms of pay, promotion
opportunities, working conditions and then they compare what the value of these facets is to them. He concludes
that the extent to which want and value match the job satisfaction results.
Needs Hierarchy of Maslow Another theory that considers the role of both internal and external factors is Needs
Hierarchy Theory of Maslow (1954). In this theory Maslow divided human needs in categories like lower level
needs (physiological & safety needs), and higher level needs (esteem & self-actualization needs), when the
lower level needs are fulfilled then people move towards the higher level needs. If the needs hierarchy theory of

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Maslow (1954) is applied in organizational settings, fulfilling the needs of employees or workforce is duty of
organization (explicit factor) and their inner needs are personal (implicit) factors. So, job satisfaction is a
function of both personal and organizational factors according to Maslow’s hierarchy of needs.
Two Factor Theory of Job Satisfaction Two-Factor Theory of Job Satisfaction was developed by Herzberg
(1959) which concludes that job satisfaction is outcome of two factors as hygiene factors and motivational
factors. This conclusion was outcome of experiments on 203 male accountants and engineers in Pennsylvania.
Herzberg concluded that job satisfiers were related to job content and job dissatisfiers were allied to job context.
Herzberg labeled the satisfiers as motivators, and he termed the dissatisfiers as hygiene factors. The hygiene
factors prevent or increase dissatisfaction, but they do not lead to satisfaction. As it was found by Herzberg
(1959) satisfaction and dissatisfaction are not opposite to each other as it was previously thought. It was
assumed traditionally, when there were problems like job dissatisfaction, the only solution was pay raise, more
fringe benefits, and better working conditions. But managements of organizations were very much surprised
when that solution did not work. Herzberg termed it that these were hygiene factors (company policy,
supervision, working conditions, interpersonal relations, status, job security and personal life) could only
eliminate dissatisfaction. Whereas the motivators (achievement, work itself, recognition, responsibility,
advancement and possibility of growth) contribute towards the job satisfaction of employees at workplace
(Herzberg, 1959). In the study of Judge (2000) it was found that the only path to job satisfaction is through
mentally challenging work; he stated that ultimate intrinsic value is therefore aligned with Herzberg’s
motivational factors. Some studies focused on Herzberg (1959) as Woods (1998) and Griffin (1990). Findings
of all these studies validate the findings and view of Herzberg. So, it can be inferred that most of the validated
theories in job satisfaction area are based on both internal (implicit) and external factors (explicit) considering
organizational level dimensions as explicit ones and personal level dimensions as implicit ones.
Job Attributes: One approach to differentiating job attributes is in parallel with the approach of most job
satisfaction theories whether they provide extrinsic or intrinsic rewards (Rollinson, 2005). Extrinsic rewards are
tangible benefits that managers provide to organizational members in return for their work and effort. The
amount of reward is often not controlled by the individual like pay, job security, working conditions, fringe
benefits and pensions. In contrast, intrinsic rewards are psychological rewards directly felt or experienced by the
worker as he or she performs job tasks. For example, workers may find the job interesting and challenging
perhaps because they have the oppourtinity to use their skills and abilities or because they perform their job they
may experience a sense of growth, achievement or recognition. Additionally, organizational members may
experience social rewards that are realized through interactions with other people in an organization. Research
evidences vary regarding which particular set of rewards are more important for respondents (Rollison, 2005).
In a longitidunal study that spanned 30 years and included 57,000 job applicants of public utility in Minneapolis
(Jurgensen, 1978), pay was ranked average in importance but respondents believed that pay was the most
important job attribute for other workers. Over the 30 year period, benefits, pay and type of work had become
slightly more important whereas advancement opportunities and job security slighlty less important. But in
general job attribute preferences did not change much over 30 years period. Job attribute preferences differed
according to age, public/private sector, geographic location and gender in some of the studies.

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In a study by Taylor and Bergmann (1987), advancement opportunities, the nature of work, the industry and
work location were the strongest preferred job attributes consecutively. The findings of this study showed that
the nature of work was one of the most important attributes. In a study by Bartol and Manhardt (as cited in
Brooks, 2005), 648 employees rated the importance of different job attributes. Similar to previous research
findings, they found intrinsic aspects of the job, job content as more important than work environment factors
and long range career objectives. Similarly, in another study, 148 senior business student job seekers rated
challenging/interesting work as the most important job attribute (Posner, 1981).
Most of the studies related with job attribute preferences are in a parallel approach with job satisfaction theories
classifying the factors related with the job as extrinsic or intrinsic attributes. In this study, the conceptual
framework is developed on basis of this classification in order to cover all aspects of factors at personal and
organizational level. So, in the conceptual framework of this study, there will be two main categories as Explicit
Factors and Implicit Factors and all of the job attributes will be classified under these two broad categories.

Qualitative Research
Two qualitative research techniques focus group and in depth interview were selected for this study. Focus
group technique was applied as the first step considering its advantages like the explicit use of group interaction
to produce data and insights that would be less accessible without the interaction found in a group (Churchill
and Iacobucci, 2005). In depth interview technique was applied as the second qualitative technique for this
study.
Focus Group: The setting was a café at a close location to the head office building of a foreign private bank in
Maslak area. Focus group was conducted with five people, lasted for 55 minutes and was tape recorded.
Selection of participants for focus group interview requires purposive (judgement sample) rather than random or
convenience sampling (Morgan, 1997). Churchill and Iacobucci (2005) points that the researcher is interested in
a sample that is supposed to have a perspective on the research question. So, purposively selected (judgement
sample) participants who are banking employees working in marketing departments was thought to be the ideal
sampling for the focus groups of this research. The participants were aged between 34 and 42 consisted of three
female and two male participants and having work experience for more than 8 years. The focus group study was
initiated by a less structured approach and less involved moderator style to a more structured and more involved
moderator style. During the study, the participants were asked and let loosely talk about following questions: 1-
What factors motivate and make them satisfied in a job in general? 2- What are the priorities among their job
preferences to be satisfied and happy? 3- What are the main reasons for their priority ranking in their job
attribute preferences?
In depth interviews: In depth interview technique was decided as the second qualitative research technique to be
conducted in order to compare and enhance the findings of the focus group and literature survey. Two in depth
interviews with two senior bank employees was conducted to gain additional insights. One of the interviews was
done with a male participant who was 37 years old being in the status of group manager at a local private bank’s
head office corporate marketing department. The other interview was conducted with a 34 years old female
participant who worked as trade finance marketing manager at a foreign bank’s head office. Both interviews
were done at the participants’ offices and tape recorded. The first interview lasted for 20 minutes while the

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second one had a much longer duration of 35 minutes mainly due to personality of the participant being a very
talkative and extroverted person. As Churchill and Iacobucci (2005) stressed, in depth interview enables having
deeper understanding in specific topics. Also, data gathered by in depth interview from the respondents is not
influenced by others and does not bias by group effect. In depth interviews included similar questions with focus
group. The direction of the interviews was shaped by the respondents’ interests about the concept and the
researcher tried to stay neutral, nondirective by less speaking than the respondents.
Findings of Focus Groups and In Depth Interviews: After the focus group and in depth interviews, the
researcher transcribed the phrases of the participants manually. The data was analyzed as suggested by Griggs
(1987) by data reduction, data display and drawing and verifying conclusion steps. The first step was to list
down the meaningful sentences and metaphors by selecting the relevant things and excluding others. The
findings of the focus groups and in depth interviews were analyzed by content analysis (Zimmer and Golden,
1988). As the result of the findings of one focus group and two in depth interviews, an initial item pool with 42
items was generated. These items were carefully examined by the researcher and frequency of each statement
item was determined. Some statements having the same meaning were combined for being repetitive and some
items were eliminated which were not sufficient in terms of meaningfulness. The items which had frequency
lower than 2 were also deducted from the item list. Some of the job attributes which existed in literature survey
were also deducted from the list due to being seen not so important by the participants for job satisfaction were:
autonomy, job security, customers of the company, co-workers, job location, physical conditions, institutional
support for emergency cases, frequent business travels abroad, childcare support facilities, training programs,
sports club facilities, special retirement facilities and equities, medical center for employees. As the result, 10
items were left after the edition as the most significant and repeated ones.

Conceptual Framework
As mentioned at the end of literature survey part, the conceptual framework of this study would have two main
categories as explicit and implicit job attributes affecting job satisfaction of bank employees. So, the edited item
pool consisting of 10 most significant attributes were categorized under these two main dimensions in parallel
with the literature knowledge and qualitative research insights as follows:
Explicit Job Attributes (Organizational Level Factors – Hygiene Factors)
Includes dimensions of Pay, Promotion, Status, Interpersonal Relations, Supervision, Flexibility of Working
Conditions. Explicit factors in this study’s framework partially refer to hygiene factors of Herzberg’s Two
Factor Theory of Job Satisfaction. Hygiene factors were company policy, supervision, working conditions,
interpersonal relations, status and personal life in Herzberg’s study (1959). However, company policy, physical
working conditions and personal life variables were deducted from this category since they were not mentioned
as highly important in interviews and focus group. Pay, promotion and flexibility of working conditions were
existing under company policy element in Herzberg’s Theory (1959) and also existed in other theories like
Locke’s value theory (1976). So, these dimensions were considered under Explicit factors category in the
conceptual framework. Job security was founded as a contributor in previous studies (Jurgensen, 1978) but it
was not considered in this study’s framework because of the participants’ neglection. Explicit factors are similar
to Maslow’s lower level of needs which are fulfilled by the organization instead of the person, himself.

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Implicit Job Attributes (Personal Level Factors – Motivators)
Includes dimensions of Work itself, Recognition of job well done/achievement, Enhancement responsibility,
Career advancement and possibility of growth. Implicit factors in this study’s framework partially refer to
motivator factors of Herzberg’s Two Factor Theory of Job Satisfaction. Motivator factors were achievement,
work itself, recognition, responsibility, advancement and possibility of growth in Herzberg’s study (1959).
These dimensions were also stressed during focus group and in depth interviews so were considered under
implicit factors category in the conceptual framework. Implicit factors are similar to Maslow’s higher level of
needs which are fulfilled by person, itself. Figure 1 represents the conceptual model of this study which shows
the job attributes and job satisfaction relationship including explicit and implicit job attribute categories and
related dimensions of each that will be investigated by a further conjoint analysis to determine the priorities.

Explicit Factors: (Organizational)

Pay
Promotion
Status
Interpersonal Relations
Supervision JOB
Working conditions flexibility SATISFACTION

Implicit Factors: (Personal)

Work itself
Recognition of job well done
Enhancement of responsibility
Career advancement and potential
growth

Figure 1. Conceptual Framework of Job Satisfaction Model

Methodology
Conjoint Analysis is a research technique used to estimate or determine how respondents develop preferences
and to measure the trade-offs people feel when making a decision (Hair, 1998). It is a decompositional
technique, because a subject’s overall evaluation (preference) is decomposed to give utilities for each predictor
variable and for each level of a predictor variable. Conjoint analysis is commonly found in behavioral studies
(Green & Srinivasan, 1978) and in marketing studies (Green & Rao, 1971) where the predictor variables are
called attributes, and the dependent variable is often an overall evaluation of a product. The advantage of
conjoint analysis is that it provides information about bundles of attributes.
In this study, respondents’ ratings for the bundle of job attribute values, especially job satisfaction value form
the dependent variable. The measures of each job satisfaction value (job attribute levels) are the independent
(predictor) variables. The estimated betas associated with the independent variables are the utilities (preference
scores) for the levels. The decision is the prioritization of job attributes including ten dimensions with two levels
under two main categories as seen in below Table 1.

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 Table 1. Job Attributes and Attribute Levels
Job Attributes Attribute Levels
Implicit Attributes (Personal - Motivators):
Work itself (job content itself) Boring job:1
Interesting job: 2
Recognition of job well done/achievement Low recognition: 1
High recognition: 2
Enhancement of responsibility Low responsibility: 1
High responsibility: 2
Career advancement and possibility of growth Low potential for career growth:1
High potential for career growth: 2
Explicit Attributes (Organizational-Hygiene Factors):
Pay Below sector average:1
Above sector average: 2
Promotion Low premium and bonus: 1
High premium and bonus: 2
Status Medium managerial level: 1
High managerial level: 2
Interpersonal Relations No social environment: 1
High social environment: 2
Supervision Supervisor with low managerial ability
and experience: 1
Supervisor with high managerial ability
and experience: 2
Working conditions flexibility No flexibility in working hours and
schedule: 1
Flexible working hours and schedule: 2

Sample, Questionnaire Design and Data Analysis

The sample consisted of 40 corporate marketing banking employees with 28 female and 12 male working at
medium/high managerial positions with an average working tenure of 8 and more years. This sample can be
considered as appropriate for this study given the subjects’ high level of working experience and education,
having a more complex and mature understanding about job satisfaction concept.
Conjoint analysis requires respondents to make decisions for a variety of packages of attributes. In this study, a
self-completion questionnaire was used with 16 descriptive passages of hypotetical jobs in terms of rewards they
offered. By the use of conjoint technique, SPSS provides an orthogonal plan for combinations of 16 job
descriptions to be provided to respondents. Respondents were asked to rate their satisfaction level with each job
description followed by a five point Likert scale ranging from “completely unacceptable for satisfaction” (1) to
“perfectly acceptable for satisfaction” (7) which subjects used to rate their willingness to join the job of the

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organization described. The respondents were asked to rank the job descriptions as a whole. The following is an
example of one such description:
“The salary of the job is above sector average but the premium and bonuses based on performance are
quite low. The job status is a middle level managerial position. The social environment in the working place is
quite enjoyful and dynamic. Also, the working hours and schedule can be arranged flexibly upon your
preferences. Additionally, you will have responsibility on job decisions and participate in decision making. On
the other hand, your supervisor (whom you are reporting) has insufficient business knowledge, experience and
managerial skills. You don’t gain much respect in your achievements and there is low potential for career
advancement and personal growth.”

Results
Importance and Ranking of Attributes
An overall importance score was calculated by SPSS through conjoint syntax analysis and the importance
ranking and utility scores of job attributes are presented in the below SPSS output tables; Table 2 and Table 3.
Table 2. Importance Values Table 3. Utilities
pay Utility
29,235
Estimate Std. Error
prom 11,749 pay belowsec -,446 ,054
status 9,016 abovesec ,446 ,054
inter 16,120 prom lowpro -,179 ,054
super 5,738 highpro ,179 ,054
flexib 3,552 status medium -,138 ,054
workit 11,202 high ,138 ,054
recog 1,366 inter nosoc -,246 ,054
resp 9,016 goodsoc ,246 ,054
career 3,005 super badsup -,088 ,054
goodsup ,088 ,054
flexib noflex -,054 ,054
highflex ,054 ,054
workit boring -,171 ,054
interest ,171 ,054
recog lowrec -,021 ,054
highrec ,021 ,054
resp lowresp -,138 ,054
highresp ,138 ,054
career nocar -,046 ,054
highcar ,046 ,054
(Constant) 2,571 ,054
Averaged Importance Score
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As it is observed from above output results, the below Table 4 was developed by the researcher in order to
present the importance ranking of job attributes for the sample group of 40 banking employees more clearly.
Table 4. Importance Values of Job Attributes
Attribute Relative Importance (%) Overall Rank
Pay 29% 1
Interpersonal Relations 16% 2
Promotion 12% 3
Work itself 11% 4
Status 9% 5
Enhancement of responsibility 9% 5
Supervisor 6% 6
Working conditions flexibility 4% 7
Career advancement 3% 8
Recognition of job well done 1% 9

Correlation Analysis of Model Correspondence

Pearson’s R and Kendall’s Tau criteria should be examined to have an idea how well the model corresponds to
the data. Since both Pearson’s R and Kendall’s Tau are criteria for correlations between observed and estimated
preferences, it is desirable for both statistics to be as close to the value of 1 as possible. Significances indicate
whether null hypothesis of no correlation should be rejected or not with a 95% confidence level This means that
if the significance is less than 0,05, null hypothesis of a null correlation must be rejected. Both Pearson’s R
(0,996) and Kendall’s tau (0,961) are high being close to 1 and both correlations appear to be significant (sig. <
0,000) indicating that the model corresponds to the data well. The correlation output calculated by SPSS is
presented below.
Table 5. Correlations (a)
Value Sig.
Pearson's R ,996 ,000
Kendall's tau ,961 ,000
Kendall's tau for Holdouts 1,000 ,021
a Correlations between observed and estimated preferences

Discussion
The results of conjoint analysis indicates that “pay” attribute, which is one of the extrinsic rewards is perceived
as the most important job attribute by 29% among the bundle of ten job attributes. In the past literature, pay was
ranked as average in job preferences of employees in the longitudinal study of Jorgensen (1978) which included
57,000 job applicants and spanned 30 years. In Jorgensen’s study (1978), men ranked job security, advancement
opportunities and type of work as their most important attributes. Women ranked type of work to be the most
important factor followed by working for a company that they were proud of. In that study, both parties declared
that all other workers were perceiving pay as the most important attribute for their job preferences. This past
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finding of previous studies may show that conjoint analysis technique is much more appropriate strategy to
explore the hidden preferences of respondents by giving them alternatives of different job descriptions as a
whole instead of simply asking them their preferences directly.
It is also interesting that job security was not considered as an important attribute during two in depth interviews
and focus group study in contrast to past studies, so it was eliminated from the conceptual framework of this
study. Career and advancement opportunities were also ranked as one of the least important factors with nineth
ranking degree being incongruent with past findings again. Job content, in other words, the nature of the work
itself was considered as an important factor with 11% importance ranking in this study being in parallel with
previous researches. The reason for neglecting job security and career advancement attributes for this sample
group was explained by the interviewees in interview sections. The respondents mostly confessed that they were
almost frustrated with the heavy stress in banking sector and long working hours. Although they were in senior
positions which worth to retain, they were looking forward to the possibility of working in different sectors or
being entrepreneurs for future. So, “pay” attribute was much more important for them to make savings for their
future rather than staying in the same job for a long time or enhancing their banking career. In Jorgensen’s
(1978) longitidunal study which continued 30 years, benefits, pay and type of work became more important as
time passed while advancement opportunities and job security became less important. So, Jorgensen’s (1978)
previous study showed a similar trend to the findings of this current study. On the other hand, when the average
age of the sampling group was considered as being 38, it is reasonable to see the “pay” factor as the most
important attribute and “career advancement” as one of the least important ones. Because, employees being at
the end of their 30s have already completed most of their career advancement and were having more need for
money because of different type of responsibilities like their children’s expenses. So, the aging profile of the
sampling group might create some biased perspective in the interpretation of job attributes for satisfaction.
Another interesting finding of this study is that “interpersonal relations”, again being an extrinsic type of
attribute, is the second important attribute in overall ranking. This attribute was not given much notice in past
studies. The reason for this finding might be caused by the socialization need of banking employees during long
working hours spent in their offices. During the interviews, most employees stressed that they were spending
much more time with their collegeaus than with their family so the social environment in the working place was
an important motivator for them.
“Promotion” is the third important factor among extrinsic attributes in parallel with many of past studies such as
Lacy, Bokemeier and Shepard’s (1983). In this past study, the most important attribute was job content which
was followed by promotion and income. During in depth interviews, respondents mentioned that performance
based promotions were more motivating than standard ones. However, this issue raised another concern about
developing an objective and reliable performance monitoring system in the focus group discussion. The fourth
important factor is “job content”, the nature of the job, being an intrinsic attribute. Job content was found
significant in many of past studies in literature including Lacy, Bokemeier and Shepard (1983), Taylor and
Bergman (1987), Turban (1993). Although this intrinsic attribute might differ according to gender, age and
personality characteristics, it seems to remain one of the strongest factors for more than 30 years.
“Status” is considered at the same importance level with “responsibility taking” attribute. Since the sample
group were middle aged senior managers with responsibilities, these attributes were not vital for them to attain.

99
If this study was conducted with junior employees, their passion for status and taking responsibilities would be
perhaps higher till gaining some improvement. “Supervisor skills and management style” does not have much
importance level in this study. Since banking sector is one of the most institutionalized working areas with
standardized rules, performance monitoring systems and organizational policies, the effects of supervisor’s
management style might be perceived as not much important by the respondents. Some of the interviewees
declared that the policies of the bank were much more important for them than their supervisor’s skills. “The
flexibility of working conditions” also did not make much sense to the respondents because of the generalized
working standards in the sector by fixed working hours and schedule. A respondent told that he should change
the sector he’s working in if he would prefer flexible hours because it was nearly impossible and unrealistic to
find such an alternative in banking sector. “Career advancement” and “recognition of job done” were also found
least significant perhaps because of the seniority of the sample group as mentioned before.
When overall ranking is analyzed, it is observed that highest important attributes; “pay”, “interpersonal
relations” and “promotion” are extrinsic ones related with organizational level. “Job content” is the only
significant important intrinsic attribute related with personal factors for motivation. So, this dominance might
give important implications for banking organizations to manage especially their extrinsic rewards in achieving
the satisfaction of their employees.

Implications for Practitioners

As four of most important five attributes are extrinsic ones like “pay”, “interpersonal relations”, “promotion”
and “status”, banks should consider managing these rewards more efficiently. Although attributes like “pay”,
“promotion” and “status” attributes are directly or indirectly related with monetary rewards, human resource
managers of banks must follow a more holistis approach in satisfying their employees even they have not
enough fund allocation for salaries. Factors like “interpersonal relations” and “job content” have significant
importance in the eyes of employees which can be used as tools for compensating deficiencies in salaries.
Additionally, a reliable performance monitoring system enabling a realistic bonus and premium system may
motivate employees more than a standard salary even it is above the average. “Interpersonal relations” within
the organization of a bank can be improved by various communication tools like weekend trips, social
organizations and parties, birthday and new year celebrations. Although the effect of “interpersonal relations”
on job satisfaction might vary with personality traits of the individuals, warm and friendly working environment
would certainly help employees in resisting long and stressful working hours of their jobs in which they are
nearly spending half of their day. “Job content” is one of the most hardly changeable factors at a bank,
unfortunately. Although the nature of banking work requires systematic and routine processes, there can be
some flexible and creative solutions for marketing employees related with the job content. Some rotations can
be applied within the organization as the exchange of marketing people between head office and branches.
Marketing teams can face new customers, new branches or even new marketing units (SBUs- Strategic Business
Units) by the job rotation which might give them new perspectives and creativity. Starting at a new department
or branch in the same organization might provide employees a fresh look to their job and can be a good
precaution for human resource managers in decreasing their employee turnover rate.

100
Limitations and future research
As in all studies, there are some limitations of this study. First, the demographic characteristics of the sampling
group consisted of 40 middle and/or high level banking employees is a limitation which might create some bias
in the perception of some job attributes like pay, career advancement, promotion or status as mentioned in the
discussion part. Middle aged people with some working status might consider “pay” and “promotion” attributes
more important than younger employees due to their personal financial responsibilities like taking care of their
family. The same reason is valid for disregarding of “career advancement” attribute by this sampling group,
since most of them are senior managers having been accomplished most of their career path. So, a replication of
this study with younger employees at different working status might give additional insights to the issue. On the
other hand, the satisfaction level of the respondents with their current job might have an indirect effect on the
perception of job descriptions in the questionnaire. When filling the questionnaire, a respondent who is totally
unsatisfied with his/her current job at his bank might interpret a job description with standard attributes more
attractive by comparing to his current position. Personality traits of respondents can also play roles in their
priority rankings of attributes such as a social personality might favor a job description with a dynamic social
environment more.
This study provides a number of avenues for future research areas and may be extended in a number of ways.
Further research might be conducted with a broader sampling base from different age, experience and status
groups. In some previous studies, researchers have investigated whether there are gender differences in job
attribute preferences (Konrad, Ritchie, Lieb and Corrigall, 2000; Brooks, 2005). While certain studies showed
that men are interested in achievement and advancement but women prefer outcomes related to social aspects of
work, some studies indicated that these differences did not exist (Hull, 1999). So, gender, education and
personality trait differences can be explored by a replication of this study by a larger sample group.

Conclusion
The growth and integration of Turkish banking sector with global financial system, rapid technological changes
and increasing competition force banks to use their resources efficiently to reach sustainability of success. Being
an essential part of a banking organization, skilled employees are significant and reliable source of
competitiveness. Loyal and committed employees are the key source of success while job satisfaction is an
important determinant of employee performance at the workplace. So, this study is conducted to understand the
main attributes and priorities affecting job satisfaction of bank employees which is of prime importance because
only satisfied and happy employees can achieve synergy and success for the organization.
The conceptual model of this study has a wide coverage of key dimensions of job satisfaction including both
explicit and implicit factors inspired from different theoretical models in literature and qualitative research
insights. This paper provides a view to the employees’ job attribute preferences by enabling them make an
overall evaluation of several factors of job satisfaction which were tested individually in the literature before.
Tradeoffs between different job attributes are determined by introducing the conjoint analysis methodology to
the domain of this area.
The results indicate that “pay”, “interpersonal relations” and “promotion” attributes are the three most important
factors affecting employee satisfaction while “career advancement” and “recognition of job done” are

101
considered as the least important factors. “Pay” and “promotion” are existed in literature in many studies as
significant factors affecting job satisfaction but “interpersonal relations” is a more interesting finding by having
the second highest importance in overall ranking. This gives important implications to banks’ human resource
managers to follow appropriate strategies in their organizations to establish a warm and social working social
environment. Consistent with prior literature, “job content” is also found significant in achieving job
satisfaction, followed by “status” and “responsibility taking”, “supervisor” and “flexible working conditions”.
This research introduces a different methodology to understand employees’ perceptions and motivations about
job attributes towards the achievement of job satisfaction with a contribution to career management literature
and important implications for human resource practitioners.
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 Using social Media Channels to Enrich Learning in Business Education

By:
Dr. Mohammed Alawadh
King Saud University (KSU), Saudi Arabia
Alia K. Aleshaiwi
Al Imam Mohammad Ibn Saud Islamic University (IMSIU), Saudi Arabia

Abstract
As technology enters everyday life, the way people communicate with each other has changed dramatically.
Social media channels like twitter and Facebook have become a main way of commutation especially among
young people. For faculty, those changes pose challenges and opportunities in the same time regarding how to
use social media channels to communicate with students and increase their participation and engagement in the
learning process. In order to encourage strategic management course students to learn about personal strategy –
which is not a part of their curriculum-, a hashtag in twitter had been used. Then students were asked to fill a
survey that summarizes the outcomes of the exercise. The paper reviews the experiment and demonstrates the
results and the outcomes.
Keywords: Twitter, Social Media Channels, Engagement, Education, Learning

Literature review
There are many changes happen in the 21st century and affect the educational process, such as the increased use
of technology and the Internet in general and the accompanying increase in the use of social networks such as
Twitter and Facebook. Those changes enable faculty members to communicate with students in real time and
increase the level of their participation and their contribution to the educational process. , In addition to books
and lectures, students and learners in the Internet and social media age can learn from and using social media
channels. Teachers can encourage students to learn and interact outside the classroom through blogging.
Twitter, is one of the most famous and used micro-blogging services and social networking. Micro-blogging is a
Web 2.0 technology that allows bloggers to publish short messages between the 140 and 200 characters and
enables users to communicate using applications, techniques and different devices (Grosseck & Holotescu,
2008). Twitter allows users to publish blog entries - called Tweets – each tweet should not exceed 140
characters and users can attach pictures and add links to the tweet. Twitter allows users to participate in and
forming hashtags - a word or a phrase preceded by the symbol #. Users can browse tweets from different
bloggers that carry the same tag without having to move from one blogger's account to another. In other words,
it is a method in which Twitter classifies tweets under a keyword/s.
According to a report by Global Web Index, Saudis are the most active Twitter users. Saudi Arabia occupied the
first rank globally with 51 % active users and Turkey in the second place with 39 % active users. This may be
due to the fact that 60 % of Internet users in Saudi Arabia use the Internet via mobile phones. Also, 29 % of the
tweets in the Middle East came from Saudi Arabia only (Marcello, 2013). According to statistics, the number
Twitter users in Saudi Arabia exceeded three million , about 12% of the total population . And they published

105
more than one million five hundred thousand messages per day. With the increased usage of the Internet and
social networks , the integration of technology with education pose a challenge as well as an opportunity for
teachers to create an environment that characterized by interaction and dialogue (BBC, 2013: Skiba, 2008)
Twitter can be used in education in different ways, for example: the broadcast of live news during conferences,
course announcements, questions and enquiries regarding the course and engaging students using tags or
Hashtags. One of advantages for using Twitter in education is to make students feel as a part of a community
that share the same interests as well as to follow-up professionals and whoever interested in their field (Bhaskar,
2012; Rockinson & Szapkiw, 2011; Skiba, 2008).
Based on the Engagement Theory, Twitter may increase students participation and engagement through
attention, time and energy invested in the educational process. The technology can encourage participation by
improving the retention of information and stimulating learning (Rockinson & Szapkiw, 2011).
A study at the University of Michigan found that students who use Twitter for educational purposes are more
likely to be engaged, and to participate in matters related to their study from the students who don not interact
using Twitter. Also, it had been found that using Twitter in education in different ways has a number of positive
educational outcomes including: student engagement, active learning, improving the relationship between
students and teachers, and higher grades. Student's engagement is defined as the time and the effort invested by
students in educational activities. Active learning is defined as students' involvement with the material through
reading, writing, speaking, listening and thinking (Center for Teaching and Learning, the University of
Minnesota, 2008; Greehow & Gleaso, 2012; Kuh, 2009; Subramanian, 2012).
In a study of the impact of using social media in teaching social service in remote areas used several
communication technologies such as Wiki, sharing files electronically , SMS, electronic documents platforms
such as Drop Box- researchers found that these methods have increased the cooperation between students;
students supporting each other when facing challenges. The study also mentioned that some students was
annoyed due to the technical problems they faced (Kilpeläinena et al., 2011).
In a study of the impact of Learning 2.0 - a concept summarizes all the opportunities arising from the use of
social media for learning and/or education and training - researchers found that learning 2.0 strategies can make
education and training more innovative in Europe, this does not mean the absence of challenges and obstacles
resulting from adapting such methods (Redecker et al, 2010).

Introduction:
During the second semester of the academic year 2013/2014 a hashtag (titled Personal Strategy) in twitter had
been launched –in Arabic-. Fifty-nine Student had enrolled in Strategic management course in Management
department in Al Imam Mohammad Ibn Saud Islamic University. The students had been asked to participate in
the hashtag and follow Dr. Alawadh's tweets. Dr. Alawadh posted several blogs or tweets that focused on how
to write a personal strategy using several models developed by him. During two weeks, four dates were
determined to cover the topic and after each day student had to fill a survey –see appendix- and send it
electronically to the instructor Alia Aleshaiwi. Students in other sections and King Saud university were invited
to participate. However only data collected from Miss. Aleshaiwi's Students were analyzed. Filling the four
surveys would entitle the student to get 4% bonus.

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 Table 1: Topics covered in the hashtag
Topics Covered
st
1 Day Personal Strategy in General
Vision & Mission
nd
2 Day Strengths & Weakness
3rd Day Opportunities & Threats
th
4 Day SWOT analysis and constructing the strategy

Table 2 summarizes the most important question in the hashtag, the outcomes that students believed they got
after following the hashtag:
Table 2: Summary of the survey's results
Survey 1 Survey 2 Survey 3 Survey 4
1. Encouraging searching for 3.98 4.12 4.13** 4.06**
information and self-learning
2. Interacting or/and following 4 3.94 3.9 4.06**
people who have similar
interest with my field
3. Rethinking my future 4.28** 4.42** 3.96 4.02
4. Learning a new concept or 3.26 2.73 2.9 2.89
term in management
5. Increasing my specialized 3.26 3.46 3.47 3.61
knowledge in general
6. Correcting wrong concept/s 2.22* 2.33* 2.62* 2.19*
7. Participation Rate 85% 88% 90% 91.5%
** Highest rate * Lowest rate
In the last day's survey a question were added using 5-likert scale " After following the hashtag, I believe I have
the ability to construct a personal strategy." Table 3 summarizes the results.
Table 3: " After following the hashtag, I believe I have the ability to construct a personal strategy."
Frequency percentage
Strongly Agree 17 31.5%
Agree 32 59.25%
Neutral 5 9.25%
Do not Agree 0 0
Strongly don’t agree 0 0

Discussion and Recommendations:

The hashtag was part of Strategic Management course for management major students. Since the focus of the
course is on strategic management at corporate level, the hashtag aimed to supplement the course by focusing on
personal strategy.
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Table -1- summarizes the results of the fours surveys. As we see students in survey one and two "rethinking my
future" rated as the highest outcome of the hashtag, since the first two hashtags emphasises the importance of
personal strategy and planning. For the third hashtag "Encouraging searching for information and self-learning"
rated as the most important outcome, since students started to understand the topic and search for new
information to increase the quality and the quantity of their contribution to the hashtag. For the fourth one, both
"Encouraging searching for information and self-learning" & "Interacting or/and following people who have
similar interest with my field" rated equally.
For the four surveys, correcting wrong concepts rated the least important outcome. Students learned the strategic
concepts in the class so other outcomes were more important to them than it.
Table -2- measures the students' overall benefit from the hashtag. The majority believed that they got the ability
to construct a personal strategy after following the hashtag.
We found that the hashtag helped students greatly in learning how to construct a personal strategy. In addition to
that, the hashtag helped students in rethinking their future, encouraging searching for information and self-
learning, and interacting or/and following people who have similar interest with their field.
In conclusion, based on the analysis and students' comments the hashtag has helped them in seeing how strategic
concepts taught in the class can be applied to their life and help them in advancing their career in the future.
Using twitter in education has helped the students in not just gaining the knowledge to construct a personal
strategy but also in being independent learners who can search for information instead of receiving it in a formal
class setting. Using twitter and other social media channel is recommended as a tool for not just communication
with students, but also for encouraging them to be self-learners and to interact with other professionals in the
field. Research is needed to prove the outcomes of using social media channels to enrich learning in business
education and further investigation are needed to confirm the results.

References:
Bhaskar ،D. ،2012. Exploring the Potential Use of Social Networking Systems for Higher Education. Madrid,
Spain 5th International Conference of Education, Research and Innovations.
Center for Teaching and Learning, The University of Minnesota ،2008. What Is Active Learning? Available at:
http://www1.umn.edu/ohr/teachlearn/tutorials/active/what/index.html
Greehow ،C. & Gleason ،B. ،2012. Twitteracy: Tweeting as a New Literacy Practice. The Educational Forum ،
pp. 78-464, 76.
Grosseck ،G. & Holotescu ،C. ،2008. Can we use Twitter for educational activities .?Bucharest ،4th
international scientific conference, eLearning and software for education, Bucharest, Romania .
Kilpeläinena, A., Päykkönena K., Sankalaa J. (2011) The Use of Social Media to Improve Social Work
Education in Remote Areas. Journal of Technology in Human Services, 29:1, 1-12
Kuh ،G. D. ،2009. What Student Affairs Professionals Need to Know About Student Engagement. Journal of
College Student Development, Volume 50, Number 6 ،November/December ،pp. 683-706.
Marcello ،2013. Twitter usage is booming in Saudi Arabia .
Available at: https://www.globalwebindex.net/twitter-usage-is-booming-in-saudi-arabia/

108
Redecker, C., Ala-Mutka, K.m and Punie, Y. (2010).Learning 2.0 - The Impact of Social Media on Learning in
Europe. Available at
http://groups.etwinning.net/c/document_library/get_file?p_l_id=13808&folderId=32348&name=DLFE
-752.pdf
Rockinson ،A. J. & Szapkiw ،M.،2011. engaging higher education students using twitter .Available at:
http://digitalcommons.liberty.edu/cgi/viewcontent.cgi?article=1205&context=educ_fac_pubs.
Skiba ،D. J.،2008. Nursing education 2.0: Twitter & tweets .Available at:
http://search.proquest.com/docview/236637378?accountid=44936
Subramanian ،A.،2012. Twitter helps with academics. Avaliable at :
http://www.dnaindia.com/academy/1756332/report-dna-special-twitter-helps-with-academics-claims-
study

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 Appendix

Please choose your university:

 Al Imam Mohammad Ibn Saud Islamic University
 King Saud University
Choose you section (for KSU students only)
 30701
 39242
 33789
 39443
Choose you section (for IMISU students only)
 414
 415
 416
Major (for KSU students only)
 Management
 Economy
 Accounting
 Finance
 Marketing
 MIS
Name:
Serial No.:
Twitter Account:
How do you classify your experience in twitter?
 Beginner
 Medium
 Advanced
 Expert
How many tweets did you post in the hashtag:
How many tweets did you retweet in the hashtag:
How many tweets did you favorite in the hashtag:
How many retweets have you got in the hashtag:
How many favorites have you got in the hashtag:
How many questions or mentions did you tweet in the hashtag:
How many questions or mentions have you got in the hashtag:
How many followers do you have:

110
Please rank the following phrases from 1 to 6 (where 1 is the highest and 6 is the lowest). This exercise helped
me in:
1 2 3 4 5 6
Encouraging searching for information and self-learning
Interacting or/and following people who have similar interest with my field
Rethinking my future
Learning a new concept or term in management
Increasing my specialized knowledge in general
Correcting wrong concept/s
Write the most important tweets that you posted in the hashtag:
Write the most important questions that you received in the hashtag:
Write the most important questions or mentions that you tweet in the hashtag:
The tweets that you benefit from the most:
Summarize the benefit that you gain form this exercise:
Write you suggestions and comments in this exercise:
The following questions were added to the fourth survey only:
How many days did you participate in:
 1
 2
 3
 4
"After following the hashtag, I believe I have the ability to construct a personal strategy".
 Strongly Agree
 Agree
 Neutral
 Do not Agree
 Strongly don’t agree

111
 Exploring the relationship between service quality and patient satisfaction in the Pakistani Healthcare
Industry

By:
Amina Talat
Lahore School of economics

Samra Chaudary
Lahore School of economics

Ahsan Lone
Lahore School of economics

Abstract
Health care is an important and a booming industry. This research endeavours to understand which components
of service quality are important to achieve patient satisfaction in the context of Pakistan. A modified version of
SERVQUAL is used, a confirmatory analysis conducted of the modified instrument and the path analysis run.
To contextualize the study to Pakistan, another variable, Accessibility is also included in the model. The results
suggest that Empathy is the best indicator of Customer satisfaction.

Introduction
The importance of customers is central to the functioning of any organization or business. It would be
considered paramount in an FMCG firm or a financial services form but unfortunately the centricity of customer
has not translated to the health industry, more specifically hospitals. A hospitals customers are its patients. They
are unique in the sense that they do not want to be there. However, just because health is a necessity and not a
luxury, is no reason for the hospitals to take them for granted and be lax in providing them a superior service.
The healthcare industry in Pakistan especially with regard to public sector hospitals has never been one to
strictly adhere to the service quality standards which are present in other countries even with those which lie
within the Asiatic region. One reason which can be attributed to this is that the percentage of budget streamlined
for infrastructure development especially with regard to healthcare has always been less so instead of potential
growth and improvement in public hospitals, the allocated budget only serves to cover bae minimum
maintenance of hospitals as and operational expenses. Owing to this situation, focus on service quality is largely
ignored by public hospitals in Pakistan . Shahbaz and Shabbir (2010) discuss that in many countries, the concept
of healthcare is not looked at as a form of business oriented service providers but rather as welfare ,therefore
much focus is not given on further development of resources.

Research Objective
The objective of this research will be:
1. Establishing the relationship between service quality and patient satisfaction in the context of hospitals
in Pakistan.
2. Determining the impact of each dimensions of service quality on patient satisfaction.

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The study will have managerial implications because it will help hospital administration in identifying how
better to serve their customers and which dimension of service quality should they emphasize on to achieve
highest patient satisfaction.
Chapter 1 introduces the importance of conducting research in this field. Chapter presents the Literature Review
of the variables. Chapter 3 discusses the Data, Methodology and Results. Chapter 4 presents the Discussion.
Chapter 5 concludes the study.

Literature Review
Measurement of service quality and its relationship with patient satisfaction has always been a point of
contention in previous researches. Basu and Biswas( 2012) attempted to come up with a conceptual framework
that would identify quality attributes that contribute to patient satisfaction. The nature of their research is
qualitative in nature and the way they go about in the formation of their framework is that they have taken the
original SERVQUAL model as a starting point meaning that initialize with the five dimensions of perceived
service quality and through comprehensive review of other literatures they have identified other independent
variables which would have a positive relationship with patient satisfaction.. Though they have come up with a
variety of variables, there are certain limitations to their research such as the fact that their study does not
contain any measures with which they have tried to establish the reliability of their framework, meaning that this
form of framework has not been used as an application but is currently present from a very theoretical
perspective. A more different approach was initiated by (Carey & Seibert, 1993) in their comprehensive
research towards measuring quality and patient satisfaction. The study involved the development of
questionnaires for both inpatient and outpatient that were being treated in selected hospitals and that various
perspectives were taken from both the customer end side that is the patients and the administration end such as
the doctors, nurses and hospital administration staff. Ultimately they were able to come up with various
questionnaires that were focused on eight scales which measured factors such as the level of care provided by
physicians and nurses, waiting time, lab services etc. and met the reliability and validity criteria.
Haque, Sarwar et al. (2012) focus on the private sector of healthcare and evaluates their service quality through
the use of a modified SERVQUAL with the modification being that overall three independent variables were
considered namely personnel support, attention to customer and hospital facilities which were split further into
twenty two items that had to be rated on a seven point likert scale. The data was then to be analyzed using
structural equation modeling through which they could evaluate the impact of each factor on customer
satisfaction. The findings stated that personnel support was the variable that had the most impact on customer
satisfaction. (Butt & Run, 2010) offers a different perspective. They use the modified SERVQUAL model to
evaluate the quality of healthcare in private sector. The findings of the research were that there is a negative
quality gap illustrating that the quality of healthcare is not meeting up to the expectation of the consumer in all
five of the service quality dimensions. The study is useful for managers who want to identify what factors are
necessary in providing the best possible customer experience so that it translates to customer satisfaction. Rad,
Som, and Zainuddin (2010) focuses on the relation between service quality and satisfaction. The study
concluded that non tangible factors such as assurance, empathy and responsiveness had more impact on overall

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patient satisfaction and that healthcare institutions should pay special attention to these factors. Lei & Jolibert
(2012) study that the dynamics between service quality and patient satisfaction and introduced a third variable in
the form of customer loyalty. The significance of this research lies in the fact that it looks to go beyond
recognizing customer satisfaction as the end result of offering a service and focuses on the long term effect of
customer loyalty. This research also takes into account both the workings of the government hospitals as well as
the private sector hospitals.
While most previous literatures focus on hospitals as one whole location, this research by (Boudreaux, Ary, &
Mandry, 2000) focuses on only the emergency department of the selected hospital which in this case is that of a
large public hospital. While the research again suffers from the pitfall that it does not use a widely used model
such as SERVQUAL, the reliability and validity of the questionnaire tool is determined in this research through
statistical analysis.
(Andaleeb, 2000) in his research investigates the service quality of both the public and private hospitals in the
urban area of Bangladesh. The study introduces a new variable into the service quality construct which is
baksheesh. The author defines baksheesh as “the extra compensation that is expected in many service settings in
Bangladesh for due services” (P. 29)
This sort of thing is practiced by lower level employees working in the hospitals such as sweepers, ward
attendants and sometimes even nurses. The significance of this factor is that this form of practice is also
commonplace in most of the major institutes of Pakistan and can be interesting to observe, what effect this
factor has on overall patient satisfaction. Andaleeb,(2001) conducted a further study aimed at identifying which
factors constituted service quality in the environment of local country’s hospitals and also which dimensions of
service quality were most significant towards achieving patient satisfaction. The research findings indicate that
the SERVQUAL model with some modification serves as a good indicator of determining patient satisfaction
and also highlights the negative relationship which baksheesh has with patient satisfaction owing to the
harassment which they received from hospital attendants when they were not given tips.
It can be observed that the measurement of service quality and its impact and relationship with patient
satisfaction has varied from country to country as well as from author to author owing to the use of either
completely new constructs or present constructs which were modified for specific purposes. Hence keeping in
view the aim of this research as well as the fact that the country in which this research is being conducted is
Pakistan, it would be relevant to review some local researches. In the case of Pakistan, like most developing
countries in the Asiatic region, the major hospitals and healthcare facilities are available in metropolitan areas
like Karachi, Islamabad, Lahore, Peshawar etc. Hence most major researches would tend to focus on these
cities.
In the case of (Shabbir, Kaufmann, & Shehzad, 2010) the research has been conducted in the capital of the
country which is Islamabad. The study aims at comparing the components of services which are being provided
by both the public and private healthcare sector. The study focuses on service quality as being one whole part of
three variables which play a role in establishing patient satisfaction the other two being the type of word of
mouth which a hospital generates as well as the level of trust which the patient has on that particular hospital.
The research highlighted that patients perceived that public hospitals provided better quality services than did
private hospitals which comes about as a unique finding as most Asiatic researches which focus on comparative

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analyses conclude that private hospitals are better providers of service quality than public hospitals. By contrast
Ahmed & Samreen (2011) focus on the provision of service quality of hospitals in the city of Karachi. In their
research they have focused analyzing service quality and its impact on patient satisfaction through the use of the
modified SERVQUAL and also have done a comparison of the service quality provided by private, public and
semi-public hospitals. The additions that have been made to the original SERVQUAL scale such as that of
affordability and accessibility hold a fair amount of relevance in the context of this country as most of the major
facilities are located in major cities hence the people who have to come from peripheral areas in order to receive
medical aid will hold these factors important in achieving satisfaction. Another significant city based study was
by (Irfan, Ijaz, & Farooq, 2012) which focused on the relationship between service quality and patient
satisfaction in public hospitals in Lahore which is again one of the major metropolitans of Pakistan. The authors
employ the modified SERVQUAL in order to investigate the type of service quality provisions of public
hospitals to the patients. The research findings indicate that patients overall perceive that public hospitals are not
making a full-fledged effort towards providing proper quality services and that much more is required. The
research like in previous studies before also indicated that there is a good fit between the SERVQUAL model
and its impact on patient satisfaction with the highest significance going towards the dimensions of tangibility
and empathy highlighting the need for improvements in hospitals working environment as well as physical
infrastructure.

Theoretical Framework
Keeping in view the scope of this research, a modified version of SERVQUAL model will be tested. An
additional variable, Accessibility, will provide more accuracy and depth to this research in terms of the
environment in which the study is being conducted. Hence, in addition to the five original dimensions of
SERVQUAL from (Parasuraman, Zeithmal, & Berry, 1988) namely Tangibility, Empathy, Assurance,
Reliability and Responsiveness in line with the study by (Ahmed & Samreen, 2011) the variable of Accessibility
will also be considered as an independent variables. Hence the proposed theoretical framework is as illustrated
in figure 1:

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Figure1: Theoretical Framework

Operationalizing Patient Satisfaction

It is important to agree on the Operational definition of Patient Satisfaction. A comparison of three researches
have been conducted in tabular form and the one which ideally ensembles this research will be taken. The
comparison is as stated in Table 2:
Table 2: Conceptual definitions of patient satisfaction

Definitions Source
It is the end result of a process of evaluation (and appraisal) of the
service obtained from an entity (e.g., a doctor) in the patient's health care (Singh, 1989)
system
A cognitive evaluation of the service that is emotionally affected and it
(Urden, 2002)
is therefore an individual subjective perception
Comprised of both affective and cognitive components; an outcome
(Oliver, 1989)
state.

Through comparison, we can conclude that the definition proposed by (Singh, 1989) holds more relevance to
the current research when compared to other versions. The limitation in (Urden, 2002) is that as it defines
satisfaction as being idiosyncratic hence it does not offer any means of standardization while the one proposed
by (Oliver, 1989) is very broad in nature and almost any components of patient satisfaction can be included
which will then vary industry wise.
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Conceptual Definitions
1. Patient Satisfaction: It is the end result of a process of evaluation (and appraisal) of the service
obtained from an entity (e.g., a doctor) in the patient's health care system. (Singh, 1989)
2. Tangibility & Professionalism: Outlook of physical facilities and equipment and professional
appearance of personnel. (Parasuraman, Zeithmal, & Berry, 1988)
3. Reliability: The ability to provide dependable and accurate services which have been promised.
(Parasuraman, Zeithmal, & Berry, 1988)
4. Responsiveness: The amount of willingness present to help customers and to provide prompt service.
(Parasuraman, Zeithmal, & Berry, 1988)
5. Assurance: Knowledge and courtesy of employees and their ability to convey trust and confidence.
(Parasuraman, Zeithmal, & Berry, 1988)
6. Empathy: The degree of caring and individualized attention provided to customers. (Parasuraman,
Zeithmal, & Berry, 1988)
7. Accessibility: The extent to which a particular service is available and affordable to as many people as
possible (Lim & Tang, 2000).

Research Hypothesis
1. H1: There is a positive relationship between tangibles and patient satisfaction
2. H1: There is a positive relationship between reliability and patient satisfaction
3. H1: There is a positive relationship between responsiveness and patient satisfaction
4. H1: There is a positive relationship between assurance and patient satisfaction
5. H1: There is a positive relationship between empathy and patient satisfaction
6. H1: There is a positive relationship between accessibility & affordability and patient satisfaction

Methodology
Data Collection Method
Primary data regarding the research was collected in the form of a sample survey questionnaire. The
questionnaire was floated in two public hospitals and one private hospitals and the sampling technique consisted
primarily of convenience sampling and snowball sampling as in the case of one public hospital and one private
hospital, the questionnaires were handed out to patients in the Gynecology Ward and OPD (Outdoor Patient
Department) while in another public hospital, the questionnaires were handed out to patients who were present
in the Pathology lab of the hospital. The idea behind the localization of the spread of the questionnaire forms
was owing to certain limitations as well as ease of access to patients in these particular hospital areas. The
SERVQUAL dynamic present in the questionnaire which attempts to gauge both the expectations and the
perceptions of the consumer regarding quality of services is in line with past researches (Parasuraman, Zeithmal,
& Berry, 1988) and aims to evaluate the service quality gaps which are present. Overall, a total of 250
questionnaires were floated out of which 194 questionnaires were later usable for data inputting resulting in a
response rate of 77.6%. Out of these 194 questionnaires, 150 were from the two public hospitals while 44 were
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from the selected private hospital. Data analysis was then conducted using SPSS version 20 and AMOS version
18 and Microsoft Excel 2013 for calculating descriptive statistics, reliability and validity analysis, confirmatory
factor analysis, structural equation modeling and calculating means.
Instrument and Confirmatory Factor Analysis
SERVQUAL instrument is well used but it has been standard practice to modify the questions proposed in the
original study according to the industry where they are being applied. Few questions have been incorporated
from Lim and Tang. The modified version of SERVQUAL has been used by Lim and Tang (2000) and
Karassavidou (2009). For example the “concern for privacy question” included in the Tangible component ,
might not be important in developed countries because of the strong legal protection that the patient have but
might be important in developing countries where such laws do not exist or even if exist are difficult to enforce.
Our questionnaire represents a more contextualized version of SERVQUAL both in term of the industry and the
country.
To test the validity and reliability of the modified instrument a Confirmatory Factor Analysis was conducted.
Table 3 presents the items against each construct, the factor loadings of each item and the Cronbach alpha of
each construct. It can be observed that factor loadings for each item met the benchmark of 0.5. The Cronbach
alpha for each construct was either above the cut- off point of 0.7 or close.

Table 3: List of items, factor loadings and Cronbach alphas

Dimension Items Factor Reference
Loading
Tangibility Updated equipment 0.52 (Babakus & Mangold, 1992)
(Cronbach Alpha=0.72)
Hygienic & comfortable 0.58 (Babakus & Mangold, 1992)
Doctors/staff are neat in appearance 0.61 (Babakus & Mangold, 1992)
Informative brochure 0.51 (Babakus & Mangold, 1992)
Privacy is observed 0.55 (Lim & Tang, 2000)
Services are provided are appointed time 0.58 (Babakus & Mangold, 1992)
Services are carried out right 0.65 (Babakus & Mangold, 1992)
Reliability Fast and error free reporting system 0.69 (Babakus & Mangold, 1992)
(Cronbach Alpha=0.681)
Consistency of service charges 0.71 (Lim & Tang, 2000)
Prompt services are given 0.51 (Babakus & Mangold, 1992)
Doctors and staff are responsive 0.61 (Babakus & Mangold, 1992)
Responsiveness Attitude of doctors and staff 0.68 (Lim & Tang, 2000)
(Cronbach Alpha=0.748)
Waiting time does not exceed limit 0.74 (Lim & Tang, 2000)
Doctors and staff are friendly 0.76 (Babakus & Mangold, 1992)
Assurance Doctors possess wide range of knowledge 0.81 (Babakus & Mangold, 1992)
(Cronbach Alpha=0.673)
Patients are treated with dignity and respect 0.71 (Lim & Tang, 2000)
Patients are explained their medical 0.85 (Lim & Tang, 2000)
condition thoroughly
Feedback is obtained from patients 0.75 (Lim & Tang, 2000)
Services are available round the clock 0.76 (Lim & Tang, 2000)
Empathy Doctors and staff have patients best interest 0.82 (Babakus & Mangold, 1992)
(Cronbach Alpha=0.772) at heart
Doctors and staff understand the specific 0.69 (Lim & Tang, 2000)
needs of the patients
Hospital has adequate parking facilities 0.52 (Lim & Tang, 2000)
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 Accessibility The hospital is easily accessible 0.59 (Lim & Tang, 2000)
(Cronbach Alpha=0.687)
Charges for the services rendered are 0.62 (Lim & Tang, 2000)
affordable
Satisfied with outcome of medical treatment 0.61 (Carey and Seibert 1993)
Satisfied with pain control 0.58 (Carey and Seibert 1993)
Prepared by staff to manage care at home 0.60 (Carey and Seibert 1993)

After collecting data, a Confirmatory Factor Analysis was run. The purpose of running the CFA was to identify
whether the proposed model was a good fit and to measure the correlations which were present between the
designated variables. Ahmed & Samreen (2011) have conducted an exploratory factor analysis on the same
variables; hence the next logical step in this regard was to conduct a CFA. Amos version 18 was used for the
CFA in which the model was created and after drawing covariances the test was run. After running the test,
certain goodness of fit indexes were evaluated in order to determine the model fit of the proposed measurement
model from multiple viewpoints in order to provide a more holistic form of evidence (Hair, Black, Babin, &
Anderson, 2010).
The Chi Square adjusted for degree of freedom was 2.795. if lies in the 2 to 5 range; considered acceptable.
Pertaining to other indices, the Goodness of Fit Index (GFI) was 0.719, Comparative Fit Index (CFI) was also
0.850, Normed Fit Index (NFI) 0.81, Tucker-Lewis Index (TLI) 0.733 and Root Mean Square of approximation
(RMSEA) was 0.025. All of these indices indicate that the proposed model is a moderate fit.
Average Variance Extracted (AVE) of each construct was above 0.45 showing the convergent validity.
Construct reliability lies between the acceptable range of 0.65 and above. It was also observed that AVE is
greater than the squared co variances of each construct, hence discriminant validity holds. Discriminant validity
indicates that each of the proposed independent variable is distinct from the other.
We can establish face validity as the proposed model corresponds to certain literatures which have used similar
models and have provided credible validity (Irfan, Ijaz, & Farooq, 2012) (Andaleeb, Service Quality Perceptions
and Patient Satisfaction: A Study of Hospitals in a Developing Country, 2001) (Carey & Seibert, 1993). Hence
the measurement model was accepted and then taken forward for structural equation modeling in order to test
the structured model and the research’s proposed hypotheses.
Table 4: Construct Reliability and average Variance Extracted

Variables CR AVE
Accessibility & Affordability 0.661 0.45
Tangibility 0.741 0.47
Reliability 0.652 0.48
Responsiveness 0.770 0.64
Assurance 0.701 0.76
Empathy 0.775 0.69
Patient Satisfaction 0.722 0.56

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Path Analysis
It was tested whether or not independent latent variables namely Tangibility, Reliability, Responsiveness,
Assurance, Empathy and Accessibility had a significant positive relationship with the dependent latent variable,
Patient Satisfaction.
The value of the Chi Square adjusted for degree of freedom was 4.159 which considering the 2-5 range (Hair,
Black , Babin, & Anderson, 2010) falls within acceptable limits. Other Absouute Fit Indices were also
calculated. Absolute Fit indices indicate how well the date fits the proposed model. The Goodness of Fit Index
(GFI) was 0.819, Comparative Fit Index ( CFI) was 0.826, Normed Fit Index(NFI) was 0.91, Tucker-Lewis
Index(TLI) was 0.833 and Root Mean Square of approximation (RMSEA) was 0.045. All these indices indicate
that the proposed model is an adequate fit.
CMIN/df p-value GFI CFI NFI TLI RMSEA
4.159 0.00 0.819 0.826 0.91 0.833 0.045

DV IV Regression Level of Relationship R2

Weight significance
Patient Tangibles 0.543 *** + 0.24
Satisfaction Reliability 0.240 Insignificant + 0.08
Responsiveness 0.349 ** + 0.19.
Assurance 0.113 Insignificant + 0.05
Empathy 0.650 *** + 0.601
Accessibility 0.212 * + 0.131

Hypothesis 1
H1: There is a positive relationship between tangibles and patient satisfaction
In the case of the first hypothesis, the relationship between tangibles and patient satisfaction is significant at the
two tail level and that the standardized regression weight is 0.543 which indicates that a good positive
relationship exists and that a change of 1 standard deviation of tangibility will result in a change of 0.543
standard deviation of patient satisfaction. In this way we accept H1 which states that there is an apparent
positive association between tangibles and patient satisfaction.

Hypothesis 2
H1: There is a positive relationship between reliability and patient satisfaction
It was determined that the relationship between the two variables was not significant at the two tailed level. In
that regard, it cannot be justified that an association may exist between the two variables. Furthermore, the
standardized regression weight is estimated at 0.240 which indicates that a positive relationship exists. The
value of R2 was only 0.08, we can conclude that the data suggests there reliability does not have a significant
impact on patient satisfaction.

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Hypothesis 3
H1: There is a positive relationship between responsiveness and patient satisfaction
The relationship between the two variables was significant at the two tailed level and the standardized
regression weight was 0.349 which indicate that positive relationship exists between the two variables which is
moderate. Hence in this case, H1 will be accepted. R2 associated with responsiveness is 0.19.

Hypothesis 4
H1: There is a positive relationship between assurance and patient satisfaction
The relationship between the two variables is not significant at the two tailed level and the standardized
regression weight was estimated at .113 that signifies a weak positivee relationship between the variables. The
low level of significance and regression weight imply that in this case we will accept the null hypothesis .

Hypothesis 5
H1: There is a positive relationship between empathy and patient satisfaction
The relationship between the two variables is significant at the two tailed level and the R2 is 0.601 which shows
that about sixty percent of the dynamics of patient satisfaction can be explained by the empathy construct. This
regression weight is also the highest amongst all the variables,0.65, showing the importance of this variable.
Looking at these metrics, the H1 is then accepted.

Hypothesis 6
H1: There is a positive relationship between accessibility and patient satisfaction
The relationship between the two variables is only significant at 0.10 level of significance. The standardized
regression weight was estimated at 0.045 that signifies a positive relationship between the variables but not a
very strong one. The value of R2 is 0.131 and shows that the 13% of the variation in the dependent variable can
be attributed to accessibility.

Discussion
Tangibility refers to medical facilities and equipment available in the hospital and whether they are up to date or
not. Cleanliness and hygiene were also considered very important by patients. Hence the hospital administration
should improve the tangible factors as unhygienic conditions or lack of equipment can prove to have serious
adverse consequences for patient satisfaction.
Responsiveness component of the service quality is important in the context of Pakistan. This gap makes
practical sense as owing to Pakistan being a third world country, it has problems of having a low doctor to
patient ratio and that owing to overcrowding in hospitals, doctors cannot allot a decent amount of time per
patient and that the patient sometimes has to wait for a longer period of time to get checked up by the consulting
doctor who would not give the patient the required time in which the patient might consider that the proper
diagnosis has been provided.
Empathy had the most significant relationship with patient satisfaction. Hospital administration in Pakistan must
realize that the level of empathy shown to the patients is the best indicator of the eventual patient satisfaction.

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Intuitively also, whenever a person is suffering from an illness, empathy plays a vital role in establishing a
rapport between the doctor and the patient leading to better consultation from the doctor and acceptance from
the patient (Mercer & Reynolds, 2002). We can conclude that the doctors and supporting staff should take an
effort in creating an effective dialogue with the patient so that needs can be better catered to.
Accessibility also had a low significant relationship with patient satisfaction. Whether the actual premises are
physically accessible or financially affordable will have an impact on patient satisfaction.

Conclusions and Recommendations for Hospital Administration

The study provides some very useful insights for hospital administrators regarding what changes and
improvements they can make in order to enhance the quality of the provision of services to the patients so that
they can increase the patient satisfaction rate. Mostly the improvements will revolve around the three significant
variables which were determined in this research namely Tangibles, Responsiveness and Empathy. Although an
average gap of about 0.98 has been determined, some of the following factors will contribute significantly
towards improving overall service quality:

1. Modernization of medical facilities and hospital based equipment.

2. Improvement of hygienic conditions of the overall hospital.

3. Educational brochures should be provided free of charge to patients.

4. Patients should be provided prompt services.

5. Doctor-Patient consultation time should be increased.

6. Effective feedback should be taken from the patients by the doctor and the supporting staff.

7. Detailed records of the patient history must be kept so that the doctor is up to date with the patient’s
current medical condition.
The recommendations which have been put forward in this research imply to both public and private hospitals
although looking back at the sample size and its distribution, public hospitals should be more concerned with
making these changes. Now most of the suggested recommendations, especially those corresponding to
tangibles can only be accomplished if the hospitals have a strong financial backing as in the case of private
hospitals or that expenditure towards modernizing healthcare should be increased in the fiscal budget for the
case of public hospitals. It should be realized that many of the major hospitals are situated in metropolitan areas
of Pakistan and thus it creates a lot of problem for those people who come from out stations in order to receive
medical care. The problem of concentration of hospitals also serves as increasing the rate of overcrowding
which ultimately result in mediocre to poor provision of services. Conclusively, it should be mentioned that
good quality healthcare is the right of every civilian and that with respect to this research, the Pakistani

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healthcare industry should adopt a more service oriented mindset as opposed to a mechanical, emotionally
devoid and bare bone by the numbers form of healthcare provisions if they are to compete with international
healthcare standards and also to help their fellow man in every health related capacity possible.

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 Mobile Marketing: The Invincible So-Lo-Mo Driver
By:
Monaliz Amirkhanpour
University of Gloucestershire, UK

Dr Demetris Vrontis
University of Nicosia (Cyprus)

Abstract
The purpose of this research is to investigate the role and importance of mobile marketing via smartphones. This
will be achieved by theoretically defining mobile marketing; exploring its significance in adopting a multi-
channel marketing approach by marketers and business owners; investigating its role in integrating with social
media; and proposing a conceptual framework towards its utilization in the wider context of strategic marketing.
The research at this stage of development is theory-based and enhanced by secondary data. Theoretical
considerations from the literature are further conceptually developed to construct a mobile marketing
provisional framework towards empirical validation. With rapid mobile technology developments, marketing
through the mobile channel is becoming pervasive and not negligible in the upcoming years. Therefore, in order
to adopt the mobile entirely as a new element of the marketing mix, marketers are required to evolve along with
it. Otherwise, they will gradually lose a large number of customers who are frequent mobile users. Taking the
research studies on mobile marketing into careful consideration, it is evident that there is a lack of awareness
and knowledge among marketers that plan to adopt and integrate mobile marketing into their direct marketing
communications. This is due to the limited number of research studies exclusively dedicated to mobile
marketing communications using smartphones and tablet PCs. The research outcomes gathered until now do add
to the growing knowledge concerning mobile marketing and set the basis for a more refined understanding
through a more comprehensive perspective on the topic. The research is currently under development towards
obtaining empirical data from the retail industry. A number of factors that play an important role in the
utilization of mobile as a direct marketing communication tool in the retail industry such as mobile technology
adoption rate, attributes of mobile marketing, and consumers’ attitudes towards mobile marketing will be
identified.

Keywords: Marketing, Mobile Marketing, Multi-Channel Marketing, So-Lo-Mo Marketing, Social Media
Marketing, Social Networks

Introduction
Mobile marketing has emerged as a new addition to the portfolio of marketing communication tools. It is one of
the latest direct marketing communication channels and is becoming increasingly popular among marketers,
owing to the array of benefits it offers, both to potential customers as well as businesses. Every day more
businesses are incorporating mobile marketing into their marketing mix in order to communicate effectively and
efficiently with their customers. The main purpose of mobile marketing is to increase the awareness level of the
businesses by assisting them in gathering relevant information about the needs and preferences of their target
customers in a timely and profitable manner. Moreover, effective mobile marketing requires the explicit
permission or consent of the end-users in order to succeed. The popularity of personal mobile devices such as
smartphones and tablet PCs has introduced a new form of marketing to businesses that can target a large number
of people anywhere in the world. As a result, integrating mobile into the marketing mix should become a
priority for businesses that want to stay ahead in their relevant industries and enhance their profitability.
However, some research studies suggest that mobile marketing does not succeed as an isolated channel: it works

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best when integrated with other channels and tactics to form a cross-platform strategy or in other words to adopt
a multi-channel marketing approach.
In order to cover these issues, this paper is structured into six main sections: (1) Introduction, (2) Mobile
Marketing: Definition & Strategy Planning, (3) Social Media Marketing and Mobile, (4) So-Lo-Mo Marketing,
(5) Theoretical Research Development, and (6) Research Conclusions.

Mobile Marketing: Definition & Strategy Planning

Pasqua and Elkin (2013) believe that the key to success in a fast evolving digital world is to realize and
understand the challenges imposed by emerging technologies and be flexible in adopting them as they come
along. This obviously requires developing a strategic plan focused on how to handle and incorporate the newly
adopted technologies. Mobile marketing as stated by Okazaki (2012) emerged in the late 1990s with the sending
of simple messages through Short Message Service (SMS), but the strategies have changed since the
introduction of better technologies and the propagation of smartphones and tablet PCs, where many other new
mobile communication tools have emerged. The Mobile Marketing Association (MMA) defines mobile
marketing as a set of practices that enables organizations to communicate and engage with their audience in an
interactive and relevant manner through any mobile device or network (MMA, 2009). The emergence of the
mobile channel as a desired promotional conduit for many consumers has enabled the marketers to upgrade the
level of permission-based marketing to include the mobile channel. Hence, permission-based mobile marketing
is the practice of gaining consent from consumers in advance of a continuing marketing dialogue taking place on
mobile devices and in return for some kind of value exchange (MMA, 2011). Similarly, Gilbreath (2010) and
Hopkins et al. (2012) believe that mobile devices are becoming an integral part of the daily life of people and
point out that the technology will only continue to improve over the next few years since the mobile devices will
be the primary tool for connection to the Internet for most people in the world by the year 2020. As a result, the
concept of “value exchange” becomes the main point of effective and successful permission-based mobile
marketing since consumers give their consent, and sometimes personal demographic and preference information
in exchange for a product, service, or offer that they deem of interest, of relevance, or of worth to them (MMA,
2011).
As smartphones and tablet PCs become the predominant mobile devices, the transition towards using mobile
apps, the mobile web, and other mobile functionalities will lead to increased interactivity. Obviously, this
requires an appropriate framework which will incorporate value exchange via mobile network operators as well
as brands either by “opting in” to receive marketing communications or by accepting to receive updates from
mobile network operators. Figure 1 illustrates the smartphone penetration rate across different countries (Our

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Mobile Planet, 2013).

Figure 1: Smartphone Penetration Rate

Source: Our Mobile Planet, 2013
It turns out that the UAE (74%); South Korea (73%), Australia (65%), and the UK (62%) have the highest
smartphone penetration rates, respectively. Mobile devices such as smartphones and tablet PCs are ideal direct
marketing communication channels particularly because of their unique properties: (a) location-specificity, (b)
portability, and (c) wireless features. The location-specificity property enables the marketers to target location-
sensitive promotions considering the individual consumer’s preferences and behavioral patterns (Bober, 2011).
The portability property helps marketers communicate and interact with the consumers on a 24/7 basis while the
wireless features promote enhanced usage of mobile devices in order to create more opportunities for the
marketers to target consumers.
There are several methods provided by mobile network operators for reaching mobile users, but it is essential to
incorporate all the available mobile communication options into mobile marketing activities in order to make
optimum use of the capability of mobile marketing to build brand awareness and goodwill with the target
market. The most common mobile marketing communication tools are: (a) Short Message Service
(SMS)/Multimedia Message Service (MMS), (b) mobile applications (apps), (c) ambient media such as QR
codes, Augmented Reality (AR), Near-Field Communications (NFC), Location-Based Services (LBS) and
mobile social media, (d) mobile E-mail, and (e) mobile advertising. Having several mobile marketing
communication tools clearly indicates that marketing through the mobile channel enables the relevant
information to be distributed on a personalized and interactive basis to online customers. However, a high-level
strategic plan is needed in order to succeed in marketing in the mobile channel. As indicated by Pasqua and
Elkin (2013), mobile strategy is the framework that defines how various mobile tactics such as mobile websites,
mobile apps and other mobile marketing communication tools are used to satisfy the customers’ needs and
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achieve the specified marketing goals. Furthermore, a successful mobile strategy depends on a harmonious
balance between: (1) the brand, (2) the customers, and (3) the environment. The brand, the customers, and the
environment have identical importance in a mobile strategy; however, a successful mobile strategy is one that is
uniquely customized to the specific brand and the target customers.
Tsirulnik et al. (2010) suggests that having an effective mobile strategy takes more than just making the website
of a company mobile-friendly, since going mobile calls for an integrated approach. Therefore, a well-thought-
out strategy is required in order to enter the mobile channel successfully. The most important step that has to be
taken in any mobile marketing strategy is having a web presence (Snyder, 2011). Even though mobile marketing
is still a relatively young industry, there are two important aspects that should be considered when creating a
mobile website: (1) mobile users are looking for information on-the-go and (2) they want it fast (Dam, 2011).
The mobile web presence can be classified into four main types: (a) mobile versions of traditional websites, (b)
mobile landing pages, (c) dedicated mobile websites, and (d) plug-in-based mobile websites. Traditional
websites were initially designed to be accessed via desktop computers, but they can be redirected into mobile
devices. The mobile landing pages are basically single-page entities that can be designed and created in a short
period of time in order to add a mobile web presence to the specific mobile marketing campaign. On the other
hand, dedicated mobile websites are stand-alone and multi-page entities which are not the same as traditional
websites; instead, they have their own design and coding strategies in order to fully satisfy their mobile
customers’ needs. Finally, plug-in-based mobile websites are very similar to the mobile versions of traditional
websites with the difference that they can also use free open-source plug-ins to format the website for mobile
accessibility purposes (Krum, 2010; Dushinski, 2009). Therefore, marketers should know what mobile devices
their target customers are reaching them from and what type of content they use on those devices in order to
guarantee that they are delivering the best experience at all times.
Furthermore, considering today’s turbulent global economic crisis small businesses as well as marketers look for
ways to increase customer response rates by designing targeted marketing campaigns. Mobile marketing is the
most appropriate medium to achieve these goals particularly when it is integrated with other direct marketing
communication channels to form a multi-channel marketing approach which are further explained in the next
sections.

Social Media Marketing and Mobile

Social Media Marketing (SMM) is the process of gaining traffic or attention through social media tools or
applications particularly social networks. Social media refers to the online platforms and tools which are
extensively used by people to share experiences and resources such as photos, videos, and comments with each
other (Turban et al., 2010). The networked structures of these social platforms in addition to the user-generated
content enable massive communication and collaboration among social media users. Social networks are made
up of nodes of individuals, groups, and enterprises which are connected to each other by types of
interdependency. In simpler terms, a social network is a “social” structure where users create their own web
space and post photos/videos, exchange ideas, and link to other web locations (Evans, 2010). Various types of
social networking sites exist on the Internet, but all of them have two common attributes: (1) they are not traffic
drivers to other websites, and (2) they allow connected users or “friends” to share, comment, tag, and discuss

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ideas with each other (Rowles, 2014). Gregg (2012) suggests that the following metrics apply to social
networking sites:
 Number of acquired friends, fans, or followers
 Number of comments and “Likes” made on new posts
 Amount of time visitors spend on the social network
 Traffic driven from the social network
 Number of downloads/installations of the social network’s mobile app.
Tode (2012) believes that mobile devices especially smartphones and tablet PCs are great activation channels
that complement marketers’ social media efforts because there is a powerful synergy between mobile and social
media as well as the benefits of combining these two together, i.e. mobile social media. The simplicity expected
by users is the most important difference between mobile social media and traditional social media. Mobile
social media can take various forms, but the primary forms are: mobile social networks, social gaming, content
sharing and streaming, location-based check-in services, and content sharing via social sites (Berkowitz, 2010).
It should be mentioned that the beauty of social media is because it engages the customers and communicates
with them. Mobile social media is the intimate extension of this relationship where users have continuous access
to their mobile devices and can communicate with their favorite brands and businesses on-the-go. Table 1
illustrates the most popular social networks worldwide which are classified based on three metrics: (1) their
“social” nature, i.e. Social Network (SN), Location-Based Social Network (LBSN), Instant Messaging Social
Network (IMSN), etc. (2) the amount of Monthly Active Users (MAUs) for both desktop and mobile users, and
(3) the amount of mobile app users for the specific social network. Some of these social networks are
exclusively designed and released for mobile users and only their mobile app users are shown (DMR, 2014).

Table 1: Popular Social Networks Worldwide (Q1 2014)

Social Network “Social” Nature MAUs Mobile App Users

Facebook SN 1.28 B 1.01 B

YouTube Video Sharing SN 1B 400 M
Google Plus + SN 300 M 20 M
LinkedIn Business-Oriented SN 277 M 114 M
Twitter Micro-Blogging SN 241 M 184 M
Instagram Photo/Video Sharing SN 200 M 183 M
Tumblr Micro-Blogging SN 199 M 56 M
Yelp LBSN 120 M 53 M
Pinterest Visual Discovery SN 70 M 25 M
WhatsApp IMSN - 500 M
Viber IMSN - 200 M
Kik IMSN - 90 M
Foursquare LBSN - 45 M
Source: DMR, 2014

It can be obviously noticed in Table 1 that most of the generated traffic to social networks comes from the
mobile channel which clearly implies the integration of the two. As stated by Al-Suwaidi (2013), the current

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social networking age strongly depends on the mobile users who interact with various social networking sites on
a continual basis and this is characterized by a sense of personal subjectivity and the individual’s ability to make
an impact in an open world through a low-cost and widespread means of expression. As a result, marketing
through social media and mobile channels is an important asset for businesses to become known by potential
customers and to interact with them on a 24/7 basis.
The social media revolution yielded two significant outcomes: (1) it has given consumers around the globe the
most powerful voice they have ever had, and (2) it has forced companies and organizations to think about how
they can be more transparent and responsive without spending huge amounts of money as compared with
traditional media such as television, radio, and print (Kerpen, 2011). Just as word-of-mouth marketing has
always been viewed as the purest and the most transparent form of marketing, social media especially social
networks have continued to prove this fact in several ways. Evans (2010) believes that people like to share ideas
and be connected to each other, their favorite brands and organizations. One of the most important elements of
the social media revolution was the introduction of the “Like” feature by social networking giant Facebook in
2010 which has already been added by more than 2 million distinct websites around the world (Kerpen, 2011).
Some of the popular social networks that have adopted the “Like” feature are: Twitter (“Favorite” button),
Instagram, YouTube, Pinterest, LinkedIn, and Foursquare. This clearly implies that the content, companies,
products, and ideas found “likeable” by people result in building trust and popularity in their respective
categories.
The next section highlights the importance of social media especially social networks and their integration with
the mobile channel to form efficient multi-channel marketing activities.

So-Lo-Mo Marketing
Taking the research studies on mobile marketing into careful consideration, it is evident that there is a lack of
awareness and knowledge among marketers that plan to adopt and integrate mobile marketing into their direct
marketing communications. This is due to the limited number of research studies exclusively dedicated to
mobile marketing communications using smartphones and tablet PCs. This argument is further supported by
Dam (2012) who states that mobile marketing is still in its infancy and many marketers do not know what
opportunities are behind using the smartphones and tablet PCs for marketing communication purposes. In other
words, lack of consumer and marketer education about mobile marketing is one of the main reasons why growth
in this new direct marketing channel is relatively slow. There is a large gap between the rapidly increasing
mobile search volumes and the majority of small businesses lagging behind in mobile search strategy
(Bellamkonda, 2012).
Therefore, there is a need to develop an integrated mobile marketing framework that could be used effectively
by marketers to initiate efficient and successful mobile marketing campaigns. Snyder (2011) believes that
mobile marketing does not succeed as an isolated channel: it works best when integrated with other channels
and tactics to form a cross-platform strategy. The term “So-Lo-Mo” refers to the very latest online marketing
trend. Essentially, it involves the integration and convergence of social media, location-based services, and the
mobile channel. This convergence is clearly illustrated in Figure 2.

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 Figure 2: So-Lo-Mo Convergence
Source: Fathom, 2012

As stated by OIC (2012), So-Lo-Mo marketing is a novel concept of providing smartphone and tablet PC users
access to locally-focused promotions and store offerings through mobile searches based on their current
location. For instance, suppose that a potential customer is looking for an Italian restaurant while walking in
town. So-Lo-Mo-based mobile apps like Foursquare can provide instant search results and locations of
restaurants with Italian cuisine in the customer’s vicinity in addition to showing if the specific restaurant has
special offers or if “friends” are available at the same location (Vrontis and Thrassou, 2013). This is a very
innovative method of targeting potential customers in a personalized and location-centric fashion. This new
multi-channel marketing approach enables businesses to promote their offers easily mainly because potential
customers can receive highly relevant search results specific to their current location.
According to the market analyst firm IDC, by 2015 the number of people accessing the Internet via smartphones
and tablet PCs will surpass the number of users connecting via a desktop PC. This clearly implies that the
mobile channel plays an important role in the Internet traffic because in the foreseeable future most online users
will access the Internet without owning a desktop PC. Hence the post-PC era is sometimes denoted as the
emergence of So-Lo-Mo era. This is further supported by Reed (2011) who believes that So-Lo-Mo services
dominate customer attention mainly because of their social nature. Additionally, a successful So-Lo-Mo strategy
is beneficial to marketers not only by increasing business activities, but by transforming consumer behaviors. A
successful So-Lo-Mo marketing campaign leads to enhanced consumer engagement and active interaction with
the brand which makes them feel “connected” to the brand and become loyal brand promoters (Evans, 2010).
Figure 3 demonstrates the utilization of social networking platforms namely Facebook, Twitter, and Instagram
exclusively on smartphones in different countries worldwide.

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 Figure 3: Social Networking on Smartphones
Source: Our Mobile Planet (2013)
As shown in Figure 3, more than 50% of Facebook users in the specified countries are smartphone users which
indicate a high level of Facebook-mobile convergence. Similarly, between 20-50% of Twitter and Instagram
usage is via smartphones. It is equally important to investigate the role of social-mobile convergence in the
mobile purchasing behavior of consumers. Figure 4 shows the percentage of researched products in three
different retailing categories namely beauty & cosmetic items, clothing or apparel, and grocery & food items via
smartphones which has led to their mobile purchase across the same countries.

Figure 4: Mobile Purchasing Behavior

Source: Our Mobile Planet (2013)

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Even though the smartphone penetration rate and the social-mobile convergence rate are quite noteworthy in
some of the listed countries in Figure 4, the percentage of mobile purchasing is below 50%. This clearly
indicates the urgent need for an effective marketing framework exclusively designed for So-Lo-Mo adoption in
the retailing industry. The next section is dedicated to the conceptual development of the So-Lo-Mo-based
framework.

Theoretical Research Development

Planning a marketing strategy for the mobile channel is different from mass marketing strategies in that mobile
marketing has the capability to target consumers directly with personalized marketing messages which could
have advertising or promotional nature. Sankaran et al. (2011) believe that organizations should be aware of
“where they are” and “where they want to be” when planning any marketing strategy including mobile and So-
Lo-Mo features. When defining “where they are”, organizations should conduct a complete and critical analysis
of their current market shares, profits, product awareness, brand awareness, and product positioning in addition
to reviewing the current status of their competitors. Marketers are increasingly combining mobile marketing
with social media in order to deepen their interactions with consumers because it is estimated that by 2016, more
than a billion people will access their favorite social media by using a mobile device, i.e. smartphones or tablet
PCs. Therefore, marketing campaigns should pay extra attention to this fundamental transition by first
understanding the preferences of their mobile consumers (Kats, 2012).
Since the launch of smartphones and tablet PCs, consumer behavior toward marketing, shopping, entertainment,
and information sharing has been rapidly changing. In other words, modern consumers consider their mobile
devices to be their tickets, loyalty cards, and even personal wallets to search, shop, communicate, inform, read
news and respond to advertising and marketing messages (Khan, 2013). This is further supported by Schwartz
(2011) who believes that the mobile phone has become a “digital hub” where everything seems to converge:
publishing, ticketing, media, wallets, banking, and shopping. Thus, the mobile phone and the mobile consumer
increasingly appear to be merging together.
Consequently, the research proposes a conceptual framework that better illustrates and subsumes the attributes
and strategic role of So-Lo-Mo in mobile marketing activities, offering a more flexible and more comprehensive
understanding of its nature which is shown in Figure 5.

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 Figure 5: Conceptual Mobile Marketing Framework Enhanced by So-Lo-Mo
Source: Research Developed (2014)

Research Conclusions
Every day more businesses are incorporating mobile marketing into their marketing mix in order to
communicate effectively and efficiently with their customers. The main purpose of mobile marketing is to
increase the awareness level of the businesses by assisting them in gathering relevant information about the
needs and preferences of their target customers in a timely and profitable manner. Moreover, mobile marketing
plays a significant role in enhancing the interaction between the potential customers and their favorite brands.
This is particularly due to the specific characteristics that marketing through the mobile channel has: intimacy,
immediacy, intelligence, and innovation. Endeavoring to inter-relate the theoretical outcomes of the research
towards a comprehensive understanding of mobile marketing was noticeably more complex than originally
expected. The difficulty was not related to the expected complexity of the subject, but to three specific aspects

134
of it. First, it is evident that scientific marketing research, owing to the long realization-publication processes
involved, generally cannot keep up with the pace of change of mobile marketing technology. Second, the pace
of change of consumer behavior influenced by the mobile channel, i.e. the mobile consumer behavior is
significantly fast due to the technological advancements in mobile marketing. The third aspect originates from
the second and has to do with the evident focus of literature on the functional attributes of mobile marketing
neglecting partially its contextual attributes. In other words, while research exhibits the practical benefits and
determinants of mobile marketing such as mobility, cost, usability and ubiquity, it is not equally successful in
linking it with the emerging consumer behavior.
In order for a business to connect with its target market successfully, innovative forms of marketing and
advertising have to be deployed in conjunction with traditional marketing methods. Mobile marketing is an
important direct marketing communication channel to be considered by businesses to reach out to their target
customers using an effective technique. It should be taken into consideration that mobile marketing opens new
horizons for businesses and marketing managers which will ultimately result in increasing sales and consumer
traffic, driving offline sales up by incorporating location-based search strategies, and building customer loyalty
and trust by asking for their permission prior to initiating a marketing dialogue with them. Customers are, in a
sense, addicted to mobile phones and use them for online shopping, social networking, reading books, and other
things in addition to making phone calls. Connecting with mobile customers helps businesses keep them
informed and updated about various issues such as launching new products or services, special offers, sales
periods, special promotions and other issues in addition to gaining more credibility in comparison with their
competitors.

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 “Key Account: The Negotiating Process”

By:

Philippe Coffre.

Pôle Universitaire Léonard De Vinci,

Abstract:
This research plans to show the differences between sales negotiators and researchers with regard to key
accounts. This study evaluates the state of the art in key accounts and shows the differences between these two
actors. The process is evaluated via a literature review of the optimization of need assessment and influence of
client’s expectations (the following areas are considered in the literature review: prospecting management,
partnerships, sales effectiveness optimization, client’s qualification, lobbies, networks, international accounts.
The methodology includes interviews with salespeople working on key accounts for Air Liquide, Matra, Alcatel,
GEC Alstom, Bull, EADS, PPG, and Omnicom. Our research shows how key accounts approach classical sales,
complex sales, added value, the evaluation of results, network influence, European negotiation, and global
negotiation. This analysis permits us to evaluate our assumptions and provides good feedback from the field,
closing a gap in the literature. Key account salespeople take strategic dimensions into account when starting a
negotiation process. In general, researchers are more interested in organization and clients than in integrated
processes. Key account negotiators measure the cost of negotiations. They help their clients to position
themselves properly and develop partnerships. They also take part in drafting specifications for tests and
pushing manufacturers to develop satisfactory solutions. This work is a research strictly based on field
experience and practice. The number of companies could have been larger, but we interviewed each salesperson
in depth. Open ended questions do not give quantitative results. However, open-ended questions allow
researchers to review different strategies, missions, objectives and philosophies and to explore comparisons
between industries. Qualitative interviews provide more variety, diversity, and Future work on key account
salespeople should consider the following:
Influence: The influence of key account salespeople on tender.
Ethics: Which ethical steps key accounts salespersons can take with client companies to improve results.
Support: How to help clients to perceive innovation as a tool for success.
Assistance: The influence of human factors on key account salespeople.

Key words: key accounts, salespeople, client expectations, partnerships, sales effectiveness international
accounts.

Introduction
Many researchers are interested in sales performance (Moulinier, 2003, Baumgartner & al, 2014), results
improvement (Picquet, 1988, Bradford, 2012), sales efficiency (Lacoste, 2006, Awang, 2013) and international
negotiation (Benaroya, Lagrasse, 2010; Deloffre, 2000; Leroux 2009). However, only a small body of research
has considered the role of salespeople working on key accounts or analyzed how they optimize firm sales
through multimodal and international coordination. We have chosen to compare the theory with the reality of
key account sales positions. The former analysis comes from the literature, whereas the latter analysis is based
on non-directive interviews, key accounts seminars and consultations. This research examines process
negotiation to identify and compare the negotiation methods used by the companies selected for this research.

Literature Review
Optimization of Needs Assessment

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According to researchers, the negotiation process introduces a distinction between needs assessment for
traditional offers and more complex sales. Sales offers respond to a clear request for a product or a service.
Such requests may be communicated through sales calls, internet browsing (Bloch, Macquin, 2001; Méot, 2008,
Court & al., 2013), catalog orders or calls to a local distributor.
According to key account salespeople, (Jouanne 2010; Page 2002) try to build a specific solution. They are
required to satisfy client expectations by making competitive, unique and strategic recommendations that
differentiate the firm they represent from its competitors. For Baillard (2010) and Lascoumes, Lebourhis (1997),
negotiators will evaluate stakes, purchasing policies and strategic sales plans in decision-making processes,.
They must also develop good relationships and try to identify significant players on decision-making teams, as
indicated by Brassier (2010); Blanc, Le Gall (2006); Lemonnier (2007); Wysocki (2001).
The previous research has focused more on organizations and clients than on analyzing integrated processes.
Our study also involves measuring the types of relationships existing between the added value and client’s
expectations as presented in the following paragraph. We examine client responses and prospects, partnership
creation and efficient methods of negotiation.

Client response
Price setting is critical to sales increase (Falque, Tschiember, 2001; Houver, Vandoeuvre, 2006; Glavas,
Mathews, 2014) as well as building solutions designed specifically for clients which bring client’s loyalty.
Individuals working on key accounts build projects in which their contributions are recognized. Aguilar (2006),
Leroux (1993), and Méot (2010) underline the effective involvement of key account salespeople in solutions
suggested by their firms as one of the hidden dimensions of negotiation. Negotiators connect simple processes
and solutions. They build links between company quality, policy and capital evaluation (Hermel, Louppe, 2002,
Helm, Gritsch, 2014) in order to improve their approach among company alternative purposes. Researchers
promote prices to clients as the most important tool for key account managers. We continue our analysis by
considering prospecting management.

Prospecting management
Key account salespeople. During the prospecting step, salespeople working on key accounts try to create a
privileged relationship as characterized by Vandecappelle (2005), who considers "how" people negotiate (the
way in which they are likely to negotiate) together with “why" they negotiate (the results expected). This
explains why salespeople become managers. Seen as “sailing ship skippers”, salespeople can motivate their
clients (“team members”) by “always requiring more" (Grohman, 2009, Py, 2001) or “communicating better”
(Salzer, Marret, Simmonet, 1982, Kiss & al 2013). Researchers are more interested in communication between
people and organizations, whereas salespersons and client associations aim to build strong partnerships.

Development of a strong partnership

The development of strong partnerships occurs in the long-term. To consider an offer in the context of the value
chain makes it easier to measure performance (Ittner, Larcker, 2001), accentuates understanding and adds value.
The increase in value gives a wider scope on sales proposition and helps to create an offer consistent with firm

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strategy. This dialogue between suppliers and customers assists in differentiation and creates added value, as
indicated by Macquin (1993). Trappe and Tullis (2005) and Van Der Feer (2010) present a composite image of
sales team management that includes pure salespersons, sales services, and category managers. Factors that
help to build client relationships include information enrichment, serious stakes, a robust understanding of
clients’ needs, a strong dialogue support, and greater value added. A solid negotiation strategy will yield success
if presented by a good organization. The next section explores the organizational factors that influence
negotiation.

Organized Negotiation: Does Organization Optimize Sales Effectiveness?

In this section, we will review client qualifications and the clients themselves.
Client qualifications
Key account salespeople help to increase the quality of client information and determine the influence of key
actors in significant decisions. Scheelen and Lévitte (2001), Platnic-Cohen (2005), Bénito, Combes and Filleau
(2005), and Taber (2009) identify eight types of personalities: “drivers”, “motivators”, “appraisers”,
“promoters”, “supporters”, “organizers”, “facilitators” and “coordinators”. The use of these categories can help
salespeople to classify key actors. This framework can be visually represented using a purchase process matrix
for each company or service (Pardo, 1999; Legrand, Martini, 2008, Goyal, Hancock, 2012). Key account
salespeople also use a strong marketing program or conduct cost-benefit estimation. Dupont and Audebert
(1994) and Bercoff (2007) raise a few related points regarding professional negotiation. Researchers. While key
account salespeople develop cognitive tools to use with their clients, researchers, instead, seek to classify
various interlocutors.
Clients
Client satisfaction, cost control and responsiveness are important from the client’s point of view. Salespeople
working on key accounts must also "surprise" their clients (Diridollou and Vincent, 2001; Stern Askenasi, 2010)
to succeed. To achieve success, according to the latter, they can do the following:
- Improve key processes (emphasizing the personal aspects of business rather than “quality”. These efforts
focus mostly on people and competences).
- Transform key account salespeople role to become a "coach" or a coordinator The information available
about prospective clients can also be organized by external companies. These companies specialize in key
account follow-ups (Ceddaha, 2007). They identify purchasers and deciders. They can be helpful in
designing operational strategies for ambitious suppliers.
Key account salespeople track competitive efforts, sales plans, workshop coordination, access to information,
purchase matrices, group practices and cost estimation. They offer a better sales development.
Researchers propose successful methods.
Assumption H 1: The more surprised the client is, the more innovations he will pursue. We now examine sales
activity evaluation.

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Proactive negotiation: lobbies and networks.
Lobbies
This activity requires information about competitive decision-makers as presented in flow charts, contacts and
legislative procedures (Zaragoza, 2001; Selles, Testa, 2006).
The individuals interviewed in this study distinguished between two types of lobbying: maintenance lobbying
(existing client management) and development lobbying (prospective client management). A communication
plan will include possible enemies (people who hold unfavorable opinions of the firm) or "locked" individuals
(people "held" by a firm’s competitors) (Lacroix-Sablayrolles, 2002; Moulinier, 2005; Trehorel, 010).
Balanya (2000) presents three types of lobbies:
- The 45 “Round Table” members (multinational business leaders), who strongly influence the decisions of
the European Commission.
- The leaders of the largest European and American companies, who meet together regularly as part of the
“Dialogue on Transatlantic Trade Commission”.
- Public relations companies that have the power to influence European leaders; for example, “Bursin-
Marsteller”.
Lobbying controlled by key account salespersons is based on building networks and grids at various levels
(Fradet, 2000; Neveu, 2008; Scherrer, 2010) and using bartering as part of the marketing mix (Adetem, 2002),
whereas lobbying managed by CEOs involves the purposeful transmission of limited information (this strategic
consideration is not lost on careful managers) (Belorgey, Mercier, 2009; Goupilleau, 2002; Vélu, 2007).
Assumption H2: Key account salespeople work to develop networking, lobbying, marketing and personal
relationships, whereas researchers develop procedures and organizational structures.

We examine influence networks.

Influence Networks.
In Europe, researchers have shown that networking has an enormous impact on economics and politics (Capital
1998). Networks are organized around the parliaments and ministries and can be useful in countering
countervailing powers and helping to develop projects (Ballot, Ibal,2008, Houver, Vandoeuvre,2006).
Key account salespeople develop other types of networks. They note that company personnel belong to a large
range of associations that can be orchestrated to help key account managers with their research (Michaux,2007;
Moulinier,2009; White, Mazur,1994; Glavas, Mathews 2014). According to the salespeople interviewed,
companies often miss out on occasions to approach clients about unique issues. However, they make heavy
investments in efforts to identify deciders via organization matrices and thereby to find new allies, as indicated
by Khan (2001) and Porot (2004). This information helps to shed light on the nature of a business, its needs, and
its mode of organization (centralized or decentralized).
Researchers view key account salespersons as politicians and economists, whereas these salespeople prefer to
emphasize relationships.
Assumption H3: Key account salespersons focus their efforts on identifying deciders within firms, whereas
researchers see them as politicians.

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The work of key account salespeople during negotiation appears to include knowledge searching within the
market, a healthy and simple economic approach and responsibility for network activation. Researchers are
interested in the classification of counterparts, exchanges between partners and identifying supportive
individuals. We will now widen our approach to include the European context.

International accounts.
Sales management for key accounts can involve several companies grouped together under the same name or
different names. It can involve a significant number of interlocutors from different businesses, multiple sites and
signs, and local, national, multinational or multi-continental brands. Only multipurpose teams can succeed in
working with such a diverse body of actors. International account development establishes "sales and relational
intimacy" with immediately accessible contacts throughout the world. David (2005), Goupilleau (2002), and
Rieunier (2009) indicate that firms use an array of media techniques and prioritize “proximity” to develop
communication. This strategy can allow small companies to improve their client relationships. For large
companies, Kotler (2003) recommends more intensive relational networking and questions the wisdom of
significant advertising expenses that yield weak returns on investment.
Assumption H4: Salespeople working on international key accounts improve their results by using more
multipurpose teams and emphasizing proximity; researchers focus their work on charting relations. Following
points consider salespeople acting worldwide.

International sales behavior

Deloffre (2000), Jolibert (2001) and Awang (2013) provide good answers to questions regarding sales behaviour
in the context of international offers. They consider economic structure, the evolution of world religions,
negotiations between Argentineans and Brazilians, business with Israelis, what to avoid with Australians, and
commonalities and points of difference between the approaches to negotiation adopted by different ethnic
groups (Malayan, Chinese and Indian) in Malaysia. Key account salespeople recognize the difficulties of
international business and seek to resolve those issues using local organizations within a global framework.
Researchers indicate the breadth of negotiator strategy and the tendency of researchers toward classification.
Assumption H5: International coordination by key account managers increases client value.

Methodology
Sample: Research on key accounts was initiated with 20 companies in industries such as gas (Air Liquide),
technology (Matra), telephone communications (Alcatel), railway transportation (GEC Alstom for high speed
trains; e.g., the TGV), data processing (Bull), aeronautics (EADS), glass (PPG), services (advertising and
promotion agencies AZ Promotion and CPM France) and mass consumer products (animal food, detergents).
The objective was to develop a better understanding of negotiation by salespeople working on key accounts.
Methodology: Key account managers were asked 62 open questions. The companies represented preferred that
their information be kept confidential so that they might answer honestly without fear that the answers they gave
would have negative consequences for their business strategy or performance.

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The questions asked (which were intended to determine to what degree the realities observed by key account
salespeople were consistent with the theory) were as follows: Are the needs that firms express consistent with
their strategic axis? How is it possible to improve consistency in this regard? How can organizations optimize
their sales effectiveness? What influence do salespeople have? How do you evaluate key account managers?
How can projects run by key account managers progress in Europe or internationally? We now examine how to
address client needs.

Practical Study and Results of Interviews

Responding to client needs

Classical sales: According to telecommunications and advertising-promotional agencies, key account

managers’ clients do not explicitly express or even conceptualize their needs. Clients are limiting the scope of
their vision to their own problems and do not take into account other possible factors or alternatives. The sales
firm, however, will help its clients to frame questions more clearly.
In the field of chemistry, needs assessment is built around good transversal relations between partners involved
in various stages of product design and development. These positive relationships produce strategic information.
Such relationships develop around task forces that can help to identify influential organization members.
In data processing, solutions generally involve strategic partnerships that address specific needs such as
visibility, information availability, software and management tools. This business knowledge on the part of key
account salespeople extends well beyond expressed needs. It offers a view of entire teams, including their
leaders. This popular approach widens the variety of perspectives considered and reveals new needs.
In all fields considered, overall, it seems that partnership is very important to identifying client requirements and
that such efforts are key to the negotiation process. These answers confirm assumption no. 1, which suggests
that key account salesperson increase sales, while researchers work to develop information processes.

Complex sales: Management of tender

Launching an initial investigation of a client company helps to evaluate preparation and marketing test costs. It
provides a good indication of the type of investments that should be made with the prospective client.
In the data-processing field, the company created a "sales plan" for every prospective client company. This
process was essential to tender management, as was the creation of a 3-to-5 year profitability evaluation plan.
One company interviewed, which had refused large industrial contracts that were not immediately profitable,
has now failed even though it offered internationally recognized products.
In the field of mass consumer products, the answers provided underlined the importance of new product price.
Table 1 presents these considerations and shows that financial concerns are important.

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 Table no. 1: Management of tenders
Field of activity Price
Gas Expensive preparatory expenditure
Technology Expensive preparatory expenditure
Chemistry Expensive preparatory expenditure
Data processing Sales plan
Consumption Price of referencing

This table shows that the cost of new business development for key accounts is quite high.
Preparatory project: According to key account managers (regardless of their activity), preparatory
expenditures can be measured in millions of euros or dollars. The Sirius motorway program in France, built by
the Direction de l’Equipement (Highway Management Company) evaluated three companies as candidates for
this preparatory work. Two were not selected. This project required adaptation and heavy preparatory work and
entailed high costs without guaranteeing results. Such efforts, in turn, require managerial support, an appropriate
success policy and field knowledge on the part of the manufacturers involved. They also require good upstream
preparation. Indeed, the drafting of specifications during the preparation phase (with 20% of preparatory studies
paid and 80% unpaid) increased the chances of success.
Key account negotiators evaluate the cost of negotiations. They help their clients to position themselves and
develop partnerships. They also take part to drafting test specifications, pushing their company to identify
satisfactory or even advantageous solutions.
Negotiation with added value: In the field of industry (metallurgy for example), projects orchestrated by
suppliers are developed to fit better client expectations. They may not be consistent with a client’s initial
requests but can help to assist clients who may sometimes lack perspective. In the field of mass consumer
products, simple questions often result in complex answers.
In the services field, the design of more creative solutions increases client loyalty. When clients perceive a
solution as simple, they will try to achieve it without a supplier. For this reason, key account salespeople will
always design projects that are strongly connected to their own firm in particular and demand complex forms of
organization that appear to be essential for success. Nevertheless, key account managers do not merely function
to design complex projects. Table n°2 stresses the importance of the relationship between the negotiator and the
client.
Table no. 2: Negotiation with added value
Field of activity Organization
Gas, aeronautics, railway Transverse organization
Telecom Transverse organization
Agencies of promotion and publicity Additional offer
Chemistry Development strong partner
Data processing Development strong partner
Consumption Simple questions producing complex answers
Services Search for creative solutions

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Key account salespeople properly develop capacity strategy and engage in networking, lobbying, marketing and
other efforts to develop personal relationships. Assumption n°2 is confirmed.

Prospecting management
Developing a complete file on each client before the start of operations can help a firm to develop new
applications based on requests from other prospective clients. Suppliers can also make cultural and behavioral
changes in order to suit their clients via training. Key account salespeople organize their operations via a
dynamic sales development process.

An organized negotiation
In services, competition and a good knowledge of the flow of decision-making at the client firm can help to
develop tests or protocols for prospective clients. They allow strategies to be evaluated over a period of 5 to 6
months or even longer. Key account managers will anticipate and pursue changes associated with client
management. They operate more quickly than salespersons.
In industrial business, the negotiation process is organized upstream around sales plans and in transversal
workshops, whereas in the processing industries, there is no particular technique or organization method used.
Table 3 synthesizes these elements and displays up-to-date information; it indicates the importance of bilateral
relationships.

Table no 3: Organized negotiation

Field of activity Relational sales
Services Research of the most up-to-date flow chart.
Industry Task force and workshop.

Key account salespeople show their importance to clients and refine their actions when they intervene directly:
for example, in supplying spare parts in “advanced workshops”. Researchers highlight this connection.
Key account salespeople focus their efforts on detecting the most important decision-makers. This confirms
assumption n°3.

Client qualifications
Salespeople working on key accounts analyze client qualifications by measuring positive feedback and
information collected from other sources (through information-crossing). Information can also be obtained from
data collected through client suppliers. These data increase information quality and indicate the influence of
particular individuals on significant decisions.

An evaluated negotiation

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Long-term management
Salespersons interviews indicate that key account salespeople seem to know their clients or prospective clients
quite well and obtain better results. Key account salespeople establish long-term multipurpose team plans
(extending up to 10 years in gas contracts, for example); they may propose closer proximity to the client, a
capital spending program and/or a framework for ensuring profits and limiting operating expenses. Each project
is then discussed with the firm CEO.

Evaluations of sales managers’ activities generally involve an analysis by an external company that evaluates
the manager on the following points: competitive strengths, stakes.
In the industrial field: competitive strengths, stakes
In the field of data processing: development of "second sources" (alternative strategies).
In services activities, “post operational measurement” is replaced by "in situ" actions (controls during
operations).
In the field of mass consumer products, annual results are measured. Table 4 indicates the various modes of
evaluation.

Table no. 4: Networking negotiation

Field of activity Sales tools
Chemistry Experiment and competition
Technology Experiment and competition
Services Experiment and competition
Great consumption DN, DV

Proactive negotiation: lobby with networks.

The success of negotiation in such fields as chemistry, production, and technology and services agencies
depends, according to the practices of salespeople and their competences, on proven results.
For mass consumer products, success can be evaluated in France through the DN (the Numerical Distribution
for Secodip, meaning the percentage share of products in the front of the market) and DV (the Value
Distribution for Secodip, meaning percentage share of places in the front of the market).

Influence networks
Researchers have shown that in the European Community, networking has an enormous influence on economics
and politics (Capital,1998; Leroux, 2009; Perrotin, Loubere,2005). It is organized around the parliaments and
ministries. These networks can be useful in countering countervailing powers and helping to develop projects
(Camara,2009; Guillaume-Hognun, 2005). Key account salespeople develop other types of networks. They note
that company personnel belong to a large range of associations that can be orchestrated to help key account
managers with their research (Hamon, Lézin, Toullec,(2004); Neveu,(2008); White, Mazur (1994)). According
to the salespeople interviewed, companies often miss out on occasions to approach clients about unique issues.
Other personal actors such as pensioners are often a source of relational capital and should be better exploited.

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In the opinion of the key accounts salespeople interviewed, these types of speakers are helpful because they are
less expensive and more efficient than those in traditional competitive systems: clearly one single day organized
by a retiree on the field analysis yields better ideas than a “one-day report” written by an external cabinet. Table
5 presents evaluations types per field.

Table no. 5: Evaluated negotiation.

Field of activity Evaluation
Industry Measure of competitive strength.
Stakes over 5 years.
Data processing Development of second sources.
Services From “post” operations towards “in situ” actions
Great consumption Annual investigations

European negotiation
The key account salespersons interviewed observe that pan-European activities are increasing in importance and
that company partners now have more requirements. Will the clash between market expectations and the longer
procedures created because of the new European members change the work of key account salespeople?
Key account salespeople evaluate the European Commission as a context in which exchanges can occur between
partners at all levels. Such communication is a powerful success factor for key accounts salespeople. It helps
companies to transmit more powerful messages. The literature indicates that strategic considerations, necessary
precautions and sensitivities are usually associated with European relations. A summary of our research is
presented in Table 6.
Salespeople working on international key accounts improve their results using more multipurpose teams,
confirming assumption no.4.

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 Table no. 6: Syntheses comparing reports made by salesmen and subjects covered by authors and researchers.
Key accounts salespersons Authors and researchers
Need assessment Key account negotiators help customers to position, Theoretical study highlights teams
develop partnerships, take part of specifications responsibility and influence of
drafting for tests and bring manufacturers to solutions. people in negotiation processes.
Added value Key account salespersons show their capacity to read Researchers are interested
strategies and organize a dynamic process of sales by communication between people
development. and organizations. They highlight
company’s policies and hidden
resources.
Customers Key account salespersons show their implication and Authors rather seek to classify
precision when they intervene directly in parts spare various interlocutors.
supply in the advanced workshops, for example. The researchers underline
salespersons reactivity.
Evaluation The evaluation is considering a performance Researchers cover these subjects less
management in an average long term, an analysis by often.
external cabinets, second sources, annual competitive
investigations.
Lobbying A constant effort of lobbying by key accounts Researchers are interested in
salespersons, a research of information associated with interlocutors classification,
the business and their responsibility to activate different exchanges between partners and
networks. favorable personalities detection.

European Key account salespersons observe European activities Researchers often privileged the
accounts reinforcement and an increasingly large requirements European mechanisms.
from company’s partners.
International Key account salespersons know international markets Authors like Jolibert bring practical
accounts difficulties and look for answers in terms of domestic answers.
organization.

Findings & Discussion

Interviews and comparisons between interviewee comments and research by other authors have permitted us to
observe the differences between key account salespeople and other actors as listed below:

Strategy versus organization

Key account salespeople take strategic dimensions into account when starting a negotiation process. In general,
researchers are more interested in organization and clients than in integrated processes.

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Evaluation vs. influence
Key account negotiators measure the cost of negotiations. They help their clients to position themselves
properly and develop partnerships. They also take part in drafting specifications for tests and pushing
manufacturers to develop satisfactory solutions.
Theoretical studies more often highlight team responsibilities and people’s influence on the negotiation process.

Implication vs. proactivity

Key account salespeople demonstrate to clients the importance of the firms they represent when they directly
supply spare parts to “advanced workshops”.
Researchers highlight this effect.

Cognition vs. classification

The activities of key account salespeople during negotiations appear to involve knowledge searching and
coordination as appropriate for international markets. These individuals espouse an economic approach and take
responsibility for different proactive networks.
Researchers are interested in the classification of counterparts, exchanges between partners and identifying
supporting actors, as suggested in assumption n°5.

Key account salespeople appear to be more strategic, evaluate costs, help their clients to position their offerings,
view their business as dynamic, and create tools for their clients. They evaluate their competitive environment,
learn new techniques, and are expected to think using broad international multimodal points of view.
Researchers focus on organization responsibility, communication, classification, and exchange. All assumptions
have been validated. This research indicates that key account salespeople consider operational factors, whereas
researchers are more functional, as is seen in Table n°7.

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 Table n° 7: Assumptions validation.
Assumptions number Assumptions Validation
H1 The more the client is surprised, the more he will innovate. Validated.
H2 Key accounts salespersons are developing more networking, Validated.
lobbying, marketing and personal relations when searchers
work on procedures and organization.

H3 Key accounts salespersons accentuate their efforts on detecting Validated.

best deciders in companies, when searchers see them as
politicians.

H4 International key accounts salespersons improve results with Validated.

more multipurpose teams and more proximity when searchers
bring their work around chart relations.

H5 More international coordination from key accounts managers Validated.

creates more client value.

Limitations
This research has some limitations:
The Number of companies could have been larger, but we interviewed each salesperson in depth.
Open-ended questions do not provide quantitative results. However, open-ended questions allow researchers to
review different strategies, missions, objectives and philosophies and to explore comparisons between
industries. Qualitative interviews provide more variety, diversity, and cross-cultural strategies.
We conducted interviews mostly with French key accounts salespeople. However, this constraint does not
present an issue because these salespeople were working extensively throughout the world at the time.

Future Research
Future work on key account salespeople should consider the following:
Influence: The influence of key account salespeople on tender.
Ethics: Which ethical steps key accounts salespersons can take with client companies to improve results.
Support: How to help clients to perceive innovation as a tool for success.
Assistance: The influence of human factors on key account salespeople.

Conclusion
The art of negotiation relies on a wide set of resources including searching and client expectations. A good
understanding of a situation can amplify one’s effectiveness. It produces appropriate, original solutions that can
provide significant added value and that respond appropriately to client needs. If we seek a link between the
150
real-world activities of salespeople and the research undertaken by researchers, we may wish to emphasize the
following points:

Key account salespeople permanently seek new information about their partners, companies, and clients. They
play an in-house advisory role and an external role. They detect the emergence of innovations in complex
organizations. They organize their activities using worldwide lobby support and European influence networks.
Researchers show the influence of the human element on sales functions and the significance of the associated
results. They underline the influence of communication with clients and key account policies. They highlight
how salespeople can be classified and indicate the role of European institutions. The responsibilities of key
account salespeople are broad and require significant competences. By analyzing various sequences of sales
activity, authors and researchers are helping to analyze the tasks of salespeople and disseminate more
knowledge about a relatively unknown profession.

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Internet-Mediated Market Orientation and Its Determinants: Empirical Evidence from
Sri Lanka
By:
Thilini Chathurika Gamage
Sabaragamuwa University of Sri Lanka, Sri Lanka
Dr. Fazeela Jameel Ahsan
University of Colombo, Sri Lanka

Abstract
The purpose of this paper is to identify the factors that influence an organization's Internet-mediated market
orientation (IMO) implementation. Data was collected through a mail survey with the use of a structured
questionnaire. A total of 250 Sri Lankan hotels were randomly selected using Accommodation Guide Published
by Sri Lankan Tourism Development Authority. 114 usable questionnaires were used to assess reliability and
validly of the constructs. Linear regression analysis was then used in hypotheses testing to identify the
determinants of IMO. The reliability analysis, reflected coefficient values ranging from 0.77 to 0.87 indicates
satisfactory internal consistency among variables within each construct. The most important determinants of
IMO were found to be the top management emphasis, top management risk aversion, interdepartmental
connectedness, and compatibility of Internet strategy and resource availability. The results reflect the
importance of the determinants in implementing and managing MO in an Internet-mediated environment for
effective business performance. IMO is an area within the broader Market Orientation that remains relatively
under-research. As a result of this antithesis, research has not proceeded in the investigation on the factors that
determine the degree of IMO implementation. This paper will be one of the first papers to address this research
gap. The response rate does not allow for unreserved generalizations. Yet, replication of this study within
different research contexts might give a more detailed view of the nature of the relationships identified in this
paper and will most certainly help to increase the response rate, thus enhance the gravity of the conclusions.
Key Words: Market Orientation, Internet-mediated Market Orientation (IMO), Determinants, Implementation

Introduction
Market orientation (MO) has long been stressed as an essential concept in the marketing discipline. Marketing
scholars define MO as the implementation of the marketing concept (Jaworski and Kohli, 1993; Matsuno and
Mentzer, 2000) and address that MO consists of such activities as gathering, disseminating, and responding to
market intelligence (Kohli and Jaworski, 1990). The interest on MO continues to grow, result in a dramatic
increase in the number of academic papers attempting to cover different aspects of MO such as the relationship
between MO and the culture, learning organization, innovation, organizational leadership and strategy.
Although body of literature pertaining to MO is flourishing, still the marketing literature remains relatively
under-researched in relation to the relevancy of the use of the Internet on the MO process in today’s rapidly
growing Internet-mediated environment. In reality, the Internet and its related technologies enable organizations
to easily access information about customers, competitors and other stakeholders and to share innovative ideas
from various sources beyond spatial and temporal boundaries (Min et al., 2002), all of which are essential
components of the MO process.
On the other hand, MO is admittedly the characteristic of a limited number of organizations; so far the vast
majority fails to develop and exploit the benefits of this concept (Avlonitis and Gounaris, 1999). In order to
explain this paradox, it is extremely important to consider the conditions under which the concept of MO can
flourish. However, with the exemption of the scholarly work carried out by Kohli and Jaworski (1990), in
marketing literature, little attention has been given on the conditions under which MO could be developed and
IMO is no exception.

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On this background, this paper fills this research gap by identifying the importance and the role of senior
management, interdepartmental dynamics and Internet strategy variables in developing an IMO. This paper
contributes to existing marketing literature by identifying the determinants of IMO implementation; senior
management, interdepartmental dynamics and Internet strategy variables that enhance or impede the
implementation IMO.
This paper is structured as follows. Following the introduction, this paper outlines previous literature on MO,
discussing theoretical models/ frameworks of MO and IMO and presents the hypotheses of this paper. Then, the
research methodology and analysis of empirical research findings are subsequently discussed. Next, the
determinants of IMO are discussed in relation to previous literature. At the end, managerial and theoretical
implications and suggestions for future research are presented.

Theoretical Background

Explicating the IMO Concept

The marketing concept has been conceptualized as a business philosophy (Drucker, 1954; Felton, 1959) which
suggests that the long term purpose of an organization is to satisfy customer needs for the purpose of
maximizing corporate profits (Webster, 1988). However, the main constraint of the marketing concept is that it
is based on an idealistic corporate policy and has limited operational value (Barksdale and Darden, 1971) and
this is where the concept of MO becomes important as it contrasts the philosophical value of the marketing
concept with its implementation (McCarthy and Perreault, 1984). Thus, beginning from the theory of marketing
concept, scholars develop the theory of MO to operationalize the marketing concept through its implementation
(Ruekert 1992; Jaworski and Kohli, 1993; Matsuno and Mentzer, 2000; Lafferty and Hult, 2001).
In the 1990s two seminal articles in the Journal of Marketing by Kohli and Jaworski (1990) and Narver and
Slater (1990) heralded a new era for the marketing discipline by establishing the concept of MO firmly into the
academic research. In this context, a multitude of definitions and descriptions on MO have been advanced. With
the variety of definitions of MO, the contemporary MO literature is dominated by the conceptualization of two
sets of theories; namely market intelligence based conceptualization by Kohli and Jaworski (1990) and culture-
based behavioral conceptualization by Narver and Slater (1990) (Lafferty and Hult, 1999).
Kohli and Jaworski (1990) define MO as the generation of market intelligence regarding current and potential
customers, the dissemination of intelligence among departments, and the response to the changing market need.
Their major conceptual argument was that “a MO appears to provide a unifying focus for the efforts and
projects of individuals and departments within the organization, thereby leading to superior performance”. For
Narver and Slater (1990), MO is a kind of organizational culture that more effectively and efficiently creates the
behavior patterns, providing greater value for the customers and contributing to long term enhanced business
performance. Despite defining MO as a kind of culture, they deal with behavioral components; customer
orientation, competitor orientation and inter-functional coordination. Customer and competitor orientation
include all the activities involved in the acquisition of information about current and potential customers and
competitors. MO also includes its dissemination among the departments. Inter-functional coordination covers

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the collective efforts of the various departments to create superior customer value. These components involved
in intelligence generation and dissemination and in responsiveness correspond to the definition from Kohli and
Jaworski (1990). Narver and Slater (1990) further suggest that organizational learning, which consist of
information acquisitions; dissemination and shared interpretation of information across the functions are
inseparable from MO.
As a whole, the two landmark theories of MO are quite similar and complementary. Both theories emphasize the
role of market learning capability, that is, an organization’s ability to implement MO through the management
of market-related information; acquisition, dissemination and usage. Guenzi and Troilo (2007) emphasize that
the market learning capability fosters superior customer value by allowing an organization to adapt its offering
to meet expressed customer needs (adaptive learning) and to proactively enact latent customer needs (generative
learning). Nevertheless, the biggest disadvantage of the above two approaches is, even though the concept of
MO implies both generative learning and adaptive learning, none of the above two approaches is capable of
addressing generative learning (Narver et al., 2004; Min et al., 2002). As Min et al. (2002) point out, this is
basically due to off-line nature of the traditional MO activities, because in most instances such activities may
not be able to offer opportunities for generative learning due to discontinuities caused by expanded, distributed
supply chains in rapidly changing business environment. This is where the Internet becomes significant. The
Internet and its related technologies enable organizations to easily access information about customers,
competition and to share innovative ideas from various sources beyond spatial and temporal boundaries (Min et
al., 2002). Thus, the Internet can acts as a transformer of the traditional MO process into a more efficient and
effective IMO process in the Internet-mediated environment through both generative learning and adaptive
learning. Despite the mainstream adoption of the Internet for MO activities in organizations during last two
decades, Min et al. (2002) was the first scholar who has come closest to a formal definition for IMO.
Bringing together the similarities found between the two landmarks complementary theories of MO and Min et
al. (2002) definition of IMO, Gamage and Ahsan (2014) in their previous work on IMO define IMO as;
“The Internet-mediated, information rich, seamless, agile, and boundary spanning process of generating,
disseminating, and responding to market intelligence on the Internet with the objective of creating consistent
superior value for the customers over time and thereby ensuring continuous superior performance for the
organization”
Within this definition of IMO, Gamage and Ahsan (2014) emphasize three main priorities for a market oriented
organization operating in an Internet mediated environment, namely;
1. Priority in market intelligence generation on the Internet;
2. Priority in intelligence dissemination throughout the organization with the use of the Internet; and
3. Priority in responsiveness to this intelligence on the Internet.

Identifying Possible Determinants of IMO

Determinants of IMO refer to those factors that act as drivers or obstacles to IMO, resulting in some
organizations being more market-oriented in an Internet mediated environment than others. In order to identify
those factors that influence on IMO implementation, a broad search of the literature was carried out ranging
from work focusing on more traditional MO to innovation and e-commerce deployment. Kohli and Jaworski

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(1990) identify three categories of determinants of MO as senior management factors, interdepartmental
dynamics and organizational systems. Senior management factors include their emphasis on MO as well as their
risk exposure whereas interdepartmental dynamics includes interdepartmental conflicts and connectedness.
Organizational systems encompass formalization, centralization, departmentalization and reward system
orientation. Although several subsequent research works in different research settings have confirmed the above
determinants (Pulendran et al., 2000; Winston and Dadzie, 2002), however, certain scholars do not fully agree
with Kohli and Jaworski (1990) and came up with some contrasting views as well. For example, the findings of
Winston and Dadzie (2002) who studied Nigerian and Kenyan organizations indicate that the impact of top
management emphasis on MO is marginal in these countries. Moreover, Min et al. (2002) and Celuch et al.
(2007) who conceptually studied the role of MO in an Internet-mediated environment found that complexity of
Internet strategy, compatibility of strategy and resource availability, are crucial in fostering MO than
formalization, centralization, departmentalization and reward system orientation. Hence it is important to test
determinants under different circumstances and cultural settings, as in the case of IMO, where this paper focuses
on the Sri Lankan hotel industry. This was supported by the insights from the in-depth interviews with three
marketing academics and four industry practitioners, aimed at identifying additional possible influencers and
also at verifying the contextual validity of those identified from the literature. Finally this paper identifies three
broad categories of determinants of IMO as; senior management, interdepartmental dynamics and Internet
strategy factors.

Senior Management Factors

Top Management Emphasis: Several scholars have asserted that top management is a crucial factor in creating
and sustaining MO within an organization (Kohli and Jaworski, 1990; Narver and Slater, 1990). Without a clear
signal from top management regarding the importance of being responsive to customer needs, an organization is
not likely to be market-oriented (Felton, 1959; Webster, 1988). Since top management plays a central role in
shaping MO (Kohli and Jaworski, 1990) as well as implementing Internet technology within an organization, the
role of top management in the implementation of MO process in an Internet-mediated environment is likely to
be significant (Min et al., 2002). Specifically, top management has the power to reduce interdepartmental
conflict and facilitate rapid implementation of IMO by building an organization-wide strategic consensus
(Celuch et al., 2007). Accordingly, the following hypothesis is proposed.
H1: The greater the top management emphasis on being Internet-mediated market orientated, the greater the
overall IMO of the organization
Top Management Risk Aversion: A market-oriented organization is expected to respond to market intelligence
and some of these actions may require the managers to take certain risks. Risk aversive managers are therefore
less likely to emphasize MO. Kohli and Jaworski (1990) argu that if top managers are risk averse and intolerant
of failures, subordinates are less likely to concentrate on gathering, disseminating or responding to intelligence.
On the other hand, if top management shows willingness to take risks and accepts occasional failures as being
normal, subordinates are more likely to propose and introduce new ideas in response to market needs.
Implementation of Internet initiatives is risky by nature (Celuch et al., 2007). Several studies have shown that
top management risk aversion is a significant predictor of Internet adoption and leads to more successful

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Internet use in business process particularly in implementation of MO within an organization (Celuch et al.,
2007; Min et al. 2002). On these grounds, the following hypothesis is proposed.
H2: The greater the risk aversion of top management the lower the overall IMO of the organization

Interdepartmental Dynamics
Interdepartmental Conflicts: Many scholars have suggested that the implementation of MO is greatly influenced
by interdepartmental conflicts (Lusch and Laczniak, 1987). In this regard, Kohli and Jaworski (1990) describe
the lack of cooperation and coordination between functional units as one of the most common barriers to MO.
Ruekert (1992) suggests that this lack of cooperation creates frustration among the employees of the
organization, especially when individuals perceive that the other party is not behaving in a fair manner. Prior
research also suggests that organizational conflict among the employees results in reduced inter-functional
performance (Weinrauch and Anderson, 1982; Dutton and Walton, 1966). Similarly, Celuch et al. (2007)
highlight that interdepartmental conflicts hinder Internet adoption and acts as a barrier to implementation of the
MO process in an Internet-mediated environment. Accordingly, the following hypothesis is proposed.
H3: The greater the interdepartmental conflict the lower the overall IMO of the organization

Interdepartmental Connectedness: Kohli and Jaworski (1990) claim that interdepartmental connectedness
fosters interdependency within the organization and encourages employees to act in a concerted manner in the
processes of knowledge generation and knowledge utilization. Deshpande and Zaltman (1982) identify
interdepartmental connectedness to be significant and positively related to MO components of intelligence
dissemination and responsiveness. Several other scholars including Harris and Piercy (1999) also argue for a
positive association between interdepartmental connectedness and MO of an organization. In a recent study of
MO and Internet-related cognition, Celuch et al. (2007) emphasizes that interdepartmental connectedness result
in smooth flow of information flow which can be further enhanced in an Internet-mediated context. Thus,
interdepartmental connectedness contributes significantly to achieve higher levels of IMO in the organization.
On these grounds, the following hypothesis is proposed.
H4: The greater the interdepartmental connectedness, the greater the overall IMO of the organization

Internet Strategy
Complexity of Internet Strategy: Rogers (1983) generalizes that the complexity of an innovation is negatively
related to its rate of adoption. Several scholars validate Rogers (1983) finding for the Internet adoption process
of an organization (Khemthong and Roberts, 2007; Buhalis, 1998). They highlight that the complexity of
Internet strategy will affect to the rate of Internet adoption. In consistent, Min et al. (2002) and Shalthoni and
West (2010) emphasize that ease of use is an important factor for in the implementation of MO in an Internet-
mediated context. Thus, complexity of Internet strategy has a significant impact on the implementation of MO
process in an Internet-mediated environment. Accordingly, the following hypothesis is proposed.
H5: The greater the complexity of Internet strategy the lower the overall IMO of the organization.

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Compatibility of Internet Strategy: Extant literature on e-Commerce reveals that compatibility is a key factor
associated with the innovation adoption (Rogers, 1983). Moreover, it emphasize that if the innovation is
compatible with existing work practices, environments and organizations’ objectives, organizations will be more
likely to adopt it. The Internet’s ability to facilitate information acquisition, dissemination as well as market
transactions with both internal and external stakeholders, makes sense to adopt Internet in implementing MO
within an organization (Celuch et al., 2007). In this regard, it can be conclude that the compatibility of Internet
strategy is a significant factor in fostering MO process in an Internet-mediated environment. Accordingly, the
following hypothesis is proposed.
H6: The greater the compatibility of Internet strategy the greater the overall IMO of the organization.

Resource Availability: Market-oriented organizations are well aware of the needs of their customers (Kohli and
Jaworski, 1990). The organizations should not only understand the expressed and latent needs of their
customers, but also be well informed of the human capabilities and physical resources of their organizations to
convince the customers to do business with them (Jaworski and Kohli, 1993). Implementation of Internet
strategy within organizations requires certain resources such as software, hardware, data and communication
infrastructure as well as information literate workforce. Thus, availability of the necessary resources plays a key
role in fostering MO in an Internet-mediated environment and helps exploring further opportunities in joint
development activities (Min et al., 2002). On these grounds, the following hypothesis is proposed.
H7: The greater the availability of resources the greater the overall IMO of the organization.

Methodology
Following the positivistic research tradition and the quantitative research approach, in this paper survey research
strategy was adopted.

Scale Development & Refinement

Self-administered questionnaire consist of five-point likert scale was used to collect the data. The questionnaire
included items that were derived from MO literature, and new items developed through a qualitative pre-study.
The measurement used by Gamage and Ahsan (2014) for IMO was employed to gauge the degree of IMO of the
participating hotels. Senior management factors and interdepartmental dynamics were assessed using Jaworski
and Kohli (1993) measurements of antecedents to MO with adaptations. Complexity and compatibility of
Internet strategy and resource availability measures had not been included in previous empirical studies and,
appropriate scales were not available. Therefore measures for these three factors were developed from a pre-
study of sixteen personal in-depth interviews with industry experts and academics. Rogers (1983) definition of
an innovation and Donthu and Garcia (1999) wording of questions to measure innovativeness was used as a
reference to develop complexity and compatibility of Internet strategy items. Next, a pre-test were conducted
before the main wave of the questionnaires was sent out. The questionnaires were hand delivered to a purposive
sample of fifteen managers who were responsible for marketing activities in their organizations. The role of this
group was to offer their expert opinions on the nature and structure of the questionnaire. Nine complete and

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suitable responses were returned. The respondents expressed no difficulties in answering the questions and only
minor modifications were suggested.

Sample & Data Collection

Sri Lankan hotel industry was used as the research setting of this paper due to its concrete effort to strategically
position Sri Lanka in the international markets through its online initiatives. Having ascertained the validity and
reliability of the scale items, a self-completion questionnaire was sent out to 250 hotels that were randomly
selected from the Accommodation Guide published by Sri Lanka Tourism Development Authority. It was
decided to regard the senior managers as key informants. The selection of key informants was guided by three
criteria: (1) the informants’ knowledge of the research area (2) the respondents’ willingness to complete the
survey and their ability to adapt and respond to market changes, and 3) the capacity to implement a significant
marketing project; these approaches had been previously used in empirical tests of MO such as Jaworski and
Kohli (1993). However, in the cases of unclassified hotels, boutique hotels and villas, general managers or
owners were contacted because they are generally responsible for marketing decisions in particular. A total of
114 valid responses were received, representing a net response rate of 45.6%—an acceptable response compared
to previous studies on MO.

Data Analysis
Focusing on the respondents, 21% were in top management and 74% in marketing/sales. Thus the key
informants targeted in the survey provided the overwhelming majority of the sample (95%). In terms of hotel
type, 64% of the sample comprised of classified hotels, 27% comprised of unclassified hotels, and remaining
9% comprised of boutique hotels and villas.

Reliability & Validity Assessment

Prior to analysis of the results using linear regression, the research instrument was tested for its reliability and
validity. Exploratory factor analysis was used to check convergent and discriminate validity of the constructs
(see Table 1). The Kaiser-Mayer-Olkin measure of sampling adequacy was acceptable (0.7369) and Bartlette’s
Test of Sphericity was significant, indicating that the items were correlated and suitable for factor analysis (Hair
et al., 1998). The results of the factor analysis shown in the Table 1 indicate that both discriminant and
convergent validities are satisfied. There are also no apparent problems with heteroskedasticity or
multicollinearity; details of which can also be found in the Table 1. Reliability was estimated by assessing the
internal consistency of the scale items using Cronbach’s α. The alpha values were all above 0.7 exceeded the
recommended standard of 0.7 suggested by Nunnally (1978) (See Table 1).

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 Table 1: Measurement Items, Exploratory Factor Analysis Results & Composite Reliability
Construct Variables Factor Cronbach’s α VIF
Loadings Value
Top Management Strategic necessity 0.71
Emphasis Effectively communicate their support 0.74 0.81 4.393
Allocate required resources 0.75
Allocate adequate technical support 0.77
Top Management Big financial risks for higher gains 0.66
Risk Aversion Occasional information systems failures as 0.63
being normal 0.77 4.224
Implement plans only if it certainly works 0.74
Interdepartmental Ample opportunity to collaborate with 0.75
Conflicts anyone 0.86 1.289
High interdepartmental connectivity 0.61
Interdepartmental Promote cross-functional team work 0.70
Connectedness No conflicting information 0.76 0.88 1.169
Little or no interdepartmental conflict 0.69
Complexity of Compatible with the business 0.80
Internet Strategy Fits well with the way employees like to 0.71 0.82 1.217
work
Compatibility of User-friendliness 0.82 0.79 1.101
Internet Strategy Clear and understandable to use 0.84
Resource Availability of adequate infrastructure 0.86
Availability Availability of technical support 0.89 0.87 1.205
Allocate sufficient funds for maintenance 0.77
Kaiser-Mayer-Olkin measure of sampling adequacy = 0.7369
Bartlette’s Test of Sphericity 1,979.5292, sign = 0.000
Spearman’s R = 0.033, t = 0.331, and p > 0.05

Hypotheses Testing
Linear regression was used to test the seven hypotheses formulated in this paper, regressing each of the
independent variables on IMO as the dependent variable. The results are shown in Table 2.

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 Table 2: Results of Hypotheses Testing
Exogenous Endogenous Hypothesis Beta Value p-value Result
Top Management Emphasis H1 0.582 0.000 Supported
Top Management Risk Aversion H2 -0.343 0.001 Supported
Interdepartmental Conflicts H3 0.100 0.075 Not Supported
Interdepartmental Connectedness IMO H4 0.605 0.000 Supported
Complexity of Internet Strategy H5 0.154 0.172 Not Supported
Compatibility of Internet Strategy H6 0.197 0.005 Supported
Resource Availability H7 0.500 0.000 Supported

As seen in the Table 2, H3 and H5 are not supported in this research context. The support for H1, H2 and H4 is
in line with the finding of Jaworski and Kohli (1993); taking into the relevancy of the use of the Internet on the
three underlying MO processes (1) market intelligence generation, (2) market intelligence dissemination and (3)
responsiveness to market intelligence. This shows quite conclusive that across different research contexts, senior
management factors and interdepartmental dynamics has a positive influence on MO implementation. Support
for H6 and H7 is in line with Min et al. (2002). This shows strong support for the suggestion that resource
availability and compatibility of an innovation will affect to the rate of adoption

Discussion & Conclusion

Findings from statistical analysis reveal insight into the key factors that influence IMO implementation in Sri
Lankan hotel industry. Overall, the findings has shown that the most important determinants of IMO are top
management emphasis, top management risk aversion, interdepartmental connectedness, compatibility of
Internet strategy and resource availability. The findings are consistent with the previous studies on MO
implementation by Jaworski and Kohli (1993) and Min et al. (2002). According to Kohli and Jaworski (1990),
MO involves a great deal of information generation and processing. This explains the influence of
interdepartmental connectedness, compatibility of Internet strategy and resource availability on MO
development in the Internet-mediated environment as demonstrated in this paper. Top management emphasis
and risk aversion facilitate the collection as well as the dissemination of market information (Kohli and
Jaworski, 1990). Organizations that allow greater autonomy to their divisions and functions are better in
collecting and disseminating market intelligence, by allowing for more informal arrangements, communication
and intelligence flow is not deterred by bureaucratic or hierarchical obstacles and, thus MO implementation is
further facilitated. Since MO involves a great deal of information flow within the organizations, in amalgamate
with Kohli and Jaworski (1990) this study proves that decentralized and informal organizational structures also
nourish successful MO implementation in the Internet-mediated environment.

Managerial & Theoretical Implications

Understanding IMO is a significant field of interest for scholars and practitioners alike. The empirical findings
presented in this paper provide significant insights to the factors that enhance or impede IMO implementation.
This paper adds value for marketing scholars since it explains why IMO is not widely adopted; as findings
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indicated, senior management factors, interdepartmental connectivity and Internet strategy determines
successful IMO implementation. Unless an organization is faced with such conditions, or until it has realized the
change, it sees limited scope for IMO implementation. This inference is important for practitioners to consider
as it provides them with a benchmark for evaluating the IMO implementation and helps them understand
whether their organization needs to be market-oriented in the Internet-mediated environment to better serves its
interests within the given market in which it competes and at a particular time. However, this conclusion should
not be misinterpreted and organizations ought not to be relaxing. Market conditions are transient and, in the long
run, all organizations confront a market situation that will require a high degree of IMO (Min et al., 2002). Thus,
it is better to invest in becoming market-oriented in the Internet-mediated environment while the environment is
somewhat munificent than to wait until it has grown hostile.

Limitations & Future Research Directions

There are a number of limitations to this paper. To start with, despite the fact that every attempt was made to
maximize the quality of the data collected, the response rate does not allow for unreserved generalizations.
Replication of this study within different industries might give a more detailed view of the nature of the
relationships identified in this study and will most certainly help to increase the response rate, thus enhance the
gravity of the conclusions. The context of the study (Sri Lankan hotel industry) is also a concern since it puts
constraints on the generalizability of the results to other industries and other countries. Finally, it would be
useful to replicate this study in different research settings (i.e. different industries and different countries). Such
expansions and replications can, over time, develop into a body of theory specifically related to IMO and its
implementation.

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 Empirical investigation of Internet usage by Bank customers in the UAE
By:
Vimi Jham,
Institute of Management Technology, Dubai.
Abstract
Banks in the UAE have succeeded in promoting new services to its customers. Current customers are tempted to
do business online. Current customer account relationships are found to be predictive of electronic services use
in general. This paper focuses on the use of internet banking and satisfaction by existing banks customers
through an investigation of the factors that influence customer’s acceptance of Internet banking services. An
exploratory study of the UAE customers in six banks is conducted to identify the factors which enhance
satisfaction with internet banking services with the help of data reduction technique called Factor Analysis.

Key Words: Internet Banking, Customer Satisfaction, Relationship Marketing, Factor Analysis, Technology
revolution.

Introduction
Rising numbers of financial institutions are introducing and expanding their offerings of electronic banking
products. Banks have augmented their distribution networks with transactional websites, which allow customers
to open accounts, apply for loans, check balances, transfer funds, and make and receive payment over the
Internet. Some institutions view Internet banking as a way to lower costs or to create new revenue streams by
attracting additional customers and selling more services to current customers. Other institutions have begun to
offer internet banking services as a defensive step out of concern that current customers may switch to another
financial institution with more advanced electronic banking services. But, diffusion and adoption of electronic
banking is expected to progress rapidly.
Technological innovations witnessed by the corporate sector during the nineties have changed the way business
needs to be conducted I.T. has introduced new business paradigms and is increasingly playing a significant role
in improving the services in the banking industry.
Banking and investment have been revolutionaries by the rapid diffusion of the Internet. The world of banking
is moving away from the traditional ‘bricks and mortar’ approach and is focusing on the potential of online
banking (Stehling and Moormann, 2002).
The Economic Policy & Research Center (EPRC), the operational arm of Dubai Economic Council recently
conducted an economic policy study titled Soundness of UAE Banking Sector and Macroeconomic Conditions.
The study, conducted by DEC, focused on macroeconomic conditions and how they may affect soundness of
UAE banking sector. The empirical investigation consisted of panel data comprising of 19 national banks
operating in UAE (balance sheets) during the period 2005-2010, data from the world economic outlook and the
UAE central bank.
The macroeconomic indicators shows that the UAE economy started to slow down in late 2006 with real GDP
growth rate declining from a high of 8.9% in 2006 to 5.3% in 2008 in the pre-crisis period. This trend worsened
in 2009 whereby the UAE experienced negative real GDP growth rate of 3.3% However, with various
government intervention measures outlined previously, the UAE growth rate recovered in the second quarter of
2010, rising from 0.9% in 2010 to almost 5% in third quarter of 2011. While use of internet banking is
relatively low in the region, there is a rising trend in adoption of technology in the UAE which is expected to

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grow further. UAE government’s recent initiative of mobile Government will enhance the technology usage
across the emirates bringing benefits to the customers. 44% people actually prefer internet banking whilst 76%
feel safe undertaking their banking over the internet. Account Based Money Transfer (ABMT) service is yet
another step in the right direction for the company. ABMT is a web-based facility that enables customers to send
money through Western Union directly from their bank account - from the comfort of their home and at the
click of a button. 32% of those who replied use internet banking for transferring funds; 35% use the internet to
pay utility bills and 31% use it for paying their credit card bills.
• 46% of respondents still prefer the personal touch when it comes to their banking needs.
• 13% prefer telephone banking.
• Only 9% use the internet to pay their mortgage suggesting that consumers prefer more traditional methods of
payment for settling their larger bills.
• 14% of respondents use the internet to manage their investment portfolios.
• 72% of those surveyed keep their personal or family finances up to date, the remaining 28% saying that they
tend to put it off. Interestingly, women tend to be more on top of their finances than their male counterparts.

Internet Banking in the UAE

One of the major factors affecting the banks is the changing need and perceptions of the consumer (Rose, 2000).
Increasingly, consumers expect online services from their financial institutions (Constantine, 2000) and
electronic delivery of services is becoming a necessity.
Multiple branches spread across the country and lack of national bandwidth are major constraints, especially for
public sector banks (Varma, 2001). He also observed that with union issues, inertia and apathy towards online
channels plaguing the 65% of public sector banks in the UAE, and somewhat restricted growth of foreign banks
due to their perceived expensive services, private entrepreneurial banks have pulled ahead. With increasing
competition from private and foreign banks, UAE banks had to gear up their technology infrastructure to get
competitive edge on online service delivery. Legal challenges in online banking include information security
and regulatory compliance (Ryder, 2000). The private banks have been quick to capitalize on the convenience
aspect demanded by the new generation, by forming alliances with utility service providers (mainly Credit
cards, mobile operators and phone services), and offering online conveniences such as bill payments. Internet
banking is fast catching up in the UAE, especially with cyber cafes and Internet kiosks springing up on every
corner, thus making up for the lack in PC/telephone penetration. Traditional banks are facing stiff competition
from private and foreign banks, and the only way to maintain competitiveness seems to be adopting a hybrid
model that offers traditional as well as online banking services.

Literature Survey
There is need for research to identify the factors that determine acceptance of Internet banking by the users. It
also demonstrates the significant effect of computer self-efficacy on behavioral intention through perceived ease
of use, perceived usefulness, and perceived credibility. Traditional branch-based retail banking remains the most
widespread method for conducting banking transactions in UAE as well as any other country. However, Internet
technology is rapidly changing the way personal financial services are being designed and delivered. In the UAE

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banks have tried to introduce Internet-based e-banking systems to improve their operations and to reduce costs.
Despite all their efforts aimed at developing better and easier Internet banking systems, these systems remained
largely unnoticed by the customers, and certainly underused in spite of their availability.
As (Davis, 1989) noted, future technology acceptance research needs to address how other variables affect
usefulness, ease of use, and user acceptance. However, factors affecting the acceptance of a new IT are likely to
vary with the technology, target users, and context (Moon and Kim, 2001). Recent research has indicated that
“trust” has a striking influence on user willingness to engage in online exchanges of money and personal
sensitive information (e.g. Hoffman, 1999; Friedman, 2000). The first dimension of trust, perceived credibility,
is the extent to which one partner believes that the other partner has the required expertise to perform the job
effectively and reliably (Ganesan, 1994). The second dimension of trust, benevolence, Benevolence is rooted in
repeated buyer-seller relationships (Ring and Van de Ven, 1992; Zaheer, 1998) Perceived credibility is usually
impersonal and relies on reputation, information and economic reasoning (Pavlou, 2001). It is more related to
one’s judgment on the privacy and security issues of the Internet banking systems. Consequently, perceived
credibility is used as a new construct to reflect the security and privacy concerns in the acceptance of Internet
banking.
Previous studies have found that banking service product quality plays an important role in determining
customers’ perceptions of the overall banking service quality. The bank product quality is primarily associated
with product variety and diverse features. (Strieter, 1999) noted that one of the most important developments in
banking is the increased emphasis on marketing a wide array of financial services. (Dixon, 1999) also argued
that the key to getting more customers for the banks through online service is not attraction of the internet itself
but the product offered to the customers. This argument was supposed by (Latimore, 2000), who found that 87
percent of internet banking customers want to make a variety of financial transaction at one side (so called “one-
stop shopping”), including paying their bills electronically and automatically, viewing their monthly bank
statements, and purchasing stocks and insurance. Therefore it could be noted that since the present banking
customers, with the advent of the internet technology, can have unlimited access to financial information and
enjoy a wider range of choice in selecting competitive products and financial institution than ever before, the
subtle “differentiating” quality levels (e.g. diverse features) of bank products and their timely introduction on
the marketplace have become a key driving force in attracting new customers and enhancing customer
satisfaction (Moles, 2000).
As electronic banking becomes more wide spread, managers of financial institutions need to be able to assess
the impact of losing relationships and accounts to aggressive online alternatives. (Kennickell, 1997) examined
the determinants of demand for electronic media for financial transactions; they found that the likelihood of
using electronic media to obtain banking services rises with higher levels of financial assets and education.
Additionally, younger consumers tend to use computers, ATMs, and debit cards more. However, the use of
direct deposit rises with age. (Kolodinsky, 2000) also found that age and education has an influence on whether
consumers use electronic banking products. However, they conclude that positive attitudes toward e-banking
services matter more than demographic factors in determining whether such services are used. These items
included statements related to perceived use, convenience, relative advantages and risk associated with
electronic banking. (Mantel, 2000) investigated the factors that influence consumers' willingness to use

169
electronic bill payment. (Jeevan, 2000) observes that the Internet enables banks to offer low cost, high value
added financial services. Banks as well as consumers view the security threat as perhaps the most serious threat.
(Denny, 2000) observes that the security of internet access to client account is the biggest challenge facing
banks.
An investigation into the factors affecting the acceptance of E-Banking by clients who have access to the
internet and elicit the opinion of non-internet users was done in Jordan (Mansumitrchai, Somkiat; Chiu, Candy,
2012)
A similar study was under taken and technology acceptance model (TAM) and its various adaptations was
being undertaken. (Ihab Ali El-Qirem,2012).The adoption of Internet banking as a platform for carrying out
banking services has continued to rise globally. This can be attributed to a number of factors such as perceived
usefulness, perceived ease of use, self-efficacy, relative advantage, compatibility, and result demonstrability.
These factors have been tested in a study conducted in Nairobi County, Kenya (Njuguna, etal, 2012). A
Customer Adoption of Internet Banking: in Taiwanese Banking was undertaken and analyzed empirically (Chao
Chao Chuang, Fu-Ling, 2012).
The rise of low cost online services for individuals seems to be related to economic schemes and models that
have already applied to other domains and that now reach the banks, particularly in France (Marceau,
Guillaume, 2013).
A study on perceived barriers towards adoption of internet banking among non-metropolitan Internet users was
done in Pakistan ( Aslam , et all, 2011) . Another research identified various factors that impose barriers and
enhance adoption of internet banking. Chief among these were compromised security of transactions and
marketing exposure. It also unearthed the impact of demographic on internet banking adoption (Muzividzi,
Mbizi, Mukwazhe, 2103). A study focuses on the adoption of retail internet banking among consumers in the
Klang Valley, Malaysia and the impact of demographics factors on such adoption behavior (Jayaraman, 2012).
The use of internet banking has grown 174% in the past five years in the UK, according to Apacs in its latest
telephone and internet banking figures. People between the ages of 55 and 64 accounted for the largest rise in
the period with a 425% rise, with a total of 2.1 million using online banking.The biggest users were those
between the ages of 35 and 44 who accounted for 4.2 million uses, closely followed by 25- to 34-year-olds with
4.1 million users ,Sandra Quinn, director of communications at Apacs, said: "Our research shows that more and
more people are turning to the internet rather than the phone to manage their finances. While younger people
continue to make up the majority of online banking users, the greatest proportion of new internet bankers are the
over 55s. As a group they have come to embrace the ease and efficiency that online banking offers."

Objective of the Study & Gaps in the research

Perceived ease of use and perceived usefulness may not fully reflect the users’ intention to adopt Internet
banking, necessitating a search for additional factors that better predict the acceptance of Internet banking.
Several important external variables that have received more and more attention such as individual differences,
such as computer self-efficacy (Agarwal, 1999) . Individual differences refer to user factors that include traits
such as personality and demographic variables, as well as situational variables that account for differences
attributable to circumstances such as experience and training. Furthermore, there has been no such empirical

170
research to explicate how individual differences influence the usage intention of Internet banking .Numerous
individual difference variables have been studied, including demographic and situational variables, cognitive
variables, and personality-related variables (Zumd, 1979). This research paper tries to fill this gap and identifies
the various factors which will enhance the usage of internet banking in the UAE

Research Methodology
The questionnaire was designed from the literature review .It included 29 variables which will help in enhancing
the satisfaction of the customer with usage of internet banking in the UAE. Six UAE banks were chosen where
the questionnaire was randomly administered to 210 respondents who were also customers of the bank. Out of
210 questionnaires, 194 were completed questionnaires. The banks chosen for the purpose of the study were the
ones who have strong retail presence and offer comprehensive range of information to the customer. These 29
variables were measured with the help of 7 point semantic scale ranging from extremely satisfied to extremely
dissatisfied, (where 1- extremely satisfied, 7- extremely dissatisfied). The responses were transposed from
spreadsheet to SPSS where these 29 variables were reduced to four principal components.

Analysis of the data

The data was subjected to Principal Component Analysis, a method categorized under the broad area of Factor
Analysis. The 29 variables were reduced to 4 Principal Components through varimax rotation method. (Table:
1). Factor Analysis is a multivariate statistical procedure primarily used for data reduction and summarisation –
large number of correlated variables is reduced to set of independent underlying factors. In our sample the
Kaiser- Meyer-Olkin measure of sampling adequacy was .716 which greater than .5 .Table II. This suggests that
the data is adequate for factor analysis.

Principal Component Analysis

Factor 1: The first factor has an Eigen value = 7.462 since this is greater than 1.0, it explains more variance
than a single variable, in fact 7.462 times as much. The cumulative percentage of variance is 24.7% which
implies that the four factors extracted account for 24.7% of total variance (information contained in original 29
variables.)
Factor 2: The 2nd factor has an Eigen value =5.05 It is also greater than 1.0 and therefore explains more
variance than a single variable. The cumulative percentage of variance is 16.7 % which implies that that the
three factors extracted account for 16.7 % of total variance (information contained in original 29 variables.)
Factor 3: The 3rd factor has Eigen value = 4.71 Like the above two factors it is also greater than 1.0 and explain
more variance than a single variable. The percent of variance explained = 15.5 % which implies that that the
four factors extracted account for 15.5 % of total variance (information contained in original 29 variables.)
Factor 4: The 4th factor has Eigen value = 4.01. Like the above three factors it is also greater than 1.0 and
explains more variance than a single variable. The percent of variance explained = 13.27 % which implies that
that the four factors extracted account for 13.27 % of total variance (information contained in original 29
variables.)

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After extracting the Eigen Values rotation of principal components is done through varimax rotation. After the
number of extracted factors is decided upon, the next task is to interpret the name of the factors as shown below.
This is done by the process of identifying which factors are associated with which of the original variables.
Factor Analysis was used to summarize the 29 “internet usage variables “into smaller sets of linear composites
that preserved most of the information in the original data set. Factor one had all the statements dealing with
access provided by internet banking. These were named as reliability.
Factor two had all the statements related to money transactions without actually going to the bank. This factor
was named as money transactions .The statements which load into factor three are all concerned with use of
internet for financial services. This factor was named as Financial Services. The fourth factor had statements
where the internet acts as information provider. It was named as Efficiency. A four factor solutions best
described the data. (Table 2)
Table 1: Rotated Component Matrix
Component
1 2 3 4
Info enquiry -.096 -.035 .047 -.015
privacy .199 -.010 -.002 -.033
Money transfer -.091 -.219 .268 -.795
trust .009 .714 -.027 -.354
Credit card .340 -.442 -.520 -.519
aesthetics -.699 .638 .063 -.062
Error in internet .421 .474 .589 -.205
timeliness -.192 -.561 .333 .304
flexibility .198 -.802 -.005 .126
responsiveness -.154 .774 .082 -.166
Self service .814 .203 .031 -.442
Bank info .527 .487 .196 .249
Apply loan responsiveness -.352 -.036 -.359 .522
Banks needs .922 -.231 .132 -.066
quick -.199 -.144 .134 .812
Instant feedback -.819 .100 -.158 .474
Foreign exchange .319 -.239 -.137 .615
Easy to use -.050 .145 -.620 -.073
secure .807 -.034 -.073 .305
reliable .423 -.138 -.660 -.141
Low cost .116 -.275 .848 .237
timesaving .104 -.466 .719 -.049
availability -.220 .498 .456 .298
accessibility .271 .486 -.259 .141

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convenience .042 .114 -.148 -.725
million air ecert -.039 -.096 .176 .637
payment .349 .659 -.393 .262
Value added -.060 .082 .149 -.006
reputation -.148 -.024 -.854 .194
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 6 iterations.

Figure 1

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 Table 2
Principal Principal Principal Principal
Component 1 Component 2 Component 3 Component 4
Reliability Money Transactions Financial Services Efficiency
Error in internet Payments Foreign exchange Information enquiry
Easy to use Accessibility Millionaire Privacy
Credit card Easy Certificates Aesthetics
Reliable Responsiveness Convenience Self service
Low Cost Trust Quick Application Bank information
Value Added Flexibility loan Bank need
Reputation Timeliness Flexibility Instant feedback
Time Saving secure

Reliability Analysis
Several measures of reliability can be evaluated in order to establish the reliability of a measuring instrument.
Reliability is operationalized as internal consistency, which is degree of inter correlations among the items that
constitute the scale (Nunnally, 1988). Internal consistency is estimated using a reliability coefficient called
Cronbach’s alpha (Cronbach, 1951). In order to assess reliability, the Cronbach alpha was determined for each
construct (factor) identified through factor analysis. If the Cronbach alpha is greater than 0.7, the construct is
deemed to be reliable. (Teo et al., 1999). Table 3 shows that all constructs met reliability criteria, as the lowest
alpha was .887 for the data. All the values well exceed the obligatory requirement, thereby testifying that all the
twenty nine scales are internally consistent and have accepted reliability values in their original form.

Table 3
Case Processing Summary
N %
Valid 194 100.0
Cases Excludeda 0 .0
Total 194 100.0

Reliability Statistics
Cronbach's N of Items
Alpha
.887 29

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Discussion
The above research establishes the criteria that there is increase in usage of internet services by the UAE customer.
The satisfaction of the UAE customer with these services depends on reliability, efficiency and the customer uses
the internet for money transactions and financial services. The current research contributes towards understanding
the factors which will enhance the use of internet banking by the UAE customer. This is in line with empirical
findings reported earlier (Davis, 1989).
Our findings imply that banks should satisfy the needs of customers when introducing various internet services to
them. A customer wants satisfaction from internet in services on a number of parameters as derived from the
findings above. Thus the bank has to embark upon a strategy to look into the needs customers with different
occupations and educational backgrounds with respect to internet banking. Further research into this can give
better insights to improve satisfaction with this service in the future.

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 The Relationship between Organizational Culture and Business Excellence: Case of
United Arab Emirates

By:
Rassel Kassem
Abu Dhabi University

Dr. Mian M. Ajmal

Abu Dhabi University

Dr. Mehmood Khan

Abu Dhabi University

Abstract
This research studies the relationship between organizational culture and business excellence. Specifically, it
examines the relation between the organizational culture types and organizational excellence and the role of
information communication technology (ICT) as a moderator. Based on the literature review, the research
proposes a conceptual model with four organizational culture types serving as independent variables and four
variables related to business excellence treated as dependent variables, in addition to ICT as the moderator. A
quantitative study was conducted, and the data were collected using a survey questionnaire distributed to middle
managers in one of the gold winners of a United Arab Emirates-based business excellence award. The
questionnaire was based on a five-point Likert scale to see to which degree respondents strongly agreed or
disagreed with the proposed statements. This research found that there is a positive relationship between
organizational culture components and business excellence in general. A mission culture has the most
significant relationship, compared to a consistency culture, which was found to be positively related to business
excellence; an involvement culture, which has a relatively positive relationship; and adaptability culture, which
has no positive relationship. Also, the moderating role of ICT was proven. The results of this research can be
utilized by managers to prioritize the organizational culture types that are most aligned with business excellence
practices. Also, researchers can extend this study to cover the full list of sub-variables for each organizational
culture type. The contribution of this research is evident, since very few studies focus on the relationship
between organizational culture and business excellence. The research was done based on data from one
organization only. Expanding the sample size to include more quality and business excellence award winners
will help to generalize and support the current findings. Also, replicating this research by considering industry
sectors and business classifications may help to develop better understanding of the role of organizational
culture in promoting business excellence.

Key Words: Organizational Excellence, Organizational Culture, United Arab Emirates.

Introduction
Organizational culture is the set of beliefs, shared values, and norms that impact the way employees feel, think,
and behave in the place of work (Schein, 2011). Quality has different meanings and has been defined as
excellence (Peters and Waterman, 1982). Excellence can be described as an ongoing process of continuous
improvement. This perspective informs excellence models, which provide a framework for the strategic
management of competitive organizations (Martín and Rodrigo, 2003).Through the use of such models,
organizational culture has the potential to improve employees’ performance, satisfaction, and confidence in their
ability to solve work-related issues (Kotter, 2012).
Quality and business excellence awards are based on models and criteria to assess the level of excellence in the
applicant organizations. These criteria are used as guidelines by the award winners to sustain their level of
excellence through activities that promote business excellence culture among employees and imbed it in the

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work values. This research is an attempt to highlight the organizational culture types and their role in promoting
organizational excellence within organizations.
Searching the relationships between culture types and business excellence elements should allow organizations
and managers to highlight the culture traits that would help them build a robust excellence culture and sustain it.
This also should support the companies that are looking for excellence and, at the same time, the excellent
companies aiming to sustain their outstanding performance.
This research includes the following:
 Literature Review
 Research Questions and Hypotheses
 Conceptual Model
 Research Methodology
 Data Analysis and Results
 Summary and Conclusion
 Limitations and Future Research

Literature Review
It has been clearly recognized that organizational culture is crucial in organizational behavior and excellent
performance (Peters and Waterman, 2004).

Organizational Culture
Organizational culture is a pattern of norms, values, beliefs and attitudes that influences behavior within an
organization (Chin-Loy and Mujtaba, 2007).
Culture can be categorized into integration, differentiation, and fragmentation perspectives. In the integration
perspective, some agreement is available between individual employees regarding the profile of an
organization’s culture (Martin, 2002). Also, Martin highlighted that culture is more like a hard pillar that is seen
similarly by most individuals, regardless of the angle from which they look at it.
According to Martin (2002), the differentiation perspective views culture as a combination of the subcultures
within an organization. He claimed that consensus only exists in the subcultures of an organization. These
subcultures operate together, oppose each other, or act independently.
Martin asserted that the fragmentation perception assumes that culture is vague and lacks consensus. In this
regard, he writes, “Interpretations of cultural manifestations are ambiguously related to each other, placing
ambiguity, rather than clarity, at the core of culture” (Martin,2002).
Another three strategies of operationalizing organizational culture were offered. These comprise a holistic,
metaphorical, and a quantitative approach (Cameron and Quinn, 2006). Researchers deploy a holistic approach
to gain a rich understanding of culture by keenly contributing and noticing, thus attempting to become native in
the company. Cameron and Quinn (2006) noted that researchers using the metaphorical or language approaches
apply techniques to identify cultural patterns in documents, conversations, and other forms of language. Carl F.
Fey and Daniel R. Denison, in a paper published in 2003, identified four traits of organizational culture:

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 Adaptability
 Mission
 Involvement
 Consistency
The adaptability and mission traits signify an external orientation, while involvement and consistency are
associated with an internal orientation. The adaptability and involvement traits reveal a flexible orientation. In
contrast, the mission and consistency traits emphasize a stable orientation (Fey and Denison, 2003).
According to Fey and Denison (2003), the adaptability attribute comprises creating change, focusing on
customers, and organizational learning.
The company that gets high marks on the mission attribute will be able to perceive and react to the environment,
clients, and restructure behaviors and processes that allow them to adapt (Fey and Denison, 2003).
The mission attribute highlights a robust sense of organizational direction by setting vision and goals. It
comprises establishing strategic direction and intent, strategic objectives and goals, and a vision for the
organization. The company that gets high marks on the mission attribute will be able to handle its external
environment by achieving stability (Fey and Denison, 2003).
Fey and Denison (2003) concluded that the involvement attribute highlights the human relations factors of an
organization. These companies appreciate teamwork and are committed to employees’ empowerment. The
involvement attribute contains guides to empower employees, support team orientation, and develop
capabilities. An organization that gets high marks on the involvement attribute usually has an internal focus and
is considered as flexible organization.
As per Fey and Denison (2003), the consistency attribute is frequently captured in the companies that have solid
cultures. These companies show constancy in that employees usually agree with one another. The consistency
attribute comprises main values, agreement, coordination, and integration. An organization that gets high marks
on the consistency attribute usually has internal focus while providing stability to its workforce (Fey and
Denison, 2003).

Organizational Excellence
A number of studies and published papers have discussed the keys to organizational excellence and its critical
success factors. Business excellence as a concept is based on total quality management principles. Companies
that have adopted business excellence usually have done so by using initiatives, tools, and techniques to achieve
the desired results (Adebanjo, 2001).
Traditionally, companies evaluated their performance in terms of quantifiable measures such as return on
investment, net profit, and turnover. In last few decades, however, there has been a growing understanding that
companies should also consider quality-related characteristics while setting their business goals and
performance measures. Therefore, total quality management has become a principal strategy for improving
performance and later business excellence (Zairi and Alsughayir, 2011). Dr. Joseph Juran defined total quality
management as “meeting and exceeding the customer’s expectations by continuously improving all processes,
goods and services through creative involvement of all staff” (Hawkes, 1992).

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To encourage companies to improve their performance, more than eighty countries have established business
excellence or quality awards (Grigg and Mann, 2008). Most of the quality awards worldwide are based on
business excellence models and pre-defined criteria (Khitam and Tammaru, 2012). In the United Arab Emirates,
the National Quality Awards were launched in 1989 (Mavroidis, Toliopoulou and Agoritsas, 2007). The Sheikh
Khalifa Excellence Award and the Dubai Quality Award were the first two awards established in the United
Arab Emirates, and both were influenced by the European Foundation for Quality Management (EFQM) model
(Nambiar, 2012).
The EFQM was founded in 1988 with the objective of helping European organizations to become competitive in
the international marketplace (Gómez et al., 2011). After that, the first quality award was delivered in 1992 by
using the organizational excellence model as a framework for evaluating the organization’s performance (Jafari,
2013). Awards differing from the EFQM model have also been delivered, and the last one was presented in
2012 (Wireless News, 2012).
The EFQM Model is built on nine criteria of enablers and results. The enabler criteria include what an
organization does and how it does it. The results criteria include what an organization achieves (EFQM, 2013).
According to the EFQM, the results criteria for the model include:
 Customer Results: Excellent organizations reach and keep exceptional results that meet or go beyond
customers’ needs and expectations.
 People Results: Excellent organizations reach and keep exceptional results that meet or go beyond
employees’ needs and expectations.
 Society Results: Excellent organizations reach and keep exceptional results that meet or go beyond
society stakeholders’ needs and expectations.
 Business Results: Excellent organizations reach and keep exceptional results that meet or go beyond
shareholders’ needs and expectations.

Organizational Culture and Business Excellence

A popular hypothesis in the organizational culture is that a robust culture leads to a better level of performance
(Deal and Kennedy, 1983). In this paper, cultural strength is measured by the extent to which a culture exhibits
the attributes of a single cultural type (Román et al., 2004).
The level of cultural strength needed to ensure a company’s success is still debated in the literature. Some of the
authors support the idea that a robust culture leads to higher performance (Barnes et al., 2006). Others support a
contingency theory where the needed level of cultural strength is linked with the environment of the business
where the company operates (Camero and Quinn, 2006). Kotter and Heskett (1992) stated that companies that
have a robust culture, emphasize their stakeholders, and adjust to their environments will attain better levels of
performance. Gordon and DiTomaso (1992) also proposed that a robust culture, in conjunction with the ability
to adapt, would lead to better performance.
Ashish Sinha and Bindu Arora (2012) in their study about the fit between organizational culture and business
excellence revealed that both business excellence and organizational culture can be abstracted the same way.
They also noted that the results of organizational culture assessment in organizations can be compared to the

181
results of the EFQM assessment to predict the improvements companies need to make to excel (Sinha and
Aroar, 2012).

Communication as a Moderator between Organizational Culture and Business Excellence

Communication may moderate the connection between performance and work culture. This is due to the fact
that communication forms and types are linked with organization culture and, in turn, they are the concepts by
which culture impacts performance. Management thinkers and experts have agreed communication to be
significant to key organizational tasks such as making decisions, coordination, motivation and innovation, all of
which impact performance (Garntett, 2005). Moreover, casual communication can support link sub cultures and
formal structures, eliminating some of the cultural defects that might otherwise arise (Kilduff and Corley, 2000).

Research Questions and Hypotheses

1. What organizational culture type relates to business excellence in United Arab Emirates firms?
2. What is the effect of ICT on the relationship between organizational culture and business excellence in
United Arab Emirates Firms?
Hypotheses
1. There is a significant relation between involvement culture and business excellence.
2. There is a significant relation between consistency culture and business excellence.
3. There is a significant relation between adaptability culture and business excellence.
4. There is a significant relation between mission culture and business excellence.
5. ICT has a significant effect on the relationship between organizational culture and business excellence.

Conceptual Model
Figure 1:
Study Conceptual Model
Independent Variables Dependent Variables
(Organizational Culture) (Business Excellence)
 Involvement  Customer results
 Consistency  Employee results
 Adaptability  Society results
 Mission  Business results

Moderator
Information Communication
Technology

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Research Methodology
The logical nature of this study required the use of a quantitative research approach because it focuses on
analyzing and evaluating several variables, as well as exploring their relation to each other. Therefore, a
numerical analysis was done to provide an in-depth understanding of the information, theories, and concepts
related to the research questions and hypothesis. By the use of a quantitative research approach, it was easy to
code the responses, thus facilitating the use of statistical analysis methods to compare different variables related
to organizational culture and business excellence.

Questionnaire Design
Based on the literature and previously tested questionnaires, a 32-question survey was developed to cover
theoretical model variables. The organizational culture-related questions were adapted from the survey used by
Fey and Denison’s (2003) study “Organizational Culture and Effectiveness: Can American Theory be Applied
in Russia?” The questions related to business excellence criteria were adapted from the EFQM self-assessment
questionnaire. The table below shows the survey structure:

Table1: Survey structure

Variables/Sub-variables Number of Questions

Organizational Culture 12

 Involvement 3
 Consistency 3
 Adaptability 3
 Mission 3
Business Excellence 12
 Customer results 3
 Employee results 3
 Society results 3
 Business results 3
Information Communication Technology 3
Demographic Questions 5

The questionnaire was based on a five-point Likert scale where:

5= strongly agree
4= agree
3= neutral
2= disagree
1= strongly disagree

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Data Collection and Sampling
The questionnaire was manually distributed to the middle managers, including division and section heads, in the
targeted organization. A total sample size of 45 managers was identified and 29 responses were received,
resulting in a response rate of 64.44%.

Data Analysis and Results

SPSS statistical data analysis software and Microsoft Excel were used to process the primary data received. A
reliability test was done and the variables shown to possess relatively high internal consistency with Cronbach’s
alpha coefficient (0.891). Pearson correlation and linear regression analysis were performed to test the suggested
hypotheses:

HB 1:
Null hypothesis: There is no significant relation between mission culture and business excellence.
Alternate hypothesis: There is a significant relation between mission culture and business excellence.
The Pearson correlation is .642, which is 0.3. The P value is 0, which is < 0.05. In linear regression analysis,
the R square value = 0.412, which means that mission culture accounts for 41.2% of the variation in business
excellence. Also the significance is 0, which is < 0.5. These values indicate a strong positive relationship
between mission culture and business excellence. Therefore, we reject the null hypothesis and accept the
alternate one.

HB 2:
Null hypothesis: There is no significant relation between consistency culture and business excellence.
Alternate hypothesis: There is a significant relation between consistency culture and business excellence.
The Pearson correlation is .569, which is 0.3. The P value is 0.001, which is < 0.05. In linear regression
analysis, the R square value = 0.324, which means that consistency culture accounts for 32.4% of the variation
in business excellence. Also, the significance is 0.001, which < 0.05.
The above indicate a strong positive relationship between consistency culture and business excellence.
Therefore, we reject the null hypothesis and accept the alternate one.

HB 3:
Null hypothesis: There is no significant relation between involvement culture and business excellence.
Alternate hypothesis: There is a significant relation between involvement culture and business excellence.
The Pearson correlation is .419, which is it is 0.3. The P value is 0.024, which is < 0.05. In linear regression
analysis, the R square value = 0.175, which means that involvement culture accounts for 17.5% of the variation
in business excellence. Also, the significance is 0.024, which is < 0.05. These values indicate a strong positive
relationship between involvement culture and business excellence. Therefore, we reject the null hypothesis and
accept the alternate one.

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HB 4:
Null hypothesis: There is no significant relation between adaptability culture and business excellence.
Alternate hypothesis: There is a significant relation between adaptability culture and business excellence.
The Pearson correlation is .171, which is < 0.3. The P value is 0.377, which is > 0.05. In linear regression
analysis, the R square value = 0.029, which means that adaptability culture accounts for only 2.9% of the
variation in business excellence. Also, the significance is 0.377, which > 0.05. These values indicate a week
positive relationship between adaptability culture and business excellence. Therefore, we accept the null
hypothesis and reject the alternate one.

Figure2:
Weight of Organizational Culture Traits That Affect Business Excellence

4.00 3.92 3.93

3.90
3.80 3.74
3.70
3.60
3.48
3.50
3.40
3.30
3.20
Invlovment Consistency Adaptability Mission

HB 5: ICT has a significant effect on the relationship between organizational culture and business excellence.
As mentioned, we ran a linear regression analysis for the centered values of organizational culture, the centered
values of ICT, and the centered value of both. We concluded that when the usage of ICT is low, the correlation
between organizational culture and business excellence is 0.18. When the ICT usage is moderate, there will be a
very weak relation. When it is high, the correlation will be 0.84, which means that ICT significantly affects the
relationship between business excellence and organizational culture.

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 Figure 3:
The effect of ICT on the relationship between organizational culture and business excellence

Summary and Conclusion

This research found that there is a positive relationship between organizational culture and business excellence
in general. The mission culture has the most significant relationship. In other words, setting goals and objectives
by leaders that are ambitious and realistic and having widespread agreement about them will significantly
enhance the organizational excellence outcome. Consistency culture has a strong positive relationship with
business excellence. Promoting coordination and integration by making people from different business units
share common perspectives, making coordination of projects across functional units easy, and establishing a
good alignment of goals across levels will enhance the excellence journey of an organization. Involvement
culture has a strong positive relationship with organizational excellence. Improving team orientation by making
employees feel that they are part of a team, relying on horizontal control and coordination to get work done, and
considering teams as primary building blocks within the organization will enhance its business excellence
culture. Adaptability culture has a weak positive relationship with organization excellence, which has no
positive relationship. However, the moderating role of ICT was not proven, which means organizational
learning by encouraging risk taking and awarding risk takers is not linked to business excellence. It was proven
from the data analysis that ICT has a significant effect on the relationship between organizational culture and
business excellence.

Limitations and Future Research

The research was done based on data from one organization only. Expanding the sample size to include more
quality and business excellence awards winners will help to generalize and support the current findings. Also,
186
replicating this research by considering industry sectors and business classifications may help to develop a better
understanding of the role of organizational culture in promoting business excellence.

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Do the characteristics of construction companies have effect on innovation adoption and
creation?
By:
Dr Nor’Aini Yusof
Universiti Sains Malaysia

Dr. Ernawati Mustafa Kamal

Universiti Sains Malaysia

Mohammad Iranmanesh
Universiti Sains Malaysia

Abstract
The recent debate on innovation within an organizational setting has shifted focus towards discussing whether
innovation is being adopted, or being created. This shift is due to the failure of many innovation efforts and the
fact that for each innovation creation or innovation adoption, different resources are needed to encourage each
innovation. The aim of this study is to investigate the influence of construction companies’ characteristics on
their type of innovation activities. Data was gathered through a survey of 105 firms in the Malaysian automotive
supply chain industry. Data was analyzed using the partial least squares technique. The results indicate that type
of firm, business scale, and firm age have effect on innovation creation by construction companies, whereas firm
size and major clients are the determinants of innovation adoption. The results suggest that the characteristics of
innovation adopter and innovation creator firms in the construction industry are generalizable across certain
characteristics of firms. This research contributes to the existing knowledge by adding new firms'
characteristics, namely firm type, firm business scale, and firm major clients as potential predictor of firms’
innovativeness. The findings of the present study are useful for the managers of construction companies because
they will help these managers when making the decision to adopt innovation or create innovation based on their
respective firms’ characteristics. The study used a survey sample limited to construction firms in Penang,
Malaysia. Future research could test the research model of this study in different regions of Malaysia and
different countries. This study does not cover the potential effect of manager characteristics of innovative firms
in the construction industry; hence, presenting a limitation and the need for future study with a more exhaustive
model.

Keywords: Innovation adoption; Innovation creation; Construction industry; Malaysia

Introduction
Innovative activities of organizations have attracted the attention of many researchers who try to identify the
factors that promote innovation (Rocha et al., 1990; Medina et al., 2005; Cáceres et al., 2011). From a review of
a relatively large body of literature, it becomes clear that the focus of previous studies was to identify the
characteristics of innovative companies without distinction between innovation adopter and innovation creator
companies. Recently, however, several studies on innovation within an organizational setting, have shifted to
focus on whether innovation is being adopted or being created (AbuJarad and Yusof, 2010; Yusof et al., 2014).
From the perspective of a particular innovation, scholars have come to realise that different skills, resources, and
cultures are needed to encourage each innovation (Pérez-Luño et al., 2011). Therefore, it is important to
determine the organizational characteristics that may lead to adoting or creating the innovations.
The construction industry has been criticised because of its low productivity and quality in comparison with
other industries. One of the main reasons for this situation is because the industry suffers from a lack of
innovation (Winch, 2003). On the other hand, the importance of innovation has been recognised by industry
peers. Damanpour and Schneider (2009) point out that innovation is commonly perceived as a basis of
organisational change, growth and effectiveness. Pérez-Luño et al., (2007) add that innovation is vital to
achieve competitive advantage and to ensure survival. To date, most innovation studies devoted their effort to
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innovation in general (Cooper and Kleinschmidt, 2007; Winch, 2003; Yusof et al., 2012) and very few
attempted were devoted on innovation according to its type namely innovation creation and innovation adoption.
The aim of this study is to investigate the effect of construction firms’ characteristics on adopting and creating
innovation. The findings of the present study will help the construction firms to adopt or create innovation in a
successful manner.

Literature Review
Innovation in Construction Industry
Most construction firms are currently still managed and organized in a traditional way andthe lack of innovation
in this industry is one of the main reasons. The construction industry has several specific features which are
likely to affect how innovation is or can be achieved. The government regulations (Pries and Janszen, 1995;
Blayse and Manley, 2004), the lack of long-term relationships (Dubois and Gadde, 2000, 2002), and integration
in the supply chain (Akintoye et al., 2000) limit opportunities for innovation in construction industry. In
addition, there are many players in the construction industry and innovation in this industry needs to engage
each actor differently (Bygballe and Jahre, 2009). The main objective of this study is to explore the factors
related to the characteristics of construction firms that may affect its adoption and or creation of inovation.

Innovation Creation and Adoption

It can be useful to distinguish between innovation adoption and creation as different skills and resources are
needed to encourage each innovation (Pérez-Luño et al., 2011). Innovation creation and adotion can be
differentiate based on four criteria; by justification of new ideas; by purposes; by activities involved, and by
nature (Yusof et al., 2014). In general terms, innovation creation is about introducing a new product or service
ahead of other competitors (Kerin, Varadarajan, and Peterson, 1992), whereas innovation adoption is about
adopting ideas from the competitors (Naranjo-Valencia et al., 2011). Kok-Seng and Yusof (2011) described
innovation creation as involving generation of new ideas, transformation of new products, technology or
services and the implementation of them. The idea is generated in a continuous process of information gathering
from various sources, particularly the clients, together with an ever-challenging entrepreneurial vision (Urabe,
1988). Innovation creation may result in a new outcome to an organisational population (Damanpour and
Schneider, 2008), while the adoption of innovation may result in the assimilation of product, service, or
technology new to the adopting organisation (Damanpour and Wischnevsky, 2006).

Hypothesis Development
The previous research shows that firms’ characteristics have an effect on their tendency to innovate. Kim and
Utterback (1983) found that the younger firms, although smaller and with less internal technology, have higher
rates of innovation. The size of the firms is another characteristic that has received the greatest attention in the
research literature and most of the studies, found a positive relationship between size and innovativeness (Rocha
et al., 1990; Cáceres et al., 2011). Based on our best knowledge, almost all of the studies concerning the effect
of firm characteristics on innovativeness, have not considered separately innovation adoption from innovation
creation. In addition, type of firm, business scales, and the firms’ major clients are the potential characteristics

190
that may have an effect on innovation tendency. These were neglected in past research. Therefore, the following
hypotheses were developed:

H1: (a) Firm age, (b) firm size, (c) firm type, (d) firm business scale, (e) firm major clients has an effect on
firms’ tendency to create innovation in the construction industry.

H2: (a) Firm age, (b) firm size, (c) firm type, (d) firm business scale, (e) firm major clients has an effect on
firms’ tendency to adopt innovation in the construction industry.

The research framework of this study

The research framework, shown in Figure 1, was developed to investigate the effect of five characteristics of
construction firms (firm age, firm size, firm type, firm business scale and firm major clients) on firms’ tendency
to create or adopt innovation in the construction industry.

Firm Age

Firm Size Innovation Creation

FirmType

Firm Business Scale Innovation Adoption

Firm Major Clients

Figure 1: Research Framework.

Research Methodology

Measure of Constructs
The present study employed a quantitative survey along with a structured questionnaire. The questionnaire was
divided into 3 sections: company’s basic information, innovation adoption, and innovation creation. Besides the
company’s basic information, the other elements were measured using a 6-point Likert scale anchored by
‘strongly disagree’ and ‘strongly agree’. To ensure the content validity, the items were adapted from Yusof et al.
(2014).

Data Collection and the Sample

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The questionnaire survey administered face-to-face with the top management of the developer, consultant and
contractor firms operating in Penang, Malaysia. The sampling list was obtained from the list of members of
housing developer associations, contractor associations and professional bodies (Board of Architects Malaysia,
2013; Board of Engineers Malaysia, 2013) and they work in firms that operate in Penang. A total of 870 firms
were identified and the survey forms were distributed to all firms. Several steps were taken to increase the
response rate following the suggestions of previous researchers (e.g. Ryu et al., 2005; Zagorsky and Rhoton,
2008). These steps included ensuring that the survey took less than 10 minutes to complete, respondents were
given a ballpoint pen, reminder calls and follow-up visits were arranged for non-responses. 105 firms returned
the questionnaires and all were useable for analysis.

Analysis
The causal relationships between the constructs were analyzed by partial least squares (PLS). The PLS approach
was selected due to its small size requirements and the exploratory nature of the research (Hair et al., 2011).
SmartPLS Version 3.0 was used for this analysis. The sample size of 105 exceeded the minimum sample
requirements, recommended by Wixom and Waston (2001).

Results
Profile of Respondents’ Firms
The distribution mainly focuses on contractors (66.9%), consultancies (19.6%), and property developers (8.8%).
The majority of the respondents’ firms work in national scales (65.0%) and their major clients are the public
sector (57.3%). About 62.2% of the respondent firms’ age is between 11 and 20 years. This gives an indication
that in Malaysia overall construction firms have established and experienced service providers. 30.0% of the
firms have been established between 6 to 10 years. The remaining are 7.8% under 5 years. In terms of the
number of employees in the firm, the data explained that 53.5% of the firms have numbers of permanent
employees below 50. The breakdowns are 29.3% below 20 employees and 24.2% between 21 to 50 employees.
The remaining respondent firms’ size is 46.5% for above 51 permanent employees.

Measurement Model Results

To prepare the company’s characteristics (firm age, size, type, business scale, and major clients) for casual
relationship assessment, these categorical variables were divided into two categories as such: 1) young firms
(less than 10 years) and old firms (above 11 years), 2) small firms (less than 50 employees) and big firms (above
51 employees), 3) contractor firms and non-contractor firms, 4) national/ international business scale, and
within state business scale and 5) public sector and non-public sector as major clients.
Reflective measurement models need to be assessed in connection with their reliability and validity. Igbaria et
al. (1995) suggested accepting items with loadings of at least 0.5. Since the loadings associated with each of the
scales were all greater than 0.5 (Table 1), individual item reliability was acceptable. The internal consistency
reliability is established as the composite reliability (CR) of each reflective constructs exceeded the
recommended threshold of 0.7 (Straub et al., 2004). Convergent validity is demonstrated as the average variance
extracted (AVE) of all reflective constructs exceeded the threshold of 0.5 (Fornell and Larcker, 1981).

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 Table 1: Measurement Model Evaluation.

Constructs Items Factor Loadings CR AVE

Firm Age (FA) 1 1.000 1.000 1.000

Firm Size (FS) 1 1.000 1.000 1.000

Firm Type (FT) 1 1.000 1.000 1.000

Firm Business Scale (FBS) 1 1.000 1.000 1.000

Firm Major Clients (FMC) 1 1.000 1.000 1.000

Innovation Creation (IC) 7 0.657-0.831 0.8 0.5

91 40
Innovation Adoption (IA) 9 0.598-0.844 0.8 0.5
95 52
CR= Composite Reliability; AVE= Average Variance Extracted
To assess the discriminant validity of the constructs, two approaches were used. First, the cross loadings of the
indicators were examined. This revealed that no indicator loads higher on an opposing construct (Hair et al.,
2012). Second, following the Fornell and Larcker (1981) criterion, each construct’s square root of AVE
exceeded the intercorrelations of the construct with the other constructs in the model (Table 2). Both analyses
confirmed the discriminant validity of all constructs.

Table 2: Discriminant Validity.

FA FS FT FBS FMC IC IA
FA Si
ngle Item
FS 0. Si
346 ngle Item
FT 0. - Si
041 0.177 ngle Item
FBS - - 0. Si
0.265 0.160 139 ngle Item
FMC 0. 0. - - Si
172 074 0.064 0.006 ngle Item
IC 0. 0. - - 0. 0.
312 113 0.198 0.340 029 734
IA - 0. 0. - - - 0.
0.095 110 044 0.050 0.185 0.164 743

Assessment of the Structural Model

193
With the satisfactory results in the measurement model, the structural model was evaluated subsequently. The
predictive accuracy of the model was evaluated in terms of the portion of variance explained. The results
suggest that the model is capable of explaining 43.1% variance in innovation creation and 44.1% in innovation
creation. Besides estimating the magnitude of R2, Stone-Geisser Q2 (cross-validated redundancy) was computed
to examine the predictive relevance using a blindfolding procedure in PLS. Following the guidelines suggested
by Chin (2010), a Q2 value of greater than zero implies the model has predictive relevance. In the present study,
a value of 0.112 was obtained as an average cross-validated redundancy which is far greater than zero. In sum,
the model exhibits acceptable fit and high predictive relevance. Nonparametric bootstrapping was applied
(Wetzels et al., 2009) with 2000 replications to test structural model. The results indicated that the effects of
firm age (β=0.276, p<0.05), firm type (β= -0.186, p<0.10), and firm business scale (β= -0.250, p<0.01) on
innovation are significant. It means older firms, non-contractor firms, and the firms that work within state have
more tendency to be an innovation creator. In addition, firm size (β=0.176, p<0.10) and firm major clients (β= -
0.167, p<0.10) have a significant effect on innovation adoption. As such, the big firms and the major clients that
are not affiliated with the public sector have more tendencies to adopt innovation.

Table 3: Path coefficient and hypothesis testing.

Independent Variables Innovation Creation Innovation Adoption

Path Decision Path Decision

Coefficient Coefficient

Firm Age 0.276** Supported -0.115 Not Supported

Firm Size -0.053 Not Supported 0.176* Supported

Firm Type -0.186* Supported 0.081 Not Supported

Firm Business Scale -0.250*** Supported -0.074 Not Supported

Firm Major Clients -0.028 Supported -0.167* Supported

*p<0.10, **p<0.05, ***p<0.01 (two tail)

Discussion and Implications

The purpose of the present study is to identify the effect of firms’ characteristics on the tendency of construction
firms to create and adopt innovation. Our findings suggest that older firms, non-contractor firms, such as
property developers or consultancy firms, and the firms that work within the state have more tendency to be an
innovation creator when compared to other construction firms. In addition, the bigger firms that have more
employees and the firms whose major clients are not a part of the public sector that also work more with
individual and private firms, have more tendencies to adopt innovation.
The findings of this research contribute to the existing knowledge by adding new firms' characteristics, namely
firm type, firm business scale, and firm major clients as potential predictor of firms’ innovativeness.
Additionally, to our best knowledge, the effect of the firms’ characteristics on the tendency of firms to be
194
innovative was investigated for the first time. The findings of the present study are useful for the managers of
construction companies because they will help these managers when making the decision to adopt innovation or
create innovation based on their respective firms’ characteristics.

Limitations and Future Studies

There are certain limitations that need to be taken into account for generalizing the results of this study. One
limitation is that, the study used a survey sample limited to construction firms in Penang, Malaysia. Future
research could test the research model of this study in different regions of Malaysia and different countries. This
study does not cover the potential effect of manager characteristics of innovative firms in the construction
industry; hence, presenting a limitation and the need for future study with a more exhaustive model.

Acknowledgements
The authors acknowledge the financial support of Ministry of Education Malaysia through the Fundamental
Research Grant Scheme (FRGS) (Grant Number 203/PPBGN/6711254) which have made the presentation of
this paper possible.

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 Market Orientation & Innovation: A Moderating Role of Intellectual Capital

By:
Nosheen Jawaid Khan
School of Business and Economics
University of Management and Technology Lahore, Pakistan
Abstract:
Market orientation is the response to today’s dynamic environment and firm’s innovativeness plays a significant
role to satisfy changing needs of market in order to gain long-term success. Intellectual capital is increasingly
gaining its importance as strategic resource for firms that influence innovation outcomes. The study attempts to
explore the moderating role of intellectual capital linking market orientation and innovativeness to gain firm’s
performance. It also examines different dimensions of intellectual capital (human, organizational and relational
capital) impacting innovation outcomes. The result supported that intellectual capital is showing up as strong
facilitator in market orientation enhancing organization’s capability to innovate. Behavioral elements of MO
(Customer orientation, Competitor Orientation and Inter-functional coordination) exhibited strong impact on
innovation when illustrated with different dimensions of intellectual capital. It is also identified that Customer
and Social capital execute utmost impact on innovation outcome (new product development).Future research
directs empirical testing of conceptual model given in this paper. Further research requires managerial
implications that probe of how intellectual capital can be created and maximum utilized to innovate in process
and management dimensions.
Key Words: Market Orientation, Innovation, Intellectual Capital

Introduction
Today’s dynamic business environment has direct effect on the changing needs and wants of the customers. The
major factors that cause dynamism in business environment are economic growth or crises, competitive
environment, globalization, technological turbulence and product innovations. (V Kumar et al., 2011).The
organizations are enforced to be adaptive the changing environment for their survival. And ability to take right
decisions and respond accordingly, firms should identify strategies for taking measures for the investment in
marketing activities (Richard, 2001).In this approach marketing concept conceptualizes as building strong
relationship by exchanging value between producer and consumer. And for this purpose it identifies wants of
humans and offers products that fulfill their needs (Robert, 1996).
The activities and behaviors of an organization involved in recognizing the changing needs and wants of
customer and responsiveness in terms of delivering high quality of products or services is being market oriented
(Ajay & Bernard, 1993).In 1990s marketing orientation was seen as true implementation of marketing concept
and in operationalization process involved continuous analysis of market scenarios and responsiveness of an
organization (John & Stanley, 1990; Ajay & Bernard, 1990). Extensive research has been done over the past 20
years; to measure impact of market orientations on business performance (V Kumar et al., 2011).Recent
researches have focus on its conceptualization and definition, its antecedents, consequences and moderators, its
influence on employees and business performance and construct measurement (Rajdeep & Patriya, 2001).

198
Market orientation is only a start for any business to maximize its learning capabilities about changing market
conditions (John & Stanley, 1995).Hence, all the businesses that are competing in dynamic and turbulent
environment need to follow the process of learning, behavioral change and performance enhancement. Whereas,
market orientation support environment for organizational learning, which emphasize on organization’s capacity
to acquire knowledge to utilize and act on information gathered in responsiveness to market conditions (John &
Stanley, 1997).Market orientated companies that involved organization processes in learning strongly related to
innovation orientation (John et al., 2004).
Market driven firms strongly positioned them by responding customer needs and wants through addition of
innovative products or services. When resources (knowledge, capital, and economic) are abundant, firms
emphasizes more on adopting innovativeness and generate innovations outcomes to get competitive advantage
(Robert & Tomas, 1998). It is extensively known from immense literature that firm’s innovativeness is
thoroughly linked to its intellectual capital, or its capability to exploit its knowledge resources (Mohan & Mark,
2005).It has been acknowledged that firm’s intellectual capital dimensions; human, organizational, and
relational capital exhibit its different aspects as various approaches to accumulate information and to utilize
acquired knowledge (Thomas & Lawrence, 1998; Janine & Sumantra, 1998; Martin, 1961).
There have been vast amount of work done in relating intellectual capital and innovation. Some studied
intellectual capital as a determinant of innovation and others considered innovation as an outcome of intellectual
capital (Janine & Sumantra, 2002; Ikujiro & Hirotaka, 1995; Mohan & Mark, 2005; Wenpin & Sumantra, 1998).
Various researchers also concluded that the innovation process is similar to knowledge management process and
innovativeness dependent on the type of knowledge required (Ikujiro & Hirotaka, 1995).
The gap identified is the missing link between market orientation, intellectual capital and innovativeness. To a
large extent it has been studied that in learning environment, market oriented firms respond innovatively which
is a source for sustainable competitive advantage that ultimately leads towards higher business performance
(Margaret, 1993).This study focuses on how the role of intellectual capital (human, organization and relational
capital) moderates linkage of market orientation and innovativeness. Author of this paper, further makes an
attempt to interpret how human, organizational, and relational capital enables firm to either strengthen or change
their existing knowledge to get innovation outcomes (product and process).Following are the research objectives
prevalent under research questions mentioned above;
1. To identify the moderating role of intellectual capital (human, organizational and relational) between
market orientation and innovativeness that ultimately leads to superior business performance
2. To measure the impact of intellectual capital (human, organizational and social) in enhancing
innovativeness that leads to innovative outcomes (product and process innovation)
After synthesizing these insights, research would make an attempt to develop a conceptual framework that
delineates the idea of incorporating the role of intellectual capital in linking market orientation and
innovativeness. And to explore contribution of intellectual capital in enhancing innovative behaviors of market
oriented firms.

199
Literature Review
Market Concept
A market concept is considered as business philosophy and its true implementation termed as market orientation
(Ajay & Barnard, 1990; John & Slantey, 1990).This philosophy has been a foundation for the marketing
discipline and defined marketing with respect to entire business that should be conducted only to create
customers only (Peter, 1954). It is also studied as for establishing culture that has positive effect for doing
successful business, marketing concept should be a core business philosophy. Marketing concept was only
developed from past few years with the purpose of linking marketing orientation with performance variances
(Barbara & Tomas, 1999). Marketing orientation was an apple’s eye to most of the managers and was seen as
most powerful concept of marketing. But renewal of this concept in academia it followed the path of formal
research (Frederick, 1988).

Market Orientation
This argument has significance importance that common idea of market orientation is it portrays a business
culture in which each individual working in an organization are dedicated in a process of value creation for
customers (John & Stanley, 1990; Rohit et al., 1993).
Initially market orientation is conceptualized as identifying and fulfilling the needs and wants of customer. The
objective was to ultimately increase business performance by adding value to the product for the satisfaction of
the customers (Kotler & Armstrong, 1994).Later market orientation was utilize as instituting of the market
concept.
Extensive research has been published in 1990; work is done in building up a theory and finding effects of
market orientation (Kohli and Jaworski, 1990; Narver and Slater, 1990). The two papers broaden the view on
marketing concept and conceptually derived market orientation out of that new wider concept. Work on finding
an effective and arguable antecedent of market orientation was presented by (Peter, 1954).
An extensive empirical analysis till date has found a significant link between market orientation and firm
performance. Additionally, results showed that in all types of markets market orientation is positively related to
business performance (Slater & Narver, 1994). Both cross sectional and longitudinal research have been done to
dig out relevant results (Narver and Slater, 1990; Jaworski and Kohli, 1993; Rohit et al., 1993; Pelham &
Wilson, 1996). The study involved another construct of customer perceptions in relating business performance
with market orientation (Rohit et al., 1993). Result suggests a significant positive association between market
orientation and firm performance, now the next step was to find how a business helps to develop a market
orientation and enhance it. It was studied and proposed that a market orientation should be assumed as an
organization’s culture that involved processed and activities to do so (Rohit & Frederick, 1989). But there is
another perspective that market orientation was not only acquired with help of positive behaviors originates
from the organization’s culture, we would not have obtained such kind of results from large numbers of firms in
creating marketing orientation culture (Frederick, 1994).
A market orientation demonstrates four significant directed behaviors that are related to the superior value
creation for customers. These should have larger impact when embedded in culture and execute accordingly.
Market oriented firms working on these should exhibit: (1) Clearly explained its objective as value creation

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centered (Michael & Fred, 1995) and well prescribed its target market, strategy positioning and business
definition in its value propositions (Frederick , 1994). (2) Customer- Led firms (C.K. & Gary, 1994; Kenichi,
1988); (3) Incorporate service orientation as an essential element in whatever the business is (Frederick, 1994);
and (4) Engaged in maintaining long-term relationships with key customers and employees (Frederick & Earl,
1990). The theory and findings (Ajay & Bernard, 1993) find out top management leadership as an important
element in creating a market orientation. Market-oriented firm can attain competitive advantage and long-term
superior performance by using Resource-Advantage theory (Shelby and Robert, 1995).
Market Orientation Perspectives
Several viewpoints have been suggested by researchers in conceptualizing the market orientation as a construct
and practicing its implementation (Barbara & Tomas, 1999).
1. The decision-making aspect (Carl, 1988), the core of the process is a strong role of management
assuring sharing of information through departments and take open decisions by involving inter-
functional employees.
2. The market intelligence aspect (Ajay and Barnard, 1990) included the key elements like information
gathering, its dissemination and responsiveness.
3. The culturally based behavioral perspective (John and Stanley, 1990), explain market orientation as a
behavioral component, requires knowing customer’s needs and wants in order to provide them product
or services that add greater value than its competitors with the help of inter-functional coordination.
4. The strategic perspective (Ruekert, 1992), his study broadened the concept and taken it to another level
business unit. Its idea was to gather information of the customers from outside the firm in order to
established goals at business unit level, and to meet the requirements of customers, strategy should be
adopted and implemented.
5. The customer perspective (Rohit et al., 1993) provided more divergent view excluding competitor from
the market orientation.
The four common elements come up out of the perspectives are emphasis on customers, significance of
knowledge sharing, inter-functional coordination, and being responsive against market activities (Barbara &
Tomas, 1999).
Market orientation is defined as "the organization-wide generation of market intelligence, dissemination of the
intelligence across departments and organization-wide responsiveness to it" (Ajay & Barnard, 1990).Market
orientation involved behavioral aspect that confirms the efforts and projection of individuals and departments
across organization (John & Stanley, 1990).
On the contrary, market orientation is defined as "the organization culture that most effectively and efficient
creates the necessary behaviors for the creation of superior value for buyers” (Rohit & Frederick, 1989)thus
resulted in continuously achieving higher business performance (Carl, 1988; Philip & Gary, 1994; Ajay &
Barnard, 1990).
MO Construct (Antecedents, Consequences & Moderators)
Two most widely known measurement scale for market orientation are MARKOR and MKTOR (John, 1990;
Ajay & Barnard, 1993).The antecedents of market orientation established from researches are categorized as:
top management factors, interdepartmental factors, and organizational systems and the consequences of market

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orientation are categorized into four categories: organizational performance, customer consequences, innovation
consequences, and employee consequences (Ahmet et al., 2005). Customer consequences involved behaviors
like customer loyalty, and customer satisfaction from perception of products or services quality that are offered
by firm (Barnard and Ajay, 1993). Innovation consequences include innovativeness; which is the firm’s
capability to generate and instrument new ideas, products, processes and new product performance (Tomas &
David, 2001).Several researchers have identified three most significant moderating factors that strengthen
linkage between market orientation and business performance are dynamic environment, technological
dynamism, and competitive intensity that (Rajdeep & Patriya, 2001). Performance of market oriented firms’
enhanced through market turbulence and competitive intensity because organization responsiveness is
confronted changing customer requirements and aggressive competitors (Barnard and Ajay, 1993). On the
contrary, it is known that technological turbulence lowered down the influence of market orientation on
performance as firm’s involved themselves in innovative behaviors. Research and development–driven
innovation becomes more important to a firm’s performance (Rajdeep & Patriya, 2001; Ajay & Barnard, 1990).
Vast literature has confirmed association between market orientation, innovation and performance (Rohit &
Frederick, 1989).

Learning Organization, MO & Innovation

Recent researchers have explored foundation in the concept of market orientation that positively impact
businesses’ degree of innovation and provided potential theoretical framework relating market orientation,
business performance and innovation (Robert & Tomas, 1998). This relation is consideration with concept
prescribed by (Stanley & John, 1995). New concept explored market orientation accelerates business
performance when it is combined with a learning orientation. The focus of the concept was gathered information
about customers and competitors from external environment helps market-oriented firm to respond through
innovative products and services. This enables capability of firm to analyze opportunities and threats. Therefore,
market orientation is integrally a part of learning orientation (Stanley & John, 1995).Learning organization
focus on a shared vision given to their employees on developing their behaviors that emphasis on value creation
for the customers. These organizations continuously involved in a process of acquiring and disseminating
knowledge across the organization related to market, product, technologies and business. Marketing functions
has a key role in creating learning organizations. Learning architecture could be source for competitive
advantage but it includes processes in creating value for the customers that are complex, hard to copy and
suitable in dynamic environment. Organization innovativeness is important for market orientation and
organization learning (Robert & Tomas, 1998).Product innovation and firm’s capacity to innovate is essential
from different point of views. Innovation helps firms to explore new markets, expand and grow to achieve
competitive advantage. From the literature innovativeness classified as; product innovativeness stand at
viewpoints of customers and firm; process, work place process; and management practices innovation in
organization (Charle et al., 2002).
A market orientated firms for better performance cultivate behaviors form top management and other employees
to gather information on customers’ latent and expressed needs and competitors’ strengths and weaknesses to
achieve superior customer satisfaction Continuous gathering and flow of information regarding customers and

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competitors across an organization, helps market-oriented to develop an organizational memory, essential for
the foundation of learning organization (William, 1997).

Intellectual Capital
Defining the Intellectual Capital
John Kenneth Galbraith was the economist who introduced the term Intellectual capital for the very first time in
1969. He differentiates the term between a firm’s market value and book value. Even though intellectual capital
known as ‘capital’, it is even then used as a conventional accounting term (Jan et al., 2001). Various definition
of Intellectual Capital comes out literature because of its abstract and dynamic nature. Several researchers have
found intellectual capital is considered as a firm's key source in achieving competitive advantage. (Ya-Hui &
Wenchang, 2009). Some researchers use this term as ‘‘to refer to the knowledge and knowing capability of a
social collectivity, such as an organization, intellectual community, or professional practice’’ (Janine &
Sumantra, 1998 p. 245). Other authors sometimes relate the term with processes and functions of human
resource management or with the management of information technology (Boudreau & Ramstad, 1997; Thomas
& Lawrence, 1997). Intellectual capital classified as ‘‘intellectual material—knowledge, information,
intellectual property, experience— that can be put to use to create wealth’’ (Thomas, 1997). He stated that
intellectual capital includes an organization’s processes, technologies, patents, employees’ skills and abilities,
and information about customers, suppliers, and stakeholders. Moreover, term intellectual capital used
synonymously as intellectual assets or intangible assets (James, 2001). A profound definition stated about
intellectual capital is “Intellectual capital is the term given to the combined intangible assets which enable the
company to function.” (Annie, 1996, p. 12). The vast literature pointed out that intellectual is an output of
vigorous business processes and firmly tied to domain of knowledge management and organizational learning.
Intellectual capital also helps to achieve firm’s goal with its components like total abilities, knowledge, culture,
strategy, procedure, intellectual assets, and relational networks that established in a company for the value
creation and attaining competitive advantages for the firm (Ya-Hui & Wenchang, 2009). But (Nick, 1998)
contradicted that intellectual property is not a part of intellectual capital. Intellectual property is tangible assets
that include copyrights, patents, semiconductor topography rights, design rights, trade and service marks.
Essential and highlighted concepts prevalent in these definitions concluded idea that intellectual capital as
closely related to knowledge orientation, apprehended in an identifiable form, and useful in organizational
learning and development.

Components of Intellectual
It was identified in early researches of intellectual capital that it has three dimensions namely human, customer
and structural or organizational capital (Leif & Michael, 1997; Nick, 1998, 1997; Annie, 1996). It has been
identified three components namely employee competence, internal structure and external structure (Karl,
1997). He explained that employee capability involved in the formation of both tangible and intangible assets in
various situations is known as Employee competence. Whereas internal structure comprises of patents, concepts,
models, and computer and administrative systems and External structure includes developing and maintaining a
networks of relation with customers and suppliers. It also involves brand names, trademarks, and brand equity of

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a company. The intellectual capital is considered as strategic element that includes resources, skills and
capabilities that act and cooperate in value creation task. It has also indicated that intellectual capital developed
on the basis of several intangible resources like employees competence, knowledge, education, skill, intellectual
agility, brand name, customer relationship and organization structure ( Nick et al., 2000).Furthermore, concept
of intellectual being extended and two new components has been added namely social capital and technological
capital (Bueno, Salmador, & Rodrıguez, 2004; Wu & Tsai, 2005). In another study five components in
intellectual capital have been acknowledged that are human capital, organizational capital or structural capital,
technological capital, social capital and business process capital or customer capital (Yolanda, 2010).

Human Capital
Human capital resource is one of the important elements of debate in a long tradition. In early stage it was
identified by Adam Smith “the acquired and useful abilities” of individuals as a source of “revenue or profit”
(Robert & Thomas, 2011).In another perspective it is elaborated that people should be considered as important
asset similar to physical asset that contribute in organizations and businesses development and growth. The
collective attitudes, skills and abilities of individuals add much in organizational performance and productivity.
It is been recognized that notion of Human capital should deal people as valuable assets, rather than as an
expense. Literature suggests that human capital is the core element in intellectual capital and it comprises of
individual’s knowledge, competence, skill, capability and innovation (Nick, 1998; Nick et al., 2000; Leif &
Michael, 1997; Thomas, 1998; Karl, 1997).
Human capital can also be explained as” The primary purpose of human capital is innovation (new products and
services, or of improving in business processes) ’’ Thomas, (1997, pp. 86).It is confirmed that human capital is
significant for the innovativeness of the firm, but in another study Human Capital is not directly linked to the
management Innovativeness (Helena et al., 2010).

Structural or Organizational Capital

Structural capital is explained as ‘‘knowledge that doesn’t go home at night” Thomas, 1997, pp. 108-109). It
entirely relates to the organization shared technologies, inventions, data, publications, strategy and culture,
structures and systems, organizational routines and procedures those can be replicated. Organizational or
Structural capital is the knowledge and experience that is established and codified within an organization and
exploited through databases, patents, manuals, structures, systems, and processes (Mark et al., 2004). Structural
capital can be owned by the company like hardware, software, databases, organizational structure, patents
trademarks, and everything else included in organizational capacity to enhance employee’s productivity
(Muritsena et al., 2001). The full utilization of intellectual capital becomes difficult if structural capital residing
in an organization is poor (Nick, 1998).Whereas, strong structural capital of an organization leads to full
exploitation of intellectual capital (Yolanda, 2010).

Relational Capital
(William, 1999) And (F. Tunc, 2004), accepting that intellectual capital categorized as human capital, structural
capital, and relational capital. Furthermore, Relational capital comprises all value resides in relations with

204
stakeholders, customers, and supplier (William, 1999). Relational Capital can be categorized into Customer and
Social capital. Customer capital is considered one of the most important elements of intellectual capital and is
embedded in the association between the firm and its customers as well as in customer satisfaction, loyalty and
network (Muhammad et al., 2011; Leif & Michael, 1997).The essential part of customer capital is knowledge
rooted in relationships, created and maintained outside the firm. It scopes goes beyond the firm as well as to the
human capital nodes (Nick, 1998).On the contrary it has also been identified that the relationship with customers
is distinct from other relationships either within or outside an organization (Muhammad et al., 2011).
Another aspect of relational capital is social capital, which is defined as knowledge embedded within, accessible
to and exploited by exchanges among individuals and through their ties and network (Janine & Sumantra, 1998).
Social capital is stated as the networks of associations comprises of and result in resources that can be utilized
for the beneficial purpose of both individual and organizational levels. Social capital at the individual level,
social defined as the resources entrenched in interpersonal relationships. Secondly at the organizational level, it
has been distinct as the value embedded in associations formed by actors to drive behaviors engaged in doing
combined action (Mark, 2000).Further three dimensions of social capital was introduced and widely accepted
among researchers includes structural, cognitive and relational that create the valuable intellectual capital in an
organization (Janine & Sumantra, 1998).

Innovation
Innovation is known as conversion of existing knowledge involved in developing new products, services or
processes and introducing them into new market. Or introduce existing ones with the significant modification
(F. Xavier & María Teresa, 2010). Innovation and firm’s capability to innovate both related to utilization of
knowledge resources (Bruce & Udo, 1992).On the whole innovation as a term has attained several meanings as
developed over the years; the procedure of developing a new product, process or services, the new item itself,
and the practice of embracing the new item. (Gerald et al., 1973). Innovativeness is defined as the concept of
embracing new ideas as cultivated in a firm’s culture (Robert & Tomas, 1998). Innovation is classified into
incremental or radical innovations (Robert & Jane, 1986). First category of innovation is defined as modifying
prevailing products, services, or technologies and strengthens the likeliness of already existing product/service
designs and technologies (John E. , 1983). In this respect, incremental innovativeness is considered as firm’s
capacity to create innovations that related to refining and reinforcing existing products and services (Mohan &
Mark, 2005). Second form of innovation : Radical innovations, is defined as major conversions of prevailing
products, services, or technologies that often make previous one outdated (Rajesh & Gerard, 2000). Therefore,
radical innovativeness is the firm’s capacity to create innovations that majorly transform existing products and
services (Mohan & Mark, 2005).The fundamental difference between both incremental and radical innovative
capabilities lies in how different these utilize of organizational knowledge (Mohan & Mark, 2005).

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 Theoretical Model

Business
Customer Performance
Product
Orientation
Innovation

Market
Competitor Innovation
Orientation Orientation

Inter- Intellectual Process

departmental Capital Innovation
Coordinati

Human Organizational Relational

Capital Capital Capital

Social Customer
Capital Capital

Fig: 1: Market Orientation and Innovation: A Moderating Role of Intellectual Capital

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Discussion
Moderating Effect of Human Capital: Linking Market Orientation & Innovation
Human capital is a part of intellectual capital holds all of the skills and capabilities of the employees gained
from experience, training and education (Bernadette, 2000). Human capital is embodied in the form of
knowledge and talent in an individual who brand particular organization, demonstrating it ability of knowing,
competence, attitude, and intellectual agility (Leif & Michael, 1997). The trademarks of human capital are
employees with innovative, bright, skills and knowledge about roles and jobs assigned to them. A firm with
highly skilled and knowledgeable individuals are more likely to create the major source for new ideas and
knowledge, correct decisions which showed up enhanced firm’s innovativeness (Scott & James, 1992; Michael
et al., 2001).Market oriented firms involved in customer and competitor orientation focused on behaviors
required for acquiring and to disseminate the information that create value for buyers. By assigning right tasks
to the right people i.e. effective human capital utilization – market oriented firms gain prospective to promote
consumer and customer interactions, along with nurturing internal and external relationships those influence
knowledge resources. It leads firms to exploit their potential to innovate and help in value creation. Innovation
linked to an intellectual agility, competence, skills, build on existing knowledge and creating new knowledge
(Johan et al., 1997).Individual’s attitude covers the behavioral dimension in human capital that encourages
transformation of existing knowledge and originates new ways of thinking enhancing organizational
innovativeness capability. Inter-functional coordination in market oriented firm is the utilization of resources in
value creation for the customers (John & Stanley, 1990). Individual’s creativity bring innovative ideas, their
assistances are likely to achieve acceptance, facilitated, and strengthen through networking and lobbying within
organizations for innovations (Donald, 1963).Relations and networks that widely boost the sharing of
information and knowledge among individuals further expedite role of human capital in transmuting prevalent
knowledge that increase base for innovation (Mohan & Mark, 2005).
Moderating Effect of Organizational Capital: Linking Market Orientation & Innovation
Structural capital also termed as organizational capital comprises of all systematic sources of knowledge in
organizations, i-e databases, organizational charts, process manuals, strategies, routines that shows higher value
to the firm than its material value. Structural capital is a knowledge created by an organization and it cannot be
separated from the entity (Muhammad et al., 2011). Structural capital helps individuals to capitalize their human
capital supportive with an environment that enable them to create leverage existing knowledge (Thomas, 1997).
In market oriented firm information gathering and its dissemination across the firm is fully facilitated by a
firm’s capability to appropriately stock acquired knowledge in organization’s storehouses such as databases,
manuals, and patents (Thomas & Lawrence, 1998) as well as in structures, processes, cultures, and process of
conducting business (Walsh & Ungson, 1991).Customer orientation is supported by the repositories like
customer database, management information system that help in understanding of present and future customer
needs and work upon to satisfy them. Through competitor orientation, market oriented firm utilized
organizational capital in term of making strategies and culture in organizations to create products that add value
for the firm that leads to competitive advantage (Muhammad et al., 2011). Innovation is basically about
recognizing opportunities and by using them it helps to develop new products, services, or work practices (Van
de Ven, 1986). Knowledge is the powerful tool for innovation that helps firm to accomplish its goals and due to

207
diversion in knowledge chances get revealed and expedite across firm (Andrew & Robert, 1997).Teams and
clusters play a significant role in sourcing knowledge within organizations (Ikujiro, 1994).After gathering and
disseminating information, codification is done to preserve the generated knowledge. The inter-functional
coordination is the next behavioral process in market oriented firms that postulate with quality of group work
and teams that leverage by organization’s codified knowledge process and also emphasize how these knowledge
sources are restructured and strengthened (Mohan & Mark, 2005). The process of continuous innovation is
accumulating by unique knowledge (Ikujiro & Hirotaka, 1995). In this regard organizations involved in the
process of reproduction, codification and storage of an individual knowledge in storehouses like manuals,
databases, and patents for present and upcoming mutual usage (Raghu & Praveen, 1994).Organizations involved
in instituting dynamic structures, new product development teams embodied systems, and formal product-
planning like processes to make a modernize individual contributions into constant flow of innovative outcomes
(Robert, 2001). Organizations also incorporate knowledge by instituting various means like communication,
sharing, and transfer of know-how among individuals and by reassuring exchanges in groups and networks
(Thomas, 1977).
Moderating Effect of Relational Capital: Linking Market Orientation & Innovation
Relational capital resides in a firm connotes as relationship with its stakeholders, customers, and suppliers (Ya-
Hui & Wenchang, 2009).For this reason, Relational capital can be further classified into Customer capital and
Social capital. Sometimes, Customer capital is known as simply a form of social capital by another name, value
a relationship only between a company and its customers (Leif & Michael, 1997).But the discussion of this
paper deals customer and social capital as a separate elements of intellectual capital (Muhammad et al., 2011).
That further leads to explore the moderating part of Customer capital and social capital in linking market
orientation and innovation.
(John & Stanley, 1990) define of market orientation has behavioral component that includes
(1) customer orientation; that comprises the sufficient understanding of what customer wants and
providing the value in terms of superior product that satisfy their needs (John & Stanley, 1990). In order to
being responsiveness, gathering information about customer present and future needs is very important for a
firm. And to satisfy those needs firm need to offer either unique product or desired product with low cost
(Barbara & Tomas, 1999).Customer capital shows a potential of a firm in the form of ex-firm intangibles
(Bontis, 1998).These non-physical resources comprise of knowledge resided in market actors like customers,
suppliers, the government regulatory or similar industry associates (Ya-Hui & Wenchang, 2009).Knowledge
developed in customer capital belongs to marketing channels and customer relationships (Nick, 1998).And
customer orientation is after all is about understanding what customers want in a product or a service better than
anyone else is what makes a firm performance superior than its competitor. Customer orientation requires high
customer capital that should likely based on customer satisfaction, loyalty and network of strong relationship
(Muhammad et al.,2011). The argument is complemented by the fact that theme of effective innovation lies in
knowing the firm’s customers and market (Proctor, 1998). It is supportive for the fact that strong customer
capital would strongly impact in strengthening customer orientation (Nick et al., 2000), and it is observed that
market orientation could be a response to market environment in the form of innovative behavior (Lee & Tsai,
2005).

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 (2) competitor orientation; is basically understanding the present and future competitor, their strength,
weaknesses, competencies and strategies (John & Stanley, 1990), like customer orientation, it is also gathering
information about competitor to access their capabilities in order to satisfy same buyer with better response
(Barbara & Tomas, 1999).Social capital is known as value of associations among people in firms, and between
firms and other firms (Leif & Michael, 1997). It can also be viewed as the total resources that accumulated to an
individual in exchange from networking of associations (Peirre & Lo'ic, 1992). Additionally; Social capital is
classified into three branches (Janine & Sumantra, 1998). The first structural dimension comprises of social
connections or network bonds (Janine and Sumantra, 1998; Wenpin & Sumantra, 1998). Competitor orientation
is impacted by this aspect of social capital. By establishing the strong bonding with competitors makes
information gathering and accessing capabilities easy for firms. Trust, reciprocity, relationships, and norms
highlights significance of structural social capital, altogether enhance a firm’s capacity to communicate around
the environment in creation of new knowledge (Wann-Yih et al., 2008).It is established that knowledge and
innovation derive from both internal and external sources. Innovation is a conversion of knowledge which can
be accomplished by external sources that can be portrayed in the form of the relations of the firm with other
market actors in the social networks (Molina-Morales & Martínez-Fernández, 2010).
(3) Inter-functional coordination: involves coordination among department and employees in utilization
of resources available to a firm in creation of superior value. Information is generated through customer and
competitor orientation and that information is disseminated with the coordinated use of company resources
(Barbara & Tomas, 1999).Second domain of social capital is the relational aspect, which showed trust and
trustworthiness as resources that are embedded in associations (Wenpin & Sumantra, 1998; Janine & Sumantra,
1998). Trust and trustworthiness established strong ties and link, which help to boost up knowledge and
information sharing among individuals working in a firm (Mohan & Mark, 2005). Relational trust and mutual
respect can boost the communication of ideas, knowledge sharing, and resolving conflicts (Kohtama¨ ki, Keka¨
le, & Viitala, 2004) and (Norhayati et al., 2004).Relationships that are established among individuals through
network association are beneficial for refined transfer of information. Eventually it helps to resolve conflicts and
problem among two individuals through coordination (Brian, 1997). The impact of intellectual capital on
innovation increased due to continuous flow of thorough information and the problem-solving functions through
networking (Wann-Yih et al., 2008).Hence, market oriented firms in a behavioral process of inter-functional
coordination is supportive with the strong relational and cognitive dimensions of social capital. The cognitive
domain is known to be those resources providing shared illustrations, understandings, and systems of
interpreting meaning among networks (Janine and Sumantra, 1998).Market oriented firm that is resourceful with
operationalized collaborative environment facilitates employees in creation of innovative culture and
information sharing (Wann-Yih et al , 2008).

Conclusion
This study was conducted to conceptualize focus on intellectual capital while exploring a relationship of market
orientation and innovation. Current era is the information and technology age, where we can encompass miles of
distance with blinking of an eye. This phenomenon based on the knowledge creation and utilization which
ultimately leads towards dimension of Intellectual Capital. Due to scarce resources and economic downturn all

209
over the world, many organizations focus to balance the monetary losses through different work reduction
schemes. In this regard, organizations mainly focused on developing the employee’s competencies within the
organization and they focus on using the available competences of the employees that will eventually add value
in the business performance.
According to the notion discussed in research, it can be established that knowledge creation provides a
sustainability of competitive advantage, that eventually supported by the concept of Intellectual Capital. The
term Intellectual Capital has gained much attention in the field of research due to mount of the new ‘knowledge’
economy which shifted the paradigm from mass production- based economy to information and knowledge-
based economy.
The idea of Intellectual capital gets hyped few decades ago because of the continuous transformation in the
world scenarios. Due to emergence of new trends, established conceptualization started changing; (1) Shift in
economy from production-based economies to knowledge-based economies, and 2) Intellectual capital gain the
importance as the moderating role in organizational performance. Whereas, Market orientation portrays a
business culture in which individuals working in an organization are enthusiastic in a process of value creation
for customers. Intellectual capital meant to be knowledge resources for an organization, and the success of
market oriented firms depends on discovering, capturing, disseminating, measuring and creating knowledge
(Product and Process Innovation).
Market oriented firms involved themselves in behaviors pertaining to knowledge or information gathering from
external environment, disseminate that knowledge within organization and create products or services through
inter-functional coordination that provide value to the customers. Intellectual capital is strategic asset for an
organization that helps to delineate all the behavioral components in market orientation. Human capital is the
source helps to extract required knowledge from the external market related to customer and competitor, that
knowledge or information is stored in the form of Structural capital with an organization. That acquired
knowledge or information resided in an organization in the form of source disseminated with the support human
capital. Inter-functional coordination embedded in Relational capital that ties bond or network of relationships
with external and internal individuals entrenched with required knowledge leads to develop organizational
capability to innovate. Firms engaged in market orientation with the help of intellectual capital enhanced
innovation orientation.
If organizations focus on the concept of organizational learning and management capabilities, they can easily
increase their knowledge creation and better utilization of intellectual capital (human, organizational, relational)
to increase innovativeness in market oriented firms. It’s an ongoing process than never end’s but keeps on
changing. Eventually, it is the grounding for adaptability and innovation that will increase the firm performance.

210
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 Work-Life Balance, Perceived Stress, & Locus of control: A Chain of Interrelated
Predicaments
By:
Dr. Silva Karkoulian
Lebanese American University

Ms. Tala Sinan

Lebanese American University

Abstract
This study aims at verifying whether a lower level of perceived stress combined with a high level of control
predict a higher level of perceived work life balance for employees in the Lebanese banking sector. Primary data
was collected using 195 surveys that were distributed in several commercial banks in Lebanon. Correlations and
regression were performed to test the suggested hypotheses. According to the result of this study, work life
balance is positively affected by an increased level of control as well as a decreased level of perceived stress.
Thus, organizations should make sure that their employees are experiencing a “fair” level of work life balance to
ensure a maximized level of job performance, job satisfaction, and maximum organizational efficiency and
productivity. Moreover, locus of control should be taken into consideration during the screening process of
potential employees. Further research should concentrate more on women with an internal locus of control, on
employees in other work sectors in Lebanon, on men working in banks, and on the role that employees’ work
involvement and commitment levels play in affecting their perceived levels of stress and work life balance.

Keywords: work-life balance, gender, perceived stress, locus of control

Introduction
Balancing work and family demands is a struggle that almost all employees deal with on a daily basis, thus
making the concept of work-life balance a vital issue that is thoroughly investigated at home as well as the
workplace. In light of the importance of this issue and the crucial role that it plays in the quality of not only
work life but also family life and overall employee satisfaction and mental well-being, it has drawn the attention
of many researchers.
Work-life problems for employees as well as for organizations worldwide are continuously increasing and this
might be possibly linked to high levels of job stress. As a result of the major role that job-related stress plays in
creating various types of work-related conflicts for employees, work-related stress has been acknowledged as
being one of the largest problems in the European Union working environment (Bell et al., 2012).
Furthermore, work and family demands were both viewed as major negative precursors of work-life balance,
where the main struggle lies in finding the sufficient time to deal with work and family demands (Brough et al.,
2014). Brough et al. (2014) have also proven that achieving a healthy level of work-life balance will lead to job
and family satisfaction, and will help employees avoid psychological strain and turnover intentions. In addition
to that, Moore (2007) argues that organizations who invest in offering long-term work-life balance cultures for
their employees will ultimately enjoy high levels of employee loyalty and positive employee attitudes.

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Background
Due to recent changes in the workforce composition, the concept of work-life balance has become a major
research implication (Ehrhart et al., 2012). As more women are getting employed and as the shift from families
with a single breadwinner to dual income families is becoming more common, the concept of conflict and/or
balance between family and work life emerged. The recent attention that has been given to work-life balance
can also be linked to reasons ranging from demographic reasons such as concern about fertility rates and
dependency ratios in aging societies to economic ones such as concern about labor shortages or raising the
employment rate (Gregory et al., 2013).
In light of the Industrial Revolution and the resulting shift to manufacturing work, employers started requiring
their workers to complete longer hours than before; some workers were required to complete up to 14 to 16
hours a day, six to seven days a week, and these long hours had a significant effect on stress levels, general
health, and family life (Tandon, 2012). Based on the latter, most employers nowadays are focusing on designing
attractive and suitable flex-time schedules, child care, maternity and paternity leaves, and other forms of work-
life support as a way to retain their employees and successfully compete in the marketplace (Sullivan, 2014). It
has also been proven that most organizations implement work-life balance policies as a means to recruit and
retain employees (Ehrhart et al., 2012).
According to the fifth European Working Conditions survey which was carried out in 2010, 83% of male
respondents and 87% of female respondents were satisfied with their work-life balance, and this satisfaction was
linked to fewer and more flexible working hours as compared to earlier working conditions (Gregory et al.,
2013). Likewise, the state of being “too tired to fulfill family responsibilities” increased significantly where
working hours exceeded 40 hours of paid employment per week (Gregory et al., 2013). This triggered many
countries to form some sort of limit to the working hours per week, where most developed countries nowadays
mandate a maximum of 40-46 hours per week, in addition to a minimum of two vacation weeks per year
(Tandon, 2012). Accordingly, it can be said that the work-life balance concept has been crucial in improving the
quality of work life for employees (Tandon, 2012).
According to Barnett & Hyde (2001), “one of the most dramatic makers of the late 20 th and early 21st centuries
is the astonishingly fast pace of change in the work and family roles of women and men in the United States”
(p.781). Also, many researchers pointed out the importance of the economy in creating a necessity for having
two breadwinners in almost all families (Ford et al., 2007). In addition to the increasing number of dual earner
families (Brannen, 2000), the declining fertility rates and the increase in life expectancy, we are expected to be
heading towards an aging European population in the next 20-30 years, according to the “social situation in the
European Union report” (The European Commission, 2001). This obviously means that employees will continue
to have more elderly and childcare responsibilities that they need to take care of, and therefore more focus
should be directed towards work life balance practices and strategies to avoid work life conflicts.
The concept of work-to-family conflict (WFC) was also discussed by Michel et al., (2011), where it was defined
as the “degree to which participation in the family role is made more difficult from participation in the work
role”. Michel et al., (2011) have also confirmed that WFC (work-to-family conflict) depends on several factors
including work role stressors (role conflict and time demands), work role involvement (work interest or
centrality), work characteristics (family-friendly organization, task variety), and personality (internal locus of

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control); whereas the precursors to FWC (family-to-work conflict) include family role stressors, family social
support, family characteristics, and personality.
The newly introduced concept “work-life balance” was defined by many researchers. For instance, Bell et al.,
(2012) defined work-life balance as “the degree to which an individual can simultaneously balance the
emotional, behavioral and time demands of paid work, family and personal duties”. Moreover, according to
Brough et al., (2014), work-life balance is defined as “an individual’s subjective appraisal of the accord between
his/her work and non-work activities and life more generally.

Gender Implications
Men and women tend to handle work and family demands differently, where domestic responsibility and caring
duties are mainly preserved to women (Wattis et al., 2013). Women were also generally known to face more
emotional conflicts, where they viewed themselves as “inadequate mothers who were unable to perform what
they perceived as a sufficient caring role” (Wattis et al., 2013).
According to Emslie and Hunt (2009), it is being recognized that domestic identities and responsibilities are
finding their way into the workplace while organizational identities and responsibilities are interfering with
domestic life, and although we can notice many signs of “growing gender convergence”, gender equity is still
not seen. Moreover, the results of their study reported that: while the presence of children created a lack of
work-life balance for both men and women, these difficulties were more permanent and complicated for women
(Emslie & Hunt, 2009).
Lyness & Judiesch’s (2013) findings show that supervisors in low egalitarian countries had more negative
perceptions of females’ work-life balance as compared to male subordinates, in addition to having a more
negative perception of female’s work-life balance in low egalitarian cultures as compared to female’s work-life
balance in high egalitarian cultures. Achieving work life balance is generally seen as a more puzzling task for
women that it is for men. This is clearly seen in Mescher et al.’s (2010) study, where it was found that WLB
(work-life balance) arrangements were mainly used to meet childcare demands, which is generally known as a
“female issue”. Furthermore, while women reap the benefits of economic participation, many work-life balance
debates shed light on the inadequacies of work structure and formal care provision, in addition to their
contribution to gender inequality and unequal labor market position (Wattis et al., 2013). No adequate literature
concerning work-life balance issues for men was found; however, Evans et al., (2013) claimed that societal and
personal expectations concerning men’s career, their role within their families, and their relationships tend to
make work-life balance issues more difficult for them.
In an attempt to compare male and female behaviors when it comes to juggling work and family demands,
Murphy and Doherty (2011) confirmed that most of the female respondents who were at a senior level seemed
to successfully balance their work and family demands by making the necessary childcare arrangements and
dealing with the burdens of home and work life, as compared to male seniors who seemed less occupied with
childcare responsibilities and hence were able to work for longer time periods. Moreover, Forson (2013)
claimed that women tend to rely on power relations and social interactions between and within cultural,
structural, and “agentic” dimensions of small business ownership, when managing their work-life balance.

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Locus of Control
The term “locus of control” was first introduced by Rotter, who identified two types of personality traits:
internal locus of control and external locus of control, and he claimed that individuals with an internal locus of
control considers the incidents that occur in their lives as a result of their own behaviors, decisions, and effort,
whereas those with an external locus of control believe that their lives are merely a result fate, power, luck or
any other factors that are not subject to their control (Rotter, 1996).
The concept was further developed by Spector (1988) who introduced the work locus of control (WLOC) which
deals or measures the degree of an individual’s personal perception of the control in an organizational
environment which is known as the job specific locus of control. The term “locus of control” was also defined
by Cheng et al., (2013), where it was referred to as “the subjective appraisal of factors that account for the
occurrence of events and outcomes”. Furthermore, work family conflict or balance was thoroughly explored in
relation to the situational variables, such as supportive practice and benefits (Anderson et al., 2002).
Nevertheless, other recent researchers have focused on studying the link between individual differences or
personality traits and work family link (or conflict). For instance, Michel et al. (2011) proved that individuals
who are characterized with a high internal locus of control should be able to effectively balance their work and
family demands, as opposed to individuals who are characterized with high levels of negative
affectivity/neuroticism who generally experience more psychological distress and dissatisfaction with their
work-family domains. However, it is worth mentioning that April et al. (2012) has shown that individuals
experience maximized happiness levels when they achieve a balanced locus of control expectancy, i.e. “a mix of
internal and external locus of control”.
Within the same scope of literature, Dijkstra et al. (2011) conveyed that employees’ internal locus of control
does not act as a moderator between work conflict and psychological strain; however, employees who enjoy
high levels of internal locus of control tend to rely on a “problem-solving conflict management strategy” and
hence face less psychological strain when dealing with workplace conflicts. External locus of control was also
directly attributed to low levels of satisfaction, happiness, and well-being (April et al., 2012). In addition to that,
according to a model designed by Sur and Ng (2014), it was proposed that lower levels of perceived job stress
were attained by individuals with higher levels of internal locus of control.
According to Ngah et al. (2009), work life balance partially mediates the relationship between the locus of
control and job satisfaction, where more control meant less conflict and more satisfaction; also, women
employees who experience higher control levels were believed to encounter less work conflict and seemed more
satisfied in their occupations. It is also worth mentioning a study conducted by Andreassi & Thompson (2007),
stating that there exists a negative relationship between internal locus of control and work family conflict, where
internal locus of control is positively related to positive spillover; this study also confirmed that job autonomy
and family work conflict are positively linked, where the internal locus of control and a lower level of family
work conflict is not mediated by perceived autonomy. Similarly, internal locus of control was also considered to
aid individuals in avoiding conflicts between work and family demands (Allen et al., 2012). The positive
outcomes of high levels of internal locus of control were also demonstrated in a study done by Hung and Hsu
(2011), which indicated that higher levels of internal locus of control lead to high levels of employee
commitment in the company. On the contrary, April et al., (2012) found that internals often face high levels of

218
stress because of the high level of responsibility that they perceive by linking various outcomes to their own
actions instead of considering other external factors that may have been the cause.
Importance of locus of control is obvious in the above mentioned studies, which confirmed that an internal locus
of control reduced women’s perception of conflict and lead to higher levels of job satisfaction.

Perceived Stress
Nowadays, not only are employees being overloaded with demanding and complex job tasks and duties, but
they are also experiencing high levels of job insecurity which comes hand in hand with high cognitive and
emotional demands; hence, they need to have the ideal physical and psychological states to provide them with
the necessary focus and energy to cope with these demands (Sonnentag & Fritz, 2014).
In general, any physical or psychological reaction to a stimulus (known as a stressor) that causes tension is
considered as “stress” (Voydanoff, 2004). Sonnentag and Frese (2012) identified some job stressor categories
such as physical stressors, task-related stressors, stressful change processes, and traumatic events. Stress is
generally considered as a commonly used term: however, distress is considered a more scientific term that
includes all the negative sides of stress, i.e. stress causing negative outcomes that can affect an individual’s
well-being. Moreover, there exists another related term which is “Eustress” or “good stress”, and this is mainly
the stress that has positive outcomes on an individual’s well-being (Edwards & Cooper, 1988).
The importance of a achieving a healthy level of work-life balance is directly related to an individual’s overall
stress levels, where workers who claim that they are able to balance their work and personal lives experience
lower stress levels than those who lack this balance (Ross & Vasantha, 2014). Likewise, a strong positive
relationship between work-life imbalance/conflict and psychological distress was identified, where higher levels
of conflict lead to higher levels of psychological distress (Brough et al., 2014).
Moreover, psychological strain was shown to be a basic result of work conflict; where the ability to cope with
work conflict through effective problem solving skills weakened the “conflict-psychological strain” relationship
(Dijkstra et al., 2011). According to Chen and Silverthorne (2008), a higher internal locus of control contributed
to lower job stress levels, when discussing dispositional characteristics; this can be linked to the fact that
internals are less likely to be bothered by work stress and therefore can cope more effectively with stressful
events or circumstances as opposed to externals who believe that fate or luck controls their life outcomes (Gray-
Stanley et al., 2010).
We now come to the concept that is related to the purpose of this study, and it is perceived stress. Perceived
stress is known as the degree of how much a situation is viewed or perceived as stressful, and it is strongly
affected by an individual’s environment, character, life events, and his/her coping ability (Cohen et al., 1983).
Usually, an individual’s coping ability with stressful situations is generally influenced by his/her locus of
control (Wang et al., 2010). Sur and Ng (2014) also stated that an individual’s personality significantly
contributes to the explanation of perceived job stress.
In fact, Sonnentag and Fritz (2014) confirmed that there exists a positive relationship between job stressors and
poor well-being, with psychological detachment from work during non-work time acting as both a mediator and
moderator. Similarly, a study done by Gray-Stanley et al. (2010) showed that stressed employees were at a
higher risk for depression. Work stress was also linked to cardiovascular illnesses and high death rates (Backé et

219
al., 2012). As an attempt to determine the antecedents of job stress, Cheng et al., (2013) argued that a general
lack of control over one’s events and outcomes is positively related to high levels of psychological distress.
Additionally, a high level of internal locus of control was positively linked to higher motivation levels where
employees started acquiring more valued resources such as employment deals and broader social networks, and
were therefore able to prevent stressful events from occurring (Ng & Feldman, 2011).

Work life balance, perceived stress & locus of control

This study aims at verifying whether a lower level perceived stress combined with a high level of control predict
a higher level of perceived work life balance in banking sector female employees in Lebanon.
The research questions were:
 What is the effect of gender on work life balance in banks?
 Which of the following factors: perceived stress, locus of control, induce work life conflict
amongst bankers?
Following the secondary data gathered above and the proposed research questions, six hypotheses were
formed:
H1: Lower level of control is negatively related to Work life balance
H2: External Locus of control is negatively related to Work life balance
H3: Internal Locus of control is positively related to Work life balance
H4: Perceived stress is negatively related to Work life balance
H5: Lower level of control is positively related to perceived stress
H6: Work life balance is negatively related to perceived stress and lower level of control

Subjects and Methods

Primary data was collected using surveys; surveys were distributed in many commercial banks in Lebanon.
Anonymity for the respondents was assured and the purpose of the research was stated at the beginning of the
questionnaire. The data collection took place between August 2009 and November 2009. In total, 195
questionnaires were distributed, 163 questionnaires were filled out. Three questionnaires were accidently filled
out by men; consequently they were omitted leading to a 160 effective questionnaires. The average response rate
is thus 83.56%. A sample of the questionnaire is available at the end of this chapter. Questionnaires were
distributed by hand to female employees working in the banking sectors.
A purposive non random sampling method was used in this research; the judgmental sampling method enabled
the researcher to make sure that all respondents were women and were working in the banking sector. In fact,
the banking sector is one of the most vital sectors in Lebanon.
Three different scales were used in the questionnaire to account for control level, perceived stress level and
work life balance level.
Locus of control at the workplace was measured using Spector’s work locus of control scale, it is made of 16
questions (questions 1-16), where employee’s opinions about the origins of their actions, behavior, and thoughts
are assessed. This scale has shown a good internal reliability and concurrent validity according to Furnham and
Steele (1993) and others. A five point Likert scale was used ranging from strongly disagree to strongly agree.

220
Half of the questions were reverse coded following the author’s request. Lower scores on this scale represent
higher levels of control (internal locus of control), whereas higher scores represent lower levels of control
(external locus of control). Data analysis was performed for the whole sample, followed by further analysis for
individuals with internal locus of control and external locus of control respectively.
It has been shown that there has been little development of stress measurement instruments over the years
(Monroe and Kelley, 1995). In this research, the level of perceived stress was assessed with the help of the four
items found in the perceived stress scales developed by Cohen, Karmarck, and Mermelstein in 1983. This scale
aims to measures how stressful an individual’s life is rather than how does an individual react to a certain
stressor (Cohen et al., 1983). It is notable to mention that the higher scores represent higher levels of perceived
stress. The second and third questions in the scale (questions 18 and 19 of the questionnaire) were reverse
coded.
In this context, the work life balance quiz developed by the Canadian mental health association was adopted.
Half of the questions (21, 23, 24, 28, and 30) were recorded for a better reliability. A five point Likert scale
ranging from “strongly disagree” to “strongly agree” was used as part of the original scale, instead of the
“agree/disagree” answer choices; this was done to achieve further comprehensive results.
The data was analyzed using the predictive analysis software “PASW” which is the new version of the well-
known “SPSS” software. Descriptive statistics were performed for the demographics questions. Correlation and
regression were also performed to test the suggested hypotheses.

Results
Descriptive statistics
A five point Likert scale was used in the distributed questionnaires, where 1 refers to strongly disagree, 2 to
disagree, 3 to undecided, 4 to agree, and 5 to strongly agree. The respective descriptive statistics for the different
variables measured in this study are represented in the table below:

Table 1: Descriptive Statistics

Mean Median Standard Variation
deviation
Work life balance 3.109 2.75 0.508 0.258
Locus of control 46.968 47 8.373 70.105
Perceived stress 2.845 2.75 0.798 0.637

Demographic analysis
The survey included five demographic questions at the beginning. The first question was the respondent’s age;
four age ranges were available: 20-31, 31-40, 41-50, and greater than 50. The second question was about the
respondent’s gender. Since this study was restricted to female employees only, the purpose of this question was
to omit any questionnaires accidently filled out by male employees. The third question was about the
respondent’s educational level; respondent Bachelor of Science (BS) / Bachelor of Arts (BA) / Master’s degree

221
MS/MA/MBA/ Post graduate degree, Ph.D. The fourth question was about the years of experience; the ranges
provided included: 1-3, 4-6, 7-9, and 10 or more. The last demographic question was about the respondent’s
marital status, where the answer choices provided were: married, divorced and single. Finally, respondents were
asked to identify the number of their children.
The results of this study show that nearly half of the respondents, who are all female employees in the
Lebanese banking sector, are single, aged between 20 and 30 years, and holding a Bachelor’s degree. Similarly,
the majority of the respondents indicated that they have between one to three years of experience. Since the
majorities are single, they had no children (64.4%). The second highest percentage (16.9%) corresponds to
women who had only two children.

Statistical Analysis
Equation 1: Work life balance = 3.946 – 0.294 Perceived stress
The analysis shows a coefficient of determination (R2) = 0.214 and a high significance F = 42.945. Perceived
stress is said to negatively predict work life balance. As Perceived stress scores increase by 1 unit (i.e. more
perceived stress), work life balance decreases by 0.294 units. Thus, hypothesis H4 is supported: Perceived stress
is negatively related to Work life balance.
Equation 2: Work life balance = 4.096 – 0.021 Locus of control
The analysis shows a coefficient of determination (R2) = 0.187 and a high significance F = 21.529. A Lower
level of control is said to negatively predict work life balance. As locus of control scores increase by 1 unit (i.e.
less control), work life balance decreases by 0.021 units. Hence, hypothesis H1 is supported: Lower level of
control is negatively related to Work life balance.
Equation 3: Work life balance= 4.308 – 0.011 Locus of control - 0.245 Perceived stress
The analysis shows a coefficient of determination (R2) = 0.239 and a high significance F= 24.623. Lower levels
of control and perceived stress are said to negatively predict work life balance. As Locus of control scores
increase by 1 unit (i.e. less control level), work life balance decreases by 0.011 units. Moreover, as perceived
stress levels increase by 1 unit, work life balance decreases by 0.245 units. Therefore, hypotheses H1, H4, and
H6 are supported:
H1: Lower level of control is negatively related to Work life balance
H4: Perceived stress is negatively related to Work life balance
H6: Work life balance is negatively related to perceived stress and lower level of control
Equation 4: Work life balance = 4.348 – 0.015 LOC (external) – 0.179 Perceived stress
The data analysis shows a coefficient of determination (R2) = 0.161 and high significance of F=11.799. External
locus of control is said to negatively predict work life balance by 0.015 units. Similarly, perceived stress in
individuals with external locus of control is said to negatively predict work life balance by 0.179 units. Work
life balance was shown to decrease by 0.015 units each time external locus of control increases by 1 unit and to
decrease by 0.179 units each time perceived stress increases by 1 unit. Thus, hypothesis H2 is confirmed, and
hypothesis H4 is reconfirmed:
H2: External Locus of control is negatively related to Work life balance
H4: Perceived stress is negatively related to Work life balance

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 Equation 5: Work life balance (internals) = 4.351 - 0.431 Perceived Stress
The analysis shows a coefficient of determination (R2) = 0.452 and a high significance F= 26.369. Perceived
stress is said to negatively predict the work life balance of individuals with internal locus of control. Work life
balance was shown to increase by 0.431 units each time perceived stress decreases by 1 unit. Thus, H3 is not
supported while H4 is again reconfirmed: Perceived stress is negatively related to Work life balance
Equation 6: Perceived stress = 0.866 + 0.042 Locus of control
The analysis shows a coefficient of determination (R2) = 0.195 and a high significance F= 38.344. Locus of
control is said to positively predict perceived stress. Each time locus of control increases by 1 unit (i.e. less
control level), perceived stress increases by 0.042 units. Thus, H5 is supported: Lower level of control is
positively related to perceived stress

Discussion
The data analysis showed that five out of the six hypotheses of this research were supported. The first
hypothesis, H1: Lower level of control is negatively related to Work life balance, was supported two times in
this study. Hence, the results were coherent with the literature where many articles have confirmed that high
levels of control enabled the individual to cope more effectively with stressors and thus experience less work
family conflict (Dijkstra et al., 2011). Based on the latter, it can be deduced that it is highly crucial for
organizations to take the control level or the control type (internal or external) into consideration while
recruiting employees. Recruiting employees having a high level of control will help them to break away from or
at least to decrease the impact of work life balance conflicts on their health and overall wellbeing.
The second hypothesis, H2: External Locus of control is negatively related to Work life balance, was also
supported. In fact, the literature has addressed special attention to differences between individuals with external
vs. internal locus of control. The belief was mainly that having an external locus of control changes the way an
individual copes with challenging circumstances and therefore contributes to higher stress levels, which in turn
acts as a precursor for work life conflict (Gray-Stanley et al., 2010). However, no research, to the knowledge of
the researcher, has investigated the relationship between work life balance and locus of control. This study
comes to fill this gap. The findings can be of great importance for the organizations as well as the employee.
Organizations should work to increase the control level of their employees and/or recruit potential employees
with high level of control. Similarly, employees should enhance their perception of control in order to avoid the
negative outcomes resulting from a decreased work life balance.
The third hypothesis H3: Internal Locus of control is positively related to Work life balance, was not supported
in this research. This may be due to many reasons. First of all, when the questionnaires that were filled by
respondents having an internal locus of control were filtered and analyzed, their sample turned out to be only 34
out of the total 160 respondents. This relatively small sample number could have caused the lack of correlation
between internal locus of control and work life balance. Moreover, cultural differences might have also played a
role in this result. In fact, no research was conducted in Lebanese organizations or more specifically in the
Lebanese banking sector.
The fourth hypothesis, H4: Perceived stress is negatively related to Work life balance, was supported. This
result also came in harmony with the literature. Hence, based on results, it is advisable that organizations avoid

223
confronting their employees with stressful events. In fact, studies have confirmed that high levels of perceived
stress were associated with depression, cardiovascular illnesses, high death rates, and most importantly poor
well-being (Gray-Stanley, 2010; Backé et al., 2012; Sonnentag & Fritz. 2014).
The fifth hypothesis, H5: Lower level of control is positively related to perceived stress, was supported. Lower
levels of job stress were associated with a higher level of control (Chen and Silverstone, 2008). In fact, the study
confirmed the findings of previous researches by validating that the lower the level of control, the higher the
level of perceived stress.
The last and most comprehensive hypothesis in this study, H6: Work life balance is negatively related to
perceived stress and lower level of control, was supported. In fact, a combination of lower level of perceived
stress and a higher level of control were both shown to have a positive effect on work life balance. It is
remarkable to mention that the lack of work-life balance has been proven to lead to many undesirable outcomes
such as low job and family satisfaction, psychological strain, and turnover intentions (Brough et al., 2014).
Thus, organizations should take those findings into consideration while recruiting and retaining employees.
Recruiting employees with high level of control, as well as reducing stressors at work while retaining them, is
essential for the overall health and productivity of the employees and the organization as a whole.
This research aimed at verifying whether a relationship exists between work life balance, locus of control and
perceived stress. In fact, the research confirmed that work life balance is related to locus of control and
perceived stress. According to the findings of this study, work life balance is positively affected by an increased
level of control and a decreased level of perceived stress.
As the authors explained throughout the study, decreased levels of work life balance can have severe negative
effects on employees and organizations. In order to avoid the latter, organizations should make sure that their
employees are experiencing a “fair” level of work life balance. Moreover, based on the results of this study,
locus of control should be taken into consideration during the screening process of potential employees.
Organizations can also aid current employees in the enhancement of their control level by providing suitable
training programs and workshops.
In addition to that, the level of perceived stress has also been proved to be negatively related to work life
balance. Therefore, providing employees with effective strategies and techniques that might help them reduce
their levels of perceived stress in the workplace, as well as manage their stress levels successfully will have a
beneficial effect on their job performance, job satisfaction and more importantly their achievement of a healthy
level of work-life balance.
It is noteworthy to say that achieving the perfect work life balance could be an unrealistic goal. We can
definitely relate what was previously stated to Caproni’s (2004) saying about work-life balance: “It is built on an
individualistic, achievement oriented model that assumes that people have choice and control over their lives”.
Not only will achieving a “reasonable” and healthy level of work-life balance affect employees’ overall
wellbeing and job performance positively, but it will also help in improving the overall organization’s
productivity levels and efficiency.
As for further research, more focus should be directed towards women showing an internal locus of control (as
their number was small in this study), on employees in other working sectors in Lebanon, on men working in the

224
Lebanese banking sector, and on the effect of other variables such as employees’ work involvement and levels
of organizational commitment on their levels of perceived stress and work life balance.

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