EFFECT OF FIRM SIZE ON INNOVATION AMONG …

European Journal of Business, Economics and Accountancy Vol. 5, No. 6, 2017 ISSN 2056-6018

Progressive Academic Publishing, UK Page 1 www.idpublications.org

EFFECT OF FIRM SIZE ON INNOVATION AMONG

MANUFACTURING COMPANIES IN NIGERIA

Oluyinka Isaiah Ogungbade

Department of Economics

Accounting and Finance, Jomo

Kenyatta University of

Agriculture and Technology

Nairobi, KENYA

Tobias Olweny

Department of Economics

Accounting and Finance, Jomo



Nairobi, KENYA

O. Oluoch

Department of Business

Administration, Jomo



Nairobi, KENYA

ABSTRACT

The relation between firms’ size and innovations has produced confounding theoretical and

empirical results. Many earlier authors claim that large firms adopt new innovations more

than small firms while few authors argued otherwise. This study sheds light on the relation by

investigating the choice of advanced manufacturing technology and modern management

accounting practices among the manufacturing companies in Nigeria that are not listed on

Nigeria stock exchange. A retrospective longitudinal survey was conducted to examine the

usage of advanced manufacturing technology and modern management accounting practices

during a period of 5 years (2011-2015). A structured questionnaire was personally

administered among the management accountants/Head of accounts and Finance units of 154

manufacturing companies that were randomly sampled from the main directory of

manufacturers association of Nigeria. 133 useful completed questionnaires were retrieved.

The data were subjected to descriptive analysis and logistic regression. The outcome of the

study shows that firms’ size has a significant effect on both manufacturing technology and

management accounting practices. Unlike many earlier findings, the study established a

negative relation which implies that smaller firms applied advanced manufacturing

technology and modern management accounting practices more than larger firms.

Keywords: Firms size, Innovations, Manufacturing technology, Management accounting

practices.

INTRODUCTION

The 21st century business firms are exposed to various kinds of innovations as a result of

globalization which turns the whole world into a global village. The decisions on whether to

adopt/apply new innovations are often times being faced by many business firms.

Technological and administrative innovations are increasingly becoming essentials for any

businesses firms that want to thrive and compete favourably in the dynamic business

environment of the 21st century.

Nigerian manufacturing sector and Small and Medium term Enterprises were given great

attention by the transformation agenda (2011-2015) which focused on SMEs and

manufacturing companies among others. Various programmes targeted at transforming and

innovating the sector were carried out by the government during the period. Such

programmes include the launching of National Enterprise Development Programme

(NEDEP), National Micro , Small and Medium- Term Enterprises policy, establishing the



N200 billion SME/Manufacturing Refinancing and Restructuring Fund by the Central Bank

of Nigeria (CBN) in March, 2010 and increased commitment of Bank of industry to SME and

manufacturing sector during the period(Gyong, 2012; Mid-Term Report, 2013). There was

also a record of 13 percent increase in capacity for design and fabrication of machines and

equipment and transfer of improved post harvest processing technologies to SMEs and

establishment of same in the geo-political zones of the country(Mid-Term Report , 2013).

However, despite the importance of technological and administrative innovations in the

survival of business in the 21st century, the adoption rate of the new innovations differs across

business organizations. The adoption of innovation by firms relates to various factors

comprising the financial capabilities of the firm, availability of the specialists and

infrastructures among others(Abdel-Kader & Luther, 2008; Askarany & Smith, 2008;

Haldma & Lääts, 2002). It is further argued that financial capabilities, specialists and

infrastructures needed to adopt new innovations are much more available in large firms than

small firms(Abdel-Kader & Luther, 2008; Askarany & Smith, 2008). On the contrary,

Nooteboom (1994) claims that small firms bring technological change to the market more

quickly than large businesses. The claims of Nooteboom rest on the premises of less

bureaucracy, greater motivation, better survey of the entirety of the project, and greater

proximity to the market associated to small firms while Feldman(1994) posits that small

businesses are the prime source of technological change in certain industries.

Intensifying global competition and rapid advancement of manufacturing technology are two

realties in today’s business environment. The combined effect of these two realities have

shifted the business strategic priorities toward quality, cost effectiveness and responsiveness

to marketplace changes (Gunawardana, 2006). Globalization brings in new technology and

makes a developing country open to greater competition (Kassim, Md-Mansur, & Idris, 2003;

Ominunu, 2015). With the advent of digital technologies, a variety of issues relating to

pricing strategies, cost management and control mechanisms are evident as there are

alterations in management accounting systems, structures, thinking, and practices(Bhimani,

2003). To this end, sophisticated management accounting practices have been developed and

recommended for practice toprovide management with frequent, detail and correct financial

and non-financial information for informed management decision. Business innovation can

come in form of technological and administrative advancement. The advanced manufacturing

technologies and sophisticated management accounting techniques are the technological and

administrative innovations respectively(Askarany & Smith, 2008).This study examined the

effect of firms’ size on manufacturing technology and management accounting practices.

LITERATURE REVIEW

This section comprises the review of theoretical and empirical literature

Theoretical and Empirical Review

Diffusion of Innovation Theory

Diffusion of innovation theory, developed by Rogers in 1962, is one of the oldest social

science theories; it originated in communication to explain how, over time, an idea or product

gains momentum and diffuses (or spreads) through a specific population or social

system(Léger & Swaminathan, 2007).Rogers and Scott(1997) define innovation, as simply

“an idea perceived as new by the individual and diffusion as the process by which an

innovation is communicated through certain channels over time among the members of a

social system, or a special type of communication concerned with the spread of messages that



are perceived as new ideas. The result of this diffusion is that people, as part of a social

system, adopt a new idea, behavior, or product.

There are technological and administrative innovations that manufacturing companies are

confronted with in the dynamic business environment of 21st century. Examples of

technological innovations confronting the manufacturing firms are the advanced

manufacturing technologies such as; Robotics, Flexible Manufacturing System, Computer-

Aided Design, Testing Machine, Computer Integratedmanufacturing and Just in Time among

others(Askarany & Smith, 2008). Administrative innovation includes Management

accounting innovations which refers to emergence of contemporary management accounting

techniques or the adoption of “newer” or modern forms of management accounting systems

such as activity based costing, target costing, life cycle costing, balanced score card, kaizen

costing, product profitability analysis, throughput accounting, total quality management and

value chain management(Ajibolade, 2013; Chenhall, 2008).Accounting methods can also be

considered as innovations, and accounting change, consequently, is subject to the diffusion of

innovations theory(Askarany & Smith, 2008). Contemporary management accounting

techniques differ from the conventional techniques in the sense that the former are strategic-

focused that combine both financial and non-financial information(Bhimani & Bromwich,

2010; Chenhall & Langfield-Smith, 1998).

Gosselin(1997) categorizes the innovation process into four stages: adoption, preparation,

implementation, and routinization. The adoption stage involves the identification of the need

for change by the company and the decision to adopt or reject the change subject to some

contextual factors. During the preparation stage, the organization engages in employees

training, extensive use of consulting services, and purchasing of computer software. During

this stage, the company might modify its previous decision and even stop the installation

process. The implementation stage consists of introducing the innovation and evaluating its

effects. During the routinization, the innovation turns into regular practices of the firms. This

study examined the innovation of modern management accounting practices and advanced

manufacturing technology based on their application among the manufacturing companies in

Nigeria. To this end, the study tested the following hypotheses:

H01 There is no significant difference on the choice of manufacturing technology among

the manufacturing companies in Nigeria based on their firms’ size

H02 There is no significant difference on the choice of management accounting practices

among the manufacturing companies in Nigeria based on their firms’ size

Empirical Review

Virtually all of the management accounting practices employed by firms today and

explicated in leading cost accounting textbooks had been developed by 1925(Kaplan, 1984).

These old management accounting techniques are referred to as traditional management

accounting practices. The traditional management accounting practices such as standard

costing, absorption costing and marginal costing provide information that is too late, too

aggregated and too historical and therefore criticized of relevance loss in a 21st business

environment characterized by stiff competition and advanced manufacturing technology

which require more sophisticated management accounting information for managers to make

informed decisions(Bhimani & Bromwich, 2010; Jhonson & Kaplan, 1987; Kaplan, 1984;

Mat & Smith, 2014; Watts, Yapa, & Dellaportas, 2014). The modern management accounting

techniques which were developed as a results of deficiencies in the traditional techniques



include activity based costing, target costing, life cycle costing, backflush costing, throughput

accounting, balanced scored card, and just in time among others(Ajibolade, 2013).

Traditional manufacturing is defined as the act of convertingraw materials into finished

products by using manual or mechanized transformational techniques to add value to achieve

targeted objectives without precluding society's overall interests(Thareja, 2005). Advanced

Manufacturing technology (AMT) represents a wide variety of mainly computer-based

systems, which provide adopting firms with the potential to improve manufacturing

operations greatly. Another definition is Advanced manufacturing technology refers to a

family of technologies that include computer-aided design (CAD) and engineering systems,

materials resource planning systems, automated materials handling systems, robotics,

computer controlled machines, flexible manufacturing systems, electronic data interchange

and computer-integrated manufacturing systems(Gunawardana, 2006).

The relationship between cost of a product or service and the technology involved cannot be

over emphasized. The quest for lower operating costs and improved manufacturing efficiency

has forced many manufacturing firms to embark on various advanced manufacturing projects

(Gunawardana, 2006).To understand cost behaviour and cost drivers, it is necessary to

understand the relevant technology because cost is determined by both the technologies

available for production and the relative prices of the inputs. Minimising costs requires the

selection of the optimal technology given the relative prices of the inputs utilised (Bhimani &

Bromwich, 2010). The advanced manufacturing technologies include; computer aided

manufacturing, computer aided process planning, computer aided engineering, testing

machine, just in time, flexible manufacturing system, numerical control and direct numerical

control among others(Askarany & Smith, 2008; Mat, 2010).

Some authors believe that large companies adopt innovations more easily than smaller ones

do because they have a capability of managing the risk, abundant available resources and a

strong infrastructure(Ayadi & Affes, 2014; Lucas, Prowle, & Lowth, 2013). On the contrary,

small businesses suffer from the lack of resources, from financial difficulties and from the

scarcity of professionals, the thing which can lead to difficulties in adopting innovations(Ko,

Kim, Kim, & Woo, 2008).Having investigated the effect of firm size on adoption of modern

management accounting practices among 100 Tunisian companies; the findings of Ayadi and

Affes (2014) show that large firms adopt new management accounting techniques more than

the small firms do.

In the same vein, Askarany and Smith(2008) found a significant positive relationship

between business size and both technological innovation and the implementation of ABC. An

inference from their study shows that large firms adopt ABC more than small firms do.

Similarly, Lucas et al.(2013) conclude that larger organisations do more management

accounting than smaller ones. Erserim(2012) also found out a relationship between firm size

and the management accounting practices. Similarly, based on a sample of 144 responses

from a survey of members of the Australian Association of Practice Managers (AAPM), King

et al., (2010) established that the adoption of written budgets is related to firm size.

In like manner, the empirical investigation of 658 manufacturing companies in UK by Abdel-

Kader and Luther(2008) shows that firm size influences the choice of management

accounting practices. The authors sent two versions of questionnaire to Management

accountants and production managers; measuring firm size based on number of employees

and management accounting practices on 7-point likert scale ranging from never used to



often used. They argue that large firms adopt more sophisticated MAPs than small firms as

moving from traditional to modern MAPs requires resources and specialists only affordable

by large firms. Their findings lend credence to the arguments of Albu and Albu(2012) that an

increase in size is usually associatedwith a tighter control on the environment and an increase

in the firms’ resources, as well as with an increased use of control techniques. Also ,Haldma

and Lääts(2002) argue that the sophistication level of cost accounting and budgeting systems

tends to increase in the line with a firm’s size.

On the contrary, Nooteboom (1994) claims that small firms bring technological change to the

market more quickly than large businesses. The claims of Nooteboom rest on the premises of

less bureaucracy, greater motivation, better survey of the entirety of the project, and greater

proximity to the market associated to small firms while Feldman(1994) posits that small

businesses are the prime source of technological change in certain industries. Similarly, Van

Triest and Elshahat(2007)do not find any correlation between the size of the firms and the

management accounting practices.

RESEARCH METHOD

A retrospective longitudinal survey was adopted to find the relation between firms size and

the type of manufacturing technology and management accounting practices among

manufacturing companies in Nigeria over a period of 5 years (2011-2015). A structured

questionnaire was personally handed over to the management accountants/Head of

Account/Finance unit or their representatives in some cases. 154 companies were randomly

selected out of the 448 manufacturing companies in Lagos and its immediate environs which

were extracted from the Main directory of Manufacturers Association of Nigeria.

The research instrument developed by Baines and Langfield-Smith (2003) was adapted to

measure manufacturing technology and management accounting practices. Respondent were

asked to state how they have used the advanced manufacturing technologies on a 5-point

likert rating scale ranging from never used to very frequently used. The scale adopted from

Khandwalla (1977) was used to measure the complexity of their manufacturing process

ranging from customized production, small batch of similar goods, large batch, mass

production and continuous production representing increasing level of complexity and

standardization. Likewise, they were asked to rate their level of automation on a 5 point likert

rating scale from very little automation to completely automated. The composite figure of the

responses was determined and the average was found. The index below average was regarded

as traditional and coded as “0” while the index above average was regarded as modern and

coded as “1”,

In like manner, management accounting practices was measured based on their level of usage

during the period of five years (2011-2015). The use of 15 modern management accounting

techniques including; activity based costing, activity based budgeting, activity based

management, target costing, throughput accounting, backflush costing, life cycle costing,

product profitability analysis, quality costing, kaizen costing, balanced score card, just in

time, value chain analysis, benchmarking and shareholders’ value analysis/ economic value

added (EVA) was tested on 5 point Likert rating scale from never used to very frequently

used. The average of the index value was calculated; index value below average was regarded

as traditional and coded as “0” while index value above average was regarded as modern

management accounting practices and coded as “1”.



Firm size was measured using the number of employees ranging from less than 10 to over

1,000. Firms were categorized into 6 based on number of employees. The categories include;

less than 10, 10-49, 50- 199, 200 – 500, 501 – 1000, over 1,000. Average of the employees’

number was calculated and index below average was classified as small firms and coded as

“0” while the index value above average was classified as large and coded as “1”.

Model Specification

The study used two models, the fist one representing the causal relation between firms’ size

and manufacturing technology and the second one showing the causal relation between firms’

size and management accounting practices.

…eq.1

…eq.3.2

Where = coefficients of the Firms size for relation between manufacturing technology and firms

size.

= coefficients of the Firms size for relation between management accounting practices and

firms size.

RESULTS AND DISCUSSION

Factor Analysis

Factor analysis is important because it is easier to focus on some key factors rather than

having to consider too many variables that may be trivial, and so factor analysis is useful for

placing variables into meaningful categories(Yong & Pearce, 2013). This study adopts

Principal-components method (or simply P.C. method) of factor analysis because it explains

more variance than would the loadings obtained from any other method of factoring (Kothari,

2004). Field (2009) posit that a factor is reliable if it has four or more loadings of at least 0.6

regardless of sample size while Pituch and Stevens (2016) suggests using a cut-off of 0.4,

irrespective of sample size, for interpretative purposes.

The outcome of factor analysis on management accounting practices table 1 shows that all the

items reached the acceptable threshold of 0.4 and accepted for further statistical analysis.

This acceptance implies that data gathered had relatively high internal consistency and could

be generalized as a reflection of the opinion of all respondents in the target population on the

effect of changes in manufacturing technology on management accounting practices among

the manufacturing companies in Nigeria.

Table 1 Factor Analysis for modern management accounting practices

Component Matrix

Component

1

Quality Costing .678

Target Costing .675

Throughput Accounting .658

Activity Based Budgeting .658

life Cycle Costing .629

Backflush Costing .616

Just in Time .543

Activity Based Costing .402

Product Profitability analysis .400

Benchmarking .258

Shareholdervalue analysis/Economic Value Analysis -.091

Extraction Method: Principal Component Analysis.



Table 2 Reliability tests for management accounting practices

Reliability Statistics

Cronbach's Alpha N of Items

.727 9

Table 3 Factor Analysis of advanced manufacturing technology Components

Testing Machine .709

Numerical Control .668

Just in Time .615

Computer Aided Processing .611

Robotics .592

Computer Aided Engineering .582

Computer Integrated Manufacturing .565

Flexible Manufacturing .552

Computer Aided Manufacturing .375

Direct Numerical Control .305

Table ‎0 Reliability test for manufacturing technology

Reliability Statistics Cronbach's Alpha N of Items

.764 9

Descriptive Analysis of Manufacturing Technology

The usage of 9 advanced manufacturing companies during 2011-2015 was tested. Even thou

the mode show virtually all the advanced manufacturing technologies listed were used except

Robotics. However, not all the technologies listed were used by them but on average,

manufacturing companies in Nigeria used Flexible manufacturing system, Computer Aided

Manufacturing, Testing machine and computer integrated manufacturing.

Table 5 Descriptive Analysis of Manufacturing Technology

Never

Used

Rearly

Used

Not sure Frequently

Used

Very

Frequently

used

Sub total

Row N % Row N

%

Row N % Row N % Row N % Mean Mode Sd

Robotics 39.4% 22.4% 12.4% 22.9% 2.9% 2.02 1 1.23

Flexible manufacturing

system

5.8% 11.1% 3.5% 61.4% 18.1% 4.32 4 0.97

Computer Aided

Manufacturing

9.9% 10.5% 8.8% 47.4% 23.4% 4.19 4 1.01

Computer Aided Engineering 8.7% 22.7% 18.0% 37.8% 12.8% 3.37 4 1.01

Computer Aided Process

Planning

6.4% 31.6% 8.2% 37.4% 16.4% 3.29 4 1.06

Testing Machines 5.8% 11.6% 21.5% 43.0% 18.0% 4.09 4 1.08

Just in Time 5.2% 33.7% 16.3% 34.3% 10.5% 2.98 4 0.79

Numerical Control 5.3% 24.0% 14.6% 39.2% 17.0% 2.88 4 1.41

Computer Integrated

Manufacturing

5.8% 14.5% 9.3% 45.3% 25.0% 4.17 4 1.24

Management Accounting Practices

Similarly, this study found out that manufacturing companies in Nigeria practice some

modern management accounting techniques. The modern management accounting techniques

that manufacturing companies in Nigeria used to provide information for management



decision during the period include activity based costing, activity based budgeting, activity

based management, target costing, quality costing, product profitability analysis, value chain

analysis and benchmarking. The analysis results show that life cycle costing, just in time,

throughput accounting, backflush costing, balanced score card and kaizen costing were not

frequently used during the period. Similarly, the outcome of this analysis partially confirms

the findings of Oyerogba(2015) that Balanced score card and activity based management

have not been embraced by manufacturing companies in Nigeria.

Table 6 Descriptive Statistics for modern management accounting practices

Never

Used

Rarely

Used

Not

sure

Frequently

Used

Very

Frequently

used

Sub-total

Row N

%

Row N

%

Row N

%

Row N % Row N % Mean Mode Sd

Activity- Based Costing 3.5% 5.2% 2.3% 68.0% 20.9% 4.03 4 1.19

Activity Based Budgeting 2.3% 16.4% 4.7% 41.5% 35.1% 4.19 4 1.03

Activity Based

Management

1.7% 20.3% 4.7% 48.8% 24.4% 4.35 4 1.08

Target Costing 1.2% 19.8% 22.1% 34.3% 22.7% 3.95 4 0.98

life Cycle Costing 7.0% 19.9% 29.8% 28.1% 15.2% 3.46 3 0.88

Quality Costing 2.3% 24.0% 8.8% 40.9% 24.0% 4.02 4 1.35

Just in Time 2.9% 31.6% 18.7% 33.3% 13.5% 3.42 4 1.22

Throughput Accounting 8.1% 11.6% 27.9% 35.5% 16.9% 3.31 4 1.26

Backflush Costing 4.7% 15.2% 34.5% 28.1% 17.5% 3.37 3 1.08

Product Profitability

analysis

2.9% 5.3% 4.7% 40.4% 46.8% 4.24 5 1.42

Balanced Score Card 3.5% 30.2% 16.3% 31.4% 18.6% 2.98 4 1.30

Kaizen Costing 14.5% 32.0% 22.1% 26.2% 5.2% 3.05 2 1.24

Value Chain Analysis 3.5% 12.8% 9.9% 59.3% 14.5% 4.08 4 0.96

Benchmarking 1.2% 10.5% 11.0% 52.9% 24.4% 4.10 4 1.09

Effect‎of‎firms’‎size‎on‎manufacturing‎technology

Omnibus tests of model coefficient give a Chi-square of 14.734 with additional 1 degree of

freedom. This is a test of null hypothesis that adding another variable to the model has

significantly increased the researcher’s ability to predict the decisions made by the

respondents. Since the model is significant at 0.05, the hypothesis is rejected, implying that

adding another variable to the model has not significantly changed the prediction about

respondents’ decision.

Table 7 Omnibus Tests of Model Coefficients for manufacturing technology

Chi-square Df Sig.

Step 1

Step 14.734 1 .000

Block 14.734 1 .000

Model 14.734 1 .000

The essence of -2 Log likelihood is to see whether adding another variable to the model

would lead to a significant reduction in its value. Cox & Snell R Square can be interpreted

like R2 in multiple regressions but cannot reach the maximum of 1. Nagelkerke R Square can

also be interpreted like R2 in multiple regressions and it can reach 1. Nagelkerke R Square

result implies that firm size contributes about 14% variation in manufacturing technology

Table 8 Model Summary for manufacturing technology

Step -2 Log likelihood Cox & Snell R Square Nagelkerke R Square

1 163.269a .105 .142

a. Estimation terminated at iteration number 4 because parameter estimates changed by less than .001.



Table 9 shows that 73.1% of traditional manufacturing technology was correctly classified

while 60.5% of the advanced manufacturing technology was correctly classified. The overall

percentage of correct classification is 65.4%.

Table 9 Classification Table

Observed Predicted

TECHNOLOGY Percentage Correct

0 1

Step 1 TECHNOLOGY

0 38 14 73.1

1 32 49 60.5

Overall Percentage 65.4

a. The cut value is .500

Given the non-liner nature of logistic regression, it is difficult to interpret the relations

between the predictor and the probability that y=1 directly. Notwithstanding the above

limitation, statisticians have shown that the relation can be interpreted using a concept called

the odd ratio. The odd in favour of an event occurring is defined as the probability that the

event will occur divided by the probability that the event will not occur((Anderson, Sweeney,

& Williams, 2011). The p-values .000 indicates that firms size significantly influence the

choice of manufacturing technology. A parameter that is more crucial in the interpretation of

logistic regression is Exp (B) also known as the odd ratio. The odd ratio that is greater than 1

implies that as the predictor increases the odd of outcome occurring increasers while a value

that is lower than 1 implies that as the predictor increases the odd of outcome occurring

decreases(Field, 2009). Therefore, Exp (B) which is .241 implies that as the firms’ size

increases the odd of manufacturing firms using advanced manufacturing technology

decreases. Therefore, based on p-value, hypothesis 1 is not accepted

H01 There is no significant difference on the choice of manufacturing technology among

the manufacturing companies in Nigeria based on their firms’ size

Table 10 Variables in the Equation

B S.E. Wald df Sig. Exp(B)

Step 1a

NEWFIRMSIZEAVERAG

E

-1.425 .387 13.584 1 .000 .241

Constant 1.253 .303 17.089 1 .000 3.500

a. Variable(s) entered on step 1: NEWFIRMSIZEAVERAGE.

The outcome of this analysis shows that firms’ size significantly influences the type of

manufacturing technology that the firms used during the period. This result is supported by

many earlier empirical studies that firms size has a significant effect on adoption of

technological innovation(Askarany & Smith, 2008). However, unlike the findings of many

earlier studies that large firms use advance manufacturing technology more than small firms

do, the result of this study shows that the likelihood of small firms using advanced

manufacturing technology is more than that of the large firms. This lends credence to the

findings of Stock Greis and Fischer (2002) that smaller firms exhibit higher levels of

dynamic innovation performance. The findings of this study is also supported by the claim of

Rosnah, Ahmad and Osman (2004) that advanced manufacturing technology can be

implemented in smaller firms and are more successful than in bigger firms. In both developed

and developing economies, the small and medium scale enterprises (SMEs) are the backbone

of the industrialization process. With globalization and free trade agreements, the SMIs are

under increasing pressure to adopt advanced manufacturing technologies to be competitive or



simply to survive(Rosnah et al., 2004) . It however contradicts the findings of Kennedy and

Hyland (2003) that larger firms use advanced manufacturing technologies more than the

small firms both in OECD and non-OECD countries. The outcome of this study could be due

to the claims of Nooteboom (1994) that small firms adopt new innovation more than large

firms because of less bureaucracy, greater motivation, better survey of the entirety of the

project, and greater proximity to the market associated to small firms.

Effect of Firm Size on Choice of Management Accounting Practices

Omnibus tests of model coefficient give a Chi-square of 5.322 with 1 degree of freedom not

significant at 0.005. This is a test of null hypothesis that adding another variable to the model

has not significantly increased the researcher’s ability to predict the decisions made by the

respondents. Since the model is significant at 0.05, the hypothesis is not accepted, implying

that adding another variable to the model has not significantly changed the prediction about

respondents’ decision.

Table 11 Omnibus Tests of Model Coefficients

Chi-square Df Sig.

Step 1

Step 5.322 1 .021

Block 5.322 1 .021

Model 5.322 1 .021

-2 Log likelihood is 175.726, Cox & Snell R Square is .039 while Nagelkerke R Square is

.053. It implies that firm size contributes 5.3% variation in management accounting practices.

Table 12 Model Summary for management accounting practices

Step -2 Log likelihood Cox & Snell R Square Nagelkerke R Square

1 175.726a .039 .053

a. Estimation terminated at iteration number 3 because parameter estimates changed by less than .001.

Table 13 shows that 64.3% of traditional manufacturing technology was correctly classified

while 55.8% of the advanced manufacturing technology was correctly classified. The overall

percentage of correct classification is 59.4%.

Table 13 Classification Table

a

Observed Predicted

MANAGEMENT ACCOUNTING

PRACTICES

Percentage

Correct

0 1

Step 1

MANAGEMENT

ACCOUNTING PRACTICES

0 36 20 64.3

1 34 43 55.8

Overall Percentage 59.4

a. The cut value is .500

Exp (B) which is .439 implies that as the firms’ size increases the odd of manufacturing firms

using modern management accounting practices decreases. The p-values .023 indicates that

firms size significantly influence the choice of management accounting practices. Therefore,

hypothesis 2 is not accepted.

H02 There is no significant difference on the choice of management accounting practices

among the manufacturing companies in Nigeria based on their firms’ size.



Table 14 Variables in the Equation B S.E. Wald df Sig. Exp(B)

Step 1a

NEWFIRMSIZEAVERAG

E

-.823 .361 5.188 1 .023 .439

Constant .765 .271 7.999 1 .005 2.150

a. Variable(s) entered on step 1: NEWFIRMSIZEAVERAGE.

The hypothesis is not accepted because the analysis shows that there is a significant

difference on the choice of management accounting practices based on the firms’ size. This

finding is supported by the claims of many earlier authors that firms size has a significant

effect on the choice of management accounting practices(Abdel-Kader & Luther, 2008; Albu

& Albu, 2012). However, unlike the findings of many earlier authors which established a

positive relation between firm size and modern management accounting practices, this study

established a negative relation. This implies that smaller firms used modern management

accounting techniques more than the small firms. This could be due to the claims of

Nooteboom (1994) that smaller firms adopts new innovation more than bigger firms because

of less bureaucracy, greater motivation, better survey of the entirety of the project, and

greater proximity to the market associated to small firms. Moreover, this study contradicts the

findings of Van Triest and Elshahat(2007) who claim that there is no correlation between the

size of the firms and the management accounting practices.

SUMMARY AND CONCLUSION

The study examined the effect of firms’ size on the technological and administrative

innovations during a period of five years (2011-2015). Advanced manufacturing technologies

were used to proxy technological innovation while modern management accounting practices

were used to proxy administrative innovations. The study established that firms’ size

significantly influenced both the technological and administrative innovations that they used

during the period. Unlike the findings of many earlier authors that established a positive

relations between the firms size and innovation, this study established a negative relationship

which implies that as the firms size increases, their probability of adopting new innovations

decreases.

This could be due to various programmes under the transformation agenda (2011-2015)

which focused on transforming and innovating SMEs and manufacturing companies. Such

programmes enabled them greater access to funds which must have enabled them to afford

the costs of some modern manufacturing equipments. Their usage of modern manufacturing

equipments must have been responsible for their choice of modern management accounting

practices.

In conclusion, firms’ size is one of the firms’ characteristics which greatly determine the

application of new innovations. It is a key driver of the type of technological an

administrative innovations in manufacturing companies. Specifically, it significantly

influences the choice of manufacturing technology and management accounting practices.

However, this study only investigated the non-listed manufacturing companies in Nigeria.

Any generalization beyond the scope of the study should be taken with caution. A further

study that combines both listed and non listed manufacturing and service companies is

recommended. Also an investigation of the causal relation between management accounting

practices and manufacturing technology among non-listed companies is suggested for future

studies.



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TREASURY MANAGEMENT POLICY AND IMPROVEMENT IN

REVENUE BASE IN NIGERIA

*OGUNDANA Oyebisi; *NJOGO Bibiana; *IMEOPARIA Lawrence; **OJUA Michael &

*OGUNLEYE Olusogo

*Department of Accounting, Bells University of Technology, Ota, Ogun State

** Department of Accounting, Covenant University, Ota, Ogun State

ABSTRACT

Recent decreases experienced in the federal government level of revenue generation have

brought about an urgent need to improve the national revenue base through an effective and

efficient Treasury Management. This revenue generation decrease at the Federal level would

invariably affect the state and local government since certain percentage of their revenue is

derived from the federation account. As a result of this decline in government revenue, The

Federal Government is compelled to pull funds from the excess crude account and a

continuous pull from this account would bring about amongst other consequences a drastic

reduction in the country’s foreign reserve. To avoid such problems, there is the need for a

proper Treasury Management Policy and Practice in the Nigerian System at all levels of

Government.

Keywords: Management, revenue, policy, treasury.

1.0 INTRODUCTION

Available reports have shown that in recent months, there has been a reduction in the monthly

allocation from the federation account to the 36 states in Nigeria and the Federal Capital

Territory. This has given rise to many complaints regarding the adverse effect this is having

on the smooth running of activities at the State and Local Government level, including non-

payment of salaries, poor infrastructural facilities, pending pension benefits amongst others

(Office of the Accountant General of the Federation, 2014). This of course is not good

enough for the country as it is able to stall economic growth and development as well as dent

the image of the country at the international level.

Government at the three (3) tiers is established alongside other basic functions and role; to

provide social and infrastructural services to the citizens to enable an improvement of overall

wellbeing of the populace. To accomplish this primary objective, government must put in

place an effective and an efficient Treasury Management policy and practice which would

bring about optimal generation of revenue and efficient/judicious utilization of the revenue

raised.

The Treasury department is the golden animal that lays egg applied for economic planning

and development of the areas in local government structure (Nwosu & Okafor, 2013). The

Treasury department is one of such departments which act as the ministry of finance for the

council. The Treasury department is responsible for the generation and collection of external

and internal revenue due to the local government, the judicious utilization/disbursement of

revenue collected and the preparation of annual budget for consideration of the finance

committee and subsequent approval by the approving authority.



An efficient Treasury Management Policy and Practice would bring about provision of social

amenities, better infrastructural facilities, provision of employment opportunities,

improvement of standard of living, better accountability and transparency e.t.c. all of these

are what people at the grassroots level requires from local government. Thus, no matter the

level of financial resources in the hands of government, if there is no proper treasury

management policy and practice in place to ensure that revenue generated are used

economically, effectively and efficiently, the desired objectives of such government would

not be achieved (Hamid, 2011)

This paper is therefore focused on the Local Government as one of the tiers of the

Government of Nigeria. The main objective of this paper is therefore to discuss the role of

Treasury Management in improving the revenue base at the Local Government through

internally generated revenue.

This paper is divided into four sections. Section one (1) examines the concepts of Treasury

and Treasury Management, section two (2) discusses the function of the Treasury department

and the Legal Framework guiding the Treasury Management Department, section three (3)

states the Research Method, section four (4) centers on Treasury Management and

improvement on Revenue Base and ways of enhancing Internally Generated Revenue through

the Treasury department, section five (5) is conclusion

2.0 LITERATURE REVIEW

2.1 CONCEPTUAL FRAMEWORK

2.1.1 Concept of Treasury and Treasury Management in Nigeria

According to Hamid (2011), “The treasury is the unit/department that is charged with the

responsibility and management of public funds, creating and safeguarding effective internal

control, creating the conditions for prompt and efficient provisions of services and proper

maintenance and preservation of necessary records of all financial transactions”.

Treasury Management may be defined as the management of government revenue generated,

government cash flows, management of money and capital market transactions, effective and

efficient control of risk associated with this activities and the pursuant of optimum

performance consistent with these risks (Hamid, 2011).

The treasurer as the head of the Treasury department is the financial director of the local

government charged with the responsibility of ensuring proper working of the treasury and

the financial requirement of the council.

2.2 Functions of Treasury Management in enhancing revenue in the Public Sector

According to Hamid (2011), the under listed are some of the functions of Local Government

Treasury department:

2.2.1 Management of Government Bank Account: The Treasury department has the

responsibility of supervising Government bank accounts (including all extra-budgetary

funds). All banking arrangement must be negotiated by the Treasury department, this would

enable government select the banks with better opportunities and services such as: lower

interest on borrowings, higher interest on savings, lower commission on turnover and faster

services etc. the treasurer is expected to receive regularly (month end) a statement from the

Local Government Bank, this statement must be critically analyzed for the purpose of

preparing a reconciliation to ensure there is no form of fraud or error that has taken place.



2.2.2 Debt Management: In order to avoid a situation of uncontrolled indebtedness, the

treasurer should be the only one as the finance director, permitted to borrow money on behalf

of the Local Government. The money borrowed should either be channeled into projects

(project loans) or for financing budget deficit. The Local Government in fulfillment of its

accountability function is expected to disclose to the relevant legislation its level of

indebtedness, and publish statistics of the government debt.

2.2.3 Cash Management: Cash Management can be defined as having the right amount of

money to fund government expenditure in a timely manner as well as meeting its obligation

as they fall due (Dikwa, 2014). Cash Management involves basically control of cash inflows

(that is, revenue collected either by the treasury department or commercial banks must be

swiftly processed and made available for use), control of cash outflows (this is to ensure the

sufficiency of cash until the due date of payment) and control of disbursements (to ensure

that all payment made are within the budget and there is no form of mis-management of

funds).

2.2.4 Management of Foreign Grants and Aid: All forms of grant (in cash or in kind)

must be duly budgeted and expenditures financed using grant must be subjected thoroughly

to scrutiny by the treasury officer. This is to ensure there is no form of mis-appropriation of

fund or misplacement of priority.

2.2.5 Management of Government Financial Asset: The treasury department is expected

to manage the government shares in companies and to manage loans granted by the

government. The treasury department is expected to do this by ensuring the authorization of

disbursements and tracking payments. The treasury department gets vivid information of

those companies where the Local Government holds shares on capital appreciation, share

dividend, bonus shares e.t.c.

2.2.6 Financial Planning and Forecasting: Financial planning involves the preparation of

budget implementation plan, annual and monthly cash plan and monthly forecast. These

various plans must be prepared by the Treasury department to ensure that cash outflows are

compatible with cash inflows, and just in case borrowings are needed, to ensure that

borrowing plans are in place.

2.2.7 Financial Control: Financial control can be defined as the process which assures that

financial resources are obtained economically and used effectively and efficiently for the

purpose of actualizing set goals (Oshisami, 1994).

2.2.8 Preparation, Expenditure and Control of Budget: Here, the Treasury department

passes a form across to several heads of department within the confines of the Local

Government. This form enables them disclose the information relating to their financial needs

and the various persons and things required to aid the fulfillment of those needs. Once these

forms are filled, they are passed back to the Treasury department and this department makes

this financial need known to the legislation for approval (and of course this is also subject to

prior scrutiny by the Treasurer before he presents it to the legislation). The Treasury is

therefore expected to presents the budget which would now be a compilation of the various

financial needs received from the various departments.

2.2.9 Risk Management: One of the most important functions of the Treasury department

is management and control of risk associated with treasury activities. Some of this risks are:



Liquidity risk (risk that the Local Government would run out of cash needed to carry out its

activities), Interest rate risk (Risk that the Local Government fails to get good value for its

cash dealings), Inflation risk (Risk that growth in the authority’s investment income does not

keep pace with the effect of inflation on its outgoings).

2.2.10 Books of Account: The purpose of accounting is to provide relevant and reliable

accounting information to users to aid decision making. To unable the provision of this

information, the treasury department is therefore expected to keep proper books of accounts,

records and forms to enable the documentation of government transactions on a daily basis.

The books of account to be kept include: cashbook, ledgers, journals, records of assets and

liabilities, stores receipt etc.

2.2.11 Stores Administration: For every item needed in the Local Government due

approval must be gotten from the Treasurer and his approval is subject to consideration of

factors such as: availability of the item within the budget, availability of adequate money to

cover such item, necessity/urgency of such item and his level of authority to approve such

expenditure.

2.3 Legal Framework for Public Treasury Management in Nigeria

Public Sector Treasury Management is governed by the following regulatory framework:

2.3.1 Nigeria Constitution: The 1999 constitution of the Federal Republic of Nigeria is

one of the legal frameworks guiding and regulating the receipts and payments of

funds. The constitution provides guideline with respect to financial reporting

process in Local Government accounting, budgeting and auditing.

2.3.2 Audit Ordinance of 1956 (act of 1956): This act regulates and guides

Government audit of financial accounts, records and transactions.

2.3.3 The Finance Act of 1958: The Finance Act of 1958 regulates the accounting

system, books of accounts to be kept and the procedure for preparing final

accounts and financial statement.

2.3.4 Financial Regulations: These are the accounting manual of government at all

level which provides guidance on accounting and financial matters. They set out

the steps to be followed in treating most government transactions.

2.3.5 Gazette: The Gazette is a periodically published government official newsletter

containing government policy statements like appointment of new officers,

retirement, financial statement, contract advertisement etc.

2.3.6 Finance/Treasury Circular: These are administrative tools used to amend the

existing provisions of financial regulations. They are periodic communications

made or releases issued by the Ministry of Finance. They are specific guides of

the operations of public sector financial transactions.

2.3.7 Appropriation Act: This act states the amount to be spent on each program to be

embarked upon by the government based on the approved estimate.

3.0 Research Method

This paper is an Exploratory research based on Library research; hence, it is a theoretical

review of various authors work on the subject matter.

4.0 Treasury Management and Improvement in Revenue Base

The local government has three (3) main sources of revenue, they are: External Revenue,

Internal Revenue, Loan. This section focuses on examining the various options of

Internally Generated Revenue available to the Local Government and how this option

can be taken advantage of.



Internally Generated Revenue: This refers to those revenue sources that are generated

mainly by sub-national entities such as Local Government within the areas of jurisdiction

as specified in the 1999 constitution (Oyaghire, 2014). This can be referred to other

sources of revenue internally generated (within the country) other than the statutory

allocation from the State or Federal Government (Nwosu & Okafor, 2013). According to

Nwosu & Okafor (2013), the sources of Internally Generated Revenue at the Local

Government level are:

4.1.1 Taxes: Tax is payable by all citizens of Nigeria. According to Act No. 21 of

1998, the taxes payable to the Local Government amongst others include:

Market Taxes, Cattle tax payable etc.

4.1.2 Tenement Rate: This is one of the most dependable sources of revenue to the

Local Government if well harnessed. This involve tax on landed properties,

commercial and residential buildings and even right of occupancy fees on

land in the rural areas (excluding those collectable by the Federal and State

government) etc.

4.1.3 Rent: This is another type of internally generate revenue that the Local

Government can take advantage of. The treasury department must ensure the

full harnessing of this area of revenue generation. It includes rent on

residential/commercial buildings.

4.1.4 Interest and Dividend: Local Government at times also take advantage of

investing in profitable ventures, the interest and dividend derivable from this

investment serves as another source of income to the government. Treasury

Department must make sure all interest and dividend are collected duly.

4.1.5 Local License fees and fines: This includes a long list of different revenues

derivable from licenses and fees charged. According to Nwosu and Okafor

(2013), this licenses and fees can be sub-divided into eight (8) different

headings:

a). Fines: Fees accruing from wrong parking charges, Throwing of dirt on the

floor,

b). General License:, Bicycle license fees, truck, canoe, wheelbarrow license

fees

c). Food control: Slaughter slab fees

Security: Goldsmith and gold sellers license fees

Social: Merriment and road closure fees, marriage, radio and Television

license fees

Health: birth and death registration fees, domestic animal license fees

Economic: tenders fees and contractors registration fees

Engineering works and survey: hire of plants charges

4.1.6 Miscellaneous fees: Public convenience, sewage and refuse disposal fees,

customary burial ground permit, signboard and advertisement permit fees, on

and off liquor fees, domestic animal license, vehicle radio license fees etc.

4.2 Ways of Enhancing/Improving Internally Generated Revenue through the

Treasury Department

a. Reliable Database: To ensure a proper assessment of taxes due to the local government

and optimum revenue collection process, a reliable and robust database is necessary. The

Treasury department should ensure that a comprehensive database is in place.

b. Monitoring of delegated authorities: Agencies having power to collect revenue on

behalf of the Local Government must be adequately monitored by the Treasury



Department to ensure that all revenue collected on their behalf are remitted as and when

due:

c. Enforcement of Sanctions: There should be appropriate sanctions for revenue diversion,

failure to remit collections, delayed remittance, and revenue consumption without

appropriation.

d. Prosecution of offenders: Loss of revenue through corruption and other illegal means is

responsible for the inability of the Local Government to perform their provision of social

services function. Therefore, offenders who indulge in any form of channeling of

revenue generated by the Local Government to personal account must be duly

prosecuted to serve as deterrence to upcoming fraudsters.

e. Training and Development of Staff: Staff of the Treasury department of the Local

Government must be adequately trained in the area of collection of Internally Generated

Revenue.

f. Appropriate Remuneration and Motivation: There is the need to reward and motivate

the entire treasury staff appropriately in view of the challenges of their function and the

delicate nature of revenue collection. This would discourage the treasury staff from

stealing part of the money gathered from internally generated revenue

g. Deployment of appropriate Technology: There is the need to acquire and intensify the

use of modern technology in matters of revenue collection and management this is

because efficient resource management is significantly technology-driven.

5.0 CONCLUSION Local Government must see to it that its harnesses fully the option of Internally Generated

Revenue as a medium of generating revenue and increasing its revenue base. The Local

Government can achieve this only with the existence of an efficient Treasury Department in

place. The Treasury Department must be guided by the Legal framework put in place to

perform its role as the live wire of the Local Government.

REFERENCES

Okafor, O. and Nwosu, M. (2013). Financial management in Local Government: The Nigeria

Experience, International Journal of Financial research, Vol. 4 (4)

Hamid, K. (2011). Standard treasury management policy and practice: The starting point of

fraud prevention, being a paper presented at a seminar for senior Local Government

officials of Jigawa State on the theme “Emerging issues in Local Government

Auditing and Treasury Management” held at Dutse, Jigawa State from 25th

to 27th

October, 2011.

Institute of Chartered Accountant of Nigeria (2009). Public Sector Accounting and Finance

Oshisami, K. (1994). Government accounting and financial control, Ibadan, Nigeria:

Spectrum Books Limited.

Office of the Accountant General of the Federation (2014). Transforming the Nigerian

treasury to enhance accountability and fiscal responsiveness.

Oyaghire, B. (2014). Improving the National revenue base through effective treasury

management and accountability



A META-ANALYSIS OF 20 YEARS OF STUDIES ON INTELLECTUAL

CAPITAL (1997-2017)

Driss Tsouli

PhD student in intellectual capital, National school of management Tangier, MOROCCO

&

Bouchra Elabbadi

Research professor, National school of management Tangier, MOROCCO

ABSTRACT

Leif Edvinsson introduced the intellectual capital in his 1997 Long Range Planning journal

article. 2017 marks 20 years since that article. This anniversary had motivated us to review

the state of research on intellectual capital, to highlight a number of research questions

pertaining to country, institutional and individual productivity, publication frequency, and

favorite inquiry methods were proposed. To this end, we reviewed 372 articles published in

business, management and accounting journals in the period 1997-2011.the findings of this

literature review are presented in three part. First, the reviewed articles are categorized by

topics, research settings, and research method. Second, the contributions of research to the

field and the lessons learned from these studies are discussed. Third, knowledge gaps in

existing intellectual capital research are identified, leading to consideration of several ideas

for future research.

Keywords: Intellectual capital, accounting business and management, literature review.

INTRODUCTION

2017 marks 20 years since the first publication of the intellectual capital article by Leif

Edvinsson in the June issue of long range planning journal. After a year’s research activity

inside the Swedish insurance company Skandia, Edvinsson [11] disseminated their findings

through an Intellectual Capital measurement framework which he developed and called the

Skandia navigator. Edvinsson’s original version of developing intellectual capital at Skandia

expanded on mere value creation measures based on intangible assets, categorized by three

perspectives: human capital, structural capital and customer capital. Following that article,

there has been a remarkable increase in articles, books, and conferences. In June 2001

Thomas Stewart former editor at Harvard business review has published on the cover of this

review: the brainpower and intellectual capital was becoming America’s most valuable asset.

So intellectual capital became part of a new form of value creation.

10 years later Guthrie, Ricceri and Dumay [15] published a critique review of the field of

intellectual capital accounting research, they showed that there is an increase in research in

the field of intellectual capital, with focus on developed countries, public listed companies

and on management control and strategy areas, and more empirical studies.

As a starting point our paper considers the argument of Guthrie, Ricceri and Dumay [15],

“Reflections and projections: A decade of Intellectual Capital Accounting Research“, as

published in the British Accounting Review and it’s an extension of the seminal paper

seminal paper on ICA, “Intellectual capital literature review: Measurement, reporting and

management” as published in the Journal of Intellectual Capital.



Guthrie, Ricceri and Dumay [15] was chosen as the starting point because it appeared in the

first volume of British accounting review and has to date been cited 120 times (Scopus at 1

January 2017), we develop a descriptive meta-analysis of over 945 journal articles, using a

method previously employed to select and categorise academic papers (see also [4] [16]).

This analysis is used to evaluate, identify and address future research agendas. In doing so,

our paper answers four inter related research questions:

1. What is the scholarship field of intellectual capital?

2. What has happened in the field of IC over the 20 years?

3. How and why is the field changing?

4. What is the future of IC?

Our paper has four further sections. Section two offers a brief review of the original article

and a general review of contemporary IC literature, establishing what constitutes the field of

IC. Section three outlines our research method followed by a descriptive meta-analysis of the

IC papers. Section four discusses issues associated with the field of IC. Last, a conclusion

outlining an agenda of future IC research is provided.

The evolving research on intellectual capital

The concept of intellectual capital (IC) is complex and poorly understood [22] .there are

various viewpoint about IC, its components and structure and its role in value creation of an

organization.

In the 1990s, many scholars focused their research on the nature of IC, its structure and role

in an organization’s value. Different authors made an attempt to formulate a definition of IC

by means of many approaches, by including some elements characterizing the concept, by

using the structure of intellectual capital and by broadening the concept of knowledge, etc.

Edvinsson and Malone [12] defined intellectual capital as knowledge that can be converted

into value. This work inspired others and after 1997 saw the proliferation of conferences on

IC; the myriad of books, working papers, and journal articles; and the large number of

consulting firms offering products and services centered around IC, are testament to the

growing awareness in the area [22].

According to Guthrie, Ricceri, Dumay [15], and Giuliani [19], the research on IC has passed

by three stages:

The first-stage: focused on why recognizing and understanding the potential of IC

towards creating and managing sustainable competitive advantage is important. And

to make the invisible visible, relied on the old adage “what gets measured gets

managed” .The publications has target to argue that “intellectual capital is something

significant and should be measured and reported”, without referring to specific

empirical research [12] [22] [23] [24].

The second stage: established IC research on how capital and labour markets react to

the potential for IC to create value and how IC should be managed in order to create

and maintain a sustainable competitive advantage. In this case, the attention of

scholars and practitioners moved from the analyses of production of IC measurements

In other words, in this stage the focus was on how IC measurements, together with

images and narratives, affect an organization or the capital market [9] [20].

The third stage: the implementation of IC and it utilizations inside organizations. In

other words, this stage is focused on the analysis of the use of IC measurements in



practice, to the exam of the interplay between them and IC mobilization and

management and to the investigation of the effects, the benefits and the drawbacks of

measuring IC [6] [15]. Thus, this stage is devoted to critically investigate how

organizations understand and adopt IC as a management technology [7] [20].

Research method

Our method for selecting and reviewing the papers utilized in our study is similar to method

used by to Broadbent and Guthrie [4], and Guthrie, Ricceri , and Dumay [15].

The review process was conducted in five different stages. In the first stage, the core research

objectives were formulated based on the work of Petty and Guthrie [22]. Based on this

research objective, several classifications/codes, boundaries and definitions were determined

in order to select articles on IC. The data set was restricted to a twenty year period from 1997

to 2016.

The second stage involved the selection of journals. The journals consist of two specialist

journals, journal of intellectual capital (JIC), and International Journal of Learning and

Intellectual Capital (IJLIC).

In the third stage, we analyzed the titles and abstracts of all articles published in the journals

during the period (a total of 372) with Scopus (Scopus is a bibliographic database containing

abstracts and citations for academic journal articles. It covers nearly 22,000 titles from over

5,000 publishers).

The fourth stage pilot tested and adapted our classification system, based on the framework

employed in [4], on a sample of papers (Table 1). The first criterion is Organisational Focus

(A). The second criterion is the country Focus of the study (B). The third criterion is Focus of

IC Literature (C). The fourth criterion is based on the Research Method used (D).

Finally, in the fifth stage we utilized the classifications to establish a range of descriptive

statistics, allowing us to understand the patterns emerging from the reviewed articles. This

provides the basis for our meta-analysis and discussion of the IC field over the period in

question. The following section outlines the meta-analysis and is followed by an open

discussion of our findings.

Table 1 Classification system for analysing IC articles. A. Organisational focus

A1. Public listed

A2. Private - SMEs

A3. Public sector

A4. General/other

B. Location

B1. North America

B2. Asia

B4. Continental Europe

B5. Other

C. Focus of ICA literature

C1. Auditing

C2. Accountability and governance

C3. Management control/strategy

C4. Performance measurement

C5. Other (including general)



D. Research methods

D1. Case/field study/interviews

D2. Survey/questionnaire/other empirical

D3. Theoretical: literature review/empirical

---------------------------------------------------------------------------------------------------------------------------

Source: Adapted from Broadbent and Guthrie (2008) [4].

Meta-analysis

The purpose of this section is to provide a meta-analysis of the IC articles selected and to

answer our proposed question two: “What has happened in the field of IC over the past

twenty years?” and question three: “How and why is the field changing?”

The total number of articles focusing on IC was 372 and, of these, 287 articles were

published in JIC (see Table 2).

Table 2 number of articles focusing on IC Journal name Journal code IC articles % articles

Journal of intellectual capital JIC 287 77.15

International Journal of Learning and

Intellectual Capital

IJLIC 85 22.85

Total IC articles 372 100

Table 2 highlights how journal of intellectual capital published 287 of the 372 (77.15%) total

IC articles. The yearly pattern of published articles in Fig. 1 shows a spike in 2015 of articles.

Figure 1: evolution of publications per year

Organisational focus

Table 4 highlights the extent of research in terms of different types of organisations. It

demonstrates that apart from general other (A4), the most commonly researched organisation

is public sector (A3) with 99 articles and Public listed companies. There are very few articles

on SME. In examining public sector, as an organisational focus, it was found that many of the

studies focused on the content, determinants and measurements. For Public listed companies

it was found that many of research focused on the consequences of IC disclosure in capital

markets and relation between human capital disclosure and value creation ( [1] [3] [14] [9]

[21]).



Table 3: Organisational focus

Total %

A1. Public listed

65 17.46%

A2. Private - SMEs

20 5.72%

A3. Public sector

99 26.62%

A4. General/other

188 50.2%

Total 372 100%

Location

Table 4 illustrates the country focus or the geographical location of the work undertaken. As

highlighted in the table for the selected journals the most active regions were: continental

Europe with 121 (32.5%) papers, followed by Asia with 63 (16.9%) and North America with

72 (17%). The North America (Canada and USA), as a research site, and its authors have

been relatively silent with only 47 (12.6%) papers. Not surprisingly, Continental Europe is in

the forefront of IC because, since the 1990s, European authors, especially Scandinavian

countries, have continuously published IC articles and books [5]. Continental European

articles mainly focus on the European nations, indicating the strong tradition of IC research in

Europe.

Table 4 Location

Total %

B1. North America

47 12.6%

B2. Asia

63 16.9%

B4. Continental Europe

121 32.5%

B5. Other

141 38%

Total 372 100%

Focus of IC literature

Table 5 represents the focus of the IC literature. The most popular focus of IC is Performance

measurement which has 89 papers. We also observe how more than two thirds of the

published articles use a “management control/strategy” (C3). Little has been published about

accountability, governance (C2) and auditing (C1). The extent of publications in Performance

measurement, as the most researched area of interest, is highlighted in Table 5, representing

89 articles covering a wide range of management-related subjects. For instance, there were

articles on the Balanced Scorecards [13] and its use for managing IC.



Table 5 Focus of IC literature

Total %

C1. Auditing

1 0.2%

C2. Accountability and

governance

58 15.5%

C3. Management

control/strategy

72 19.5%

C4. Performance

measurement

89 23.9%

C5. Other (including general)

152 40.9%

Total 372 100%

Research methods

Next, Table 6 considers the research methods used within the selected articles depicting the

spread used to study IC. The Table shows that Survey/questionnaire/other empirical is the

most commonly used, followed by Case/field study/interviews. There are fewer articles on

Theoretical: literature review/empirical that link theory with empirics.

Table 6 Research methods.

Total %

D1. Case/field

study/interviews

97 26%

D2.

Survey/questionnaire/other

empirical

238 64%

D3. Theoretical: literature

review/empirical

37 10%

Total 372 100%

CONCLUSION –THE FUTURE OF INTELLECTUAL CAPITAL

In conclusion we find that over twenty years, the study of intellectual capital has made

undeniable advances and become more mature. The area is today much more recognized not

only by academics from different disciplinary fields, but also by other important societal

stakeholders (professionals, policymakers, managers, etc.)

The future research directions are to challenge the status quo, and employ innovative

methodologies, experiment with the novel. In the future more critical field studies which will

provide empirical studies of IC in action and help develop broader theoretical research.



The conclusion of this article should be considered after taking into account the following

limitations. First, the selection of journals was restricted to two. Results could vary if more

journals were scrutinised and if other forms of scholarly activities were included only

(articles). Second, although the coding process was performed systematically with utmost

care to allow consistency, there could be errors of omission and coding could have also been

affected by coder bias.

REFERENCES

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[3] Bozzolan, S., O’Regan, P., & Ricceri, F. (2006). Intellectual capital disclosure (ICD): a

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[4] Broadbent, J., & Guthrie, J. (2008). Public sector to public services: 20 years of

“contextual” accounting research. Accounting, Auditing & Accountability Journal, 21(2),

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[5] Bukh, P. N., & Johanson, U. (2003). Research and knowledge interaction: guidelines for

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[6] Catasús, B. and Gröjer, J.-E. (2006), “Indicators: on visualizing, classifying and

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[8] Dumay, J., & Guthrie, J. (2007). Disturbance and implementation of IC practice: a public

sector organisation perspective. Journal of Human Resource Costing and Accounting, 11(2),

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[9] Dumay, J., & Tull, J. (2007). Intellectual capital disclosure and price sensitive Australian

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Management Review, 13(4), 531–548.

[11] Edvinsson, L. (1997), “Developing intellectual capital at Skandia”, Long Range

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Establish Your Company’s Real Value by Measuring its Hidden Brainpower, Judy Piatkus

Ltd, London

[13] Flamholtz, E. G. (2003). Putting balance and validity into the balanced scorecard.

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Projections: A Decade of Intellectual Capital Accounting Research”, British Accounting

Review.

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human capital accounting: a tribute to Jan-Erik Grojer. Journal of Human Resource Costing

& Accounting, 13(2), 125–142.



[17] Guthrie, J., & Parker, L. (2006). Editorial: the coming out of accounting research

specialisms. Accounting, Auditing & Accountability Journal, 19(1), 5–16.

[18]Johanson, U., Mårtensson, M., & Skoog, M. (2001). Measuring to understand intangible

performance drivers. European Accounting Review, 10(3), 407–437.

[19] Marco Giuliani Maria Serena Chiucchi Stefano Marasca , (2016),"A history of

intellectual capital measurements: from production to consumption", Journal of Intellectual

Capital, Vol. 17 Iss 3 pp. 590- 606

[20] Mouritsen, J., Larsen, H. T., & Bukh, P. N. (2005). Dealing with the knowledge

economy: intellectual capital versus balanced scorecard. Journal of Intellectual Capital, 6(1),

8–27.

[21] Murthy, V., & Abeysekera, I. (2007). Human capital value creation practices of software

and service exporter firms in India. Journal of Human Resource Costing & Accounting,

11(2), 84–103.

[22] Petty, R., & Guthrie, J. (2000). Intellectual capital literature review: measurement,

reporting and management. Journal of Intellectual Capital, 1(2), 155–176.

[23] Stewart, T. A. (1997). Intellectual capital: The new wealth of organisations. London:

Doubleday - Currency.

[24] Sveiby, K.-E. (2001). A knowledge-based theory of the firm to guide in strategy

formulation. Journal of Intellectual Capital, 2(4), 344–358.



EFFECT OF FINANCIAL MARKET INTEGRATION ON FOREIGN

PORTFOLIO INVESTMENT DIVERSIFICATION IN DEVELOPING

STOCK MARKETS

Suva, M. Mark

Jomo Kenyatta University of


RWANDA

Jaya Shukla



RWANDA

Marcel Ndengo



RWANDA

ABSTRACT

The purpose of this study was to analyze the effect of financial market development level on

foreign portfolio investment diversification in developing stock markets. The study sought to

affirm or reject the alternative hypotheses that financial market integration level has a

negative effect on international portfolio investment diversification. From a sampling frame

of 43 developing stock markets, the study constituted a sample of 20 markets through non-

probability multi-stage procedures. Using a data capture sheet, equity time series data was

collected and summarized into Roy’s Safety-First Ratio (RSFR) excess returns on a

benchmark of FTSE 100. Data analysis techniques involved were simple pairwise correlation

and Johansen cointegration to respectively measure short run and long run integration levels.

The study found financial market integration partly critical to international portfolio

investment diversification.

Keywords: Integration, Diversification, Developing markets.

INTRODUCTION

Analyzing stock market dependencies in frontier and emerging markets is critical to

investment diversification, more so with regard to financial downturns. This importance is

attached to the fact that in highly comovement markets, shock transmission from a market

can have significant effects on others, from different proximity and size dimensions. Diverse

historical evidence affirms this: - The 2007/8 sub-prime mortgage crisis caused a 53% dip in

developing markets composite index performance, a 20-year low, against a 19% fall in the

All-Country World Index over the same time. This dip was echoed by markets in different

regions. While Pakistan’s Karachi stock market index gained over 10,000 basis points (or

100%) in the 3rd

Quarter of 2008 (Crisis date was July 17, 2008), the rest of the markets lost-

Egypt (36%), Hungary and Russia (34%), Argentina (32%), India (24%); South Africa

(22%), MSCI (2016).

A similar situation occurred in 1997 when the Thai Baht was devalued, resulting in a

currency crisis. The turmoil spread to East Asia and Russia (which defaulted in 1998) and

subsequently to Brazil. This was named the Asian flu (Forbes & Ringobon, 2002). Other

relevant spillovers across markets were the Debt crises in 1982, the Russian Cold in August

1998 (including the LTCM crisis), the Brazilian Sneeze in January of 1999, the NASDAQ

Rash in April of 2000 and the European debt crisis of 2007/8 (2009, Krugman et al., 2013).

In October 1987, the Hong Kong market cratered and the crash spread west to Europe,

hitting the United States after other markets had already declined by a significant margin. The

Dow Jones Industrial Average (DJIA) for example, dropped 508 points to 1738.74 ( a



22.61% dip), and the crash quickly affected major stock markets around the globe

(Zwaniecki, 2007).

Understanding the dynamics of volatility or shock transmission is hence central to financial

research and hence this study. Although stock market shock transmission is associated with

different preconditions, empirical literature (for instance Beine and Candleon 2006; Eun

&Shim, 1989; Nathaniel et al., 2008) delineates a tripod of factors: Industrialization

(economic development) differences, the degree of financial market synchronization

(financial market integration) and the filtration of material information to the markets under

study (financial market contagion).

From empirical literature on stock market linkages and investment diversification, 2 classes

of studies emerge. The first class consists of Crisis contingent studies-those that investigate

diversification possibilities across a crisis breakpoint date (for example Esin, 2004, Murshid,

2004, Nathaniel et al., 2008, Forbes & Ringobon, 2002; Connolly & Wang, 2003). The

second is the non-crisis-contingent studies, which simply investigate stock market

comovements over an undivided time horizon (studies like: Corhay & Urbain, 1993, Erb et

al., 1994, Roll, 1992, King et al., 1994; Beine & Candleon, 2006).

The grey area of the foregoing studies is that none of them used a benchmark portfolio. At the

core sound financial investment decision making is benchmarking, an analyst must consider

the investment’s suitability (to investor objectives, investment characteristics and

benchmarks), communicating them in plain language (Eaton, 2014) and failure to do this is a

violation of Global Investment Professional standard III (C). The researches lack both a

market benchmark and a measure of excess risk. Consequently, to advise investors on risk

diversification based on the findings of the foregoing studies is professionally imprudent, and

may lead to sub-optimal portfolio construction. In order to address the gap, this study

incorporates the FTSE 100 benchmark to the workings of excess returns and Roy’s Safety-

First Ratio (RSFR) for measurement excess risk based on the benchmark.

LITERATURE REVIEW

Esin (2004) examined the effect of economic integration among Turkish and European stock

exchanges, seeking to establish the suitability of international portfolio diversification. Using

correlation and cointegration tests on a sample of fifteen EU member-countries and Turkey

on continental market index series over the 1990-2003 sample period, the author found the

series to be integrated of the same order and hence it was possible to conduct cointegration

tests on them. The markets’ correlations were more synchronized during the post-Euro sub-

period than the time period before. Johansen cointegration test yielded results to the effect

that countries in the same economic bloc had no pair-wise cointegration with regard to

customs union but there was intra-country long-term market relationship.

An earlier study on stock mart comovement was conducted by Christofi & Christofi (1983).

On a sample of common stock monthly market price averages of 1959 to 1978, they

examined fourteen industrial countries for annual and biennial correlation coefficients of the

US with each of the countries. The study used Box-Jenkins tests and non-parametric tests for

annual correlations, then examined the coefficients by dividing the twenty years into two sub-

periods, as fixed exchange rate environment and flexible exchange rate environments. The

results revealed that the inter-country correlation coefficients remained the same over the

sub-period years examined. Through Principal components analysis for the same period and



two equal sub-periods Christofi & Christofi’s research concluded that the national stock

market indices of the 14 sample countries were interrelated through a common factor whose

effect appeared to be consistent over time. It was therefore not possible to benefit from

international investment diversification.

Mathur and Subrahmanyam (1990), studied the Nordic and US market for index

interdependencies. They analyzed the index time series via correlations and Vector

Autoregression (VAR). While the correlations yielded the results that there were high

interdependencies among countries which had high economic interdependency, the VAR

analysis results indicated that the US market was only influential on Denmark and not any

other market hence each market was responsible for own its behaviour.

Roll (1992) examined the equity prices of 24 countries over the 1988-1991 sample period.

The research involved correlation analysis computed from daily dollar-denominated returns.

The results gave correlation levels of below 0.5 (low) for most (276) of the 326 coefficients

obtained. Roll also calculated correlations from the industry perspective and found them to be

different (generally higher) from those computed using raw stock price indices. One

conclusion of the study was that countries with similar industrial structures had highly

correlated markets yet the importance of regional characteristics should not be overlooked.

The study also concluded that stock indices in different countries generally exhibited

disparate behaviour, principally due to differences in index construction procedures, industry

composition of individual nations and the effect of exchange rates.

In a study of weekly stock price indices from France, Germany, Italy, Netherlands and the

UK for the period March 1975 to September 1991, Corhay & Urbain (1993) used

cointegration technique. Faulting the use of correlation on the grounds that it may harbour

some long run components due to the trended characteristic of its constituent data, they opted

to use common stochastic trends when the series were stationary, in order to examine whether

stock prices of two or more countries moved together. The authors concluded that

cointegration analysis could be used for finding the links between stock markets and the

results were the same for all the other European stock markets.

Erb et al. (1994) used correlation analysis to determine whether the G-7 nations had market

dependencies. They found that correlations among the G-7 countries were affected by the

business cycle, whereby the correlation was high during recession and low during recovery.

They further noted that these correlations were not symmetric in up and down markets. The

study concluded that integration initiative was not significantly responsible for market

coupling or comovement trending.

The foregoing empirical literature can be summarized to conclude that the different studies

conducted did not have generalizable findings on the effect of financial market integration

and investment diversification. Besides, the studies used indexes at level autoregressive or

differenced form but no benchmark was applied, rendering their application infeasible to

decision making on active returns. The market development contexts are also disparate, hence

the necessity of a research to address these gaps.

METHODOLOGY

Population

This study targeted all developing markets, both emerging and frontier markets as

documented in different sources of the sampling frame.



Sampling frame

The sampling frame at the time of this study was the MSCI database of developing markets.

According to MSCI (2016), the markets were 43 (including 23 emerging and 20 frontier).

The sampling frame is justified by the fact that MSCI has not only summarized the clusters

but has gone ahead and prepared indexes, stratified by different regions: - EMEA, Asia-

pacific, Europe; Latin America (Emerging markets) and a global frontier markets index,

while other indexes disregard these frontier markets on the claim of small size and

illiquidity. Besides, MSCI uses a common currency-the US dollar and index returns other

than the indexes themselves, contrary to the rest. Table 3.1 shows the sampling plan, in which

the countries in brackets contribute the main regional index constituents).

Table 3.1: Cluster samples

Stratum Size Main Countries

Frontier

23 (Kuwait, Argentina, Nigeria, Pakistan, Morocco), Bahrain,

Bangladesh, Bulgaria, Croatia, Estonia, Jordan, Kenya,

Lebanon, Luthania, Kazakhstan, Mauritius, Oman, ,

Romania, Serbia, Sri-Lanka, Tunisia, Vietnam, Slovenia.

Emerging 20 (Brazil, Chile, China, Colombia, Czech Republic), Egypt,

(Hungary, India), Indonesia, (South Korea, Malaysia,

Mexico, Peru,) Philippines, (Poland, Russia, South Africa,

Taiwan), Thailand; Turkey.

Source: MSCI Developing Markets Databases by Region (2016)

Sampling and Sampling Techniques

Out of the sampling frame of 43 countries, a total of 20 were selected in a multi-stage

sampling procedure. The 43 markets were clustered as either “Frontier” or “Emerging”.

From the countries that fit the definition of either frontier or emerging, the index constituents

were selected judgmentally according to the rules of constructing the Global Investable

Market Index (GIMI) methodology. From the MSCI (2016) database, the GIMI methodology

classifies index constituents on the basis of different parameters. These can be summarized as

in Table 3.2.

Table 3.2 Index constituents’ selection benchmarks

CLASS/MARKET Frontier markets Emerging Markets

Equity Universe Minimum

Size Requirement (UMSR)

U$ 120million U$ 150 million

Equity Universe free float-

adjusted market capitalization

0.25 of UMSR 0.5 of UMSR

Minimum length of trading ≥ 3 months before implementation date, except IPOs with

company and float Market Capitalization ≥1.8x of the Interim

Standard Index Cutoffs post sizable offering

Global minimum foreign

inclusion factor (FIF)

Larger FM: ≥ 0.15; If < 0.15, full Market capitalization

≥Interim Size-Segment cutoff; float Market Capitalization

must be ≥ 1.8x ½ UMSR.

Maximum stock price U$ 10,000

Minimum liquidity

requirement

Less: GIMI attached More: GIMI attached

Minimum foreign room

requirement

≥ 15%; if ≤25%, included with a 0.5 FIF adjustment

Source: MSCI (2016) GIMI parameters



Guided by the criteria in Table 3.2, the research from Table 3.3 judgmentally selected the 20

countries with the GIMI-compliant corporations making up the developing market indexes

(Frontier and emerging), and with the greatest contribution to the composite index market

capitalization. These market host countries were: Frontier-5 (Kuwait, Argentina, Nigeria,

Pakistan, Morocco, and emerging- 15 (Poland, Russia, South Africa, Taiwan, Hungary, India,

South Korea, Malaysia, Mexico, Peru, Brazil, Chile, China, Colombia, Czech Republic.

These countries (in Table 3.3) are the domiciles of the GIMI-compliant corporations making

up the developing market indexes.

Table 3.3 Market sampling procedure

Emerging Market constituents and (main countries

represented, Name of Stock market)

Frontier market constituents

and (main countries

represented)

Africa 92 (1): South Africa (Johannesburg)

121 (5): Kuwait(Kuwait-

KWSEIDX),

Argentina(Merval), Nigeria

(Nigeria), Pakistan (KSE 100);

Egypt (CASE 30).

Europe 171 (4): Russia (RTS index), Poland

(WIG), Hungary (BUX); Czech Republic

(PX 50).

Latin America 119(5): Brazil (Sao Paulo Bovespa),

Mexico(IPC All-Share), Chile (Santiago),

Colombia (Bogota); Peru (Lima)

Asia-Pacific 554 (5): China (Shanghai Composite),

Korea (Kospi), Taiwan (Taiex Weigted),

India (S&P BSE Sensex); Malaysia (Kuala

Lumpur).

All from 20 countries

Data Collection and processing

Using 17th

July 2007 as the sub-prime mortgage crisis breakpoint date, the research used

historical data on two 50-day sub-periods: -the pre-crisis and crisis periods. The secondary

data was obtained from Wall Street Journal via its online market database.

The analysis of the data was based on index returns instead of actual prices for two reasons: -

First, return is a complete and scale-free summary of the investment opportunity. Second,

returns are easier to handle than price series because the former have more attractive

statistical properties (Campbell, Lo, & MacKinlay, 1997). Continuously compounded returns

enjoy advantages over simple net returns. In a multi-period, setup, for example, the

continuously compounded return is simply the sum of continuously compounded one-period

returns involved. The statistical properties of log returns are also more pliable (Tsay, 2005,

Poon and Taylor, 1992; Nikkinen et al., 2008). Allowing for a passive investment

management strategy, let the index of an inter-market free float- adjusted market cap-

weighted portfolio at time = ( −1, ), be and the periodic returns be R . Following this,

the periodic absolute and log returns on the portfolio index will respectively be:

1)1( /)( tttt PPPR 3.1

Hence,

3.2

Equations (3.1) and (3.2) were the inputs of the data to be used on the time series data re-

organization.



Data summary involved computation of excess returns per unit of risk, using Roy’s Safety

First (RSF) ratio on the FTSE 100 index benchmark. Roy’s Safety-First Ratio is in the

equation (3.3).

p

Bp RRSR

3.3

Where r

Bp RR , and p are respectively the expected returns on the portfolio(to be) held, the

expected return of a benchmark portfolio (FTSE 100 index in this study) and the standard

deviation of the returns of the portfolio invested in.

Market integration Analysis

Market integration level was analyzed in two time dimensions. For the short run, the analysis

used was simple correlation of the market pairs while for the long run market integration was

measured using Johansen co integration tests.

RESULTS

Short run analysis of financial market integration

This section analyzed excess stock market index returns, benchmarked on Financial Times

Stock Exchange (FTSE) 100 world indexes. The correlation coefficients (short run dynamics)

and their significance are presented in Table 4.1.

Table 4.1 Benchmark return correlations

ARG BRA

ZIL

CHI

LE

CHI

NA

CZE

CH

EGX HUNG INDI

A

JOHA

NN

MAL

AY

MEX RUSS PAKI

ST

POL SKOR TAI

ARG 1.00

BRAZIL 0.56 1.00

CHILE 0.46 0.62 1.00

CHINA 0.34 0.42 0.19 1.00

CZECH 0.57 0.65 0.48 0.31 1.00

EGYPT 0.67 0.69 0.58 0.25 0.66 1.00

HUNGAR 0.54 0.65 0.62 0.28 0.74 0.53 1.00

INDIA 0.47 0.62 0.51 0.53 0.64 0.66 0.60 1.00

JOHANN 0.20 0.12 0.16 0.14 0.18 0.14 0.18 0.18 1.00

MALAYS 0.54 0.71 0.66 0.34 0.73 0.65 0.74 0.79 0.27 1.00

MEXICO 0.62 0.69 0.60 0.24 0.73 0.61 0.67 0.55 0.25 0.71 1.00

RUSSIA 0.30 0.46 0.21 0.17 0.55 0.42 0.50 0.41 0.14 0.48 0.27 1.00

PAKIST -0.22 -0.16

-

0.19

-

0.14

-

0.29 -0.28 -0.34 -0.29 -0.05 -0.21 -0.10 -0.39 1.00

POLAND 0.09 0.27 0.17 0.26

-

0.05 0.00 0.00 -0.03 0.01 0.05 -0.15 0.30 -0.12 1.00

SKOREA 0.66 0.81 0.66 0.50 0.81 0.67 0.76 0.65 0.22 0.74 0.67 0.54 -0.34 0.30 1.00

TAIWAN 0.56 0.78 0.70 0.47 0.68 0.69 0.64 0.61 0.20 0.71 0.61 0.58 -0.21 0.34 0.80 1.00

In Yellow Fill:significant correlations

Bold only: insignificant negative or zero correlations.

Not filled; not bold insignificant positive

correlations

From Table 4.1, Pakistan stock returns were negatively correlated with all the other markets.

These correlations were significant, except for South Korea. This means that there was

benefit of international investment diversification benefit for portfolio pairs involving

Pakistan. Investors should however be cautious in incorporating South Korea. Poland had 4

significant negative correlations (with Czech Republic, India, Malaysia and Pakistan), no



correlation with 2 markets (Hungary and Egypt) and significant positive correlations with the

rest of the markets. The other market combinations had positive correlations of benchmark

returns, implying no diversification benefit.

Long run Integration analysis

Following the finding that investment diversification was only beneficial between Poland and

Czech Republic, India; Malaysia and between Pakistan and all other markets in the short run

investment period, this study further sought to find out which market pairs were (are)

integrated in the long run for analysis of investment diversification gains for an extended

investment horizon. This was the essence of cointegration testing. Table 4.2 presents the

results.

Table 4.2 Pairwise cointegration results

ARG BRAZIL

CHILE

CHINA

CZECH

EGX

HUNG INDIA

JOHANN

MALAY

MEX RUSS PAKIST

POL SKOR TAI

ARG 1 NO NO NO NO NO NO NO NO NO NO NO NO NO NO NO

BRAZIL 0.56 1 NO NO NO X NO NO NO NO NO NO X NO NO NO

CHILE 0.46 0.62 1 NO NO NO NO NO NO NO NO NO X NO NO NO

CHINA 0.34 0.42 0.19 1 NO NO NO NO NO NO NO NO X NO NO NO

CZECH 0.57 0.65 0.48 0.31 1 NO X NO NO NO NO X NO NO NO NO

EGYPT 0.67 0.69 0.58 0.25 0.66 1 X NO NO NO NO X X NO NO NO

HUNGAR 0.54 0.65 0.62 0.28 0.74 0.53 1 X X X NO X X NO NO NO

INDIA 0.47 0.62 0.51 0.53 0.64 0.66 0.6 1 X X NO X NO NO NO NO

JOHANN 0.2 0.12 0.16 0.14 0.18 0.14 0.18 0.18 1 X NO X X NO NO NO

MALAYS 0.54 0.71 0.66 0.34 0.73 0.65 0.74 0.79 0.27 1 X X NO NO NO X

MEXICO 0.62 0.69 0.6 0.24 0.73 0.61 0.67 0.55 0.25 0.71 1 NO NO X NO NO

RUSSIA 0.3 0.46 0.21 0.17 0.55 0.42 0.5 0.41 0.14 0.48 0.27 1 X X NO X

PAKIST -0.22 -0.16

-

0.19

-

0.14

-

0.29

-

0.28 -0.34 -

0.29 -0.05 -0.21 -0.1 -0.39 1 NO NO NO

POLAND 0.09 0.27 0.17 0.26 -

0.05 0 0

-

0.03 0.01 0.05 -0.15 0.3

-

0.12 1 NO NO

SKOREA 0.66 0.81 0.66 0.5 0.81 0.67 0.76 0.65 0.22 0.74 0.67 0.54 -

0.34 0.3 1 NO

TAIWAN 0.56 0.78 0.7 0.47 0.68 0.69 0.64 0.61 0.2 0.71 0.61 0.58 -

0.21 0.34 0.8 1

In Yellow Fill: significant correlations

Bold only: insignificant negative or zero correlations.

Not filled; not bold insignificant positive

correlations

The findings in this table present the long run investment diversification opportunities

depending on the market integration levels. Of the 120 market pairs tested for integration,

only 25 are integrated in the long run. In the rest of the pairs, an investor can try out

diversification on a case-wise basis, though the results are not guaranteed. Notably, All

markets had short term investment diversification benefit (with Pakistan) though the

diversification gain vanishes into time (in the short run, both market pairs have significant

negative correlation of benchmark returns and in the long run, the market pairs are co-

movement). Table 4.2 shows that only South Korea-Pakistan portfolio investment

diversification is beneficial across time (since initial returns are significantly negative and the

markets are not co integrated).Moreover, Argentina and South Korea are not co integrated

with each other or any other market. The two portfolios can thus be adapted to any foreign

investment portfolio as a hedge against investment risk. Also (feebly) feasible for short run

and long run diversification are portfolio combinations involving Poland (with India, Pakistan

and Czech republic) and Pakistan (with Malaysia, India, Mexico and Czech republic), since



these markets have (insignificant) negative correlations of benchmark returns and are all not

I(1).

CONCLUSION

Both in the short run and long run investment horizons, only two market sets are

disintegrated: Poland and Egypt; Pakistan with any of Taiwan, South Korea, Poland,

Argentina, Czech Republic, India, Malaysia; Mexico. For the rest of stock market pairs, there

investment diversification would be infeasible.

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Law.USINFO, 1.



FACTORS AFFECTING SHARE PRICE OF CEMENT INDUSTRY:

“A STUDY ON LISTED CEMENT COMPANIES OF DSE”

Md.Shohidul Islam, Murshedul Arafin & Fatema Tuz Zohora

Lecturer Department of Business Administration, City University

BANGLADESH

Corresponding Author Email: [email protected]

ABSTRACT

This report is about the Factors affecting the share price of the cement industry: A study on the

listed cement companies of DSE.‟ The objective of this study is to analyze the factors influence

in determining the share price of the listed cement companies in DSE. The study analyzes the

share price movement of the factor for a specific time period. The factors are mainly categorized

in three broad categories such as: dividend, company, country. Therefore, the factors included:

Dividend Announcement Date & Payout Amount, Disclosure of News, and Sharp Movement of

Market Index. After thorough analysis the study reveals that the most influential factors

contributing to the price movement of the listed cement companies are sharp movement of

market index as well as the disclosure of news whereas dividend did not affect that much

surprisingly. It was also found that the theoretical perspectives regarding the stock market are

often surpassed by different stock market volatility variables due to the inefficiency of the

existing capital market. Recommendations like decreasing the news circulation time, proper

monitoring system, awareness were made lastly to minimize the inefficiency and to attract more

educated investors to benefit the market in the long term.

Keywords: Share Price, Cement Industry, DSE, Factors, Dividend.

INTRODUCTION

Stock exchange is an important part of financial mechanism in Bangladesh. It works as a

supplement of fund raising through shares to spread the fund to deficit units of economy. Hence

it is undoubtedly a vital institute for economy of Bangladesh. The main objective of stock

exchange is to create a win-win situation for both investor and issuer through trading of stocks

and debt financing. With the supervision of government, investors gains confidence to invest in

share market. But only supervision is not enough to ensure financial gain for the investor. Other

particular analyses are also important to make investment decisions. This report focuses on some

crucial factors that have high impact on share prices. Based on historical data, the analyses were

to conclude the dependability of share price on the factors. Factors assumed to cause change in

share price are the dividend announcement news, other news regarding change in organization

structures (merger or acquisition), change DSE general index.

Objectives The main objective of the study are, To study and analyze movement of share price after the

Dividend Announcement Date & Payout Amount, To observe share price changes after

disclosure of important company based News circulated by DSE, To study the change in share

price with the sharp Movement of Market Index (DGEN).



Scope There are 5 cement companies enlisted in Dhaka Stock Exchange. To conduct the study, data of

all the 7 companies were collected. Daily data available in stock exchange and other secondary

sources were used for definite periods focusing on the study. The 5 cement companies are:

i.Aramit Cement Ltd ii.Confidence Cement Ltd iii.Heidelberg Cement Ltd iv.Lafarge Surma

Cement v.Meghna Cement Ltd .

Limitations Due to the volatility of share market, trends of the factors didn’t show relevance according to

the theory sometimes. Hence making any concrete interpretation was difficult.

An overall macro-economic study could have elevated the accuracy of the study.

Lack of availability of some confidential information about the companies also hindered the

study.

LITERATURE REVIEW

A large number of empirical studies have been conducted about the determinants of stock prices.

Several researchers examined the relationships between stock prices and selected factors which

could be either internal or external. The results show a variety of findings depending on the

scope of the study. Some of those factors could be common for all stock markets. In this section

some of these studies will be reviewed. (Rahman, 2006) found the negative correlation between

the beta and stock return, which is reason for inefficiency of market. The decomposition of stock

price movements is very sensitive to what assumption is made about the presence of permanent

changes in either real dividend growth or excess stock return (Wohar & Mark, 2006). (Hartono,

2004) examined that the positive recent earning information has significant relation with stock

prices when it follows negative dividend information, and vice versa. Dividend change

announcements elicit a greater change in stock price when the nature of the news (good or bad)

goes against the grain of the recent market direction during volatile times (Docking and Koch,

2005). (Glaser and Weber, 2007) found the Stock prices have a significant positive effect on long

term money demand and its omission can lead to serious misspecification in the money demand

function in both short and long term. (Joshep, and Vezos, 2006) assert that Foreign exchange

(FX) rate and interest rate risks are important financial and economic factors affecting the value

of common stocks. The results indicate a significant and negative relation between stock prices

and inflation and output growth negatively and significantly affect stock prices. (Dimitrios

Tsoukalas,2003) Exchange rate, industrial production, money supply, and consumer prices were

used as macroeconomic factors and reveal a strong relationship between stock prices with those

factors. (Bayesid Ali and Tanbir Ahmed, 2010) stated in their study that announcement of

dividend is considered to be a significant variable for stock price movement. Theories of finance

are never concrete. The laws in finance are seldom proven. However, the laws provide the ideas

about the mechanism of stock market (Bergen,2017). It explains the flow of funds around the

economy through stock exchange. The pattern fluctuates, but somehow stabilizes. Such

fluctuations raise confusion among the investors. They fall in dilemma about whether to invest in

stock market or not. They debate about the efficiency of stock market. That means whether the

available public information reflects the share price of a company or not. Rumors and

falsification started to dominate and tempered the peak of price of shares for so many companies.

In 2007, the stock exchange almost outperformed the previous years. In 2010, it gained almost

83% (Saha, 2012). Everything was going so well until the liquidity level hit the ceiling, calling

for a new policy and the implementation of policy disrupted the whole share market, reducing



the share price index sharply within few days in December 2010. Such unexpected price fall

crashed the whole Dhaka stock exchange, causing the investors great financial misery. The

abnormal growth of DSE finally became an eye wash. Such volatility and abnormality is always

sure to cause problem in financial condition of any country. Hence, it is important to study the

factors affecting the price of share more than any other factors existing. There are some factors

causing positive growth in share price and company profitability. For example, any news of

disclosure of dividend indicates that the performance of that particular company is being well in

the industry. So this news causes a temporary increase in share price. There are many other

factors which affect share price both positively and negatively. However, such impact not only

depends on those factors only but also on the macroeconomic condition of country as well.

Methodology

The report is mainly based on the findings and interpretations that came up after consulting the

secondary data and primary data.The secondary research was carried out elaborately to

generalize the idea of Dhaka stock exchange, its previous and current scenario. Though there

were many data regarding the different modes separately, the final sorting of data were made

based on the 5 cement companies.

Findings & Analysis Price movement of stocks in Dhaka Stock Exchange (DSE), more specifically of the listed

companies in the cement sector are affected by a number of factors; among which some key

factors have been taken considering the availability of quantitative data to calculate and show

actual price shift incurred by the below mentioned factors. The factors discussed in this part of

the report can be categorized broadly as company specific, industry specific, country specific,

and global market specific whereas a single factor isn’t strictly limited to fall into one single

category. This categorical aspect of the factors is going to provide insights into the movement of

share price of the listed cement companies from different angles and give a more overall view on

how closely the companies‟ share prices are related with the relevant factors, three factors have

been chosen based on the criterions mentioned above and the factors are as follows: Dividend

Announcement Date & Payout Amount, Disclosure of News, Sharp Movement of Market Index

(DGEN) .

Dividend Announcement Date & Payment Amount

A dividend is a systematic distribution of a portion of a company's earnings, to a segment of its

shareholders and is decided by the board of directors of the company. Dividends can be issued as

cash payments, as shares of stock, or as other property (Investopedia). Dividend are announced

and distributed in both interim and final periods, depending on the company policy.

In Bangladesh, cash payment is the main form of dividend disbursement. Both interim and final

dividend is given by the listed companies of the cement industry. Here, interim dividend is

announced mainly based on half yearly earnings and final dividend is given based on annual

earnings. The cement companies with previous January-December financial year (recently all

cement companies is changing their accounting year to July-June as par new BSEC notification)

announced their final dividend in March-May period while companies with July-June financial

year have announced their final dividend in a period ranging from September-November.

However, in both cases the share price of the companies should have affected positively/

negatively, based on the amount of dividend that has been announced to be distributed.



Impact of Dividend on Cement Companies’ Share Price To measure the impact of disclosure of dividend, a period of 15 trading days, both before and

after the date of dividend declaration has been taken to visualize the direction of share price

movement.

Aramit Cement:

Aramit Dividend: Oct 30, 2016

45

41.8

Pri

ce

40

36

33.1

35

30.2

Sh

are

30

31.4

25

12% cash dividend (total) for Jun 2016 (18 months)

20

5-Oct-16 12-Oct-16 19-Oct-16 26-Oct-16 2-Nov-16 9-Nov-16 16-Nov-16

Pre Dividend Price Post Dividend Price

On May 4, 2015, Aramit announced 10% cash dividend per share (means Tk. 1) for the year

ended at December 31, 2014, a positive price change after the dividend being announced can be

seen. 10% cash dividend is not high considering most of the listed companies in the cement. But

this dividend margin showed that the management has confidence in their company to pull

through and have better financial performance in the future and the investors have reflected their

trust which moved the share price upwards. Within, 4 days of the announcement date the share

price reached to Tk. 26.6, making the capital gain at 24.3%. Then the price moved a bit up &

down but ultimately hit the price of Tk. 26 within the 15 days period.In the new financial year of

July-June ending in 2016, Aramit announced its final dividend to be at 70%, by adding 20%

more to the interim dividend announced previously.

In this case, the price movement doesn’t follow previous post dividend declaration pattern. The

price was rising and falling by a significant amount before the announcement of dividend. Then

the announcement of dividend came when the price was Tk. 31.4 which then slightly rose to Tk.

33.1 three days after the announcement date. The price later fell gradually for other variables of

the stock market but not at the volatile rate that was present before the announcement of

dividend.



Confidence Cement

Confidence Dividend: Nov 1, 2016

135

127.8

125

Pri

ce

115

105

111.4

Sh

are

95 89.7

98.4

85

37.5% cash dividend (total) for Jun 2016 (18 months)

75

9-Oct-16 16-Oct-16 23-Oct-16

30-Oct-

16 6-Nov-16 13-Nov-16 20-Nov-16


On May 4, 2015, Confidence Cement announced 25% cash dividend for the year ended at

December 31, 2014.A change in share price is very much evident before and after the date of

dividend declaration. The price of the share fell by 17.70% till the date of declaration but then

rose by 27.65% to Tk. 88.4 during the 30 days trading period.In the new financial year of July-

June ending in 2016, Confidence announced its final dividend to be at 37.5% for the 18 months

period, by adding 10% more to the interim dividend announced previously. Here, the price

movement is again obvious of a sharp rise after the date of the announcement. The almost flat

line movement before the announcement date took a sharp upward to Tk. 127.8/ share, making

the capital yield almost 30% within one week of the announcement. But then the price fell for

due to share market volatility and parked at Tk. 111.4 at the end of 30 days period-still at a lot

higher price than the starting price of Tk. 89.7.



Heidelberg Cement

Heidelberg Dividend: Mar 1, 2015

540

531.1

520

Pri

ce

500

500.7

Sh

are

480

465.4

460

380% cash dividend for Dec

2014

440

8-Feb-15 15-Feb-15 22-Feb-15 1-Mar-15 8-Mar-15 15-Mar-15 22-Mar-15


On March 1, 2015, Heidelberg Cement announced 380% cash for the year ended at December

21, 2014.

In this case, an interesting reverse effect of dividend announcement is observed. The price rose

to Tk. 531.1 from Tk. 500.7 during the 15 days period before the declaration date, but then took

a downturn to ultimately reach at Tk. 465.4 within 15 post dividend trading days. This trend can

be explained as the investors‟ expectation of greater dividend declaration which fueled the price

rise before that day of announcement but then fell sharply after expectation being not met. Also,

dividend of Tk. 38 means a dividend yield of only 7% at the date of announcement which may

have also been a reason behind price downfall. Heidelberg Cement announced 300% cash for the

next year ended at December 31, 2015; 80% less than the previous year’s declared dividend. The

previous trend of price downfall after the dividend declaration can be observed. This can again

be accounted to investors‟ expectation and comparatively lower dividend yield of only 5% than

that of previous year, along with the company’s symbol of loss of confidence in their own

performance by announcing lower dividend rate. This ultimately led to investors‟ loss of

confidence too and hence the downfall of the price.



Lafarge Surma Cement

Lafarge Dividend: Mar 6, 2016

90

84.8

85

Pri

ce 80

74.7

75

Sh

are

73.5

69.6

70

65

10% cash dividend (total) for Dec

2015

60

11-Feb-16 18-Feb-16 25-Feb-16

3-Mar-

16 10-Mar-1617-Mar-16 24-Mar-16


On March 8, 2015 Lafarge Surma announced a 10% final cash dividend. a real case of

share market volatility can be observed. The price of the share was in a downward trend before

the announcement date. Then the price increased to Tk. 124.6 within 4 days of the declaration,

making the capital yield at almost 13% and decreased to Tk. 110.3 just after 2 days. Then the

price rose again and fell again; ultimately leading to Tk. 114.5 after the 15 days of dividend

declaration. Larfarge announced 10% cash dividend again for the year 2015 on March 6, 2016.

Here, it is seen that the price of Lafarge shares were in a sharp upward then downward pattern

before the dividend announcement. After the date of announcement, the price ultimately

decreased; but the movement of share price became more stable making the capital loss at only

5.31% after 15 days post dividend declaration date. As Lafarge is also changing its accounting

year to July-June, they announced an interim 5% cash dividend for the 12 months ended at

December 31, 2016.

It can be safely assumed that Lafarge’s share price is at more stable state than the previous year’s

announcement period. The price movement here is represented by almost a flat line; the only

significant change being 5% capital gain at Tk. 77.9 only after 4 days of dividend

announcement. The price ultimately fell to the announcement date price later.



Meghna Cement

Meghna Dividend: Apr 30, 2015

125

115.5

115

106.4

105 100.1

Pri

ce

95

Sh

are

85

75

74.8

65

55

15% cash dividend for Dec

2014

7-Apr-15 14-Apr-15 21-Apr-15

28-Apr-

15 5-May-15 12-May-15 19-May-15


For the year ended at December 31, 2014, Meghan Cement announced 15% cash dividend.

it can be perceived that the price of the stock of Meghna had a general decreasing pattern before

the date of the announcement. The decreasing pattern also continued for some days after the

dividend declaration, probably because of the low dividend yield and the time the investors took

to evaluate the newly announced dividend policy and company’s future prospects. Then the

dividend factor kicked in, making a sharp upward trend to a price of Tk. 115.5 from Tk. 74.8

with a capital yield of 54.4% within one week of the announcement date. Lastly, the price

decreased a little to Tk. 106.4, still being a lot higher than the price at the announcement date.

For the 18 months period ended at June, 2016, same % of dividend was declared by Meghna

Cement As the same amount of dividend was given for the 18 months period which was given

for the previous 12 months period, this indicated a fall in the company’s financial performance

and the investor’s didn’t take it positively. The share price decreased after the dividend

announcement date but the percentage decrease was only 4% at the end of the given period.

Factor Evaluation Dividend declaration showed a positive impact on share price movement in most cases; if the

dividend declaration didn’t take the share price upward, it at least stabilized the movement of

share price. Yet, dividend announcement also showed some unexpected downturn for which no

justifiable reason can be found. There are so many variables in the share market that dividend

solely couldn’t affect the price much enough to show the expected theoretical result.

Disclosure of News News, in some cases also known as PSI (Price Sensitive Information), is another factor that

greatly affects the stock prices in DSE. News can be positive, negative or neutral. In case of

cement companies of DSE, positive news are mainly about capacity expansion, acquisition,

merger etc. whereas negative news can be decrease in EPS, hiding information etc. Neutral news

like AGM date, transfer of shares among the sponsors does not have any impact on the share



price at all. For the purpose of logical analysis, one selected price sensitive news for each listed

cement companies have been taken from the latest two years news available at DSE‟s website.

Impact of News on Cement Companies’ Share Price To measure the impact of disclosure of news, a period of 7 trading days, both before and after the

date of news disclosure has been taken to visualize the direction of share price movement.

Aramit Cement

Aramit News: Dec 29, 2016

50

47.4

44.8

Pri

ce 45

40

Sh

are

35

37.2

30 34

25

Pre News Price Post News Price

On December 29, 2016, Aramit Cement informed to comply with BSEC regulations that Unit

2‟s commercial production will initiate from January 01, 2017, having a production capacity of

1,000 M. Tons per day (Dhaka Stock Exchange, 2016).After the news was disbursed, the price of

Aramit Cement’s stock started to rise, showing a forward effect. The price was already in an

upward trend, rising to Tk. 34/ share from Tk. 37.2/ share in 7 days; but started to skyrocket after

the disbursement of news. Within 3 trading days, the price increased by Tk. 10.2, reaching to

47.4 tk/ share and making the capital yield 27.4%. Expanding production capacity means that the

company is growing and is likely to have more profitability in the near future, which constitutes

as the main reason behind this price rise. Later, the price dropped a little and ended at Tk. 44.8

after the end of post 7 days period.



Confidence Cement

Confidence News: Nov 15, 2016

130

127.8

Pri

ce

125

120

115.5

Sh

are

115

112.3 110

110

105


It was on November 15, 2016 that Confidence Cement disclosed the news clarifying their EPS

for the period from July-September, 2015, stating that the company didn’t mention their income

from associate companies in that quarter as the information was not available. That income was

later restated in their Q1 ‟17 quarterly statements (Dhaka Stock Exchange, 2016). As it can be

observed from the graph, the price movement of Confidence was very much volatile before the

announcement of the news, rising from Tk. 112.3/ share to 127.8 and then again falling to 115.5

tk within just 7 days. But after the news, the price movement became a bit steady, following a

downward trend. This was mainly because of the skepticism that was existent in the investors‟

mind regarding this new source of income as it was not previously mentioned. This withholding

of information by the company was not taken lightly by the investors and as a result, the price

fell to Tk. 110 at the end.



Heidelberg Cement

Heidelberg News: Oct 27, 2016

555

551.5

550

Pri

ce

545

Sh

ar

e

544.8 545.8

540

541.9

535

530

Pre News Price

Post News Price

Heidelberg Cement announced on October 27, 2016 that Heidelberg Cement Central Europe East

Holding B.V. is acquiring 99.99% share of Meghna Energy Limited, a private company limited

engaged in generating and supplying electricity as a Small Power Plant in Bangladesh (Dhaka

Stock Exchange, 2016).Heidelberg’s share price was already in a declining trend when this news

was announced. Sometimes it takes some time to affect the price movement even after some

price sensitive event occurs, known as the „lagging effect, which is observed in this case. The

price continued its declining trend the next 3 days after the dissemination of the news, falling to

Tk. 541.9/ share. The effect of this positive news then can be observed through the sudden price

boost, increasing by around 10 tk within the next 4 days.


Lafarge News: Jul 12, 2015

130

125.9

Pri

ce

125

120

122.5

Sh

are

115 118.1

110.7

110

105




The company informed on July 12, 2015, “Lafarge S.A., one of the two sponsor groups of

Lafarge Surma Cement Ltd. (LSC), has merged with Holcim Ltd. to form Lafarge Holcim Ltd.

As a result of the above merger in the Group level, one of the Lafarge Surma’s sponsor groups is

now LafargeHolcim Ltd.” But in Bangladesh, they remained as separate entity for the time being

due to the current corporate structure (Dhaka Stock Exchange, 2016).The sudden change in price

due to this huge merger news is pretty evident from the above line chart. The price was following

a decreasing pattern before the news, falling from Tk. 118.1 to Tk. 100.7 per share during the

previous 7 trading days. But after that, a massive uplift in the movement of price is seen; within

6 days the price increased by around 15 tk with a capital gain of 13.7%. Lastly, the price fell a

little to Tk. 122.5/ share, at the end of 7 post trading days.

Meghna Cement

Meghna News: Nov 6, 2016

110

Pri

ce 105

102.9

101.2

100

Sh

are

95

93.5

90

85


On November 6 of 2016, Meghna Cement notified DSE in compliance to the BSEC regulations

that they have taken a price sensitive decision to import machineries and equipment valued at Tk.

244.79 crore to increase their annual production capacity (Dhaka Stock Exchange, 2016). The

direction of price before the news disclosure was a bit unstable. After the news disclosure, the

downward trend that is observed in price can be expressed as the effect of cost increment

because of this capacity expansion. Though capacity expansion is positive news, in an ideal

scenario this should lead the price downward as it means increased financing cost needed for this

expansion and decreased profitability for the time being. Therefore, what happened here goes

with the theoretical perspective of share price movement, which has made the share price fall by

9.1% in the next 7 trading days after the day of the announcement.

Factor Evaluation The impact of DSE news on share price has been consistent in most of the cases. Where positive

news was disbursed, the price increased and vice versa. But arguments can be made on whether

the price movement occurred when it was supposed to occur like it can be observed in case of

capacity expansion. Demonstration of both theoretical and expectation based movement of stock

price was found and it can be safely inferred that in case of established companies the price trend



was theoretical, but not for the emerging or growing companies.

Sharp Movement of Market Index (DGEN) The Dhaka Stock Exchange General Index or DGEN is a stock market index for the Stock

Exchange of Dhaka. It is mainly an index of the main market capitalizations of the listed

companies in DSE. It started on November 27, 2001 with a base-index of 817.62 points and the

shares were classified as A, B, G and N group of shares but excluded the Z group shares. So all

the calculations made by DGEN where excluding the Z group shares which ultimately led to the

obsolescence of this index. The calculations were done on the basis of price movement of

individual stocks. The faults in the DGEN index first came to notice in November, 2009 when

Grameenphone (GP) was listed on the DSE. After much controversy, on Jan 28 2013, the

regulator BSEC launched a new index, the DSEX, which was developed by the US-based

financial service organization Standard and Poor’s (Stock Market, 2013).

The Boom Banks & other financial institutions of Bangladesh had a lot of idle fund available to them due to

less business opportunities in the global recession period of 2009-10. To minimize this cost and

generate a greater return, theses financial institutions & its officials as well as the general people

took loan and invested in the capital market. This made a huge flow of liquidity in the share

market. The total number of BO (Beneficiary Owner) Account holders on 20th

December, 2010

reached to 3.21 million while the number was 1.25 million in December 2009, making it more

than double over one year (Saha, 2012). Such changes from 2009 to 2010 caused a drastic

change in the DGEN index. The index increased abnormally, breaking all the previous records.

Impact of the Boom Period on Cement Companies’ Share Price To measure the impact of the boom period, the DGEN index data were taken from 4

th July 2010

to 5th

December 2010, the time period in which the index increased significantly. Along with the

index, share price of the players of cement industry were taken of those dates. Data were plotted

in line graphs where the X axis defined the dates on a monthly interval. The Y axis on the right

hand side indicated the values of DGEN Index whereas Y axis on left hand side indicated the

actual values of share price in Taka. The red line denotes the DGEN index and the blue line

denotes the share price in this portion of analysis.



Aramit Cement

Aramit: Boom Period

100

10,000.0

0

80 8,000.00

DG

EN

In

dex

Sh

are

Pri

ce

60 6,000.00

40 4,000.00

20 2,000.00

0 -

4-Jul-10 4-Aug-10 4-Sep-10 4-Oct-10 4-Nov-10 4-Dec-10

Share Price DGEN

From the graph, it can be inferred clearly that the change in share price of Aramit cement

maintained a positive correlation with the changes in DGEN index. That means the price curve

and the index curve almost went line in line during that period. However, the increase in share

price was slightly above the rate of increase of DGEN index during the month of September

2010. But the price started to decrease in mid-October 2010, taking a stable increase in early

November 2010.

Confidence Cement

Confidence: Boom Period

300

10,000.0

0

250

8,000.00

In

dex

Pri

ce 200

6,000.00

150

Sh

are

DG

EN

100

4,000.00

50

2,000.00

0 -


Share Price DGEN



This graph also clearly indicates that the change in share price of Confidence cement maintained

a positive correlation with the changes in DGEN index. However, the increase in share price was

slightly below the rate of increase of DGEN index during the month of July 2010. But the price

started to increase in mid-October 2010, taking a stable increase in late November 2010 and

maintaining an almost equal increasing pattern in price per share along with the increase in

DGEN index

Heidelberg Cement

Heidelberg: Boom Period

450

10,000.0

0

400 9,000.00

350

8,000.00

300

7,000.00

Index

Pri

ce

250

6,000.00

5,000.00

Sh

are

DG

EN

200

4,000.00

150

3,000.00

100

2,000.00

50 1,000.00

0 -


Share Price DGEN

The graphical representation shows that the change in share price of Heidelberg cement also

went almost line in line with the change in DGEN Index. However, the increase in share price

was slightly above the rate of increase of DGEN index at the beginning of the month of October

2010. But the rate of increase in price started to decline at the beginning of November 2010. But

in the end the increasing rate of DGEN index became a bit higher than the price movement of

Heidelberg cements share.




Lafarge: Boom Period

60

10,000.0

0

50

8,000.00

Pri

ce 40

6,000.00

Index

30

Sh

are

DG

EN

20

4,000.00

10

2,000.00

0 -


Share Price DGEN

The change in share price of Lafarge cement also maintained a somewhat positive correlation

with the changes in DGEN index. That means with the increase in DGEN index, the price per

share of Confidence Cement also increased. The increasing rate in share price was almost same

with the rate of increase of DGEN index till the month of July 2010. But the price started to

increase sharply in early September 2010, but then again started to decline continuously even

with the increase in DGEN index.

Meghna Cement

Meghna: Boom Period

500

10,000.0

0

400 8,000.00

Index

Pri

ce

300 6,000.00

Sh

are

200 4,000.00

DG

E

N

100 2,000.00

0 -


Share Price DGEN



This graph also indicates that the change in share price of Meghna cement maintained a

positive trend with the changes in DGEN index during most of the period. . The increasing

rate in share price was almost same with the rate of increase of DGEN index till mid-

September 2010. But the price started to increase at the end of September 2010, and then

from late November 2010 maintained almost equal increasing rate in price per share along

with the increase in DGEN index.

Overall Evaluation

From an overall point of view, it is apparent that theoretical perspectives regarding share

market do not hold much value in real life scenario, at least in Bangladeshi stock market. All

the four factors discussed and analyzed here should have affected the stock price movement

unambiguously; yet inconsistency in various cases has been found in the evaluation.

Dividend is one of the strongest factors that should single-handedly control the share price

movement at the period it was announced. The capital gain at the period of dividend

declaration should have reflected the dividend amount; which cannot be established from the

analysis. The dividend factor also didn’t show any lagging effect, which should have been

present in an ideal scenario. Dividend effect here is completely company and investors

expectation based.

News is one of the strongest factors that affected the price direction of shares in the report.

Disclosure of news showed results from both types of perspectives; investors‟ enthusiasm

moved the price and the theoretical „lagging‟ effect was also found in the analysis.

The sharp movement of DGEN index is the only factor that showed almost line on line

movement along with the share price of then listed cement companies. During the Boom

period, all of the companies‟ share experienced price inflation and showed strong positive

correlation with the index pattern. Same scenario is evident in case of the Bust/ Crash period.

The unusual exchange rate fluctuation period also showed an impact on price, but that impact

should have shown a „lagging‟ effect. The cost of importing raw materials couldnt have

increased and affected the profitability of the companies almost instantly because of

inventories and companies‟ risk safety mechanism. But the price movement failed to show

such effect.

Therefore, overall it can be deduced that the disclosure of news and sharp movement of the

index within a short time period have the dominant impact on the share price of the listed

cement companies. The other two factors do not have that much strong relationship with

price movement; rather can easily be diminished by other volatility factors of the stock

market.

RECOMMENDATIONS

To identify the limitations of the factors discussed and the flawed characteristics of the price

sensitivity of the listed cement companies‟ shares, the overall evaluation of the analysis has

to be considered. In the cases where the factors failed to demonstrate consistency in terms of

price movement; it was due to the inefficiency and volatility of the market, where price is no

longer affected by these determinants. Some determinants are so much positive to the

investors that the theoretical perspective or even the financial performance of the companies



becomes irrelevant.

To minimize the effect of such inefficiency in terms of share price movement and the stock

market, the following recommendations are provided:

1. As DSE news is the main credible source of news for the stock market investors, the

time between the management’s taking of the decision and the news being published

in DSE‟s website should be reduced as much as possible.

2. A specific guideline regarding the accounting year change to July-June for the cement

companies should have been provided as many companies took this as an opportunity

not to publish their audited annual statement and declare their dividends.

3. Investors have to be made more aware and more educated investors should be made

involved in the capital market of Bangladesh. Without the awareness of investors and

educated investors, majority of the share transactions become prone to rumors instead

of actual news.

4. Proper monitoring system of the transactions, especially after disclosure of news and

dividend should be implemented so that the news and dividend can have the intended

affect after disclosure. Educated investors make decision based on these policies and

without ideal market reaction; they will leave which will make the market more

volatile.

5. The listed companies should be forced to publish their annual statements with proper

financial notes while making their previous years statement available for performance

analysis. Some cement companies (Aramit, Meghna) do not have proper information

available and their share price movement can easily be manipulated.

CONCLUSION

In conclusion, it can be said that the cement companies listed in Dhaka Stock Exchange

(DSE) are not that much different from the other listed companies. The factors that ideally

should affect the price of shares of other listed companies also influenced the price movement

of the cement companies in most cases. But the price movement of the shares in the cement

industry is still highly dependable on investors‟ expectations, rumors and other volatility

factors. This is why, the price of the shares of the listed cement companies went the most

coherently with the previous DGEN index as reflected the overall market condition. But in

can be said that the cement companies are doing better financially, basing on the dividend

they offer. All the listed companies are categorized in Class- A, which is also again a proof of

their success. But due to the in efficiency of the market, the price status of the listed cement

companies isn’t where it is supposed to be.

REFERENCES

Dhaka Stock Exchange. (2016, 12 29). News for: ARAMITCEM. Retrieved 1 3, 2017, from

Dhaka Stock Exchange Ltd.: http://www.dsebd.org/old_news.php

Dhaka Stock Exchange. (2016, 11 15). News for: CONFIDCEM. Retrieved 1 3, 2017, from


Dhaka Stock Exchange. (2016, 10 27). News for: HEIDELBCEM. Retrieved 1 2, 2017, from


Dhaka Stock Exchange. (2016, 10 27). News for: LAFSURCEML. Retrieved 1 4, 2017, from


Dhaka Stock Exchange. (2016, 11 6). News for: MEGHNACEM. Retrieved 1 2, 2017, from


Investopedia. (n.d.). Dividend. Retrieved January 15, 2017, from Investopedia:



http://www.investopedia.com/terms/d/dividend.asp

Saha, S. (2012). Stock market crash of Bangladesh in 2010-11: Reasons & roles of regulators.

Helsinki.

Saha, S. (2012). Stock market crash of Bangladesh in 2010-2011: Reasons and Roles of

Regulators Bangkok: Arcada.

Younus, D. S., & Islam, S. M. (n.d.). An Analysis of the Turmoil in the Stock Market: Issues

and Challenges for Monetary Policy. Dhaka: Bangladesh Bank

Rahman, M., Baten, A., Uddin, B., Zubayer, M..(2006. Fama-French’s CAPM: An empirical

investigation on DSE. Journal of Applied Sciences, 6(10), 2297 2301.

Wohar and Mark, E. 2006, “What drives stock prices? Identifying the determinants of stock

price movements”. Southern Economic Journal.

Hartono, Jogiyanto. 2004, “the Recency Effect of Accounting information,” Gadjah Mada

International Journal of Business, Vol. 6 No.1, p 85-116.

Glaser, M. and M. Weber 2007, Why Inexperienced Investors Do Not Learn: They Do Not

Know Their Past Portfolio Performance, Finance Research Letters, 4(4), 203-216

Docking, Diane S.; Koch, Paul D. 2005, “Sensitivity of Investor Reaction to MarketDirection

and Volatility: Dividend Change Announcements,” Journal ofFinancial Research, 28

(1), 21 -41.

Joseph LN, Vezos P 2006, “The sensitivity of US banks’ stocker turns to interest rate and

exchange rate changes”, Manage, Finance. 32(2): 182-1999

Dimitrios Tsoukalas 2003, “Macroeconomic Factors and Stock Prices in the Emerging

Cypriot Equity Market,” Managerial Finance, 29( 4), 87-92.

Ali ,Mohammad, Bayezid & Ahmed ,Tanbir, 2010, “Effect of Dividend on Stock Price in

Emerging Stock Market: Astudy on the Listed Private Commercial Banks in DSE” .

International journal of Economics and Finance,4,52-64

Stock market. (2013, August 1). Retrieved January 15, 2017, from risingbd.com:

http://www.risingbd.com/english/Good-bye_to_DSE_General_Index/4940

Bergen, J. V. (n.d.). Efficient market hypothesis. Retrieved January 25, 2017, from

investopedia.com: http://www.investopedia.com/articles/basics/04/022004.asp



THE EFFECT OF BOARD SIZE ON FIRM FINANCIAL

PERFORMANCE OF LISTED FIRMS IN NAIROBI SECURITY

EXCHANGE

1Adan Haji Shunu

Masters Student School of Business and Economics

Garissa University college P. o Box 1801- 70100 Garissa

Email:[email protected]

2Dr. Philip Bii

Lecturer School of Business And Economics

Garissa University College P.O Box 1801 -70100 Garissa

Email;[email protected]

3Dr Kennedy M . Ombaba

Lecturer School of Business and Economics

Garissa University College P.O Box 1801 70100 Garissa

ABSTRACT

The study sought to establish the effect of board size on the performance of listed firms in

Nairobi security exchange. It was guided by agency theory, upper enchlon theory which

captured the board’s monitoring role. The study used exploratory research design. The study

employed panel approach for a period covering ten years from 2006-2015. The target

population comprised of all 68 listed firms in Nairobi Securities Exchange. The study used

secondary data which was obtained from annual reports and NSE bulletins. Data was

analyzed using both descriptive and inferential statistics. Specifically, multiple regression

was used to test the hypothesis. The study found a significant positive effect of board size on

firm financial performance.

Keywords: Board size, financial performance, security exchange.

Introduction

Financial performance is used to measure firm's overall financial health over a given period

of time and can also be used to compare similar firms across the same industry or to compare

industries or sectors in aggregation. Rahman and Haniffa (2006) reasoned that financial

performance of a firm can be used to determine its operating performance that means that the

firm’s performance is in quantifiable metrics.

Board size is also viewed as a proxy to measure the diversity of the knowledge pool and the

availability of resources provided by the board from the perspective of resource dependence

theory. Boards in unlisted firms can potentially complement a management team’s

knowledge base (Gabrielsson and Huse, 2005; Minichilli et al., 2009). A larger board is more

likely to have a wider range of skills, knowledge, and expertise which, in turn may contribute

to both its monitoring and service roles (Corbetta and Salvato, 2004). Moreover a large board

may counter the weight of a CEO (Maere et al., 2014).

According to agency theory, the main argument in favor of a larger board of directors is that

the increase in the number of members raises their disciplinary control over the CEO



(Brédart, 2014). Jensen (1993) confirmed that the smaller board size is more correlated with

the quality of monitoring. Lipton and Lorsch (1992) also stated that the board might become

less effective in monitoring management when its size increases. They recommended that

board membership should be between eight and nine persons, and any additional benefits that

can be gained from the increased monitoring by additional membership will offset the costs

linked with slow decision making.

Empirical evidence on the effect of board size on firm performance provided mixed results.

While, Ahmadu et al. (2005), Chan and Li (2008), De Andres et al. (2005) and Mustafa

(2006) found that larger boards are associated with poorer performance, Beiner et al. (2004),

Bhagat and Black (2002) and Limpaphayom & Connelly (2006) found no significant

association between board size and firm performance.

The board of directors is one of the central institutions to ensure firms act in the interest of

their stakeholders and mitigate the agency problem between management and shareholders

(Fama and Jensen, 1983). Therefore, the board plays a significant role in ensuring that the

firms’ financial performance is sound. Therefore, this study will seek to find out the effect of

board size on firm financial performance in the listed firms in Nairobi Security Exchange

(NSE).

METHODOLOGY

This study used exploratory research design. The emphasis of exploratory studies is to study

a situation or problem in order to establish whether causal relationships exist between

variables. This design is suited to this study as it used secondary data on all variables and

relationships between variables was interrogated without making any attempt to influence the

variables.

Panel data was used in this study. Panel data entails studying of a particular subject within

multiple sites, periodically observed over a defined time frame (Gujrati, 2003). In this study

balanced panel data was used in which each cross section unit has same number of

observations.

The target population comprised of all firms listed in Nairobi Securities Exchange (NSE) in

Kenya. The total number of listed firms in Nairobi securities exchange at the end of 2015 is

68 (NSE handbook, 2015). The target population consists of 68 companies for the period

2006- 2015. However, listed firms to be included in the study are those that were trading on

the NSE during the period, and therefore firms that were listed after 2006 and those were

delisted or deregistered during the period of study was excluded from this study.

The panel data was collected from the yearly financial reports of the companies. The annual

reports from the NSE and CMA, and downloads of other journals from the company websites

was also used.

Secondary data was used in this study which was derived from secondary sources including

journals, Nairobi Securities Market reports, Capital Market Authority reports, the specific

company annual reports and their websites.



Data Analysis

The research employed both descriptive statistics and inferential statistics. Descriptive

statistics provided simple summaries about the sample and the observations were made. This

often involves summarizing the central nature of variables, it also comprised the spread or

range of scores, as well as the average difference each score is from the mean. Descriptive

statistics include measures of skewness, and kurtosis to indicate how asymmetric or lopsided,

and how peaked or heavy-tailed, respectively is a distribution of scores. Thus, descriptive

statistics summarize basic characteristics of a distribution such as central tendency and

standard deviations.

Inferential statistics was concerned with making predictions or inferences about the

population from observations and analyses of a sample. It allows generalization beyond the

sample data to a larger population. To address the issue of generalization, Chi-square was

used to tell the probability that the results of the analysis on the sample were a representation

of the population that the sample represented.

RESULTS AND DISCUSSIONS

The sample comprised of firms listed in Nairobi Securities Exchange. Secondary data was

collected for a period of ten years from 2006 to 2015. Twenty-five firms were removed from

the analysis as a result of incomplete data. The final sample comprised of 43 firms making a

total of 430 observations.

Descriptive Statistics

The means and standard deviations of the variables in the study are presented in the table

below.

Mean Std. Deviation N

ROA 1.106250 0.361890 430

Profitability Profitability 0.614836 430

Financial Leverage 0.409281 0.198333 430

Board Size 8.765625 2.314884 2.314884

Inferential Statistics

Research findings showed that board size had correlation coefficients of estimate which was

on β1= -0.005 (p-value = 0.0084) which is less than α = 0.05) implying that we reject the idea

stating that there is no significant effect between board size and firm performance.

CONCLUSION AND RECOMMENDATION

The findings seem to suggest that greater emphasis need to be taken by firms to have larger

board size which is argued and found in this study to have a positive implication on firm

performance. Future research could also explore on board characteristics and firm

performance by using different research method.



REFERENCES

Harris, M. & Raviv, A. (2008).A Theory of Board Control and Size. The Review of Financial

Studies, 21(4), 1797-1832.

Hermalin, B.E., Weisbach, M.S., (2003). Boards of directors as an endogenously determined

institution: A survey of the economic literature. FRBNY Economic Policy

Review 9, 7–26.

Jonas De Maere, Ann Jorissen, & Lorraine M. Uhlaner; (2014) Board Capital and the

Downward Spiral: Antecedents of Bankruptcy in a Sample of Unlisted

Firms.Corporate Governance: An International Review,

Johnson, S. G., Schnatterly, K., & Hill, A. D. (2013). Board composition beyond

independence: Social capital, human capital, and demographics. Journal of

Management, 39: 232–262.

Jonsson, E. I., 2005. The Role Model of the Board: A Preliminary Study of the Roles of

Icelandic Boards, Corporate Governance: An International Review, 13 (5),

710-717.

Kosmas Kosmidis & Antonios Stavropoulos (2014).Corporate failure diagnosis in SMEs; A

longitudinal analysis based on alternative prediction models. International

Journal of Accounting and Information Management. 22 No. 1,



THE CONTRIBUTION OF GEOGRAPHICAL INDICATIONS IN

SUSTAINABLE RURAL DEVELOPMENT (EVIDENCE FROM

NORTHERN ALBANIA)

Roland BARDHI1*

& Ilir KAPAJ2

1Mountain Areas Development Agency (MADA), Tirana, ALBANIA

2Department of Agribusiness, Faculty of Economy&Agribusiness, Agricultural University of Tirana, Tirana

ALBANIA

ABSTRACT

Geographical indications (GIs) are a form of protective labeling used to indicate the origin of

food and agricultural products. The role of protected geographical indicators as a promising

sustainable rural development tool is the basis for this paper. The protection of geographical

indications is a new practice and much research is still required for both sides of the debate.

The focus of this debate is: Can a Geographical Indication (GI) which indicates that a certain

product originates from a certain region with a given quality being attributable to its place of

origin, become a tool to promote socio-economic livelihoods of rural communities? The

research method employed for this study is a qualitative research approach. Two potential GI

products are used to investigate the benefits brought to rural areas through the protection of

GIs. The case studies include the GIs Chestnut and chestnut honey in two geographical

Albanian areas, Tropoja and Reç of M. Madhe areas. Twenty-five in-depth interviews were

conducted in 2016 for this study. The study identifies predominantly indirect links between

GIs and sustainable rural development (SRD), through economic and social benefits brought

to rural areas by the GIs investigated. This finding suggests that GIs are worthwhile for

implementation in Albania as a rural development tool. The initiative for development of GI

products was undertaken by BiodivBalkan Project, implemented in the North Albania, aiming

to link biodiversity with development of quality signs (GIs) in order to support rural

development and poverty reduction in the poorest areas of Albania.

Keywords: Geographical Indications, Agrobiodiversity, Rural development, BiodivBalkan

Project.

INTRODUCTION

This paper is intended to present the contribution given by development of geographical

indications of some unique products, originating from specific geographical areas in

sustainable rural development of these areas.

A geographical indication (GI) is a form of protection highlighted in the Trade Related

Aspects of Intellectual Property Rights (TRIPS) Agreement of the World Trade Organization

(WTO). It protects intangible economic assets such as the quality and reputation of a product

through market differentiation (Vandecandelaere, E., F. Arfini, G. Belletti and A. Marescotti

(eds.) (2010).

It is considered a promising tool at the international level to maintain multi functionality in

rural landscapes and involve local populations in biodiversity management and conservation.

Using the examples of creating GI for “Chestnuts” and “Chestnut Honey”, we discuss how a



GI can be successfully used by local producers and what conditions are needed for it to have

a positive impact on the rural development and its associated biodiversity.

GIs, in a general sense, are signs placed on products that have a clearly established origin and

poses qualities and reputation derived from its place of origin. GI provides a relevant tool to

protect and promote or enhance biodiversity (Larson Guerra, 2004). It is important therefore

not to only consider the biological characteristics of a geographical area, but also the local

knowledge and practices involved (Bérard and Marchenay, 2006) in order to achieve

biodiversity benefits.

It is generally agreed that GIs promote sustainable rural development because they:

• Help producers obtain premium prices for their products whilst guaranteeing safety

and quality to consumers;

• Improve redistribution of the added value to the actors (producers, processors etc)

throughout the production chain;

• Bring added value to the region of origin;

• Increase production, create local jobs and prevent rural exodus;

• Preserve landscapes, traditional knowledge and biodiversity;

Giovannucci et al., (2009) emphasizes that even with originality of a potential GI product, the

benefits will not accrue to the actors without the support of the legal and institutional

frameworks. Other factors that support GIs registration of products include; collective action,

prices and market for the product, specificity and reputation of product, support from other

actors along the value chain, production methods and link of a product characteristics to

history or tradition of the geographical area (Bramley and Biénabe, 2013).

There is much reference in economic and agrofood literature to the contribution of

geographical indications to rural development. This reference is predominantly theoretical,

signifying that there is a need for more empirical evidence demonstrating that geographical

indications promote rural development. Furthermore, there are many forms of geographical

indications each possibly impacting rural development differently (Barham, 2003). There is

far less literature specifically concentrating on the influence of GIs on sustainable rural

development than there is on origin labeled products in general. However from the many

researches done it is generally believed (Babcock & Clemens, 2004; Barham, 2002;

O’Connor and company, 2005; Rangnekar, 2004) that GIs do promote sustainable rural

development.

GIs serve also as a marketing tool that can add economic value to agricultural products by

conveying a cultural identity using the region of origin, acknowledging the value of specific

human skills and natural resources in the production process, and creating a unique identity

for the products (Babcock and Clemens, 2004).

GIs as promoters of rural development

Studies have shown that when the name of a product obtains a protection as a geographical

indication, there is a positive socio-economic impact on local communities. This is because

GIs:

increase production, create local jobs and prevent rural exodus;

help producers to obtain a premium price for their products in exchange for

guarantees offered to consumers on production methods and quality;

allow for a better redistribution of the added value in the production chain;



bring value to the land of origin;

have other indirect positive effects, such as on tourism (O’Connor and Company,

2005).

Chestnut and chestnut honeys in northern area of Albania are two potential GI products.

Chestnut. The chestnut (Castanea sativa Miller.) production in northern Albania (Tropoja and

Reçi regions) is one of the most important economic activities, providing good incomes for

the local population, which is considered as the poorest areas in Albanian. On the other hand

many stories aspects are related with this specie and could be considered as a logo for both

Reçi and Tropoja regions. There are a lot of traditional foods prepared by the chestnuts.

The forest stands are managed traditionally by the local population for timber production,

fruit production, shelter and recreate properties (MADA). Chestnut stands are an important

component of the Balkan Alps, which together with Spruce forests (Piceaexcelsa (Lam)

Link.), Beech forests (Fagussylvatica L.), Oaks and Hornbeam forests (traditionally managed

mostly assilvo-pastoral systems), Mediterranean evergreen shrubs (dominated by

Pomegranate-Punicagranatum L.) as well as alpine grass and dwarf vegetation, where

Blueberry (Vacciniummyrtyllus L.) takes place, but not only; represent a beautiful diversified

landscape, much preferred for the tourists and high potential for the economic development

and poverty eradication.

Biological points of view, all the chestnut stands are natural or naturally regenerated, which

locally isolated, represent, we think, a specific genetic patrimony.

Chestnut honey is one of the most a favorite honey varieties. It is not just unique flavor, not

very sweet and with an almost bitter aftertaste, that stimulates the taste bud that makes it so

special. Chestnut honey is also one of the healthiest honeys. It is rich in, mineral salts and

tannin, with a high proportion of fructose that resists crystallization and a relatively low

acidity, dark in color, ranging from yellowish brown to almost black. Of all the varieties of

honey, he has the most pronounced antimicrobial, antibacterial and antiseptic properties, and

therefore applies not only inside but also outside in the treatment of wounds, ulcers and sore

throat (MARDWA, 2012).

Due to this characteristics chestnut honey is much requested and its price is higher than most

of the other honey varieties. The chestnut honey produced in both regions (Tropoja and Reçi)

is well known. Perceptions on chestnut and chestnut honey reputation and quality by the

producers and consumers of these products have identified as potential for GI registration in

Albania, which have been attributed to the geographical area where the products are produced

and the initiatives by the stakeholders.

The honey has a unique taste and a white color which is attributed to specific floral plants

where bees obtain their nectar (Blakeney et al., 2012). Apart from increasing monetary value

and employment creation, this honey has promoted forest and biodiversity conservation

through a number of programs that include reforesting degraded areas (Bainkong, 2014) for

sustainable production.

MATERIALS AND METHODS

The study was conducted in northern area of Albania aiming to assess how production of the

potential GI chestnut and chestnut honey can contribute to rural development of these areas

(MADA, 2012).



In the framework of BiodivBalkan Project–Sustainable Rural Development, a comprehensive

inventory of the various local traditional products suitable for GIs development scheme has

been drawn up in 2013, through focused interviews with expert, farmers and other

stakeholders related to the traditional products. Based on this inventory, a typology of

stakeholders was prepared, comprising production practices and unique and typical

characteristics associated to the local production. This typology has been used in gathering

quantitative and qualitative data through structured interviews. Two questionnaires were

designed and prepared.

A questionnaire was prepared with different sections aiming at identifying the characteristics

of chestnut farms and production, chestnuts distribution and sale, technology used for

production; problems faced by chestnut and chestnuts honey producing farms. The areas

included in the study are Tropoja region and Malesia e Madhe region (Reç County). Face to

face interview with representatives of two chestnut and chestnut honey producers association

was conducted.

These areas have already seen the development of two GIs products (chestnut and chestnut

honey), which are official registered at Patents and Marks Office in Albania in 2016 and their

brand names are in use by their associations established in each areas.

The other questionnaire was used to assess the changes and implications of geographical

indications in rural development of respective areas (MADA, 2016). Twenty-five interviews

were conducted in both areas in late 2016, 11 stakeholders for each case study and a further 3

large retailers who were questioned about both products. The interviews for both case studies

were chosen from almost the same list of stakeholders directly involved in producing and/or

marketing of products.

The research method employed for this study was a qualitative research approach. The

interviews were conducted to the primary producers, collectors, processors and enterprises.

Than a comparison analysis of data between two periods, the inventory and data collected in

2013 and the data and results from interviews of 2016 was done.

The study identifies also predominantly indirect links between GIs and sustainable rural

development (SRD), through economic and social benefits brought to rural areas by the GIs.

This finding suggests that GIs are worthwhile for implementation in Albania as a rural

development tool. In this paper are described main results on the chestnut and chestnut honey

products, after their development as GIs product and their implications on economic, social

and environment aspects.

RESULTS AND DISCUSSION

Results from both questionnaires indicate that the GIs products (chestnut and chestnut honey)

are considered as very important contributors to the yearly income of farming family. In

general, all families interviewed admitted they are in better economic conditions after their

chestnut and chesnut honey production was launched in market with a brand new name and

with quality signs (GI indications).

The table below gives some information about the surface, number of trees, number of

beehives and total production for both products, in two regions in two periods.



Table 1: General situation of Chestnut and honey in Tropoja and Reçi

No Description of products Unit

2013 2016

Reçi

Area

Tropoja

Area

Reçi

Area

Tropoja

Area

Chestnut

1 Total surface ha 600 2000-

2400

600 2000-2400

2 Total number of trees no 33

000

188600 33 000 188600

3 Total chestnut production tons 350 1500 500 1680

Chestnut Honey

1 Number of Beekeepers no 125 400 130 420

2 Number of Beehives no 2500 6550 2650 7100

3 Total of Chestnut honey produced tons 24 60 27 70

Changes on productivity

Compared with the productivity of 2013 the productivity of chestnut and chestnut honey is

increased. The total chestnut production in Reçi area was increased by 150 tons, while in

Tropoja area by 180 tons. The increase in production was due to more people were involved

in harvesting of chestnuts.

The same increase was noticed in the productivity of chestnut honey. The quantity of

chestnut honey produced in Tropoja area in 2016 was 10 tons higher than in 2013, while in

Reçi was 3 tons higher 2016 compared with 2013.

Taking in account the total of chestnut production of two regions, the majority of farmers (52

%) produce less than 5 tons, about 22 % of farmers produce 5-8 tons, 16 % produce about 10

tons and 10 % of farmers produce more than 10 tons.

Chart1. Structure of Chestnut production by farms

Prices

The chestnut prices have been increasing every year despite the production increase. Actually

the price of fresh chestnut in both areas is almost the same. It varies from 100 ALL/kg to 130

ALL/kg and depends on the season. Compared to the 2013, the price of chestnut was

increased by 20-30 ALL/kg.

52% 22%

16% 10%

Chestnut Production

% of farms

Less than 5 tons

5 to 8 tons

till 10 tons

more than 10 tons



The superior quality chestnut was sold in Reçi with 280 ALL/kg. From the data gathered, the

price of Tropoja and Reçi chestnut is 20% higher than the chestnut coming from other

regions of Albania, although the origin of the product sold in the market is not always clear.

Regarding chestnut honey, due to its higher antiseptic and antioxidant properties, it is

considered as a natural medicament. These characteristics increase the price of chestnut

honey which actually is almost 30% higher than the price of mixed flower honey. Actually

the price of 1 kg of chestnut honey is 1500-2000 ALL, which is triple higher compared to

2013. There is a high demand in the internal and international market for chestnut honey,

which is promising for high prices even in the situation of a possible increase of the

production. Since the price of the chestnut honey is very much related to its chemical and

organo-leptical characteristics, an improvement in logo and labeling, where these

characteristics are easily noticed by customers, has contributed in increasing the prices.

Marketing channels

In 2013 the chestnut commercialization was not everywhere well organized. In most

prominent chestnut production areas in Albania (Reç and Tropoja areas) there were collectors

and wholesale traders that deal exclusively and continuously with fresh chestnuts, while in

other areas commercialization was performed sporadically by traders that deal mainly with

other agricultural products.

Based on the data of 2013, the most important chestnut collector and trader entity in Tropoja

was “AMLA Company”. In 2013 “AMLA” has collected, processed and traded almost 500-

600 tons of chestnut which was almost 45% of the total amount traded in the Tropoja area.

The other chestnut percentage (65 %) was sold direct by producers to local shops or

consumers.

Based on the data of 2016 the structure of marketing has changes. A high quantity of chestnut

was exported in Kosovo. The price was decided through negotiations between the farmers

and traders. The price of the chestnut was around 100-120 ALL/ kg. Since there is no

selecting process, the price is unique for whole production quantity. It changes only

according to the season. At the beginning of the harvestin period it is higher and it falls to

100 ALL/kg in November-December.

During the last year, 50% of chestnut produced in Tropoja has been exported to Kosovo. Due

to the short distance many farmers invented themselves as traders and started to export

chestnuts. These traders sell the collected product also in the local market, mainly in Tirana

and Shkodra. Based on the assessment made by the Project, small traders collected last year

almost 1500 tons, half of it was sold in Kosovo and half in the internal market.

The main chestnut trader’s entity is the Cooperative “Reçi Prodhimtar”. They sold last year

more than 500 tons of chestnut. Almost 90% of the product was exported. The largest

quantity is exported in Italy, where the cooperative has established good business linkages.

Smaller volumes of the product are sold to Kosovo traders. The main Albanian market is the

area between Tirana and Durrës, but part of the product is sold also in Shkodra and other

Albanian important cities.



Chart 2. Main distribution channels -Tropoja region Chart3. Distribution channels

-Reçi region

Compared to some other fruits and agriculture products, producers of chestnut do not have

problems with the chestnut sale. Since there is no selecting process and standardization of the

product, the price is unique for whole production quantity. It changes only according to the

season.

The marketing of chestnut honey in general and in particular in Tropoja and Reçi village is

moderately organized. Each beekeeper sells its own honey to occasional buyers or different

mediators. No defined marketing channels exist or are used for honey. Since the chestnut

honey product has a logo and label the price increased and no market problems were faced.

In fact the demand for this product is high. For this reason the producers have not yet face

any difficulties in marketing it.

Incomes

Most of the chestnut and chestnut honey producers confirmed that their incomes by both

products have been increased during 3 last years. Based on their responses their incomes have

been increase by about 30-35 %.

They admitted that the biggest incremental income share is dedicated to the increase in

chestnut production, considering two reasons, productivity and prices increase.

CONCLUSIONS

Literature indicates many positive effects of GIs on sustainable rural development, very

simply these can be categorized into ecological, economic and social effects. The two

products investigated do not have profound direct links to all of these elements, however

many indirect links were found. The Geographical Indications evaluated were least strongly

tied to ecological benefits, with stronger ties to economic and social values.

The rural development of the Northern Albania can be improved through the creation of

value added marketing channels for typical products, and GIs are a possible means towards

that and where products have particularities and a preferential position in markets.

Both products have: (i) better price in the market compared with similar production produced

in the other areas of the country; (ii) their specifities and characteristics have strong links

with their geographical area (territory); (iii) there is a high demand for these products in the

domestic and regional markets; (v) these products have a strong link with biodiversity.

50%

20%

20%

10%

Distribution channels

Exported

Wholesale markets

Direct to consumers

Supermarkets

90%

4% 6%

Distribution channels

Exported Direct to consumers Supermarkets



In both areas the local stakeholders (farmers, processors and traders) have a satisfactory level

of organization, which should be strengthened. “Reçi Prodhimtar” and “AMLA Company”

are two structures that can keep around them most of the farmers engaged in this sector. On

the other hand there is willingness for collaboration between the local actors.

There is enough evidence to show that the GIs investigated in this study are linked to more

than just economic benefits and are therefore trending toward Sustainable Rural

Development; however these links alone are not strong enough to say that GIs promote

sustainable rural development. A promising finding of the study was that although many of

the links between the GIs investigated and Sustainable Rural Development were indirect all

stakeholders agreed that GIs promote Sustainable Rural Development.

Protection of GIs could help to sustain economic activities and settlement in rural areas and

increase the life standards of the residents. Rural population is the prime beneficiaries of

these kinds of products in terms of income and employment generation. Moreover, under an

effective protection and marketing process, the economic activities in rural areas could

increase further not only by the growth of GI production but also by developments in the

other sector as well. While it is hard to obtain a competitive advantage based on technology

in rural areas and that advertisement costs are high for the local producers, GIs provide

important alternative advantages for the rural development by sending direct signal to the

consumer that the product is originated from a specific region with a certain quality not

requiring big investments on technology and advertisement.

Acknowledgements

This study was prepared under the BiodivBalkan Project – sustainable rural development of

Balkan Mountain areas.

The idea was to produce an inventory of the products arising from the biodiversity of the

Northern Albanian Mountains and study the commodity chains for these products. The

chestnut and chestnut honey products were pre-selected as two potential products, whose

characteristics and their quality is so linked with their territory. An additional objective was

to have the analysis of changes and improvements after the development of two GIs products,

focusing on their economic, social and ecological effects.

REFERENCES

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Barham, E. (2003): Translating Terroir: The Global Challenge of French AOC Labeling.

Journal of Rural Studies. 19: 127-138.

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account of local knowledge and biodiversity. Int. Soc. Sci. J. 187, 109–116, 58.

Bramley, C. and E. Biénabe. (2013). Guidelines for Selecting Successful GI Products. p. 123-

136.

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geographical Indications. Linking products and their origins. International Trade

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(http://www.bujqesia.gov.al/files/pages_files/14-02-25-01-33-

30Statistikat_e_Vitit_2012.pdf).

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perspective of nut trees (walnut, chestnut, hazelnut, almond) and pomegranate

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(2016), p.22-27.

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countries, A discussion paper, Agritrade, April 2005.

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Project on IPRs and Sustainable Development, Issue Paper No. 8.

Vandecandelaere, E., F. Arfini, G. Belletti and A. Marescotti (eds.) (2010). Linking people,

places and products: A guide for promoting quality linked to geographical origin and

sustainable geographical indications. 2nd ed. FAO and SINER-GI, Rome.

http://www.bujqesia.gov.al/files/pages_files/14-02-25-01-33-



RELATIONSHIP MARKETING STRATEGIES AND COMPETITIVE

ADVANTAGE IN SELECTED COMMERCIAL BANKS IN UASIN-

GISHU COUNTY

Andrew W. Wetosi

Student, Kisii University, KENYA

Dr. Kimutai Geoffrey

Coordinator of School of Business and Economics, Kisii University, Eldoret Campus

P.O Box 408-40200, Eldoret, KENYA

&

Dr. Yusuf Kibet

School of Business and Economics, Moi University P.O Box 74-30100, Eldoret, KENYA

ABSTRACT

After decades of vigorous expansion and prosperity, many firms lost sight of competitive

advantage in their scramble for growth and pursuit of diversification. Firms throughout the

world have faced slower growth as well as global competitors are no longer expanding their

customer relationships. Relationship marketing is heralded by some marketing academics and

practitioners as the new paradigm of marketing. However, despite the intense growth in the

adoption of Relationship marketing practices by organizations all over the world and the

widely accepted conceptual underpinnings of Relationship marketing strategy, conflicting

opinions and increased pessimism about the effectiveness of relationship marketing strategy

abound the marketing literature. Also studies done in literature did not focus on relationship

marketing especially in developing countries like Kenya. To this effect, scholars have called

for more rigorous studies to establish the usefulness of Relationship marketing as a strategic

orientation. The general objective of this study was to determine the effects of relationship on

competitive advantage in selected commercial banks in Uasin-Gishu County, Kenya. The

specific objectives of the study included, to find out the effect of customer focus on

competitive advantage among selected commercial banks in Uasin-Gishu County, to

determine the extent to which customer communication affect competitive advantage among

selected commercial banks in Uasin-Gishu County, to establish whether customer events

affect competitive advantage among selected commercial banks in Uasin-Gishu County and

to assess whether customer rewards affect competitive advantage among selected commercial

banks in Uasin-Gishu County. The study adopted descriptive survey research design and

targeted162sales and 104 marketing employees. The study employed convenience sampling

technique to help sample the subjects to participate in the study. Data was collected using a

questionnaire and was analyzed using both descriptive and inferential statistics. Data was

presented in tables and figures. It emerged from the study that customer focus played a role in

marketing of the banks products, all scores were above average on the statements which

supported the competitive advantage of the organization. On the influence of customers

communication on Competitive advantage, the study pointed out that it was to a very large

extent influencing the banks to gain their competitive advantage. It was also established that

the bank staff greatly influence this by frequently communicating to its customers hence

gaining a competitive base with other banks. In conclusion, the relationship marketing

strategies under the study have indeed proved to influence the competitive advantage of

organizations and specifically in banks. Customer Focus has been highlighted in a very great

extent to influence the customers towards having a good relationship and positive attitudes

towards the banks. It is also noted that the banks try their best to be honest to its customers



and therefore winning their behaviors and be influenced to purchase their products. This

increases the loyalty of customers to the bank and hence achieving their competitive

advantage. The study recommended that for those organizations which immensely depend on

competitive environments to maintain its stand, they should focus on relational strategies

which are customer centered in order to achieve their goals.

Keywords: Marketing Strategies, Customer Focus, and Competitive Advantage.

INTRODUCTION

Relationship marketing has become a vital issue that has led to important interest to both

academic and practitioners for more than two decades, (Frow& Payne, 2009). Relationship

marketing describes a marketing strategy which stems from direct response marketing

campaigns. It emphasizes on customer retention and satisfaction rather than concentrating on

sales volumes. Firms that practice relationship marketing acknowledge the long term value of

their customers (Frow& Payne, 2009). Christopher at al., (2002) asserted that the term

“relationship marketing” stems from the industrial and services marketing literature of the

1980s. According to Matute-Vallejo, Bravo, & Pina, (2010), services success of firms is

attached on their capability to uphold long-term interactions with customers that enables a

repeat of purchases and communicate positive involvements with the service provider to

others (Matute-Vallejo, Bravo, &Pina, 2010). The same way Ndubisi (2007) thinks that

constructing relationships with customers enables a company to acquire quality bases of

intelligence marketing which assists in good planning marketing strategy.

Relationship marketing has in so many years expanded to the banking sector (Gummesson,

2008). Comparisons have been drawn by Anderson (2005) and Gaurav (2008) said growing

competitions and operating costs on one side, and relationship marketing on the other. In this

view, the escalating operational costs and the ever stiffening competitive environment have

obliged business firms which include financial institutions to grow and maintain long-term

relationships with their customers. Kolter and Armstrong (2006) asserts that all the ways of

relationship marketing reinforce the rationale for commercial banks to use it as a way of

maintaining two-way relationships with customers and other stakeholders. Sin et al (2005)

outlined the paradigm shift that has been elicited by relationship marketing by demonstrating

the case of a cross-cultural study in Hong Kong, China. Sin et al. (2006) further showed six

components of relationship marketing orientation which included trust, communication,

shared values bonding; it also included reciprocity and empathy. The inferences of trust to

productivity, market share, development, and customer maintenance require banks to employ

it in their push to gain a strategic competitive advantage (Yudi, 2012).

In the global perspective, the issue of relationship marketing has much been studied. Brand,

culture, commitment, service, satisfaction, trust, loyalty, value, strategy, customer

relationship management, and marketing theory amongst others have been previously

discussed (Lages et al., 2009; Yudi, 2012). It is true that that the theme of relationship

marketing has been empirically studied in the USA and the UK. Continentally, Europe leads

the pack of researchers in relationship marketing at thirty four per cent between 2007 and

2011, Asia being the second at twenty nine per cent, America ( twenty five per cent), and

lastly Africa and Oceania at 6 per cent (Yudi, 2012).

According to William Desbordes (2011), service delivery system emphasizes that it is the

people that bring change. Even with the same product features service from one person to



another can change. There is therefore the need for an integrated service marketing method

that provides an even service as well as generating the problem will be in the area of

relationship marketing.

In today world of banking, financial institutions are undergoing through stiff competition

both from within the banking sector and outside. The strong competition has brought about

little or no distinction among the products being given due to product imitation hence no

bank can assert a substantive competitive edge over another. Service quality is therefore very

important to generate and sustain commendable relationships with customers and also to

retain abreast with their varying needs and behaviour. Many commercial banks have adopted

relationship marketing so that they remain competitive. The aim of this study is to establish

the effects of relationship marketing on the commercial banks’ competitive advantage in

Uasin-Gishu County, Kenya.

RESEARCH DESIGN AND METHODOLOGY

Research Design

The study used descriptive survey design because it is descriptive in nature (Mugenda and

Mugenda, 2003). The rationale for choosing this design was based on its ability to provide

the researcher with appropriate techniques for systematic collection of extensive data from a

large group of respondents through interviews and administration of questionnaires (Orodho,

2009).

Target Population

A target population is defined as a complete set of individuals, cases or objects with some

common observable characteristics (Mugenda & Mugenda, 2003). The study was conducted

in all banks in Uasin-Gishu County, targeting sales and marketing and team leaders. The

aforementioned team leaders and sales marketers are presumed to be the savviest with issues

touching on relationship marketing and customer retention in their respective banks. The total

target population was 600 sales team and 300 marketing team.

Banks in Uasin-Gishu County which make the target of this study are Barclays bank Ltd,

CFC Stanbic bank ltd, Prime Bank, Chase Bank, Diamond Trust bank Kenya ltd, Housing

finance, Kenya Commercial Bank ltd, National bank of Kenya ltd, NIC bank ltd, standard

chartered bank ltd, Equity bank ltd and cooperative bank ltd (Table 1).

Table 1: Target Population

Bank Sales team Bank marketing team

Kenya Commercial Bank 28 6

National bank 11 7

Equity bank 60 26

Cooperative bank 36 12

Standard chartered Bank 22 13

Barclays bank 26 17

NIC bank 6 10

Diamond Trust Bank 27 6

Prime bank 4 17

CFC Stanbic bank 22 11

Chase Bank 20 12

House Finance 12 5

Total population 274 142



Sample Size and Sampling Procedures

According to Mugenda and Mugenda (2003), in a larger population where time and resources

allow, a big sample should be taken. This enables findings to be a true representative of the

whole population. The small samples do not reproduce salient characteristics of the

accessible population to an acceptable degree. Calculating the sample size the study

employed Yamane’s formula.

(Yamane, 1967).

Where, n - Sample size, N – Population size, e- the level of precision.

Therefore the assumed sample size for Sales team is calculated as;

= 162 sales team

The assumed sample size for marketing team was

== 104 participants from the marketing team

The total sample size for the study was therefore be 266 participants

The study employed convenience sampling technique to help sample the subjects to

participate in the study. This was adopted because of its convenient accessibility and

proximity of the study subjects to the researcher. As such the researcher recruited the

participants’ until saturation or until the sample selected was reached.

Research Instruments

The study employed a structured questionnaire to collect primary data from the respondents.

Mugenda and Mugenda (2009) asserted that questionnaires are suitable in collecting data in

survey studies. The questionnaire was structured in such a way that it captured the

respondents‟ demographic information, but more importantly facilitated collection of data

pertinent to both independent and dependent variables. The instrument’s sections aimed to

capture data regarding the study variables which comprised of the various questions on a 5-

point Likert scale.

Data Analysis Techniques

According to Mugenda and Mugenda (2003) data editing classification and tabulation are the

processes of bringing out order, structure and meaning of mass information collected.

Statistical Package of Social Sciences (SPSS) version 22 was used to aid the analysis. It

adopted both descriptive and inferential statistics. Descriptive statistics involved frequencies,

percentages, means and standard deviations while inferential statistics will included chi-

square tests (p=>0.05) and the use multiple regression model to determine significant

relationships between variables where the p- value was used to determine whether observed

sample frequencies differ significantly from expected frequencies specified.

Multiple regression analysis was also be used to test hypothesis. In its simplest form multiple

regression analysis involved finding the best straight-line relationship to explain how the

variation in an outcome (or dependent) variable, Y, depends on the variation in a predictor (or

independent or explanatory) variable, X. Once the relationship is estimated, it is possible to

use the equation:

Y = b0 + b1X1 + b2X2 + b3X 3 + b3X 3 +e

Where:

X = The independent variables -

X1 – customer focus

X2 _ customer communications

X 3 – customer events

X 4- customer rewards



Y = The dependent variable (competitive advantage)

b = Independent Variable Coefficients e = Error margin

RESULTS AND DISCUSSIONS

The study involved descriptive and inferential statistics

Relationship between Customer events and competitive advantage

The objective was to establish whether customer events are associated with competitive

advantage among selected commercial banks. Descriptive statistics were analyzed and chi-

square tests were done to establish the relationships between the variables. The findings are

presented in figure 1 and table 2 below;

Figure 1: Customer events and competitive advantage

The findings in figure 1 indicated that majority 79.8% of the respondents to a very great

extent agreed that the customers of the company is quite knowledgeable about their

products/services, 12.4% agreed to this to a great extent, 2.6% agreed on this to a moderate

extent, 2.10% agreed to a little extent while 3% were in disagreement on this.

Additionally, on the statement that they do frequent roadshows in different destinations to

encourage customers invest in their banks, majority 80.3% of the respondents agreed on this

to a very great extent, 9.9% agreed on this to a great extent, 6.4% agreed on a moderate

extent, 1.3% agreed on a little extent, while 2.1% disagreed on this.

The customers of the company

is quite knowledgeable about their

products/Services

We do frequent

roadshows in different

destinations to encourage

customers invest in our

banks

We have several visits to companies to market our products and

services

The bank staffs are

prepared to be asked

questions of what is not being done

right

There are information desks in our banks which

enable customers

communicate well with our

team

We have weekly and

monthly exhibitions to sensitize our

customers

No Extent 3% 2.10% 1.30% 0.90% 1.70% 1.30%

Little extent 2.10% 1.30% 1.30% 1.30% 2.60% 0%

Moderate extent 2.60% 6.40% 0.00% 2.10% 2.60% 6.40%

Great Extent 12.40% 9.90% 26.60% 12.40% 12.90% 10.70%

Very Great Extent 79.80% 80.30% 70.80% 83.30% 80.30% 81.50%

12.40% 9.90%

26.60%

12.40% 12.90% 10.70%

79.80% 80.30%

70.80%

83.30% 80.30% 81.50%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Customer events and Competitive advantage



Similarly, 70.8% of the respondents agreed in a very great extent that they have several visits

to companies to market their products and services, 26.6% agreed in a great extent, 1.3%

agreed on this on a little extent and another 1.3% disagreed on this statement.

Further findings on that the bank staffs are prepared to be asked questions of what is not

being done right, showed that 83.3% believed this to a very great extent, 12.4% agreed on

this to a great extent, 2.1% agreed to a moderate extent, 1.3% agreed to a little extent, and

0.9% disagreed on this.

The findings also indicated that majority 80.3% of the respondents agreed to a very great

extent that there is information desks in their banks which enable customers communicate

well with their team, 12.9% agreed in a great extent, 2.6% moderately agreed on this, another

2.6% agreed this in a little extent and 1.7% of the respondents disagreed on this.

Finally, the results showed that majority 81.5% of the respondents agreed to this to a very

great extent, 10.7% to a great extent, 6.4% moderately agreed on this and 1.3% disagreed on

this.

These findings agree with those of Bolton (2008), the author studied, how the role of

satisfaction effect through organizations events on the duration of customer’s relationship in

the organization. His results revealed that the level of satisfaction evolves with time so

customers who have been longer time in a company, give value on the earlier experiences

with the company. They weigh the prior service quality more heavily and places less weight

on the new information. This means that they won’t defect so easily as the first conflict

arises. The findings indicated that organizations should give more attention to new customers

through organizational events, whom have no good experiences yet, because they are more

likely to defect if a conflict arises (Page, Pitt and Berthon 2006).

The Chi-square test at p ≤ 0.05 significance level illustrating statistically significant

relationship between variables are presented in Table 4.7 below;

Table 2: Chi-Square tests for customer events and competitive advantage

Chi-Square Tests

Value df Asymp. Sig. (2-

sided)

Pearson Chi-Square 1165.270a 108 .000

Likelihood Ratio 444.963 108 .000

Linear-by-Linear Association 195.316 1 .000

N of Valid Cases 233

a. 124 cells (95.4%) have expected count less than 5. The minimum expected count is .00.

From the results in Table 2, the P-value for the Pearson Chi-Square test for relationship

between customer events and competitive advantage is 0.000 at 5% level of significance,

showing a significant relationship between customer events and competitive advantage. The

strength of association was measured using Phi and Cramer’s V as indicated below;



Table 3: Symmetric Measures customer events and competitive advantage

Symmetric Measures

Value Approx. Sig.

Nominal by Nominal Phi 2.236 .000

Cramer's V .745 .000

N of Valid Cases 233

a. Not assuming the null hypothesis.

b. Using the asymptotic standard error assuming the null hypothesis.

From the table it is seen that the strength of association between the variables is very strong

of value 2.236 and 0.745.

The regression results in indicated that customers events does have a direct effect on the

competitive advantage of the organization with a beta coefficient of 0.707 and significance of

(p=0.000). The study rejected the hypothesis. These results indicate customer really gives an

organization a basis to enhance its competitive advantage. This could be attributed to the fact

that customer events benefits to the company such as creating a bond between them, creating

awareness of new products and enlightening them to invest in their banks.

SUMMARY AND CONCLUSIONS

On the relationship between customer events and competitive advantage, the findings also

indicated that to a great extent customer events are being utilized to gain their

competitiveness, customer information desks have been highlighted to enable customers

communicate well with the bank team members hence gaining its competitiveness. Chi-

square tests also indicated a significant relationship between customer events and competitive

advantage with the strength of association being very strong.

Customer events were not an exception in influencing the banks competitive advantage of the

banks, from the findings it was evident that through the customer events, they are able to

know about the existing products and services. Through the frequent road shows in different

destinations, awareness of existing and new products in the banks are made clear and

therefore the competitive advantage of the banks are enhanced.

REFERENCES

Anderson, E.W., and Gaurav, D.R. (2008), “Customer Satisfaction, Market and advertising

effectiveness”, Journal of Advertising Research, Vol. 44 No. 3, pp. 271-80.

Christopher L. and Lauren W (2002).Principles of service marketing and

management.Journal of Business Ethics, 71, 425-439.

Frow, S. and Payne, T. (2009), The Great Marketing Turnaround, Prentice-Hall, Englewood

Cliffs, NJ.

Gummesson, E. (2008), “Broadening and Specifying Relationship Marketing”. Asia

Australia. Marketing Journal, 2 (1), pp. 10-30

Kolter and Armstrong (2006).1mpact of ATM on Customer Satisfaction (A Comparative

Study of SBI, ICICI & HDFC bank). Business Intelligence Journal - August, 2(2),

276-87.

Matute-Vallejo G., Bravo R.D., and Pina N., (2010). Exploring customer switching

intentions through relationship marketing paradigm.International Journal of Bank

Marketing Vol. 30 No. 4, pp. 280-302, Emerald Group Publishing Limited.



Ndubisi, N. O. (2007). Factorial and Discriminant analysis of the underpinnings of

relationship marketing and customer satisfaction. International Journal of Bank

Marketing, vol. 23, No. 7, pp. 542-557.

Sin, A., & Jones, E. (2005). Customer relationship management: Finding value drivers.

Industrial marketing management, 37, 120–130.

Yudi, C. H. (2012) Services marketing, (3rd ed). Englewood Cliffs, N.J.: Prentice Hall.



ROLES OF COMMERCIAL BANKS IN THE GROWTH OF SMALL

AND MEDIUM ENTERPRISES - CASE OF ALBANIA

Arjona Spahiu

Agricultural University of Tirana

ALBANIA

Ana Kapaj

Agricultural University of Tirana

ALBANIA

ABSTRACT

SMEs play an essential role to the overall performance of an economy giving their

contribution in economic growth, employment, innovation and technology diffusion. In the

other hand commercial banks plays play an important role in the country's economic

development through promoting firms' development by influencing positively the mitigation

of information-related issues between the investor and the borrower by ensuring a more

efficient use of depositor funds and securing their own funds. The aim of this study is to give

a short view of the banking activity in Albania giving more focus on their role in SME

growth. A combination of quantifiable and qualitative research methods is carried out to test

the hypothesis of the study in order to have a complete and accurate result. Specifically, the

study uses surveys of SMEs (questioner’s field by the representatives of SMEs), interviews

with Bank’s managers and documentary analysis of Bank’s activity in Albania. The SMEs

chosen to fulfill the questionnaires are located in two cities of Albanian, respectively in

Tirana and Durres city. This study will be a reference for other studies focused in the role of

financial institutions role in SMEs growth in Albania and the examination of relationship

between financial institutions and SMEs growth.

Keywords: Role, Commercial Banks, SMEs growth, Albania.

INTRODUCTION

The bank plays the role of financial intermediaries in collecting savings and allocating them

to higher return investments. They provide financial assistance in meeting the different needs

of enterprises.

The bank's objective is the collection of free public funds in the form of deposits in order to

use them for granting loans. On the other hand, through different actions such as keeping

accounts, approving advances and loans, making transfers etc., gives the possibility to banks

to recognize the performance of various firms and businesses and to control and impacted on

them. Banks promote firms' development by positively influencing in the mitigation of

information problems between the investor and the borrower by ensuring a more efficient use

of the depositor’s funds (Allen and Gale 2008).

The importance of this study first relates to a better understanding of the role and functions of

banking financial institutions in Albania and enhances the ability to understand how banks

influence in the development of SMEs.

LITERATURE REVIEW

Commercial Bank’s Functions

The commercial bank is a financial institution that provides financial services, particularly

loans, deposits and payment services, and performs the most extensive financial services for



business companies. While in the concept of regulators of banking activity, the bank is an

institution whose current activity is lending and acceptance of deposits by the public (Salko

and Dhuci 2008).

Through the banking system of a country is realized (Zaho and Cani 2008):

1. Acceptance of cash deposits by individuals, companies, other legal entities, by the

government.

2. Mobilization of deposits on loans and increase of their value.

3. Mediation of payments as well as the execution of all payments and receipts arising and

deriving from transactions carried out for a certain period of time.

In summary, the functions of commercial banks can be considered:

Lending function

The liquidity function of payments

Risk management of interest rates and liquidity

Monitoring the firm's activity

The service function

Main Developments in the Albanian Banking System Over Years

Before year 1990, Albania had a one level banking system and fully centralized. It consisted

of the State Bank (the monetary authority and lending authority of the economy), the General

Directorate of Savings and Security Shares (serving as a public savings depositor and asset

provider) and the Agricultural Bank (provider of agricultural fund.)

After the fall of the communist system in the early 1990s, Albania entered into transitory

period, which was accompanied by a series of social and economic changes. Most of the

cooperatives and state-owned firms were privatized immediately by creating small family

businesses focused mainly on the commodity market. In 1992, the Law "On the Bank of

Albania" and "On the banking system in the Republic of Albania" was approved. This

change enabled the transition to the two tier system of the financial structure (the first level-

Bank of Albania, and the concentration of trading functions at the second level, which at the

moment of creation was composed by 3 Banks: Savings Bank, National Commercial Bank

and Agrarian Commercial Bank). By the end of 1996 five other banks were licensed.

After the pyramid crisis in 1997, which affected both the economic and social side of our

country, the financial system entered in another phase of its development. In addition to the

increased number of banks, the banking system has been associated with the privatization of

the National Commercial Bank, the Savings Bank, and other restructuring.

By the end of 2015 the number of commercial banks reached 16, operating through 500

branches / agencies (as showed in figure no. 1) located within the territory of the country,

while only one bank continues to have a branch outside the territory of the Republic of

Albania.



Figure 1. The number of branches/ agencies of banks over the years

Source : Bank of Albania

Banking Lending Activity in Albania

Over the years, lending to the system has had a greater orientation towards business but over

the past 3 years this tendency has been moderated, and the relationship between the two

groups - business and individuals - has a steady tendency.

The composition of the loan portfolio according to the entity and the respective currency

shows that about 60.2% of the loans granted to the business are in foreign currency , with the

largest share at 83.6% denominated in EUR, while in USD dollars it is about 16.4 % of the

foreign currency portfolio.

The table below shows the credit data by sector and purpose of use for the period 2013-2015.

By sectors, businesses provided the main contribution to the performance of credit over the 3

periods where Business Overdraft has the largest share of the total loan portfolio

Table 1. Lending by sector and purpose of use (value in billions ALL)

Description Dec’13 Weight Dec’14 Weight Dec’15 Weight

Total Loans 537.4 100% 549.1 100% 534.9 100%

Loans to Businesses: 394.7 73.40% 404.5 73.70% 388.8 72.70%

Overdraft 125.3 23.30% 126.7 23.10% 123.2 23.00%

Working capital 73.2 13.60% 75 13.70% 71.1 13.30%

Investments in equipment purchase 97.3 18.10% 94 17.10% 95 17.80%

Investments in real estate 99 18.40% 108.8 19.80% 99.5 18.60%

Loans to Individuals: 142.7 26.60% 144.6 26.30% 146.1 27.30%

Overdraft 8.2 1.50% 8.2 1.50% 8.4 1.60%

Consumption of non-durable goods 16.4 3.10% 17.3 3.10% 18.7 3.50%

Consumption of durable goods 9 1.70% 10.4 1.90% 11.7 2.20%

For real estate 102.9 19.20% 102.8 18.70% 101.7 19.00%

To operate the activity 6.1 1.10% 5.9 1.10% 5.6 1.10%

Source: Bank of Albania



For the period 2012-2015, long-term loans represent the main share in the total loan portfolio,

followed by short-term loans and finally medium-term loans (presented in the table no. 2)

Table 2. Credit outstanding by maturity term (in %)

Credit

maturity

December

2012

December

2013

Decemb

er 2014

Decemb

er 2015

Short-

term 33.2 34.0 33.7

33.9

Medium-

term 20.0 17.9 17.9

18.3

Long-

term 46.8 48.1 48.4

47.8

Source: Bank of Albania

METHODOLOGY

The study aims to highlight the role of Banks in SME’s development in Albania. To achieve

this general objective the below hypothesis is developed.

Hypothesis: “The growth of SME’s sales is affected by loans issued by Commercial Banks in

Albania”.

The necessary information for testing the hypothesis is based on the analysis of primary data

which are collected through questionnaires delivered to SME’s representatives. The

questionnaire developed in this research is conceived in two parts: The first part of the

questionnaire provides general information on SMEs activity and the second part provides

information on the role of banks in SME development.

The list of SMEs selected to fill out the questionnaires is provided mainly by banks selected

in this study which have financed SMEs with loans. The number of SMEs those

representatives have filled out the questionnaire is 55 and they are located in two cities of

Albania, in Tirana and Durres.

In order to assess the relationship between SME growth (sales growth) and financial

resources offered by banks, is used the linear regression model as depicted below:

Dependent Variable: Annual Sales of SMEs [Sl]

Independent variables: Lending [Le]

SLi=ß0 + ß1* (LEi)+ Ɛ

Where:

SL: The annual sales of businesses (SMEs) expressed in LEK currency, measured as

the average of the years included in the study. Sales are analyzed for years after bank loan is

received

LE: Loans issued by commercial banks denominated in LEK currency for the

respective firm from 2010 up to 2015.

ß0: the intercept of equation

ß1: the coefficient; the respective influence of any marginal change of the independent

variable in SMEs’s sale growth



i-firms taken in the analysis where i = 1,2,3, ...... 55

Ɛ: the error term

RESULTS

The results of the regression model used in this study are depicted in the tables below:

Table 1. Regression statistics

Regression Statistics

Multiple R 0.750372

R Square 0.563058

Adjusted R Square 0.554813

Standard Error 0.6777

Observations 55

Table 2. ANOVA

df SS MS F Significance F

Regression 1 31.36742 31.36742 68.29744 4.24E-11

Residual 53 24.34167 0.459277

Total 54 55.70909

Table 3. Regression coefficents

Factors Coefficients Standard Error t Stat P-value

Intercept 0.435417 0.218179 1.995685 0.051119

Lending 0.947917 0.114701 8.264226 4.24E-11

DISCUSSION

As can be noted in the tables above, the generated model results consistent and

important: F = 68.29744, p-value = 4.24E-11

The explanatory variable (lending) results to be significant (p-value = 4.24E-11). P-

value has resulted <5% which implies that there is at least 95% chance that the loan will

affect the growth of SME’s sale.

75% of the variation (R2 = 0.750372) of the dependent variable (increase of sale) is

explained by the explanatory variable (lending).

The relation between the two variables is positive (The coefficient showing the

relation between the two variables has resulted positive => ß1=0.947917)

CONCLUSIONS

The regression model used in this study showed a positive relationship between lending by

commercial banks lending by commercial banks, firms age, firm size, internationalization,

initial capital and growth of SME sales and SMEs sales, indicating that lending growth

affects the growth of SME sales.



Except of financial products, commercial banks in Albania ameliorate SMEs performance

and their daily activity through providing a variety of products and services such as deposit,

internet banking, domestic & foreign payment etc.

The result of the questioners with the SME’s representatives revealed that for 85% of SMEs

financial products provided by banks has influenced the development and growth of their

activity.

REFERENCES

Bank of Albania (2009), “Financial Development and Economic Growth: The Case of

Albania”

L .Zaho , Sh. Cani (2008) ,“Teknikë Bankare”

Drini Salco, Orfea Dhuci (2008) “Drejtim Bankar”

Bank of Albania (2015), “Annual Supervision Report”

Bank of Albania (2015), “Financial Stability Report”



POWER OUTAGES ON PERFORMANCE OF SELECTED

MANUFACTURING FIRMS ON THE GHANA STOCK EXCHANGE

Quarshie Dorcas1, Benjamin Agyeman

2, James Bonn

3

Ghana Revenue Authority1, Presbyterian University College, Ghana

2, Presbyterian University College, Ghana

3

P.O. Box 59, Abetifi-Kwahu, Tel: +2330245335091 Email: [email protected]

ABSTRACT

This paper aimed at Power Outages on Performance of Selected Manufacturing Firms on the

Ghana Stock Exchange. The paper measured the effect of power outage on the performance

of manufacturing firms in Ghana. The population used was all manufacturing companies on

the Ghana Stock Exchange for the period 2007-2013. The data was analysed quantitatively,

using descriptive statistics, T statistics, averages and standard deviations to make

conclusions. It was discovered that ROE (Return on Equity) in power outage and no-power

outage years, this difference is not significant and that power outage does not affect ROE of

manufacturing firms. Power outage has effect on asset management ratio or asset turnover

ratio of manufacturing firms. ROA (Return on Asset ratio) of manufacturing firms is higher

in no-power outage periods than power outage periods. The paper concluded that power

outages in the short run, do not explain much of the gap in productivity, and that

manufacturing firms in the long run may be affected by power outages.

Keywords: Performance, power, manufacturing companies, Ghana.

1. INTRODUCTION

Power is an essential commodity because every sphere of life is affected by it. Emerging

economies especially need constant availability of power since it is fundamental for national

development. Most of the operations carried out for example in Ghana depends on power.

Power is needed by the mining sector, service providers (sector) and the manufacturing

industry in order to carry out their operations. Industries, families, civil society, individuals

and the state as a whole will be affected as a result of unavailability of electricity (Adjei-

Mantey, 2013). A short or long-term loss of electric power to an area can be termed as power

outages (also called power failure, power cut or power blackout). There are many causes of

power failure in an electricity network, fault at power stations, damage of electric

transmission lines, substations or other parts of distribution system and overloading of

electric mains are some examples of such causes. Sites where public safety and the

environment are at risk are particularly critical to power outages. Manufacturing is being put

to the sword over the last seven (7) years due to the lack of conscious effort. Contribution of

the manufacturing industry in 2006 to Ghana’s GDP (Gross Domestic Product) was 10.2%, it

reduced in 2010 to 6.8% and reduced in 2011 to 6.7%. This reduction in GDP can be

attributed to unreliable power supply (www.ghanaweb.com).

Many firms are often not aware of the true costs and impact that outages have on their

operations because they are mostly not prepared for business disruption caused by power

blackouts (Bruch & Hunter, www.agcs.allianz.com). Energy (electricity) supply in Ghana has

not been reliable despite its importance to many industries and the household. Power usually

goes off often without prior notification from the Electricity Company of Ghana (ECG) to its

customers. The most affected industry by this frequent power outages is the manufacturing

http://www.agcs.allianz.com/



industry. The manufacturing industry because of the persistent erratic power supply in the

fourth quarter of 2014 suffered a dipping growth of unprecedented negative 8% eroding

confidence in the business society. AGI’s (Association of Ghana Industries) president,

warned in a communiqué that Ghana risks losing its industrial base if government policies do

not quickly address the challenge of power outages in order to revive the sector because the

manufacturing sector continues to shrink (Laary, 2015). Hence this study looks at the effect

of power outages on performance of selected manufacturing firms on the Ghana Stock

Exchange. Most research on effect of power outages was conducted on medium and SMEs

like Asamoah & Doe (2014), Amponsah & Barimah (2012) and Cissokho1 & Seck (2013)

and many researchers estimated cost of power outage to firms by using data on backup

generators. This paper will fill the gap by providing adequate results by analyzing the effects

of electricity outages on performance of manufacturing sector in Ghana by quantifying the

magnitude of the problem. This is important because while policymakers and government are

well aware that shortages are a problem, quantifying the losses from this, empirically is less

established in the context of developing country like Ghana.

2. LITERATURE REVIEW

2.1 Measurement of Performance

There are two broad approaches (methods) used to measure performance, the accounting

approach, which makes use of financial ratios and econometric techniques. Accounting

methods which are traditionally based on the use of financial ratios have been employed for

assessing firm’s performance. Advances in management sciences have led to the

development of other methods such as non-parametric (DEA) and parametric Stochastic

Frontier Approach (SFA) (Berger & Humphrey, 1997). The idea of measuring performance

is to draw a line between firms that are performing well from those which are doing poorly

(Delen, Kuzey, & Uyar, 2013).

2.2 Analysis of Performance in Accounting

There are three techniques use in analyzing firm’s performance with respect to accounting,

which are horizontal, vertical and ratio analyses. Data for the financial statement analysis can

be found in organization’s statement of comprehensive income, statement of financial

position, and cash flow statement. These data are easily accessible through the investor

relation sections of all firms listed on the stock exchange (Schönbohm, 2013).

2.3 Energy use in Ghana

The main sources of power in Ghana consist of electricity, fossil fuels and biomass; locally,

energy production is mainly obtained from biomass sources, hydroelectric dams, thermal

electric plants and Sun (solar energy). In order to meet the country‘s power demand,

electricity, fossil fuels and crude oil are imported to support the primary indigenous power

production. This energy is supplied to the various non-economic and economic sectors of

Ghana, which is made up of the Industrial, Residential, Agricultural and Fisheries,

Commercial & Services, and Transport Sector. In 2004, it was estimated that solar accounted

for 0.1%, electricity accounted for 6%, fossil fuels accounted for 27% and biomass accounted

for 66.9% of total energy supply in Ghana; corresponding to a net total of 7.1 million TOE

(Tonnes of Oil Equivalent) (Energy Commission Ghana, 2006). For the past years Ghana has

been experiencing frequent power outage. 1n the 2013 World Bank Enterprise Survey on

African countries, including Ghana and Nigeria, it named the on-going rampant poor

electricity supply as one of the biggest barriers, hindering the growth of the countries'

economy, and preventing or discouraging many multinational investors. Unreliable power

supply has been the main potential contributor to the large productivity gap between



developed and developing countries. Insufficient and unsustainable power supply is a major

problem in Ghana today (Boasiako, 2014).

2.4 The Manufacturing Sector

The manufacturing industry, though not strong as it should be, continues to play a respectable

role in Ghana’s economy, contributing about 9% (0.09) to GDP (Gross Domestic Product).

Ghana’s most important manufacturing industries include aluminum smelting, agro-food

processing, oil refining and cement. Other sectors include the manufacturing of

pharmaceuticals, chemicals, paints, beverages, glass, plastics, textiles, and apparel, and the

processing of wood and metals goods. The manufacturing sector provides employment for an

estimated workforce of over 250,000 citizens. About 25,000 companies are registered. More

than 80% (0.80) of firms registered are small size enterprises with less than 50 workers, while

it is estimated that 55% (0.55) of all enterprises are located within the Greater Accra/Tema

Region. The manufacturing industry recorded a growth of 5% (0.05) in 2009 compared to 4%

(0.04) in 2008, which means there was an increment of 1% (0.01). Nevertheless, the

contribution of Ghana’s manufacturing sector to overall growth is still marginal. The

Ministry of Trade and Industry is the primary Government agency with the overall mandate

of formulating, developing, implementing, monitoring and evaluating trade and industry

policies in the country. The Ministry is also the advocates for the private sector within

government and is the major agency responsible for monitoring the implementation the

Government’s private sector development activities and programs (www.natcomreport.com).

The manufacturing sector primarily produces and provides services not only to the local

Ghanaian economy but also to the West Africa sub-region at large; and some semi-processed

products are exported internationally to raise capital (Apeaning, 2012). The reduction in

growth or efficiency of the manufacturing industry in Ghana can be attributed to the poor

electricity supply in the country. The manufacturing firms such as Accra and Kumasi

Breweries, Guinness Ghana Ltd, Ghacem Ltd, and many other companies which require 24

hour power supply, in recent times have been experiencing more than 12 hours and

sometimes 24hrs power failures intermittently in a week for the past 3 years (Boasiako,

2015).

Manufacturing firms because according to AEA statistics, the industrial sector is the largest

consumer of electricity in Ghana, and also electricity represents the largest form of energy

used in the industrial sector. Based on this one can conclude that the manufacturing industry

will be mostly affected by power outages.

2.5 Empirical Review

Analysis of the relationship between the energy sector and economic development though

scanty started since the middle of the 19th

century. The 1970s energy crisis however fueled

the interest of the relationship between the energy sector and economic development which

increased the study of energy costs as a whole (Jiang, Chen & Zhou, 2011). Energy or power

in the 21st century is still very important for economic activities, in that the energy resource

of a country determines the economic growth of that country (Velasquez & Pichler, 2010).

Electricity and business has a symbolic relationship (Velasquez & Pichler, 2010). The reason

being that, it is used for different purposes ranging from production, storage, powering of

equipment and display of product. The use of electricity consequently serves as input for

production and a critical resource needed to make products. Electricity is therefore an

essential commodity for all industries, including the manufacturing, service and distribution.

Enormous amount of electricity is used by many sectors like manufacturing and transport for



operation processes including storage and production. Electricity as a transformed unity in

this respect serves as a commodity (Haanes et al, 2011). Ohio, Connecticut, Michigan,

Vermont, Massachusetts, and New York all in the United States in August 14, 2003

experienced blackout that caused an estimated loss of $6.4 billion (Anderson & Geckil,

2003). Bental & Ravid (1982) researched on a simple method for evaluating the marginal

cost of unsupplied electricity and assumed the cost of power outage to organizations using

data on backup generators. It was the first study to indicate the cost of power outages to

organizations. It was also estimated that decision makers act rationally and hedge by

investing in backup generating plants in order to ensure themselves against part or total

damages that can result from power outage or electricity failure. It was also assumed in their

study that corporations are competitively risk neutral, and will equate at the margin, (the

expected cost of self-generation of a kWh to the expected benefit from that kWh). Marginal

cost of unsupplied electricity for Israel and the US was measured. The study incorporated risk

aversion phenomenon in computing cost of power outages and also differentiates between

absolute, unmitigated costs, and mitigated cost of power outages. Findings from the research

paper indicated that the cost of power outage varies proportionally with reliability (low power

outage time). US’s (United State) reliability is higher than that of Israel where reliability is

lower but power outage cost tends to be higher in the US. Beenstock (1991) stated that there

should be a refinement of the methodology proposed by Bental & Ravid (1982). Bental &

Ravid (1982) said customers would be prepared to invest in backup as service becomes less

reliable but would face a discontinuity (stop operating) at a point when risks associated with

additional loss of service appear to be unimportant.

Tambunan (2009) investigated on SME in Asian developing countries and found that power

among the many obstacles to development of SMEs was mentioned by 62% of the 180

respondents used for the studies as being the prime obstacle to the development of SMEs.

Deficiency accounted to 21%, sales limitation was 36%, deficiency was 21% and high

production capacity accounted for 25% in the same studies. Burlando (2010) wrote on the

impact of electricity on work and health: evidenced from a blackout in Zanzibar. Researcher

established that, the large reduction in household income among those employed in

organizations that required electricity for their operation was as a result of a month-long

power outage in Zanzibar a town in Tanzania. Production hours or work hours had to be

reduced for workers relying on electricity in order to perform their task by an average of 8%

per day during blackout period.

Amponsah & Braimah (2012) investigated the causes and effects of the frequent and

unannounced blackouts on the operations of MSI in Kumasi. A sample of 320 MSI from

three industrial clusters within Kumasi Metropolis were interviewed, seven institutions and

two groups of apprentices. The research showed that MSI require constant supplies of power

for their activities and that power plays a major role in MSI’s operations in Kumasi. The

study for example, identified that cold stores need 168 hours, grinding mills need 70 hours,

wood processing firms require 60 hours and printing presses require about 46.2 hours, of

constant supply of power per week, sachet water producing firms need 37.2 hours,

straightening and welding firms required 36 hours, spraying firms need 33, and dressmaking

firms require 32.4 hours constant supply of power per every week for their operations.

Meanwhile electricity supply in the country (Ghana) has lagged behind demand (less supply

than demand). Researchers also recorded a 5.3% reduction in the quantity of power

consumed by the MSI as against what they required for uninterrupted activities. Lack of

alternative source of power during blackout hours rendered about 44% of workers of the MSI

redundant (idle). They proposed that the ever-increasing consuming population is as a result



of supply deficit, which can be confirmed in an analysis by GridCo of the total installed

power capacity and that total power demand shown a supply deficit of about 9GWh.

Researchers argued that adequate and reliable power supply in Ghana is hold by the supply-

side. Writers are of the view that the government should invest in power subsector in order to

supply and generate the amount of power needed to address the interruptions in electricity

(power). This recommendation was made because researchers believe that one of the key

factors of ensuring sustained decrease in poverty in middle income economies like Ghana is

reliable electricity (power). Other recommendations made were Ghana’s wind resources

(which is confirmed by the coastline and the Ghana-Togo border with favorable wind

velocities of between 6-7 m/s) should be harnesses to supplement capacity of power; landfill

potential can be harnesses to augment electricity generation in Ghana; Ghanaians should

exploit the potential sources of electricity towards the diversification of the country’s power

generation mix; the daily waste of 1200 tonnes generated in Kumasi Metropolitan assembly

is a potential for generating between 30 and 52 MW of electricity to support national

electricity generation capacity; potential of mini and small hydro power sites which are

dispersed over 70 sites in Ghana (and capable of generating about 25 MW) could be explored

to support Ghana power supply; and the two million tons of wood residues present in the

country should also be harnesses for electricity generation. Asamoah, & Doe (2014)

researched on the Effect of Power Fluctuations on the Profitability and Competitiveness of

SMEs within the Accra Business, conclusions drawn from the studies was SMEs suffer from

often power fluctuations (those not announced and those announced) particularly those in

Accra. ROA (Return on Asset) and ROI (Return on Investment) are adversely affected as a

result of the power fluctuations, leading to profit loss. Storage, production and service

delivery are the main areas affected by power fluctuations. Increased cost in outsourced

repair services, increased cancelled orders due to delays, and expenditure on alternatives

sources of electricity are some examples of cost incurred by corporations due to power

failure. Asamoah & Doe are of the same view with Wang (2002) and other several scholars

that profitability of SMEs is severely affected by the frequent and intermitted power outages.

Allcott, Collard-Wexler, & O’Connell (2015) investigated on How Do Electricity Shortages

Affect Industry? Evidence from India, by pinpointing lack of reliable electricity supply in

India as a stark example of how poor infrastructure can affect economic development. The

study assumed effects of shortages on manufacturing using archival data on shortages,

instrumenting for shortages with supply shifts from newly constructed power plants and

hydro availability. The studies listed four major findings. Firstly Shortages affect productivity

much less than they affect sales because plants also decrease inputs in response to shortages,

this is because to researchers at least in the short run power failure alone do not account much

for the productivity gap between companies in developing versus developed states examined

by Chang-Tai & Klenow (2009), Banerjee & Duflo (2005) and Hall & Jones (1999).

Secondly there are substantial economies of scale in generator costs shortages, shortages

severely has effect on small plants because power shortages strongly affects plants without

generators (backups). Thirdly it was found that sales was decreased by 5.6% to 8.6% for the

average plant in the short run because they assumed that shortages are substantial drag on

Indian manufacturing average plant producer surplus which reduced by 9.5% of which 3.9%

is contributed to the capital cost of generator backups. Fourthly or lastly though some

potential solutions to India’s power outages problem may be politically infeasible, policies

can help.

3. Methodology

The population used was all twelve (12) manufacturing companies on the Ghana Stock

Exchange for the period 2007-2013. The data was analysed quantitatively, using descriptive



statistics, T statistics, averages and standard deviations to make conclusions. A sample of ten

(10) manufacturing firms representing 83.33% of the population was used. Selected

organizations were Benso Oil Planation, PZ Cousin, Ghana Cocoa Processing Limited,

Fanmilk Ghana Ltd, Unilever Ghana Ltd, Pioneer Kitchen Ware Company Ltd, Starwin

Products Limited (SPL), Ayrton Drug Manufacturing Limited, Aluworks Limited, and

African Champion Industries Limited.

4. Results and Discussion

The table and the figure below shows the effect of power outage on the performance of

selected manufacturing companies listed on the Ghana Stock Exchange.

Table 4.1: Profitability of manufacturing firms during power outage and no-power

outage periods

Profitability

Indicators Mn (P.Out) Mn (N-P.Out) Std D. (P.Out)

Std D. (N-

P.Out) TL (P.Out)

TL (N-

P.Out) P-Value Decision

O.P Margin 0.0665 0.0533 0.1426 0.1673 -0.0043 -0.0093 0.3736 reject

ROA -0.0269 0.0448 0.2825 0.1647 -0.016 -0.0114 0.1219 reject

ROE -0.491 -0.1517 2.9742 2.0391 0.0445 0.0314 0.3073 reject

Source: Secondary data, July 2017

Note: Mn=Mean; P.Out= Power Outage period; N-P.Out= No-Power Outage period;

Std D.= Standard Deviation; TL= Treandline; Sig=Significance Value; O.P. Margin=

Operating Profit Margin; ROA= Return on Asset; ROE= Return on Equity;

Significance level: P-Value < 10%

Company’s profit performance is measured using profitability ratios. Looking at the first

profitability ratio (operating profit margin), power outage period recorded a mean of 0.0665,

standard deviation of 0.1426, and a trendline of -0.0043. Trendline of -0.0043 means over the

years of power failure (outage) operating profit margin will reduce by 0.43%; while no-power

outage period recorded a mean of 0.0533, a standard deviation of 0.1673, and a trendline of -

0.0093. So, over the period of no-power outage operating profit margin will reduce by 0.93%.

Operating Profit Margin recorded a significance value of 0.3736. ROA during power outage

period noted a mean of -0.0269, a standard deviation of 0.2825 and a trendline of -0.016.

Which implies over the period of power outage ROA (Return-on-Assets) will experience a

reduction of 1.6%; whereas no-power outage period noted average of 0.0448, standard

deviation of 0.1647 and a trendline of -0.0114. So over the years of no-dumsor ROA will

decrease by 1.14%. 0.1219 is recorded significance value for ROA. With respect to ROE

(Return-on-Equity) mean for power outage period was -0.4910, standard deviation of 2.9742

and a trendline of 0.0445, which means over the period of power outage ROE will increase

by 4.45%; while ROE for no-power outage period recorded a mean of -0.1517, standard

deviation of 2.0391 and trendline of 0.0314. This implies no-power outage ROE over the

period will increase by 3.14%. ROE for manufacturing firms doted a significance value of

0.3073.



Figure 4.1: Profitability of manufacturing firms during dumsor and non-dumsor

periods

Figure 4.1 as well provides a pictorial view of the trends in the manufacturing industry

profitability in Ghana from 2007 to 2013 hiring three (3) different measures for

manufacturing industry profitability specifically: operating profit margin, return-on-asset and

return-on-equity. From the above plotted profitability graph, operating profit and return-on-

asset decreased in 2008 but that of return-on-equity improved in 2008. All three profitability

measures reduced in 2009, improved in 2010 with the exception of return-on-equity. From

the manufacturing sector profitability trends, it appears all profitability measures massively

improved in 2011 (no-power outage year). However, all three (3) profitability measures

drastically decreased in 2012 (power outage year). In 2013 Ghana’s manufacturing sector

recorded improvement in operating profit margin and return-on-equity but a reduction in

return-on-asset. This can be that during that period assets or machines were idle because of

the frequent power outage in 2012. With regards to the second objective question, power

outage periods has operation profit margin mean of 0.0132 higher than that of no-power

outage years, no-power outage period deviates from it operating profit margin more than that

of power outage years, and a significance value of 0.3736 higher than 0.1 means, it is not

significance and that power outage has no effect on operating profit margin of manufacturing

firms. ROA is high in no-power period than power outage period and that in terms of ROA

there is a reduction in power outage years, power outage periods deviates from its ROA

0.1178 more than how much no-power outage deviates from its ROA, and also a significance

values of 0.1219 is higher than the level of significance of 0.1 and that power outage has no

effect on ROA of manufacturing firms even though it has a high mean in no-power outage as

compared to power outage periods. Power outage years have a lesser ROE as compared to

that of no-power outage, but power outage periods deviates much from its standard deviation

as compared to no-power outage years. So in terms of return on equity manufacturing firms

during power outage periods do not perform. Significance value of 0.3073 indicates that even

though there is a difference with respect to ROE in power outage and no-power outage years,

this difference is not significant and that power outage does not affect ROE of manufacturing

firms.

-2

-1.5

-1

-0.5

0

0.5

2006 2007 2008 2009 2010 2011 2012 2013 2014

Trend Profitability Analysis

OPERATING PROFIT MARGIN ROA ROE



5. CONCLUSION

Energy resource of the country can determine economic growth and development, as such

power is essential for economic activities. Power as an input commodity for production is a

very important commodity. By critically examining the liquidity ratios for both periods.

Though the means for power outage periods are higher and indicates that firms are more

liquid in power outage years, and also significance value shown that power outage does not

affect liquidity. Researcher deduced that by looking at the standard deviations, power outage

years deviated much from its means, also the trendline or rate of change (reduction) in power

outage years are higher, so do agree with Allcott, Collard-Wexler & O’Connell (2015) that

power outages alone in the short run, do not explain much of the gap in productivity and

concludes that manufacturing firms in the long run can be affected by power outages. The

most striking result was that though manufacturers said power outage has affected

profitability, the research shown that it is not significant.

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Papers

1. Ogungbade, O. I., Olweny, T. & Oluoch, O. (2017). Effect of firm size on innovation among manufacturing companies in Nigeria. European Journal of Business, Economics and Accountancy, 5 (6), 1-14.

2. Oyebisi, O. et al. (2017). Treasury management policy and improvement in revenue base in Nigeria. European Journal of Business, Economics and Accountancy, 5 (6), 15-20.

3. Tsouli, D. & Elabbadi, B. (2017). A meta-analysis of 20 years of studies on intellectual capital (1997-2017). European Journal of Business, Economics and Accountancy, 5 (6), 21-28.

5. Mark, S. M., Shukla, J. & Ndengo, M. (2017). Effect of financial market integration on foreign portfolio investment diversification in developing stock markets. European Journal of Business, Economics and Accountancy, 5 (6), 39-47.

6. Islam, M. S., Arafin, M. & Zohora, F. T. (2017). Factors affecting share price of cement industry: “a study on listed cement companies of DSE”. European Journal of Business, Economics and Accountancy, 5 (6), 48-66.

7. Shunu, A. H., Bii, P. & Ombaba, K. M. (2017). The effect of board size on firm financial performance of listed firms in Nairobi security exchange. European Journal of Business, Economics and Accountancy, 5 (6), 67-70.

8. Bardhi, R. & Kapaj, I. (2017). The contribution of geographical indications in sustainable rural development (evidence from Northern Albania). European Journal of Business, Economics and Accountancy, 5 (6), 71-79.

9. Wetosi, A. W., Geoffrey, K. & Kibet, Y. (2017). Relationship marketing strategies and competitive advantage in selected commercial banks in Uasin-Gishu county. European Journal of Business, Economics and Accountancy, 5 (6), 80-87.

10. Spahiu, A. & Kapaj, A. (2017). Roles of commercial banks in the growth of small and medium enterprises – case of Albania. European Journal of Business, Economics and Accountancy, 5 (6), 88-93.

11. Dorcas, Q., Agyeman, B. & Bonn, J. (2017). Power outages on performance of selected manufacturing firms on the Ghana stock exchange. European Journal of Business, Economics and Accountancy, 5 (6), 94-102.

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