Journal of Accounting and Management

Transcription

Journal of
Accounting
and
Management
UDC 65.012 / 657.6 / 658.14 / 658.56
Vol. 5 No. 1
Croatian Accountant
ISSN 1848-137X
June
2015
Journal of
Accounting and Management
Volume 5, No. 1, 2015
Zagreb, June 2015
Founder
Croatian Accountant – Independent Association of Accountants,
Tax Advisors and Finance Professionals
Published by
Croatian Accountant © Copyright 2015
UDC 65.012 / 657.6 / 658.14 / 658.56
ISSN 1848-137X
Editor-in-Chief
Đurđica Jurić, PhD (CRO)
Editorial Board
Tamara Cirkveni, PhD, Senior Lecturer (CRO)
Tatjana Dolinšek, MsC (SLO)
Martina Herceg Rendeli, MA (CRO)
Ljerka Markota, PhD, College Professor (CRO)
Urszula Michalik, PhD (POL)
Miroslawa Michalska-Suchanek, PhD (POL)
Dolores Pušar Banović, PhD, Senior Lecturer (CRO)
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FOREWORD
Dear readers,
we are pleased to present the fifth volume of the Journal of Accounting
and Management. It is rather important for the Journal’s development because this issue is the fifth in the row of its publishing. Its primary aim is to
present the results of international research works and novelties in the fields
of accounting and management.
The Journal is on a completely open-access basis and is available for use to
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We thank all the authors, reviewers, members of the Editorial Bord and
especially the readers and users of our journal and we invite and welcome new
submissions of articles.
Editor-in-chief
Đurđica Jurić, PhD, College Professor
CONTENTS
DEMAND SIDE CONSTRAINTS TO SME ACCESS TO EXTERNAL FINANCE:
EVIDENCE FROM SURVEY OF MANUFACTURING FIRMS IN ETHIOPIA
Ashenafi Beyene Fanta, PhD
1
INTERDEPENDENCE OF INDUSTRIAL PRODUCTION INDEX AND CAPITAL
MARKET IN CROATIA: VAR MODEL
17
Bojan Tomić, University specialist of economy,
Andrijana Sesar, Professional master of applied economics BUSINESS ENVIRONMENT AND THE POTENTIALS OF SMALL AND MEDIUM
ENTERPRISES IN NIGERIA 33
Andy Titus Okwu, PhD
THE ROLE OF MNCS IN DEVELOPING BEST PRACTICES IN HRM
51
INSTRUCTIONS FOR AUTHORS
63
PUBLICATION ETHICS AND PUBLICATION MALPRACTICE
STATEMENT FOR JOURNAL OF ACCOUNTING AND MANAGEMENT
64
Maja Vidović, PhD
V
Received: 20/05/2015
Accepted: 30/06/2015
Preliminary communication paper
UDC 657.6
DEMAND SIDE CONSTRAINTS TO SME ACCESS TO
EXTERNAL FINANCE: EVIDENCE FROM SURVEY OF
MANUFACTURING FIRMS IN ETHIOPIA
Ashenafi Beyene Fanta, PhD
Department of Finance, Risk management and Banking,
University of South Africa, Pretoria, South Africa
fantaab@unisa.ac.za; ashenafizb@gmail.com
ABSTRACT
Small and medium enterprises (SMEs) are financially constrained due to demand side and supply side factors. Most studies emphasize on the supply side constraints, paying less attention to the demand side constraints that arise from SME
inherent characteristics. This paper aims at describing characteristics of SMEs and
identifying attributes that hinder their access to external finance. To this end, survey of 102 randomly selected firms from the Ethiopian manufacturing sector was
conducted. We find that most SMEs are characterized by having a few or no collateralizeable fixed assets. Examination of owner’s willingness to admit a new partner as a means of expanding capital base revealed that most SME owners exhibit
aversion towards selling ownership control. This shows that, contrary to conventional view, aversion towards relinquishing ownership interest increases with size.
In terms of financial transparency, we found that most small firms are not accustomed to keeping books of accounts. In general, we found that firm characteristics
and owner perceptions are partly responsible for SMEs limited access to external
finance.
Key words: SMEs, Ethiopia, Bank credit, manufacturing.
1
1.INTRODUCTION
The question of what determines SME access to external finance is an ongoing matter of theoretical and empirical investigation. Quite a lot of studies have been conducted aiming at unraveling impediments to SME access to
credit. Closer examination of array of empirical studies reveals that the problems are in fact multifaceted and differ across economies. Although not fundamentally varied, studies in advanced economies, emerging markets, and
developing countries imply that a homogenous solution is unlikely to work
across countries. This is mainly due to the fact that the nature of the SME sector, level of economic development, and status of financial intermediary system differs across countries, giving rise to differences in the type and intensity
of factors that impede SME access to finance. Divergence in the factors that
drive SME financing problems calls for a closer look at country case studies.
The existing empirical literature is fragmented and hence setting up a framework helps in easily grasping the types of restraints that prevail in a particular
economy, hence this paper.
Based on review of the extant literature, we characterize the SME sector
using attributes that can reasonably be classified into size-related, owner-attitude related, and financial-transparency related factors. Size-related factors
arise from smallness of firms in the sector. Because of their smallness, SMEs
resources are dominated more by liquid assets and less by fixed resources that
can potentially be used as collateral. Besides, the amount of loan they demand
is often not large enough to be attractive to lenders. In addition, owner-attitude related factors involve factors that have to do with the owner’s disposition towards partial relinquishment of ownership control. From owner-attitude
view point, SME ownership is mostly limited within a sole proprietor, family,
or friendship group that often repels an outsider. Strikingly, the repulsion becomes stronger when ownership is limited within family group. The other most
important attribute has to do with financial transparency. Most of the small
firms are managed by the owner and depend on the wisdom and businesses
experience of the major owner, hence very few see benefit in maintaining financial records as a basis of business decision. Consequently, financial opacity
is among their distinguishing characteristics.
The rest of the article is organized as follows. Section 2 presents credit constraining characteristics SMEs based on existing literature. Section 3 describes
the survey and methodology. Section 4 presents the results and the last section concludes.
2
Ashenafi Beyene Fanta, PhD DEMAND SIDE CONSTRAINTS TO SME ACCESS
TO EXTERNAL FINANCE: EVIDENCE FROM SURVEY OF MANUFACTURING FIRMS IN ETHIOPIA
2. CREDIT CONSTRAINING CHARACTERISTICS OF SMES
The existing body of literature shows that, besides constraints imposed
by the financial intermediary system, SME own inherent characteristics partly
contribute towards their problem in accessing external finance. We classify
these characteristics into three categories as size-related, owner related, and
financial transparency related. The three categories differ in terms of susceptibility to reform. For instance, while size-related characteristics are inherent
and can hardly be improved, owner-related and financial-transparency related
attributes can be altered by reforming ownership structure and by enhancing
the quality of their books of accounts. In the ensuing paragraphs, we summarize the existing empirical work in the stated areas.
Country case studies converge to the view that SMEs across economies
share a common attribute. The first of these attributes is related to their size.
Because SMEs are smaller, they rely less on capital and hence have relatively
lower investment in physical assets that can be used as collateral for a bank
loan. Besides, they transact in amounts that may not be large enough to attract lenders. Besides, SMEs are mostly established by a sole proprietor or a
small group of friends or family members to whom an outsider is less welcomed. They therefore do not like to sell ownership interest in fear of inviting
an outsider, and this constrains their ability to raise external finance, and in the
absence of equity capital, SMEs become more desperate to get a bank loan.
Moreover, lack of financial transparency, caused by absence of system of books
of accounts, further limits their ability in accessing external finance.
2.1 TRANSACTION MAGNITUDE
Employment of capital at a lower magnitude is the primary reasons for
their smallness. This is also among the factors that encourage establishment
of small businesses, because such firms can be set up without requiring large
investment in physical assets. While SMEs generally have large portion of their
resources in the form of current assets (Teruel & Solano, 2007) they have few
fixed assets that can be potentially pledged as collateral for a bank loan. Excessive liquidity is more prevalent in the sector. This typical characteristic of SMEs
restrains their ability to access credit, especially where the financial intermediary heavily relies on tangible assets as a security for a loan. In fact, SME access
to credit can be eased where current assets such as merchandise inventory are
accepted as a security. Even then such a loan is so small that it can hardly be
used for financing expansion, and used only in supplementing their operating
cash flow requirements. Consequently, absence of large collateralizable asset
base, in a collateral backed lending environment, limits their ability to obtain
a loan.
3
Because of their size, the value of transactions SMEs execute is small in
magnitude (Vandenberg, 2003), leading to higher transaction cost. They apply for relatively smaller amount of bank loan. Banks, on the other hand, prefer loans that are large enough to generate income that covers administrative
costs and allow a profit. Banks therefore consider SME loans less profitable and
find little incentive in lending to them, and when extending credit they charge
higher interest. In the worst case, they set a minimum loan size, beyond what
SMEs can afford, thereby cleverly excluding SME lending.
2.2 AVERSION TOWARDS DILUTION OF OWNERSHIP INTEREST
Most SMEs are established within family or friendship group. Theory predicts that insider sales of ownership interest tends to convey bad news as they
suggest a dwindling of insider’s incentives and a lack of insider confidence
on business prospect (Livingston, 2007). Empirical studies, however, show that
SME operators dislike selling interest to avoid monitoring by outsiders. Besides, the founder may derive utility from his ability to “exercise authority, dictate strategy, and choose which investments the firm will undertake” (Schulze
et al, 2003:179). The controlling managers in small firms exhibit a good deal of
apparently defensive behavior and as reported by Livingston(2007), managers in firms with substantial family involvement tend to hold higher stakes in
their firms and are less likely to break them up. Wu et al (2007) in their survey of family businesses, found that financing decisions of family firms involve
a trade-off between family control and the pursuit of growth opportunities.
They also show that a highly levered capital structure or limiting growth allows
the family firm to maintain control and pursue complex objectives. In addition,
family involvement decreases the use of monitoring by both the board and
non-family financial managers.
The fact that SME operators detest dilution of control often limits their
financing ability and also their growth. Independence and control are often
considered the primary reasons for the differences in SME financial behavior
compared to what might be expected from the publicly listed firms. According
to Vos et al (2007) SMEs exhibit signs of financial contentment, showing that
SME owners like to sustain their firm and do not seek growth beyond their
ability to control. They claim that financial contentment as a financing pattern
describes much of the SME sector. SMEs seeking growth, however, participate
more in the external capital markets than those not seeking growth. Small firm
owner’s control averse behaviour limits SME financing alternatives increasing
their reliance on bank credit. This is confirmed by Carey & Flynn (2005) who
found that there is a high degree of Irish SME dependence on banks as a source
of funding.
4
2.3 FINANCIAL TRANSPARENCY
Financial transparency is important in the credit market, be it debt or equity market. Investors and creditors want to get as much information as possible
about the firm whose share they buy or to which they extend credit. Banks require borrowers’ financial information before making a credit decision. If a borrower is unable to present financial statement, either the loan application is
rejected or higher interest is charged based on the presumption that it is risky.
SME are non-transparent (Pissarides, 1999), and their informational opacity further exacerbates their problem in accessing credit. Two reasons have
been forwarded: most SMEs do not have an accounting system in place to allow production of credible financial reports. Second, even those with an accounting system may elect to stay opaque in order to evade tax.
3. DESCRIPTION OF THE SURVEY AND METHODOLOGY
The survey was conducted covering randomly selected sample of 102
manufacturing SMEs operating in Addis Ababa, the capital that hosts nearly
one half of manufacturing SMEs. The sample was drawn from manufacturing
enterprise directory obtained from the Ethiopian Central Statistical Authority
(ECSA). We define SMEs ,by taking into account international experience, the
level of economic development of the country, the size of average manufacturing firm relative to firms in other industries as firms using automated manufacturing process employing between 10 to 150 workers and having capital
over the range of ETB 50,000 (approximately €3,000) to ETB 15 million (approx
€900,000). Based on the foregoing definition, we identified 784 SMEs out of
1,138 manufacturing firms in the country in 2006.
We established a sampling frame by narrowing the population of SMEs
down to 375 firms operating in Addis Ababa, the capital. The firms are stratified into 10 industrial classes. The sample was drawn from each stratum on
a random basis, and eventually 120 firms were selected for survey. However,
only 102 firms were approached due to lack of willingness to participate or
absence of the owner for the rest. Industrial composition of firms in the sample
is as follows: Food products and beverages (31.4%), wearing apparel (5%), Tanning and dressing of leather; manufacture of footwear, luggage and handbags
(7.8%), paper products and printing (15.7%), chemical and chemical products
(5%), Rubber and plastic products (6.9%), Non-metalic mineral products (5.9%),
fabricated metal products (2.9%), machinery and equipment (7.8%), and Furniture (11.8%). The sample represents 27.2% of manufacturing SMEs operating
in the capital. The survey was conducted using a door-to-door self-complete
questionnaire filled by SME owners. The response rate is 85%, and hence we
5
believe the survey outcome is clean from non-response bias. A cross sectional
data were generated from survey that comprises responses of each SME operator on financing startup, working capital, and growth. The cross sectional
data were analyzed using descriptive statistics.
4. THE RESULTS
In this section, we describe the Ethiopian manufacturing SMEs using survey data. SMEs are described based on their asset structure, owner’s willingness to relinquish control interest, and financial transparency.
4.1 ASSET STRUCTURE
Due to absence of reliable financial information useful in determining
the value of fixed assets owned by the firms we resorted to using the status
of non-residential buildings1 wherein the firms conducts business. The nonresidential buildings are either owned by the firm or rented. We justify the use
of non-residential buildings as a proxy for fixed assets based on the fact that
banks in the country see real estate as the most reliable asset to accept as collateral. As depicted in figure 1 below, while most of the small-sized firms use
rented buildings as their place of business, medium-sized ones have their own
buildings, implying a direct correlation between ownership of non-residential
buildings and size, and indirect correlation between using a rented building
and size. However, it has to be noted that in countries where there is a weak
property right, ownership of a non-residential building per se does not guarantee better access to bank credit. A mere ownership of property without possessing ownership title is not sufficient in the eyes of lenders because some of
them may not qualify as collateral owing to technical and legal reasons.
1 6
Real estate serves as the primary collateral in the credit market in the country. Although there is no organized
real estate market, banks have value of buildings assessed by a team of experts.
Figure 1: Ownership of non-residential building versus size
80%
70%
% of firms
60%
50%
40%
Private
30%
Rented
20%
10%
0%
Medium
Small
Size classification
Source: Survey
Dissecting the firms into different ownership groups gives a further insight
into the distribution of property ownership across different ownership forms.
As depicted in Figure 2, sole proprietors are the primary owners and renters of
non-residential buildings, followed by privately limited companies (PLCs). Sole
proprietor’s predominance reveals the fact that ownership of most of the SMEs
is confined to a single individual. Per our survey results, even the PLCs are former
sole proprietorship businesses reformed into such structure by encompassing
family members of the sole proprietor. This, according to some of our respondents, is intended to formalize management of the firm by enhancing commitment of all the members. Besides, organizing it in such a manner relieves the
family group from entering into a battle over inheritance upon death of the principal owner. Figure 2 also reveals additional fact that while more sole proprietors
rent than own a building to carry out business, more PLCs and partnerships own
than renting. One can imply that as ownership form changes from sole proprietor to partnership and PLCs, the tendency of owning a non-residential building increases, leading to a conjecture that re-formation of a firm gives rise to its
growth, or at least accompanies it. In general, consistent with existing empirical
evidence SMEs have few fixed asset in their structure delimiting their ability to
raise bank credit where lending is mostly backed by collateral.
7
Figure 2: Non-residential building status by ownership forms
70%
60%
% of firms
50%
40%
Private
30%
Rented
20%
10%
0%
Sole propr
PLC
Partnership
Cooperative
Others
ownership form
Source: Survey
4.2 WILLINGNESS TO RELINQUISH CONTROL INTEREST
We inquired SME owners whether they are willing to sale ownership interest in order to raise capital. We summarized the responses by size, ownership
form and age. Age is measured using regime in which the firm was established.
At an aggregate level, the response shows that while 60% of firms replied ”No”
only 40% replied “Yes”, implying that there is general resistance towards relinquishment of ownership interest. As shown in figure 3, owners of smallsized firms show more interest in selling control interest than those that own
medium-sized firms, implying that as firms grow bigger so does their resistance to welcome an outsider. Contrary to conventional view, smaller firms are
relatively more open to outsiders. This may be explained based on the ground
that they have a more serious financing challenge than medium sized ones.
Besides, medium firms might be established within family or friendship group
where a question of whether to include an outsider is a matter of a collective
decision whereas in small firms it solely rests upon a single proprietor.
8
Figure 3: Willingness to sale control interest by size
35
30
% of firms
25
20
Small
15
Medium
10
5
0
Yes
No
Responses
Source: Survey
A look at owner’s inclination towards relinquishing control interest across
ownership forms gives as insight into its pattern determined by a change in
form of ownership. As depicted in figure 3, most of sole proprietors are willing
to relinquish control while a few PLC owners are willing to do so. This confirms our earlier conjecture that most small enterprises are operated by a sole
proprietor whereas most of the medium sized ones are partnerships or PLCs.
A “Yes” response by most sole proprietors can be regarded as signal of their
desperation in accessing external finance despite a potential decline in exercising exclusive control over company affairs. In contrast, a lower degree of
willingness by partnership and PLC owners implies that the financing problem
they face is not so serious as to compel them to abandon an inherent aversion against an outsider. The general implication of the foregoing discussion
is therefore that the intensity of financing problem in the country falls as firms
grow in size. However, we like to make a caveat that any contentment on the
side of medium sized firms owners about company size can lead to resentment of an outsider, even where there is no improvement in financial access.
We have come to understand in our discussion with owners that a decision of
whether to admit an outsider has a tradeoff between the newcomer’s business
skill and additional capital on the one hand and the possibility of conflict of
interest that may ultimately grow so much as to bring the firm into closure on
the other hand.
9
Figure 4: Willingness to sale control interest by ownership form
Sole proprietorship
PLC
No
Yes
Partnership
Cooperatives
0%
10%
20%
30%
40%
50%
60%
% of firms responding
Source: Survey
To see if a decision to admit an outsider is determined by age of a firm
and the regime in which it was established, we also analyzed owner’s willingness across companies of different ages. We established three age categories
as those established during the imperial regime (the oldest), the socialist regime (medium), and the post reform period (the youngest). As shown in table 2, while majority of imperial regime and post-reform regime firm owners do
not show interest in selling control interest, two-thirds of socialist regime firm
owners expressed willingness to admit an outsider. One possible explanation
for the attitudinal convergence of imperial regime and post-reform firm owners
is the fact that the two periods witnessed unfettered growth of the private sector. In contrast, the socialist regime was the least favorable for private sector
development, and quite significant portion of the economy was controlled by
the government. Private investment took only the form of cooperatives, promoted by the government but with a lot of restraints.
The best alternative explanation is that entrepreneurs who set up their
firms during the socialist regime have the experience of working in cooperatives and hence do not have the apprehension towards sharing ownership interest. On the other hand, private businesses that flourished during imperial
regime and post reform period owing to commitment of the state towards
promotion of the private sector did not have to set up cooperatives to un10
dertake business activities. They rather had the chance to establish solely run
firms, without seeking a partner. This in turn gave them the leeway in easily
setting up a business concern, while at the same time denying them a chance
to experience working with others.
Table 2
Willingness to sell control interest by period of establishment
Period of establishment
Are you willing to sell control
interest?
Total
Yes
No
Post reform period (Youngest)
23(52%)
39(48%)
44
Socialist regime (Medium)
14(67%)
7(33%)
21
Imperial regime (Oldest)
5(28%)
13(72%)
18
Source: Survey
4.3 FINANCIAL TRANSPARENCY
Informational opacity is among SMEs attributes that are considered to deter their access to formal credit. Lack of financial transparency gives rise to
exclusion of the sector from the credit market as it aggravates adverse selection and moral hazard-caused by asymmetric information between the lender
and borrower. When lending is based on data supplied through financial statements, firms that cannot produce independently vouched statements are denied credit. We describe extent of financial transparency on the basis of our
survey on the type of financial data they keep, and present results across size
and ownership group. While 68% of the firms have a full-fledged system of
accounting in place capable of producing standard financial statements, 13%
have only a record on revenue and expenses in a less professional way, and
19% do not have any kind of record other than sequentially filled vouchers and
receipts used to produce statements once a year by accounting consultants.
A look at figure 5 reveals that financial transparency is inversely correlated
with size. Medium-sized enterprises are more transparent than smaller ones.
While virtually all medium enterprises have a full-fledged accounting system,
majority of small firms either have only list of revenue and expenditure or
have no record at all. In our attempt to understand the reason behind financial opacity in smaller firms, we inquired small firm owners with no books of
account to justify it. We came to realize that most of them saw no compelling
reason to maintain accounting records owing to lack of education and simplicity of their transactions. Those that keep books of accounts do so primarily for
the purpose of fulfilling tax agency requirements, and its usefulness in business decision making is secondary.
11
Figure 5: Financial transparency by size class
50
45
40
No of firms
35
30
25
Medium
20
Small
15
10
5
0
has full fledged
accounting
system
Source: Survey
has only income and
expenditure list
has no any book of
account
A look at the disparity in financial transparency across different ownership
categories gives an insight into the relation between transparency and ownership form. Of those that do not have any books of accounts2, sole proprietors account for 90%, and majority of PLCs have full-fledged system of records,
mainly driven by the law that compels such firms to keep standardized system
of financial information. For most PLC owners using financial statements in the
decision making process is only secondary, the primary reason being fulfilling
legal requirements. Very few of them see the benefit of producing financial
statements in enhancing their chance to secure bank credit. In fact, banks require financial statements as part of a loan application, but use it only as a
mechanism for ensuring financial prospects. Financial statements are not used
to circumvent collateral requirement, nor is it used in negotiating more favorable terms with the lender. They are only part of the formality in applying for a
loan. The amount and cost of loan is determined primarily based on strength
of the collateral. In general, despite the existing evidence that SME opacity
limits their access to bank loan, financial statements are of little use in loan decisions in the Ethiopian credit market, and hence financially transparent firms
have no perceptible advantage in accessing loan over those that are not.
2 Firms with incomplete or no accounting records are often smaller in size and hence fall under category of tax
payers whose tax liability is predetermined by the authorities. It means they pay a fixed sum.
12
Figure 6: Financial transparency by form of ownership
100%
90%
80%
70%
full fledged books of
accounts
60%
50%
only income and
expenditure list
40%
no any book of account
30%
20%
10%
0%
Sole propr
PLC
Partnership Cooperative
Source: Survey
5.CONCLUSIONS
Studies on SME financing emphasize more on the supply side constraints,
giving less regard to SME inherent characteristics that often impede their access to credit. This paper aims at describing characteristics of SMEs with the
view to identify attributes that hinder their access to external finance. To this
end, survey of 102 randomly selected firms from the Ethiopian manufacturing
sector was made. We find that the asset structure of most SMEs is characterized by a few or no collateralizeable fixed assets. Most small firms do not own
the property where they conduct business, they rather use rented offices. The
likelihood of owning a business premise increases with size. Examination of
owner’s willingness to admit a new partner as a means of expanding capital
base revealed that most SME owners exhibit aversion towards selling ownership control. Owners of medium sized firms exhibit greater resistance to sell
ownership interest than smaller firms. This shows that, contrary to conventional view, aversion towards relinquishing ownership interest increases with size.
In terms of financial transparency, we found that most small firms do not keep
books of accounts, and the likelihood of keeping books increases with size.
13
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14
OGRANIČENJA U PRISTUPU VANJSKOM FINANCIRANJU MALIH I
SREDNJIH PODUZEĆA. PRIMJER PROIZVODNIH TVRTKI U ETOIPIJI
SAŽETAK RADA
Mala i srednje velika poduzeća financijski su ograničena zbog čimbenika ponude i potražnje.
Većina studija naglašava ograničenja faktora ponude ne obraćajući pažnju na
ograničenu potražnju koja proizlazi iz prirođenih svojstava malih i srednjih poduzeća. U radu se opisuju obilježja malih i srednjih poduzeća i identificiraju atributi koji
koče njihov pristup vanjskim financijama. U tom je smislu provedeno istraživanje
na 102 nasumično odabranih tvrtki iz etiopskog proizvodnog sektora. Ustanovili
smo da većinu malih i srednjih poduzeća karakterizira nedostatak instrumenata
osiguranja dugotrajne imovine. Ispitivanje spremnosti vlasnika na udruživanje s
novim partnerom kao sredstvo širenja osnovnog kapitala pokazalo je da većina
vlasnika malih i srednjih poduzeća negativno reagira na gubljenje vlasničke kontrole, u čemu prednjače vlasnici tvrtki srednje veličine nad vlasnicima malih tvrtki.
To pokazuje da se, za razliku od konvencionalnog stajališta, averzija prema gubljenju vlasničkog udjela povećava s rastom tvrtke.
U smislu financijske transparentnosti, otkrili smo da većina malih poduzeća ne
vodi poslovne knjige. Općenito, otkrili smo da su obilježja tvrtke te percepcija vlasnika iste djelomično odgovorni za ograničen pristup malih i srednjim poduzeća
vanjskom financiranju.
Ključne riječi: mala i srednja poduzeća, Etiopija, bankovni krediti, proizvodnja,
financiranje.
15
Original scientific paper
UDC 658.14
INTERDEPENDENCE OF INDUSTRIAL PRODUCTION
INDEX AND CAPITAL MARKET IN CROATIA: VAR
MODEL
Bojan Tomić, University specialist of economy HEP – Distribution system operator, Elektra Zagreb d.o.o., Croatia
University College EFFECTUS – College for Finance and Law, Zagreb, Croatia
bojan.tomic2@gmail.com
Andrijana Sesar, Professional master of applied economics Raiffeisenbank Austria d.d., Zagreb, Croatia
University College EFFECTUS – College for Finance and Law, Zagreb, Croatia
andrijanasesar@gmail.com
ABSTRACT
Industrial production is an important indicator of future trends in each of the
economy including the Croatian economy. On the other hand, as a preceding factor of the economy dynamics changes, the equity indices of the capital market can
be used. Due to different considerations and interpretations of their mutual initial causation, the paper analyzes the interdependence between the main index
Croatian capital market CROBEX and indicators of total industrial production of the
Republic of Croatian. Also, in the model was introduced exchange parity euro/kuna
as an additional variable rate which is considered to have a significant influence
on the competitiveness of the Croatian economy, as well as the capital market. The
theoretical premise about the interaction of the foreign exchange rate and capital
markets has been considered in the context of the “flow-oriented” and “stock-oriented” model. Aiming to determine the interdependence between aforementioned variables, the analysis was carried out using the vector autoregression model
(VAR). The Granger causality test was conducted as part of the VAR model, as well
as the decomposition of variance in future periods and the impulse response function of relevant variables. The results of analysis indicate the existence of causality
of the exchange rate to the index of industrial production, as well as the existence
17
of causality of the index of industrial production to CROBEX index.
Keywords: VAR model, causality, industrial production, CROBEX, the exchange rate.
1. INTRODUCTION AND MOTIVATION
In the wider economic literature it is common opinion that interdependence of certain macroeconomic variables that represent the financial market
are not strictly defined. The reason is cited a number of factors: time of observation, selection of analysis model, monetary policy that is carried out, economic development degree of individual countries, changes in the structure
of economic and social organization that undergo the transition countries, and
which are characterized by the underdevelopment of the financial system. The
existing domestic researches, such as Sajter and Ćorić (2009), Tomić et al. (2014)
indicate a high degree of correlation between the US and Europe, and the Croatian capital market, partly due to industrial-financial coherency of the United
States and Europe, and partly because of the influence of psychological factors
on the behavior of the individual, respectively the behavioral finance notion.
However, the assumption is that the value changes of some observed market
depends not exclusively on the changes of value the leading foreign markets.
Opposed to developed markets, considerable number of research were carried out about impact of macroeconomic variables on the value changes of
the share market, in Croatia there is very small number of research on this or a
similar topic. Therefore, the study of causality between macro indicators and
stock markets index, contributes significantly to the wider scientific community in Croatia, also through a practical approach, taking into consideration
the results of new research. Considering that the study analyzes the interconnection between the index volume of total industrial production, the CROBEX
index as trend value indicator of the capital market and middle exchange rate
of the euro against the kuna, the following briefly describes the theoretical assumptions of the interdependence between these variables.
Classical economic theory assumes the interaction between the stock
prices and foreign exchange rates in two basic models: the “flow-oriented” and
“stock-oriented” model. The first model assumes that the foreign exchange rate
can affect the market value of the shares (Dornbusch and Fisher, 1980). The domestic capital market reacts to the EUR/USD parity value for several reasons.
As the most important reason, the competitiveness of the economy is alleged,
ie. appreciation or depreciation of the kuna against the euro. In general, increase of one currency value in terms of another opens more economic questions in relation to whether the economy is more import or export oriented. If
18
Bojan Tomić, Andrijana Sesar; I NTERDEPENDENCE
OF INDUSTRIAL PRODUCTION INDEX AND CAPITAL MARKET IN CROATIA: VAR MODEL
joint-stock companies imports more goods as basic inputs for their products,
depreciation of the domestic currency could result with higher operating costs
which consequently can reduce the value of their shares. Further, in case of
currency appreciation, the situation is reversed, and that the final outcome
could be value increase stock shares. On the other hand, it can be set the opposite hypothesis which due to the depreciation of the kuna assumed revenue
growth export-oriented companies, and value increase of their stock shares.
Also, if appreciation of the local currency happened, it can mean a reduction
in their business activities and ultimately lower value of their shares on the
secondary market.
The second, “stock-oriented” model, based on the inverse assumption, suggests that the stock market can affect the exchange rate value (Branson et al.,
1977). The assumption is that the increase of domestic shares value may lead
to appreciation of the domestic currency for two reasons. First reason is that
the rise of domestic stocks prices attracts new investments. Investors, owners
internationally diversified portfolio, simultaneous sale foreign shares in foreign
currencies and buying domestic shares in the domestic currency, where high
demand for domestic currency causes its appreciation. The second reason is that
the increase of shares value can be an indicator of positive changes in the economy trends, which again leads to higher investor demand for domestic currency,
which results with higher market interest rates. Higher interest rates attracts foreign capital and increases demand for domestic currency because international
funds transferring requires currency conversion, which ultimately causes currency appreciation. Of course, here are placed and reverse hypothesis which says
that in case of fall in share prices investors will sell domestic shares, which will
lead to the exchange rate depreciation. Finally, the hypothesis of the existence
of causality between the capital market and foreign exchange rate does not exist. This is explained by the fact that the rate represents the cost of property and
its price is determined by its movement in the future (Muhammad and Rasheed,
2002). Therefore, future events will affect the current exchange rate movement,
and these events can be completely different from those that affect the movement of stock prices. In this case the relationship between stock prices and the
exchange rate may not exist (Benazić, 2008).
The theoretical assumptions about interrelation between the CROBEX index and the industrial production index can be described in several ways. In
fact, the equity indices are recognized as a very good leading indicator of real
aggregate activity, and usually come as a leading (lead) variable in models. This
becomes particularly evident in developed capital markets. For example, when
reduction of real activity is expected in the future, investors expect weaker
business results of companies.
19
The consequence of weaker performance is reflected in smaller dividends,
which ultimately results in lower stock prices1. On the other hand, small open
economies such as Croatian, with poorly developed financial market, are extremely susceptible to outside influences. Accordingly, it is difficult to expect
that the index CROBEX to be leading factor to dynamic changes of domestic
economic indicators. If causation exists between the CROBEX index and the
index of total production, it is expected that the causation goes from the production index direction towards the capital market.
Finally, the theoretical assumption of causality between the exchange rate
EUR/USD and industrial production index has been described in the context
of the “flow-oriented” model, respectively through competitiveness economy
changes that comes to the fore in the case of the exchange rate changes in
direction that corresponds to the import or export oriented enterprises. Due
to the large number of research, the results of relevant studies is following, and
briefly describing the considerations of recent date that are served as indicators for the selection of independent variables in the analysis.
1.1 PREVIOUS RESEARCH
Different studies provide conflicting results, one of the reasons are specifications of a certain markets, due to different model specifications, as well as
selection of variables in model; Cheung and Ng (1998) are thinking that conflicting results of a similar studies in different countries are due to differences
in investor’s perception about monetary policy of a certain country. Furthermore, Ramasamy and Yeung (2005) cite that reasons for conflicting results are
wider economic factors such as the level of development and changes in the
structure of economic system of a certain country, including the capital market. According to these results, and considering differences in social systems,
an important factor in the analysis represents the time period in which the
analysis is carried out.
Before overview of new researches, worth mentioning is some consideration of the first studies regarding relationship between macroeconomic factors
and the equity markets, such as Fama (1981), Fama and French (1989), Ferson
and Harvey (1991). It can be concluded that, in all above mentioned studies
a significant relationship has demonstrated between the capital markets of a
certain macroeconomic indicators, such as industrial production, inflation, interest rates, the yield curve and the risk premium.
1 More about the stock market indexes as indicators of overall real economic activity see: Kunovac (2011).
20
New studies by Dilrukshan and Simpson (2009) conducted in Australia are
about interaction between the value of the shares and the value of the Australian dollar against the US dollar by testing the relationship through the “floworiented” and “portfolio balance” models. Results point to “portfolio balance”
model, respectively suggest that changes of value of the Australian capital
market have effect on changes of value of the Australian dollar exchange rate.
Furthermore, by applying multivariate VAR model, Phyllis (2010) affirms that
there is a causal link between the Greek stock market and industrial production during the period from January 1996 to June 2008. Masuduzzaman (2012)
using the VECM model2 proves the link between share prices and macroeconomic indicators for Germany and the UK. Research in the United States and
Japan were conducted by Humpe and Macmillan (2009), based on which they
determine positive correlation between the share price with industrial production, but negative correlation with inflation and long-term interest rates in the
US, while in Japan, it was determined positive correlation between stock market and industrial production, but a negative link between the stock market
and money supply.
In Croatia Vizek (2006) examines impact of monetary policy implementation on the real sector by using the VECM model, which is presented as an
index of industrial production. Results indicate that depreciation of the kuna
against euro will cause a decrease of industrial production in the long term,
while long term appreciation of the kuna causes expansion in industrial activity. This result indicates that the relationship between the exchange rate
and industrial production was not in line with the fundamental economic
assumptions which suggests that the depreciation of the exchange rate will
have a positive impact on industrial production. Also, Benazić (2008) using the
VECM model analyzes connection between the stock prices and real effective
exchange rate. Long term analysis indicates that increase of stock prices will
lead to appreciation of the exchange rate, while in short term analysis impact
of share prices on the exchange rate is almost insignificant. Impulse response
analysis showed that increase of share prices will affect to the exchange rate
appreciation while the exchange rate appreciation will lead to instantaneous
decline of stock prices along their growth just seven quarters after the shock
occurrence. Given previous research conducted in Croatia, contribution of this
study is reflected through formal examination of causality existence between
the industrial production index, as a leading indicator of economy state and
the leading national indexes of the CROBEX capital market.
2 engl. Vector Error Correction Model.
21
2.METHODOLOGY AND SELECTION OF VARIABLE
OBSERVATION
In this paper for the purpose of analysis there were used three time series data expressed on a monthly basis: the industrial production index (PRODUCTION), the main
national equity index (CROBEX) and the average middle exchange rate value of the
euro against the kuna (EUR)3. Unlike previous studies, the time interval used in this
paper is past 17 years, from 1 January 1998 to 31 December 2014. Considering that
the purpose of analyze is causality between selected variables, the best selection of
variables that presents the Croatian economy should be GDP indicator. However, the
index of total industrial production as a measure of GDP was used in this paper, because the GDP figures are reported on a quarterly basis. Also, the CROBEX variable
was expressed as monthly average value, because the exchange rate value was also
expressed as the average. In order to make a visual inspection of common dynamic
variables of interest and determine potential unsteadiness or co-integration between
them, the following shows the variables movement in levels and in their first differences4, according to Figure 1.5
Picture 1.:Comparative overview of the time series variables CROBEX, PRODUCTION and EUR time series in levels (left), comparative overview of
their first differences (right)
!!!!!!!!!!!!!!!
!
EUR
Source: made by authors
3 Input data sources were provided by monthly reports of the Central Bureau of Statistics (PRODUCTION
variable), monthly bulletins of the Croatian National Bank (EUR variable), as well as the Zagreb Stock
Exchange (CROBEX variable)
4 Because of better statistical properties, the variables were differentiated by using logarithms, respectively
Pit
they were expressed as series of natural logarithms using:
, where: ln – natural logarithm, Pit –
Pit-1
variable value i in time t, Pit-1– variable value i in time t – 1
5 Results obtained by the analysis of non-stationary time series could lead to wrong interpretation of results
and creating a false assumptions about representativeness of the model Benazić (2008)
(
22
)
All variables indicates the existence of trend, ie. do not exhibit a tendency
of returning to its average value in levels, in contrast to their differentiated
values where it is apparent that the values range around its average. Dynamics of movements between EUR variables and CROBEX variables shows no
tendency of cointegration. On the other hand, the dynamics of movements
between CROBEX and PROIZVODNJA variables suggests that between them
could be a long-term connection. Considering this type of variable dynamics, before the VAR model implementation, in the paper is carried out formal
testing of time series data properties on stationarity, respectively integration
using the unit root tests, ie. the expanded Dickey-Fuller test (ADF test), (Dickey
and Fuller, 1979). Results of ADF test - Table 1, indicate that the variables are
non-stationary ie. integrated of order one I (1). Accordingly, the paper is carried out, Johansen test of cointegration in order to formal examine their longterm equilibrium of relationship in levels, ie. the residuals stationarity of their
regression (Johansen, 1988; 1991), (Johansen and Juselius, 1992). Hereinafter
of this paper, with the aim of establishing mutual causality between the variables, is carried out a VAR model. The VAR model creates endogenous variable
of all observed data series e = (x, y, z)’, and as such is suitable for analysis of the
interdependence of important macroeconomic variables. There are two main
applications of the VAR methodology: during the economic theories testing
and in the dynamics of the phenomenon analysis (Jošić and Jošić, 2011). The
standard Granger causality test, orthogonal variance decomposition of forecast errors (eng. Decomposition of Variance - DVC), and Impulse-Response
function Analysis (eng. Impulse Response Function - IRF) was processed within
the VAR methodology.
3. RESULTS OF ECONOMETRIC ANALYSIS
Table 1. shows results of the ADF test of selected variables in levels and
their first differences. Variables expressed in levels do not meet the requirement of stationarity because values of ADF test are not less than the critical
value, suggesting that there is a positive correlation between the residuals of
regression variables. After differentiation of variables, the value of ADF test are
lower than the critical value which indicates that the variables are stationary
or integrated of order I (1).
23
Table 1.: Results of ADF unit root test (constant and trend included)
Variable
CROBEX
PRODUCTION
EUR
Critical values of ADF test
1%
5%
10%
-3,99
-3,43
-3,13
-3,99
-3,43
-3,13
-3,99
-3,43
-3,13
Level
First difference
-1,7652
-1,4901
-2,6546
-8,7158
-8,4618
-9,7076
The critical value of the ADF test were taken from Hamilton (1994) and Dickey and Fuller (1981).
Optimal number of lags in the model were determined according to Bayes „BIC“ information
criterion and it is 1 for all variables.
After testing of stationarity, we carried out a formal test of long term equilibrium relationship existence between the observed variables, respectively
cointegration. A prerequisite for number of cointegration vectors determination is selection of optimal lag number models (Benazić, 2006). Four criteria
were used in this paper in purpose of determining the optimal lag number
models: Akaiake information criterion - AIC, Hannan - Quinn information criterion - HQ, Schwarz information criterion - SC, Final prediction error - FPE. Different criteria yielded with different results, as shown in Table 2. However, Liew
(2004) proves in his work that the HQ and SC criteria give better results on a
sample more than 60 observations. Since in this paper the length of sample is
204 observations, the optimal lag number is determined to HQ and SC criteria,
so the chosen number of lags is 2.
Table 2: Length of optimal lag number according to various criteria – variable
in levels
Criterions
Optimal lag number
AIC
3
HQ
2
SC
2
FPE
3
After determining the lag number, authors were accessed testing of variables expressed in levels on existences of cointegrating vectors between them.
Testing was conducted on a test size: λ trace – test traceability matrix, and the
size of the test: λ max – the maximal-eigenvaalue test. λ trace traceability test testing the null hypothesis that the number of cointegrating vectors is less than or
equal to r against the alternative hypothesis. On the other hand, λ max statistic
test testing the null hypothesis that the number of cointegrating vectors is
equal to r, against alternative r + l (Jošić and Jošić, 2011). Cointegrating test
results are shown in Table 3.
24
Table 3: Results of Johansen method – determining number of cointegrating
vectors
Number of
cointegrating vectors
0
1
2
Eigenvalue
λ trace statistics
Critical value
λ max statistics
0,0439
0,0227
0,0003
0,06
4,68
13,71
8,18
17,95
31,52
0,06
4,62
9,03
Critical
value
8,18
14,90
21,07
Critical values of the test for the statistical significance of 5% were taken from Osterwald-Lenum, M. (1992). The model excludes the constant and trend from the calculation.
Given that the value of the test are less than the critical value, it can be
concluded that there is no long term connection between dynamics of the selected variables in levels, therefore the analysis continues with the VAR model
and variables in their first differences. However, before running the VAR model,
it is necessary to determine the optimal number of lags using previously described information criteria, in accordance with Table 4.
Table 4: Length of optimal lag number according to various criteria – variable
in first difference
Criterion
Optimal number of movements
AIC
2
HQ
1
SC
1
FPE
2
As with Johansen method, for determining the optimum number of lags
were used SC and HQ criteria, and the selected number of lags is 1. In continuation of the paper the VAR model is formed on the first variables differences and
test its stability, ie, stability regression of equations in the model. In purpose
of testing of the model stability, reverse characteristic polynomial was used
according to express 16
det ( IK - A1z - ... - Apzp ) ≠ 0 za IzI ≤ 1(1)
If the above equation, has a z = 1 for unit root as solution, then some or all
of the variables in the VAR model are integrated order I(1), which results with
possibility of cointegration existence between them. Testing results of the VAR
stability is shown in Table 5.
Table 5: Results of VAR model stability for 3 equations
Characteristic polynomial of the matrix
0,3882
0,3882
0,1121
6 Source: http://ftp.uni-bayreuth.de/math/statlib/R/CRAN/doc/vignettes/vars/vars.pdf (page 3. i 6.)
25
All the values in
Table 5 are less than one, so based on calculation it can
be concluded that the VAR model is stable. As previously mentioned, the final objective of this paper is to determine the interdependence, respectively
causality between the variables. So as to determine causality, in this paper the
Granger causality test was used (Granger, 1969). Causality is described as forecasting possibility one of the variable based on relationships with the dynamics of other variable. Accordingly, this paper examines how much changes of
value of the certain causal variables can have effect on values changes of other
response variables. Granger causality test results are contained in Table 6.
Table 6: Results of Granger causality test
Causal variable
PRODUCTION
PRODUCTION
EUR
EUR
CROBEX
CROBEX
Response variable
CROBEX
EUR
CROBEX
PRODUCTION
PRODUCTION
EUR
F-value
5,1787
0,0021
1,9361
8,2198
0,0996
0,9655
p-value
0,0239
0,9636
0,1656
0,0046
0,7527
0,3270
Default interval of significance is 5%.
The test results indicate that the PRODUCTION variable according to
Granger causes the CROBEX variable. Also, the results suggest that the EUR
variable based on Granager test has effect on the PRODUCTION variable. Other
causal variables showed no statistical significance in describing the dynamics of response variables. According to the results, the analysis continues with
variance decomposition of forecast errors of variables CROBEX and variable
PRODUCTION. Table 6 shows the variance decomposition for the time horizon
of ten months.
26
Table 6: Orthogonal variance decomposition projection of CROBEX variables
and PRODUCTION variables
Period
1
2
3
4
5
6
7
8
9
10
CROBEX variable
CROBEX
PRODUCTION
100,00%
0,00%
97,67%
1,87%
96,59%
2,44%
96,25%
2,56%
96,17%
2,58%
96,15%
2,58%
96,15%
2,58%
96,15%
2,58%
96,15%
2,58%
96,15%
2,58%
EUR
0,00%
0,46%
0,98%
1,19%
1,25%
1,27%
1,27%
1,27%
1,27%
1,27%
PRODUCTION variable
CROBEX
PRODUCTION
1,38%
98,62%
1,31%
95,12%
1,33%
94,50%
1,35%
94,42%
1,36%
94,41%
1,36%
94,41%
1,36%
94,41%
1,36%
94,41%
1,36%
94,41%
1,36%
94,41%
EUR
0,00%
3,58%
4,17%
4,23%
4,24%
4,24%
4,24%
4,24%
4,24%
4,24%
Based on variance decomposition it is possible to determine how much
variation one observed variable described with variations of the same variable,
but as well with variations of other variables in the model. Although causality results indicate statistically significant causality link from direction of total
industrial production index towards to the capital market index, most part of
the CROBEX variable variation was explained with the same observed variable
In the first period PRODUCTION and EUR variables have no effect on the variations CROBEX variables, the variations are entirely possible to explain with the
same observed variable. From the second to the sixth period that percentage
gradually decreases to a value of 96.15%, as much as in sixth period. Additionally, since the first to the fifth period the percentage of described variation by
the PRODUCTION variables gradually increases from 0% to 2.58%. Therefore, it
can be concluded that variations of the total production index significantly do
not describe variation of the capital market index. However, such results are
not surprising. In the context of secondary capital market, it is hard to expect
that one macro indicator or any other certain indicator, significantly describes
the changes of the stock market value. If this were to happen, investors would
focus all their attention to the study of prediction and other causality variables.
On the other hand, from direction of the EUR variable towards to PRODUCTION
variable, the situation is very similar. EUR variable in the first observed period
does not explain the variation of PRODUCTION variables. From the second to
the fifth period this percentage is slightly increasing, and in the end amounted to 4.24%. Accordingly, it can be concluded that changes in the value of
the euro against the kuna affects on industrial production, but with a small
percentage of described variations, suggesting that the industrial production
27
activities of the Croatian economy, as expected, depends on other macro indicators. The remaining part of the variation is described with the PRODUCTION
variable, but also with the small part of the CROBEX variable variation.
So as to determine the direction of statistically significant variables impact, hereafter of the paper is presented the function of impulse response variables.7
Picture 2: Function of impulse response for the CROBEX variable (left picture)
and function of impulse response for the PRODUCTION variable (right
picture)
From Picture 2 it can be perceive how the domestic capital market positively reacts to the unit (positive) pulses of total industrial production index.
This result is in line with theoretical expectations. One can assume that due to
increase of domestic industrial production, capital market will react positively.
This positive reaction continues through the next two periods. After a second
period, the reaction on the shock pulse gradually decreases and disappears
after the sixth period. On the other hand, midst to increasing value of the euro
against the kuna, respectively the depreciation of the kuna, it will result with
volume reduction of the industrial production index. The trend of negative
dynamics is present in the first two periods, to make it through the next four
months completely recovered and disappeared. The resulting dynamics is con7 This paper presents the impulse response results for variables that are significant based on Granger causality. Other individual results are available upon request.
28
trary to the fundamental economic assumptions that describe the appreciation of the domestic currency as a priority in order to create greater economic
competitiveness8. According Vizek (2006) as the reason for such dynamics are
primarily stated monetary policy that is based on the regime of targeting the
exchange rate within a range of ± 2 percent
4.CONCLUSION
The primary focus of this paper was to analyze the interdependence between the industrial production index, the main index of the Croatian capital
market CROBEX and variable parity EUR/USD. Analysis was performed using
the vector autoregression (VAR) model which includes standard testing of
Grenger causality, orthogonal variance decomposition of forecast errors and
Impulse-Response function (IRF) Analysis. In the context of interdependence
of the capital markets and the exchange rate, the initial theoretical assumptions are based on “flow-oriented” and “stock-oriented” models. According to
the VAR model results, it can be established that there is no significant causality between the variables that confirmed the presence of one of these models.
Furthermore, the theoretical consideration about the CROBEX index, as
the leading variable in the analysis of causality between the capital market and
the industrial production index is justified with the assumption that CROBEX
is leading variable in real aggregate economic activity. However, the results
showed the opposite causality and confirmed the industrial production index
as the leading variable. As expected, the Impulse-Response Analysis suggests
that there is a positive correlation between the capital market and industrial
production.
Finally, the interdependence between the exchange rate and the industrial production index was examined in the context of changes in the Croatian
economy competitiveness as a response to the appreciation or depreciation of
the domestic currency. Results of the analysis indicate that depreciation of the
kuna, will result with declining of the industrial production. These results are
consistent with previously conducted considerations, but were still contrary to
fundamental economic principles. Given previous research, it is clear that the
form of negative reaction to depreciation of the domestic currency continued,
leading to the conclusion that the import of goods as inputs in the production,
continues to be a significant factor in the segment of the Croatian economy.
8 The results are consistent with previous studies on this topic (Lang i Krznar, 2004), (Vizek, 2006).
29
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INTERNET
1. Lang, M., Krznar, I.(2004). „Transmission Mechanism of Monetary Policy in Croatia“. Referat na
konferenciji „The Tenth Dubrovnik Economic Conference“ u organizaciji Hrvatske narodne
banke, Dubrovnik, dostupno na http://www.hnb.hr/dub-konf/10-konferencija-radovi/langkrznar.pdf. pristupljeno: 11.02.2015.
2. http://ftp.uni-bayreuth.de/math/statlib/R/CRAN/doc/vignettes/vars/vars.pdf (str.3. i 6.)
31
MEĐUOVISNOST INDEKSA INDUSTRIJSKE PROIZVODNJE I
TRŽIŠTA KAPITALA U HRVATSKOJ: VAR MODEL
SAŽETAK RADA
Industrijska je proizvodnja važan pokazatelj budućeg kretanja svakog gospodarstva pa tako i gospodarstva Republike Hrvatske. S druge strane, kao prethodeći
faktor promjena dinamike kretanja gospodarstva mogu se koristiti i dionički indeksi tržišta kapitala. S obzirom na različita razmatranja i tumačenja njihove međusobne inicijalne uzročnosti, u radu se ispituje međuovisnost između glavnog indeksa
hrvatskog tržišta kapitala CROBEX-a i pokazatelja ukupne industrijske proizvodnje
Republike Hrvatske. Kao dodatna varijabla, u model se uvodi i devizni paritet eura
prema kuni za kojeg se smatra da ima značajan utjecaj na konkurentnost hrvatskog gospodarstva, kao i na tržište kapitala. Teorijska pretpostavka o interakciji
deviznog tečaja i tržišta kapitala razmatrana je u kontekstu „flow oriented“ i „stock
oriented“ modela. S ciljem utvrđivanja međuovisnosti između navedenih varijabli,
analiza je provedena primjenom modela vektorske autoregresije (VAR). U sklopu
VAR modela, proveden je Grangerov test uzročnosti, dekompozicija varijanci u narednim razdobljima, kao i test impulsnog odaziva relevantnih varijabli. Dobiveni
rezultati ukazuju na postojanje uzročnosti u smjeru od deviznog tečaja prema indeksu industrijske proizvodnje, kao i postojanje uzročnosti u smjeru od indeksa
industrijske proizvodnje prema CROBEX indeksu.
Ključne riječi: VAR model, uzročnost, industrijska proizvodnja, CROBEX, devizni
tečaj.
Preliminary communication paper
UDC 658.56
BUSINESS ENVIRONMENT AND THE POTENTIALS
OF SMALL AND MEDIUM ENTERPRISES IN NIGERIA
Andy Titus Okwu, PhD
College of Economic and Management Sciences
University of South Africa, Pretoria, South Africa
okwuat@unisa.ac.za; aokwu@yahoo.com
ABSTRACT
Friendly environment enhances enterprise and management practice. This
study analysed potentials of SMEs in relation to business environment of Lagos
State; to contribute to environment-enterprise policy mechanism and regulatory
framework of the State and Nigeria, industry and management practice. With
World Bank’s sample size model, and relevant criteria, 228 SMEs were drawn via
convenience technique. Multifactor business environment-enterprise questionnaire (MBEEQ), akin to assessment tools of various agencies and institutions, was used
to elicit cross-sectional survey responses. A system of simultaneous equations model (SSEM) was used to investigate environmental effects on the SMEs. Findings:
legal-regulatory frameworks, policy stance and socio-cultural factors reduced potentials, competition aided innovation and growth; on aggregate, the environment
significantly enhanced SMEs’ potentials. Recommendations: legal-regulatory and
policy reformation towards SME-friendly environment, and SMEs should leverage
on opportunities in the environment.
Keywords: Business environment, Small and medium enterprises, potentials,
Simultaneous equations model, empirical investigation.
1.INTRODUCTION
The United Nations Conference on Trade and Development (UNCTAD)
(2005) explains SMEs as important agents of development throughout the
33
world, and promoting a country’s SME sector is important for high employment and income generation for sustainable growth and development. SME
sector plays positive role in the growth and development processes of India
(Baskaran, 2013; Ruchika, 2012), Malaysia (Saleh and Ndubuisi, 2006), Nigeria
(Aremu and Adeyemi, 2011) among others. It contributes to poverty alleviation, economic development and promotes democratic and pluralist societies
(Henriques, 1998).
It has been shown that the business environment of the SME sector shapes
its job creation, employment, innovation and growth potentials, which ultimately translate to overall economic growth and development (Olugbenga,
2012; Cai et al., 2011; Kayanula and Quartey, 2010; Ashrafi and Murtaza, 2008).
In the literature, government legal-regulatory stance and access to finance
(Lixin, 2010); infrastructure and policies (Akinbogun, 2008; World Bank, 2000),
taxes and power supply (SMEDAN, 2005) have been identified among environmental elements that affect the potentials of SMEs. The Nigerian business environment in general and Lagos State in particular seem to be characterized by
inappropriate state policies, heavy tax and regulatory burdens, erratic power
supply and hindered access to credit facilities amongst others. The results are
the absence of a strong and virile SME sector and industrial gap (Udechukwu,
2003; SMEDAN, 2005).
Available literature suggests paucity of empirical studies in Nigeria that
consider a wide range of environmental variables to investigate the effects of
business environment on SMEs, especially for the enterprise nerve centre of
the country, Lagos State. Moreover, studies by Terungwa (2011), Onwukwe and
Iheanacho (2011) and Obamiyu (2007) did not provide multifactor-based empirical evidence. This, and the desire to re-examine for the enterprise hub of
Nigeria, Lagos State, the studies of Golden et al. (1995) and Han et al. (1998),
informed this research interest.
Therefore, this study examined the effects of the business environment
of Nigeria’s enterprise nerve centre, Lagos State, on the potentials of SMEs to
create job, employment, innovate and grow. These indices are deemed appropriate to measure potentials of the SMEs as management outcomes because
they are among the criteria used in the literature to assess the SME sector and
justify the need to promote enterprise-friendly environment (World Bank &
IFC, 2012; Babalola, 2012; Stewart, 2010; UNIDO/OECD, 2004). Moreover, they
have not attracted enough attention in empirical research on the SMEs in Nigeria. This study is premised on the proposition that the business environment
has not significantly affected these potentials of the SMEs and, thus, indicated
the direction of management outcome.
34
Andy Titus Okwu, PhD BUSINESS ENVIRONMENT AND THE POTENTIALS OF SMALL AND MEDIUM ENTERPRISES IN NIGERIA
This paper has five sections. This introduction is section one, section two
is a review of related literature, section three discusses the methodology, section four is data analysis and discussion, and section five is the conclusion and
recommendations.
2.CONCEPTUAL, THEORETICAL AND EMPIRICAL
CONSIDERATIONS
2.1 CONCEPTUAL CONSIDERATION
Though the concept and definition of SMEs vary among agencies, institutions, scholars and authors, the common criteria are size, asset value, annual
turnover and number of employees. How SMEs are defined usually depends
upon the scale and structure of business in the economy, and varies from country to country (OECD, 2004). While Britain conceives SMEs as firms with annual
turnover of 2 million pounds or less and fewer than 200 paid employees, Japan
considers them to have 100 million yen paid up capital and 300 employees. In
the wholesale business, they are firms with 300 million yen paid up capital and
100 employees; but in the retail trade they have 100 million yen paid up capital
and 50 employees (Ekpeyong & Nyang, 1992). For the developing countries,
UNIDO (as in Elaian, 1996) considers a firm with 5 – 19 workers as small and
20 - 99 workers as medium. For the industrialised countries, enterprises having
99 or fewer employees and 100 – 499 employees are considered as small and
medium firms, respectively. In Nigeria, The National Council on Industry (NCI,
2001) as in Udechukwu (2003) defines SMEs as enterprises with a maximum
asset base less than N200 million (equivalent of $1.43 million), excluding land
and working capital, and employing minimum 10 and maximum of 300 employees.
For this study, SMEs are firms which, in addition to the above specifics, produce goods or render services, manage their activities and have the potentials
to create jobs, employment, innovate and grow; adapt to threats and leverage
on opportunities in the business environment.
Similarly, business environment has varying views in concept and definition. DFID (2003) and ILO (2004) consider it as a broad range of external elements that affect the growth and performance of small enterprises. Stern
(2002) explains it as the policy, institutional and behavioural environment,
both present and expected, that influence the returns and risks associated
with investment in a specific location. White (2004:8) refers to it as “everything
that affects enterprise performance from outside such as corruption, policies,
laws, culture and infrastructure”. To Lixin (2010), the concept integrates mac35
roeconomic aspects: fiscal, monetary and exchange rate policies; governance:
institutions and politics; and infrastructure: transportation, electricity and
communication. Donor Committee for Enterprise Development (DCED, 2008)
considers it as a complex of policy, legal, institutional and regulatory conditions that govern business activities.
This article considers it to comprise such factors as Legal/Regulatory, Political/Policy, Infrastructure, External Finance, Technology, Competition, Taxes
and other Fees, Social-Cultural Factors, Labour and Costs, and Corruption that
affect job creation, employment, innovation and growth potentials of SMEs in
Nigeria in general and Lagos State in particular.
2.2 THEORETICAL CONSIDERATION
Some theories have focused on the business environment in relation to
enterprise management and performance. However, Thompson’s (1967) Contingency Theory and Cyert’s and March’s (1963) Behavioural Theory of the Firm,
which emphasise system resource approach to firm management and performance evaluation, bear specific relevance to this article. They are a set of behavioural analysis that emphasises the internal and external situations as the
determinants of optimal course of action. The literature has a wide range of
contingency frameworks (Zeithaml et al., 1988). Its approach to management
derives from general systems theory and the open system variant (Von, 1951;
Boulding, 1956; Katz and Kahn, 1966; Anderson, 1957). The open system perspective considers the complex organisation as a set of interdependent components that, taken together, constitute a whole which, in turn, is interdependent
with some larger environment such that interactions among elements within
the organisation and between the organisation and the environment result in
adaptation and equifinality. That is, elements within the system adapt to one
another to preserve the basic character of the system, and a system can reach
the same final state from differing initial conditions by a variety of paths. The
perspective considers an enterprise as problem-facing and problem-solving
entity and, thus, developed rational decision processes [management] to cope
with the complex and uncertain dimensions of the business environment to
achieve a satisfactory level of performance for its ability to obtain resources.
The most common system resource measures of the SMEs include number of
employees, annual turnover, market share [growth] and revenue per employee
(Orser et al., 2000; Mohr and Spokeman, 1994).
2.3 EMPIRICAL CONSIDERATION
Several studies have investigated the association between different environmental factors and firm potentials or performance, and established varying
36
effects on enterprise variables (Norzalita and Norjaya, 2010; Han et al., 1998;
Jaworski and Kohli, 1993). Dollar et al. (2005) used the World Bank Enterprise
data for Bangladesh, China, Ethiopia and Pakistan. For the enterprise, the
study considered total factor productivity (TFP), wages, profits, growth rates
of output, employment and fixed assets; and for the environment, it used infrastructure (custom efficiency, power loss, and the number of days to install
phones), ratio of firms with overdraft access, and the frequency of inspection
visits per year by relevant government agencies. The study found infrastructure to be the most important in explaining performance. Similarly, Fernandes
(2008) found that infrastructure (measured by power) enhances performance
in Bangladesh. Hallward-Driemeier et al. (2006) examined the effect of physical infrastructure at city-level on firm outcome in China, and found that the
proxies for physical infrastructure are not significantly associated with performance.
The opposing views of Dollar et al. (2005) and Hallward-Driemeier et al.
(2006) seem to emanate, perhaps, from considerations of infrastructure variables. Firms can provide alternatives to government electricity and telephone
lines with relative ease but not such other variables like roads and security of
lives and property. Nonetheless, the findings suggest that the effects of physical infrastructure seem to differ by countries and city levels.
Some other studies have analysed the business environment in relation
to job and employment, and innovations and growth potentials of SMEs in national economies. Ayyagari et al. (2005) used a new and unique cross-country
database to examine the contribution of the SME sector to total employment
in manufacturing and GDP across 76 countries. The study considered entry
costs, contract enforcement costs, exit costs, property registration costs, employment rigidities and access to finance as environmental factors; and firm
size (SMEs’ shares in total labour force and gross domestic product) for the
SME sector. The study found elements of the business environment to predict
a large SME sector in manufacturing, but establish a weak association between
high exit costs and employment rigidities. Thus, it found stronger support for
the hypothesis that a large SME sector is due to a competitive business environment that allows and encourages entry of new innovative firms.
Corruption is one other factor of bad political environment of business. Fisman and Svensson (2007) used a Ugandan firm data set containing information
on bribe payments to determine which, taxes or corruption, is more damaging
for firm growth. The study found both to have a negative effect. Cai et al. (2011)
used a large sample of Chinese firms to investigate the effects of corruption on
firms’ performance. They considered entertainment and travelling costs (ETCs)
of firms as a proxy for corruption (these are higher when government services
37
are poor which induce firms to bribe for services as grease payment, and also
when tax burdens are high so that they tend to reduce tax burden and enforcements through bribes). The study found that, on the average, ETCs have significant negative effects on firm productivity, and that official effective tax rates
are not, on the average, significantly related to productivity. The negative effects are less pronounced and can completely disappear in areas where there
are particularly high tax burdens and bad government services. Djankov et al.
(2009) used cross-sectional regressions on cross-country data to examine the
effect of corporate tax rates on aggregate economic outcome, and found that
effective corporate tax rate correlates negatively with aggregate investment,
foreign private investment and firm activities, but is positively correlated with
the share of informal sector in the economy.
Some studies have analysed the effects of the environment on enterprises
in Nigeria. Akinbogun (2008) examined the impact of infrastructure and government policies on survival of small-scale ceramic industries in South-West of
Nigeria, and found infrastructure and government policies not to have encouraged the industries. Obokoh (2008) used 500 manufacturing SMEs in Lagos
State to investigate the effects of the 1986 trade liberalization policy in Nigeria.
With tenets of the trade liberalisaton policy, labour availability, infrastructure,
technology, competition and access to finance as environmental factors; and
turnover, profit, production level and market coverage as enterprise variables,
the study found that effects of the policies are not felt by most manufacturing SMEs due to improper planning and the absence of favourable investment
climate. Onwukwe and Ifeanacho (2011) examined the impact of government
intervention on the growth of SMEs in Imo State, Nigeria, and found that policy
formulation and implementation constitute a major constraint to growth of
the SMEs, despite several specialised institutions in charge of micro credit and
policy instruments to enhance development of the sector.
This review shows no consensus yet on the effects of business environment on SMEs’ potentials as the pivots of enterprise and management practice.
2.4 O
PERATING AN ENTERPRISE
IN LAGOS STATE RELATIVE TO 37 CITIES/REGIONS IN NIGERIA
The World Bank, in its 2012 and 2014 ‘Doing Business’ surveys, showed the
relative ease of or difficulty in starting or doing a business in Lagos State. Based
on certain indicators of business environment, the survey showed relative position of the State among 37 cities/regions in Nigeria. Lagos State ranked 8th
& 4th, 35th & 36th, 27th & 31st and 15th & 28th among the 37 cities/regions. The
measuring indicators are in terms of starting a business, dealing with construction permits, registering property and enforcing contracts, respectively. The
38
2.4 Operating an enterprise in Lagos State relative to 37 cities/regions in N
Andy Titus Okwu, PhD BUSINESS ENVIRONMENT
ANDWorld
THE POTENTIALS
MEDIUM ENTERPRISES IN NIGERIA
The
Bank, in OF
its SMALL
2012 AND
and 2014
s, showed
of or difficulty in starting or doing a business in Lagos State. Based on certa
survey showed
position of the St
survey showed business
the firsts environment,
to be: Startingthe
a business
(Federal relative
Capital Territory,
cities/regions in Nigeria. Lagos State ranked 8th & 4th, 35th & 36th, 27th & 31st
FCT) Abuja, dealing with construction permit (Jigawa); registering property
among the 37 cities/regions. The measuring indicators are in terms of start
(Gombe, Zamfara) and enforcing contracts (Katsina). These indicate that Lagos
dealing with construction permits, registering property and enforcing contrac
has not fared well
in terms
policy and
This
The
surveyofshowed
the regulatory
firsts to be:business
Startingenvironment.
a business (Federal
Capital T
is expected to affect
the
potentials
of
the
SMEs
sector
in
the
State.
Abuja, dealing with construction permit (Jigawa); registering property (Gomb
enforcing contracts (Katsina). These indicate that Lagos has not fared well in
and regulatory business environment. This is expected to affect the potentia
3.METHODOLOGY
sector in the State.
3.1 DESIGN, DATA AND SOURCES
3. METHODOLOGY
This research employed cross-sectional survey design to elicit required
3.1 Design, data and sources
information from the respondents whose response behaviours were not influThis research
employed
cross-sectional
survey
to elicit
enced by the researcher.
The study
was conducted
in Lagos
Statedesign
because
the required in
the respondents
whoseSampling
response behaviours
were nottoinfluenced
State is the enterprise
hub of Nigeria.
frame was limited
456 of theby the resear
was
conducted
in Lagos
Lagos Business
State because
the State
the enterprise
SMEs listed in the
2014
edition of
Directory
(LBD),ispublished
by hub of Ni
frame
was
limited
to
456
of
the
SMEs
listed
in
the
2014
edition
Ministry of Commerce and Industry. Judgmental and convenience techniquesof Lagos Bus
(LBD),
by Ministry
of Commerce
andWorld
Industry.
Judgmental an
were used to select
228published
(50%) of SMEs
in the LBD
based on the
Bank’s
were
used to select 228 (50%) of SMEs in the LBD based on the
(2009) model fortechniques
sample size
determination.
(2009) model for sample size determination.
n
1
N
N 1 1
k
N PQ Z (1 ) / 2
2
1
where N = population size, P = population proportion, Q = 1 P, k =
= the value
of the normal
for a
precision,
(1 population
where N = population
size, PZ=
proportion,
Q = 1standard
– P, k = coordinate
de1 value of the normal standard coordinate
sired level of precision,confidence,
Z(1 – α)/2 = the
The
selection
was
for a desired level of confidence, 1 – α.after initial contacts with 380 SMEs through telephone
LBD and follow-up discussions about the research intent, where more conven
The selection
was after initialInformation
contacts with
SMEsfrom
through
correspondences.
was380
elicited
bothtelephone
primary and secondar
numbers in thesecondary
LBD andsource
follow-up
discussions
about
the
research
was the LBD which provided informationintent,
needed to ascertai
where more convenience,
via email
Information
elicregistered SMEs
in thecorrespondences.
State and identify those
that metwas
the definitional
criter
ited from both primary
and the
secondary
sources.
secondary
source
was theEnvironment
source was
field survey
in The
which
Multifactor
Business
LBD which provided
information
needed was
to ascertain
number
of registered
Questionnaire
(MBEEQ)
used to the
elicit
responses
from the SME opera
SMEs in the State
and
identify
those
that
met
the
definitional
criteria.
The primanagers are usually more open about offering their general
views when an
mary source was
the fieldthan
survey
in which
Multifactor
Environment
questions
about
providing
accurate Business
quantitative
data (Montes, Moren
and Enterprise Questionnaire
(MBEEQ)
was used
used an
to approach
elicit responses
from the the perceptu
2005). Therefore,
this study
that determined
factors {legal-regulatory
politicsoffering
and policy (POP)
SME operators. environmental
Enterprise managers
are usually more(LGR),
open about
(INF),
external
finance
(ESF),
technology
(TEC),
competition
their general views when answering survey questions than about providing(COM), taxes
(TOF), data
social-cultural
factors (SCF),
labour availability
and costs (LAC)
accurate quantitative
(Montes, Moreno
and Morales,
2005). Therefore,
(COR)}
and that
non-financial
metrics
of SME measures
potentials of
{job
creation (JCN
this study used an
approach
determined
the perceptual
envigeneration
(EMP),
innovation
(INV)
and
growth
(GRT)}.
ronmental factors {legal-regulatory (LGR), politics and policy (POP), infrastruc-The question
sections:
A (ESF),
(demographic
information
of respondents),
B taxes
(enterprise charac
ture (INF), external
finance
technology
(TEC), competition
(COM),
SMEs), C (business environment factors) and D (metrics of SME potentials).
D contained close-ended and exhaustive pattern statements. Factors o
39key elements
environment considered in this study were adapted mainly from
and other fees (TOF), social-cultural factors (SCF), labour availability and costs
(LAC) and corruption (COR)} and non-financial metrics of SME potentials {job
creation (JCN), employment generation (EMP), innovation (INV) and growth
(GRT)}. The questionnaire had four sections: A (demographic information of
respondents), B (enterprise characteristics of the SMEs), C (business environment factors) and D (metrics of SME potentials). Sections C and D contained
close-ended and exhaustive pattern statements. Factors of the business environment considered in this study were adapted mainly from key elements of
the business environment that White (2004) identified for the Committee of
Donor Agencies for Small Enterprise Development, those used in business environment rankings methodology by The Economist Intelligence Unit (2006),
World Bank’s Enterprise Surveys (2009, 2011) and World Bank/IFC’s (2012) Enterprise Survey Indicator Descriptions. The response options had pre-codes of
the Likert-type scale: Always (4), In Most Cases (3), Sometimes (2), On Rare Occasions (1), and Never (0). Validity and reliability of the survey instrument were
ascertained through scrutiny by experts and Cronbach’s alpha coefficients of
0.7823 and 0.7112, respectively. Most copies of the MBEQ were administered
at the business premises of the respondents, and few via emails. The pre-codes
were used to process numerical data used for analysis. Descriptive statistics
were used to evaluate the responses for consistency and spread. Causal effects
were investigated with a System of Simultaneous Equations Model (SSEM) disaggregated from a Generalised Linear Regression Model (GLRM): Yi = βiXi + µi.
Parameters of the SSEM were estimated via Least Squares (LS) techniques.
3.2 ANALYTICAL MODEL
The model expresses the non-financial metrics of SME potentials as dependent on the factors of the business environment. Each equation in the system is a modified version of the model Nexus Associates Inc. (2003) used to
assess the poverty impact of enterprises in Nigeria. Vector-matrix notation of
the SSEM is:
40
3.2 Analytical model
The model expresses the non-financial metrics of SME potentials as dependent on
Andy Titus Okwu, PhD factors
of the business environment. Each equation in the system is a modified version o
BUSINESS ENVIRONMENT AND THE POTENTIALS OF SMALL AND MEDIUM ENTERPRISES IN NIGERIA
model Nexus Associates Inc. (2003) used to assess the poverty impact of enterprise
Nigeria. Vector-matrix notation of the SSEM is:
Yi
Xj
j
i
JCN
LGR
1
2
3
4
5
6
7
8
9
10
1
POP
INF
EMP
ESF
1
2
3
4
5
6
7
8
9 10
2
TEC
=
COM +
INV
TOF
1
2
3
4
5
6
7
8 9 10
3
SCF
LAC
GRT
COR
1
2
3
4
5
6
7
8
9
10
4
where Y (i = 1, 2, 3, 4) = vector of the indices of the
where Yi (ii= 1, 2, 3, 4) = vector of the indices of the SMEs’ potentials (JCN, EMP,
and GRT). X (j =
INV and GRT). Xjj (j = 1, 2, 3, …, 10) = vector of the business environment factors
POP,POP,
INF,
ESF,
COM,TOF,
TOF,
and COR).
(LGR,
INF,
ESF,TEC,
TEC, COM,
SCF,SCF,
LAC LAC
and COR).
βj (j = 1, j2,(j3, …, 10) =
of theofcoefficients
(effects)
of the
environmental
factor
4) = vector o
matrix
the coefficients
(effects)
of the
environmental
factors.i μ(ii (i==1,1,2,3,
2,3, 4)
= vector of the stochastic variables to accommodate exogenous influences on
A priori,
enterprise-centred LGR, POP, INF, ESF, TEC and LAC were expecte
the
SMEs’ potentials.
enhanceA the
potentials
of the SMEs
whileINF,COM,
TOF,
and expected
COR were expecte
priori, enterprise-centred
LGR, POP,
ESF, TEC
and SCF
LAC were
dampen
them. the potentials of the SMEs while COM, TOF, SCF and COR were exto enhance
pected to dampen them.
4. ANALYSIS, RESULTS AND DISCUSSION
4. ANALYSIS,
RESULTS AND DISCUSSION
4.1 Descriptive
analysis
Table 1 shows the descriptive statistics computed from responses of the respondent
4.1 DESCRIPTIVE ANALYSIS
environmental factors. The statistics are used to check the responses for consistency
1 shows
the descriptive
statisticsofcomputed
fromofresponses
the
spread, Table
as well
as determine
the nature
distribution
the dataofprocessed
from
respondents
on
environmental
factors.
The
statistics
are
used
to
check
the
reresponses.
sponses for consistency and spread, as well as determine the nature of distribution of the data processed from the responses.
Table 1: Descriptive statistics – Business environment factors
Mean
Median
Maximum
Minimum
Std. Dev.
Observations
LGR
1.33
1.40
3.80
0.00
0.92
190
POP
1.27
1.20
3.00
0.00
0.68
190
INF
2.77
2.60
4.40
0.40
0.93
190
ESF
1.49
1.40
4.00
0.00
0.79
190
TEC
1.62
1.60
4.00
0.00
1.00
190
COM
1.99
1.80
4.00
0.60
0.78
190
TOF
1.85
1.60
4.00
0.00
0.84
190
SCF
0.89
0.40
4.00
0.00
1.11
190
LAC
1.82
1.80
3.80
0.00
0.69
190
COR
1.57
1.40
4.40
0.00
1.03
190
Source: Analysis from field survey data
41
DISCUSSION
The mean of the data-responses on the environmental factors is in the
range of 0.89 - 2.77, with standard deviation in the range of 0.68 - 1.11. The
mean and median values are closely equal. These strongly suggest that the
response data-values are approximately normally distributed. On the ordinal
scale, the distribution implies that on the average, the responses ranged between On Rare Occasions (1) and In Most Cases (3), thereby leaving out the Always (4) and Never (0) response options. Low standard deviations of the datavalues show that the respondents were consistent in their responses.
4.2 INVESTIGATION OF CAUSAL EFFECTS
Table 2 shows the regression estimates, and associated standard errors, of
the parameters or coefficients of the equations in the model. The coefficients
are used to indicate the effects of the environmental factors on potentials of
the SMEs while the standard errors are used to determine the significance or
otherwise of such effects at 0.05 level.
Table 2: Regression estimates and standard errors of equations 1, 2, 3 & 4 of the
SSEM
Method: Least squares Sample: 1 190 Included observations: 190
Equation 1
Equation 2
Equation 3
Equation 4
Dept. Var: JCN
Dept. Var: EMP
Dept. Var: INV
Dept. Var: GRT
Envt. Factor
Effect (αi)
Effect (βi)
Effect (λi)
Effect (θi)
LGR
-0.188
-0.211
0.041
0.063
(0.095)**
(0.081)**
(0.085)
(0.095)
POP
-0.002
-0.137
0.122
-0.118
(0.1079)
(0.092)
(0.096)
(0.108)
INF
0.247
0.158
0.301
0.269
(0.0699)**
(0.060)**
(0.062)**
(0.070)**
ESF
0.307
0.124
0.183
0.276
(0.0731)**
(0.062)**
(0.065)**
(0.073)**
TEC
0.410
0.481
0.292
0.345
(0.0852)**
(0.078)**
(0.076)**
(0.085)**
COM
-0.096
-0.051
0.126
0.154
(0.0877)
(0.075)
(0.078)
(0.088)
TOF
0.076
0.078
0.101
0.153
(0.0880)
(0.075)
(0.078)
(0.088)
SCF
-0.042
-0.179
-0.110
-0.289
(0.0690)
(0.059)**
(0.062)
(0.069)**
LAC
0.084
0.107
0.121
0.047
(0.10000)
(0.085)
(0.089)
(0.099)
COR
0.106
0.116
-0.020
-0.030
(0.0765)
(0.065)
(0.068)
(0.076)
Adjst. R-sqrd = 0.482 Adjst. R-sqrd = 0.405 Adjst. R-sqrd = 0.614 Adjst. R-sqrd = 0.469
Prob(F-stat = 0.000) Prob(F-stat = 0.000) Prob(F-stat = 0.000) Prob(F-stat = 0.000)
42
Standard errors are enclosed in parentheses. **Significant at 5%; p-value < 0.05.
Estimated
Vector-Matrix
of SSEMof(see
Table
Estimated
Vector-Matrix
SSEM
(see2)
Table 2)
Yi
JCN
=
EMP
INV
GRT
i
-0.188 -0.002 0.247 0.307 0.410 -0.096 0.076 -0.042 0.084 0.106
-0.211 -0.137 0.158 0.124 0.481 -0.051 0.078 -0.179 0.107 0.116
=
0.041 0.122 0.301 0.183 0.292 0.126 0.101 -0.110 0.121 -0.020
0.063 -0.118 0.269 0.276 0.345 0.154 0.153 -0.289 0.047 -0.303
Xi
LGR
POP
INF
ESF
TEC
COM +
TOF
SCF
LAC
COR
where i (i = 1, 2, 3, 4) is vector of estimation errors
where εi (i = 1, 2, 3, 4) is vector of estimation errors
Discussion
i
1
... Eqn. 1: Job Creation
2
... Eqn. 2: Employment
3
... Eqn. 3: Innovation
4
... Eqn. 4: Growth
DISCUSSION
In Equations
1 and 2, the signs of the coefficients and the associated standard errors
indicate that estimates of the effects of the business environment factors show that INF, ESF
In Equations 1 and 2, the signs of the coefficients and the associated standand TEC exert significant positive effects on job creation and employment potentials of the
ard
errors
indicate that estimates of the effects of the business environment
SMEs; TOF, LAC and COR have positive but insignificant effects, while LGR exerts
factors
show
that INF,
TECand
exert
significant
positive
on job creasignificant negative effect
and ESF
POP,and
COM
SCF
exert negative
but effects
not significant
effects,
tion
and employment
potentials
SMEs; TOF,The
LACnegative
and COR
haveof
positive
with SCF
having
significant negative
effectof
onthe
employment.
effects
LGR and
and POP,
POP but insignificant effects, while LGR exerts significant
are negative
contrary effect
to pre-estimation
COM
and
SCF
exert
negative
but
not
significant
effects,
with
SCF
having
sig- of
expectations, and indicate that the legal-regulatory frameworks and business policy stance
nificant
negative
effect
on
employment.
The
negative
effects
of
LGR
and
POP,
the State dampen the potential of the SMEs to create jobs and generate employment. These
whichhave
lendcontributed
support totoObokoh’s
(2008)
finding,
areofcontrary
factors might
the relatively
poor
ranking
the Statetoinpre-estimation
the
(2012, 2014
s the
Thelegal-regulatory
effects of COMframeworks
and SCF areand
consistent
with
expectations, and indicate that
business
expectations,
suggest
theState
possibility
of unhealthy
competition
amongtothe
SMEs
as well
policyand
stance
of the
dampen
the potential
of the SMEs
create
jobs
and as
social-cultural
considerations
in These
job andfactors
employment
decisions.
However,
of the Fgenerate
employment.
might have
contributed
top-value
the relatively
statisticpoor
provides
empirical
evidence
that
the
factors
jointly
exert
significant
effect
(p-value
ranking of the State in the World Bank’s (2012, 2014) “Doing Business =
0.0000)Surveys”. The effects
job creation
and and
employment
in the
State.
This suggests
of COM
SCF are potential
consistent
with
expectations,
andthat
despite suggest
the heterogeneous
effects
of the environmental
onasthe
the possibility
of unhealthy
competition factors
among on
the enterprises,
SMEs as well
aggregate,
the
environment
enhances
their
potentials
to
create
jobs
and
generate
employment.
social-cultural considerations in job and employment decisions. However, pThe estimated models of job creation-environment and employment-environment
value of the F-statistic provides empirical evidence that the factors jointly exert
relationships show that the environmental factors exhibit moderate strength in explaining
significant effect (p-value = 0.0000) on the SMEs’ job creation and employment
variations in job creation and employment potentials of the SMEs (Adjusted R-Squared 0.482
potential in the State. This suggests that despite the heterogeneous effects of
or about 48% and 0.405 or about 41%).
the environmental
factors on3enterprises,
on the aggregate,
the environment
Similarly,
estimated equations
and 4 reported
heterogeneous
effects of the
enhances
their
potentials
to
create
jobs
and
generate
employment.
The esenvironmental factors on potentials of the SMEs to innovate and grow. The estimates
show
timated
models
of job
creation-environment
employment-environment
that effects
of INF,
ESF and
TEC
on INV and GRT areand
positive
and significant at the 0.05
relationships
showbut
that
the environmental
moderate
strength
level; LGR
exerts positive
insignificant
effect on factors
INV andexhibit
GRT, and
while the
effect of
in
explaining
variations
in
job
creation
and
employment
potentials
of
the
POP on INV is positive but not significant, it is negative and insignificant on SMEs
GRT as
(Adjusted
R-Squared
0.482 error
or about
48%Further,
and 0.405
or about
41%).
indicated
by the respective
standard
values.
effects
of COM,
TOF and LAC on
INV and GRT
are positive
but not
significant.
This
is consistent
with finding effects
of Cai et
Similarly,
estimated
equations
3 and
4 reported
heterogeneous
of al.
(2011; Han
et
al.,
1998
and
Golden
et
al.
1995).
While
COR
has
insignificant
negative
effects
the environmental factors on potentials of the SMEs to innovate and grow. The
on INV and GRT, the negative effects of SCF is significant on GRT but not significant on
INV. The negative effect of COR supports the finding of Fisman and Svensson (2007).
43 of
While positive effects of LGR, POP, INF, ESF, TEC and LAC, and negative effects
SCF and COR are as expected, positive effects of COM and TOF are contrary to expectations.
As in equations 1 and 2, p-value of the F-statistic (p-value = 0.000 < 0.05) provides evidence
innovation and
that the environmental factors jointly have significant effect on the
estimates show that effects of INF, ESF and TEC on INV and GRT are positive and
significant at the 0.05 level; LGR exerts positive but insignificant effect on INV
and GRT, and while the effect of POP on INV is positive but not significant, it is
negative and insignificant on GRT as indicated by the respective standard error
values. Further, effects of COM, TOF and LAC on INV and GRT are positive but
not significant. This is consistent with finding of Cai et al. (2011; Han et al., 1998
and Golden et al. 1995). While COR has insignificant negative effects on INV and
GRT, the negative effects of SCF is significant on GRT but not significant on INV.
The negative effect of COR supports the finding of Fisman and Svensson (2007).
While positive effects of LGR, POP, INF, ESF, TEC and LAC, and negative effects of SCF and COR are as expected, positive effects of COM and TOF are contrary to expectations. As in equations 1 and 2, p-value of the F-statistic (p-value
= 0.000 < 0.05) provides evidence that the environmental factors jointly have
significant effect on the SMEs’ innovation and growth potentials. This suggests
that despite the heterogeneous effects of the factors, the State’s business environment also enhances potentials of the enterprises to innovate and grow and,
thus, to be very relevance in economic growth and development processes of
the State and Nigeria. The strength of the environmental factors in explaining
variations was moderately high for innovation (Adjusted R-squared 0.614 or
about 61%) but relatively low for growth (Adjusted R-squared 0.469 or about
47%) in equations 3 and 4, respectively. This suggests that a considerable proportion of dynamism in the potentials of enterprises to create job, generate
employment, innovate and grow could be attributed to some other factors
that are not considered in this study, especially the internal environment of
the enterprise.
5. SUMMARY, CONCLUSION AND RECOMMENDATIONS
This study has employed the tools of descriptive statistics and empirical
analysis to investigate the effects of business environment on job creation,
employment generation, innovation and growth potentials of SMEs in Nigeria, with the business nerve centre of the country, Lagos State, in focus. The
study considered ten business environmental factors vis-à-vis four metrics of
SMEs’ potentials. The variables were modified from previous related studies
that form part of literature review. Descriptive statistics provided evidence of
consistency of responses by the respondents. It is also evident that no two
environmental factors measured same phenomenon and the variables have
been treated on their own individual merits in the literature; similarly for the
metrics of SME potentials. The environmental factors exert heterogeneous effects on the measures of SMEs’ potentials. Specifically, legal-regulatory frameworks and business policy stance of the business nerve centre cum Nigeria,
44
and socio-cultural factors proved to hinder potentials of the SMEs. Also, corruption was found to weaken the potentials to innovate and grow. Competition drives innovation and growth but retards job creation and employment.
In totality, however, the business environment significantly enhances the potentials of the SMEs to create jobs, generate employment, innovate and grow.
The environment also moderately explains the dynamics of SMEs’ potentials.
The study emphasises the need for legal-regulatory and policy reformation to make the environment more SMEs-friendly. In this regard, the relevant
authorities should reduce the procedures (stages), time (days) and costs of
starting and operating an enterprise in the State. Managers of the enterprises
should take more advantage of available infrastructure, credit facilities and
technology for their significant positive effects. Managers of the enterprises
should ensure that socio-cultural considerations are not the main driver of employment decisions. The managers should be more innovative and steer their
enterprises towards growth-oriented goal for competitive advantage. In this
regard, research and development (R&D) as well as avoiding corrupt practices
are appropriate strategies. The managers should strengthen the internal environments of their enterprises since the external environment explain only
moderately the dynamics of the potentials. Functional and effective internal
control systems are essential in this regard. For instance, socio-cultural considerations should be minimal in employment policy and decisions.
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POSLOVNO OKRUŽENJE I POTENCIJALI MALIH I SREDNJE VELIKIH
PODUZEĆA U NIGERIJI
SAŽETAK RADA:
Okruženje naklonjeno poduzetnicima poboljšava poduzetnički i menadžerski
duh. Ova studija analizirala je potencijale malih i srednjih poduzeća u odnosu na
poslovno okruženje pokrajine Lagos te kako poboljšati mehanizam politike odnosa okoline i poduzeća i pravnog okvira države Nigerije vezano za industrijsku i
menadžersku praksu. Koristeći primjereni model uzoraka Svjetske banke i relevantne kriterije 228 malih i srednjih poduzeća odabrano je za istraživanje. Ispitivanje
višestrukih čimbenika koji utječu na poslovno okruženje poduzeća provedeno je
uz pomoć procjena različitih agencija i institucija, kako bi se dobili odgovarajući
profili odgovora. Korišten je model simultanih jednadžbi, kako bi se istražili utjecaji
okruženja na mala i srednje velika poduzeća.
Rezultati su pokazali da pravni okvir i kulturno-socijalni čimbenici smanjuju
potencijale, da je konkurencija inicirala inovativnost i rast, te da je okruženje u cijelosti utjecalo na potencijale malih i srednjih poduzeća. Preporuča se promijeniti
pravni okvir i politiku, koji bi bili više naklonjeni malim i srednjim poduzećima, a
poduzeća bi trebala više koristiti mogućnosti, koje im pruža okolina.
Ključne riječi: poslovno okruženje, mala i srednje velika poduzeća, potencijali,
model simultanih jednadžbi, empirijsko istraživanje.
49
Review
UDC 65.012
THE ROLE OF MNCS IN DEVELOPING BEST
PRACTICES IN HRM
Maja Vidović, PhD
The Pennsylvania State University, USA & Faculty of Economics and Business,
University of Zagreb, Croatia
maja.vidovic@psu.edu; mvidovic@efzg.hr
ABSTRACT
The paper analyzes the role of contemporary multinational companies in the
overall development of HRM field through investigating their role in developing
best practices in HRM. Using the lens of four different strategies for managing
employees in subsidiaries of multinational companies (manipulative, exportive,
adaptive and integrative strategy), the paper considers the impact those strategies
have on the way HR practices are being transferred and/or developed within a multinational company. Drawing upon results from a qualitative research, the paper
discusses the processes and the scope of each strategy’s contribution to the development of best practices in HRM, and ultimately how multinational companies
shape the overall HRM field.
Key words: human resource management (HRM), multinational companies
(MNCs), developing HRM in MNCs, transfering best HRM practices
in MNCs, strategies for managing employees in subsidiaries.
INTRODUCTION
Multinational companies can be found of all shapes and sizes, but they all
have one common feature: their business expands over their national market.
They represent the type of organization that has the need to manage employees with different origins and located in different legal, political, economic,
social and cultural environments (Tayeb, 2005; Dessler, 2005 and 2013). The
51
dominance of multinational companies (MNCs) in the business world today
is substantial, which gives them the right to hold the title of key drivers of the
global economy (Tayeb, 2005; McGraw, 2004).
The focal area of this paper is the area of human resource management
(HRM) and the notion that MNCs might be the key drivers for enhancing HRM
practices. HRM practices are focused on attracting, retaining and using the
best talents for achieving organizational success. While HRM has previously
been considered as a business practice which provides for the survival of many
MNCs (Bartlett, & Ghoshal, 1989; Taylor, Beechler, & Napier, 1996; Schuler, Budhwar, & Florkowski, 2002), researchers today are convinced that the success of
multinational companies and their ability to achieve competitive advantage
is predominantly a result of having competent employees and adequate HRM
practices (Morris, Snell, & Wright, 2006; Tarique, & Schuler, 2008; Briscoe, Schuler, & Tarique, 2012). More specificaly, HRM practices have a significant impact
on vital employee outcomes such as employee job satisfaction, productivity,
engagement, and commitment, as well as broad organizational outcomes
leading to superior performance.
Every MNC today struggles to achieve a balance between centralization
which will allow control over its subsidiaries, and responsiveness to local environment which will allow better adaptation to local needs and markets.
In other words, the MNC is constantly balancing the headquarters’ need for
control and the subsidiary’s need for autonomy. One of the ways MNCs are
managing this balance is through developing adequate relationship between
headquarters and its subsidiaries. Several factors influence the relationship
between headquarters and subsidiaries, such as the context of the subsidiary,
differences between HQ and subsidiaries (geographical, psychical and business style), the role of the subsidiary, the type of entry, the conflicting needs
of the headquarter and subsidiary, and the strategy MNC uses to manage its
employees in subsidiaries. This paper is going to explore how the strategies
MNCs use to manage its employees in subsidiaries are influencing the relationship between headquarters and subsidiaries, the balance between control
and autonomy and consequently the recognition, development and transfer
of best practices in HRM.
STRATEGIES MNCS USE TO MANAGE EMPLOYEES IN SUBSIDIARIES
Typically, the headquarters either applies its parent company HRM policies
and practices directly to its foreign subsidiaries, or it tries to merge its HRM policies and practices with those that are common in the host countries (Briscoe,
Schuler & Tarique, 2012). One of the reasons for applying parent company HRM
52
Maja Vidović, PhD THE ROLE OF MNCS IN DEVELOPING BEST PRACTICES IN HRM
policies and practices is to maintain control over the subsidiary. But also, since
much of the work of HR practitioners in a multinational setting is heavily influenced by past practice, experience and tradition of the company (Farndale, &
Paauwe, 2005), it is natural to expect that MNCs will believe their approach is
the best one. On the other hand, it has been noted that HRM policies are transferred only when it is believed that the parent company’s resources in the HRM
areas provide MNCs with an important source of competitive advantage (Taylor, Beechler, & Napier, 1996). Even more, some MNCs may consider that the
transfer of HRM policies and practices itself is not necessary for their successful
operation, especially in some developing countries (Cox, 2014). Consequently,
it is obvious that the choice of strategy for managing employees in subsidiaries
is not as simple as the choice of centralization vs. localization.
Building upon the framework of Taylor, Beechler and Napier (1996), Vidović
(2013 and 2015) has identified four strategies contemporary MNCs use to manage employees in their subsidiaries: manipulative, exportive, adaptive, and integrative strategy. Those strategies can be distinguished using two basic dimensions: (1) degree of similarity of HRM practice in headquarters and the subsidiary, and (2) degree of autonomy that HR managers from the subsidiaries have
for shaping the HRM system in their subsidiary. The characteristics of four basic
strategies according to these two dimensions are visible from Figure 1.
Figure 1: Strategies for managing human resources in subsidiaries of multinational companies
Figure 1:
Strategies for managing human resources in subsidiaries of multinational companies
H ig h D EGREE OF SIMILA RITY O F HRM S YSTEM BETW EEN TH E HEA DQ UARTERS AND THE Exporti
ve
Integr ati
ve M an i p u l at i ve Ad ap t i ve
S U B S I D I A R Y Low Low High D EGREE OF AUTO NOMY OF SUB SIDIARY IN CREATING ITS OWN HRM SYSTEM Source: V idović, M. (2013). The typology of strategies of managing employees in subsidiaries of
multinational
Doctoral
dissertation,
Zagreb:ofFaculty
of Economics
Business,
Source: companies,
Vidović, M. (2013).
The typology
of strategies
managing
employees in&subsidiaries
University
Zagreb, pp.Zagreb:
173. Faculty of Economics & Business,
of multinational companies,
Doctoralofdissertation,
University of Zagreb, pp. 173.
Manipulative strategy describes a situation in which the headquarters allow low degree of
autonomy to the subsidiary, while at the same time maintaining low degree of similarity of 53
HRM
system between headquarters and the subsidiary. In other words, the headquarters tend to export
only minor fractions of their HRM practice to subsidiaries, even though this practice might be
the one to ensure them the competitive advantage in home country. Exportive strategy also
Manipulative strategy describes a situation in which the headquarters allow low degree of autonomy to the subsidiary, while at the same time maintaining low degree of similarity of HRM system between headquarters and the
subsidiary. In other words, the headquarters tend to export only minor fractions of their HRM practice to subsidiaries, even though this practice might be
the one to ensure them the competitive advantage in home country. Exportive
strategy also describes a situation in which the headquarters allow low degree
of autonomy to the subsidiary, but at the same time the similarity of HRM system between headquarters and the subsidiary is high. This implies that the
HRM system used in the headquarters is to be identically transferred to the
subsidiaries.
Adaptive strategy is the one with high degree of autonomy for the subsidiary, and low similarity of HRM system between headquarters and the subsidiary. This implies designing the HRM system in the subsidiaries which is completely adapted to the local environment, and using the local HR manager’s
expertise to make the necessary changes and adaptations. Integrative strategy
is also the one with the high degree of autonomy for the subsidiary, while at
the same time maintaining high similarity of HRM system between headquarters and the subsidiary. This strategy is aimed at recognizing and using the
best HRM approaches from different parts of the MNC and creating a universal
HRM system which will be used in both the headquarters and the subsidiaries
(implies high similarity and high autonomy of HR managers).
METHODOLOGY
In order to empirically examine how the HRM policies and practices are
being developed in subsidiaries of MNCs, how this is connected to the strategy
used to manage employees in subsidiaries, and how this relates to the development of best practice in HRM, the qualitative approach was used. Empirical
research focused on subsidiaries of foreign MNCs in Croatia that have more
than 250 employees.1 The approach of focusing on MNCs’ subsidiaries in one
country is common in literature, whereas the usual practice involves one-time
research to determine the practice of managing employees in the subsidiaries (for example see Johnston, 2005; Babenroth, Li, & Sekiguchi, 2008; Darrag,
Mohamed, & Aziz, 2010).
The interviews were performed in Croatian, face-to-face with the HR manager of the subsidiary, relying on the fact that he will be the most knowledgeable about the topic. Also, an in-depth interview with one representative of
1 The research was part of the more elaborate research design involving a qualitative and two quantitative
researches, performed as a base for doctoral dissertation of the author.
54
the organization is the usual approach in researches of this type, with HR manager being the usual interviewee for the topics regarding HRM in MNCs (De
Cieri, Cox, & Fenwick, 2007). The interviews lasted between one hour and two
and a half hours, structured around the beforehand prepared set of questions,
but allowing for interviewee to elaborate on their answers to get a thorough
understanding of the topic. Interviews were being performed in the period
between March and May 2012. The transcript of the responses was made, and
they were analyzed by their content and categorized by the topics following
instructions set by De Cieri, Fenwick and Hutchings (2005).
Interviews were performed altogether in 11 subsidiaries of 11 different
foreign MNCs, resulting with data from 2 subsidiaries with manipulative strategy, 4 subsidiaries with the exportive strategy, 2 subsidiaries with adaptive and
3 subsidiaries with integrative strategy.
Regarding the country of origin for MNCs in the sample, it is believed that
the country in which an MNC originates exerts a distinctive effect on the way
labor is managed in its international subsidiaries (Ferner, 1997; Gunnigle et al.,
2007). In this research all MNCs originate from few countries in Europe, making
them a rather homogenous group from the country of origin perspective.
FINDINGS
Interviews with both HR managers from subsidiaries which were experiencing the manipulative strategy consistently revealed the same mechanism
of transfer of HRM practice. Both subsidiaries reported that the HRM system
for the subsidiary was being developed and decided in the headquarters, for
some practices more deliberately, for some practices more as a result of lack
of attention. Both subsidiaries reported the fact that they were aware that not
all the best practices from the headquarters were being transferred to the subsidiary. Also, for some of the HRM practices, it was reported that if some initiative came from the subsidiary to implement acknowledged best practices in
HRM field, either those used in the headquarter or based on the idea from
scientific and popular press, they would be deferred from such action. This was
especially the case for HRM activities that involved getting extra budget (such
as training and development or compensation management initiatives).
Interviewees from subsidiaries with recognized exportive strategy, all four
of them, were unanimous in reporting that their headquarters would use completely identical HRM system in all of the subsidiaries of the MNC. This had
two repercussions. Firstly, those companies that did not have a very elaborate
HRM system and established HRM policies and practices before becoming a
subsidiary would receive a completely defined and already proven HRM sys55
tem that allowed them to start using some of the best HRM practices, resulting
in high satisfaction both in the HR Department and overall employee satisfaction in that subsidiary. On the other hand, those companies that already
had some HRM policies and practices defined and aligned before becoming
a subsidiary were unpleasantly surprised to find they needed to completely
change their HRM system and without any change implement the one from
the headquarters. Those HR managers would be occasionally disappointed to
see some of the HRM policies and practices that worked well in their company,
now completely abandoned. In such cases, HR managers from the subsidiaries
could not testify if the new HRM policies and practices were better than the old
ones, just that they were different than the ones used before. Such cases have
resulted in much resistance both from HR managers in subsidiaries, but sometimes also with resistance from employees, who did not welcome the change,
especially since they were not convinced the change would necessarily mean
a change for the better.
As for the findings in subsidiaries which experienced adaptive strategy,
both HR mangers from those subsidiaries reported a very high level of autonomy in regards to HRM domain. In one occasion, the headquarters showed
no interest in getting involved with the specific HRM policies and practices
used in the subsidiary, as long as the subsidiary produced satisfactory financial
results. In other occasion, the HR manager from the subsidiary was an experienced expert in his field and was working closely with the headquarters’ HR
Department on defining an HRM system in the subsidiary, but reported that
headquarters completely relied on the subsidiary to have the best knowledge
of which HRM policies and practices would work best in their local environment. The headquarters was offering advice and insight into the HRM policies
and practices used in the headquarters and other subsidiaries. Also, the headquarters was maintaining some level of control over the subsidiary by insisting
on approval of all HRM related decisions. But, the approval was only a formal
one, probably with the intention of making sure they receive all the important
new decisions and actions.
Finally, subsidiaries with integrative strategy were the most interesting
from the aspect of transfer of HRM practices. Interviewees from those subsidiaries consistently reported that the HRM policies and practices were globally/
regionally integrated in terms of having the same HRM system in the whole
MNC (headquarters and all of the subsidiaries). On some occasions, some subsidiaries would slightly adapt some of the HRM policies or practices to better
suit the local environment. What was interesting was the approach MNCs used
to come up with such integrated HRM. HR managers from the interviewed subsidiaries reported that their MNCs would have an ongoing practice of regular
56
meetings for HR managers from all parts of the MNC. Those meetings would
be held two to four times a year, and more frequent if necessary. HR managers
would physically meet and discuss about current HRM topics. Sometimes the
agenda for the meeting would be the necessity of adapting some HRM policies and/or practices to local environment in one of the parts of the MNC, and
sometimes it would be purely a discussion about some new HRM techniques
and brainstorming on the possibility of using such practice in their MNC. Such
meetings, as reported, were always very intensive and interesting for the participants. They felt connection to the whole group, and took comfort in knowing other HR experts would be willing to help decide which approach might
work best if some practice needed adaptation to specific local environment.
On the other hand, they were enthusiastic for meeting with other experts in
their field and for the opportunity to discuss some common issues and potential solutions to the problems.
DISCUSSION AND CONCLUSION
In contemporary literature the overall perception of the influence MNCs
have on the business practice is divided. Zhang, Edwards, and Edwards (2006,
pp. 131-133) have presented a summary of different opinions, ranging from
completely negative influence for the host country, through indifferent to very
positive. Also, the literature stresses the current process of two opposing forces
in European business world: globalization which fosters convergence of HRM
practices, and European integration which cherishes diversity of nations, sectors and organizations and contributes to divergence of HRM practice (Sisson,
2004). In this light, it can be said that convergence of HRM practice is actually
being directed by powerful MNCs (Morley, & Collings, 2004).
Based on the findings from this research, it seems that the role of MNCs in
Croatia in shaping the HRM practice can be seen as both positive and negative.
More specifically, for those subsidiaries experiencing manipulative strategy the
influence is mostly negative. It can be argued that MNCs using this strategy are
actually deferring the quality of HRM practice in the subsidiaries, degrading it
from the business practice that can enable gaining competitive advantage to
the one can result in lower job satisfaction from employees, and consequently
higher turnover and worse overall performance. For subsidiaries experiencing exportive and adaptive strategy the role of MNCs in shaping HRM practice
can vary from slightly negative through neutral, to positive. It seems that for
these two strategies there are other factors present which are influencing the
possibility of MNCs to act as key drivers of developing best practices in HRM,
which calls for further investigation. As for the subsidiaries with integrative
strategy, according to the findings from this research, the influence of MNCs
57
on the development of best practices in the HRM field is extremely positive. It
can be argued that it is the skills and expertise of HR experts from those MNCs
that are the biggest drivers of developing best practices in HRM. Such finding
can have important repercussions for researchers investigating the concepts
of best practices and high performing work practices in the HRM field, as it
could be implied that MNCs that use integrative strategy would be the most
important subjects for researchers that are investigating the best policies and
practices for managing employees, as well as for companies searching for adequate firms to perform benchmarking with.
In order to have a better insight into distribution of different strategies for
managing employees in subsidiaries in Croatia, i.e. to determine their presence
in the Croatian business arena, results from another research will be examined.
Specifically, drawing upon results from a quantitative study with representative sample, the presence of different strategies for managing employees in
subsidiaries of MNCs in Croatia is shown in Figure 2.
Figure 2:for managing employees in subsidiariFigure 2: Presence of different strategies
Presence of different
strategies
for
managing
es of multinational companiesemployees
in Croatia in subsidiaries of multinational
companies in Croatia
Manipulative
23%
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52%
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14%
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11%
Source: V idović,
M.Vidović,
(2013).
typology
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employees
in subsidiaries
of
Source:
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Doctoral
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&
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of multinational companies, Doctoral dissertation, Zagreb: Faculty of Economics & Business,
of Zagreb, pp. 216.
University of Zagreb, pp.University
216.
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58 MNCs according to different strategies for managing employees in subsidiaries
of MNCs, and in terms of presence of those strategies in subsidiaries in different countries.
the process of transferring HRM policies and practices within MNCs according
to different strategies for managing employees in subsidiaries of MNCs, and
in terms of presence of those strategies in subsidiaries in different countries.
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59
15. Morley, M. J., & Collings, D. G. (2004). Contemporary debates and new directions in
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60
ULOGA SUVREMENIH MEĐUNARODNIH PODUZEĆA U RAZVOJU
PODRUČJA UPRAVLJANJA LJUDSKIM POTENCIJALIMA
SAŽETAK RADA:
U radu se analizira uloga suvremenih međunarodnih poduzeća u razvoju područja upravljanja ljudskim potencijalima kroz istraživanje njihove uloge u kreiranju
i korištenju najboljih praksi u tom području. Analiza se temelji na četiri strategije
za upravljanje zaposlenicima u podružnicama međunarodnih poduzeća (pojednostavljena, izvozna, adaptivna i integrativna strategija) te se analizira utjecaj koji
svaka od navedenih strategija ima na prenošenje i/ili razvijanje prakse upravljanja ljudskim potencijalima unutar međunarodnog poduzeća. Koristeći podatke
dobivene kvalitativnim istraživanjem, u radu je detaljno opisan proces kao i opseg doprinosa svake od strategija razvoju najboljih praksi u području upravljanja
ljudskim potencijalima. Diskusija o prikupljenim rezultatima ujedno ukazuje na
ulogu međunarodnih poduzeća u oblikovanju cjelokupnog područja upravljanja
ljudskim potencijalima.
Ključne riječi: upravljanje ljudskim potencijalima (ULJP), međunarodna
poduzeća, razvoj prakse upravljanja ljudskim potencijalima u
međunarodnim poduzećima, prenošenje najboljih praksi upravljanja ljudskim potencijalima u međunarodnim poduzećima,
strategije upravljanja zaposlenicima u podružnicama
međunarodnih poduzeća.
61
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recommendations in making this decision.
Equality
An editor, member of the editorial board or reviewer must evaluate manuscripts for their intellectual content without regard to race, gender, political
philosophy, sexual orientation, ethnic origin, citizenship, or religious belief of
the authors.
Confidentiality
The review process takes place in two stages. In the first stage the editor
must not disclose any information about a submitted manuscript to anyone
other than the corresponding author, reviewers, potential reviewers, and other
editorial advisers. This stage concludes with an agreement between the author
and reviewers about the continuation of their cooperation in the open reviewing forum in which issues of confidentiality do not arise.
Disclosure and conflicts of interest
Unpublished materials disclosed in a submitted manuscript must not be
used in an editor’s, reviewer’s or any other reader’s own research without the
express written consent of the author.
64
Duties of Reviewers
________________________________________
Contribution to Editorial Decisions
Reviewers assist the editorial board in making editorial decisions and
through the editorial communications during the open review process with
the author may also assist the author in improving the paper.
Qualification of Reviewers
Any selected referee who feels unqualified to review the research reported
in a manuscript or knows that its prompt review will be impossible should notify the editor and excuse himself from the review process. The editorial board
is responsible for ensuring the competence of the reviewers
Promptness
Authors will normally receive feedback about the acceptance of his/her
paper for the reviewing process within three weeks and in another three weeks
s(he) will normally receive the first response from the reviewers.
The editorial board is responsible for ensuring the promptness of responses in the open review process.
Confidentiality
Any manuscripts received for review in the open review process are subjected to the criteria of enhancing their rationality through the mutual rational
controls of critical discussion.
Establishing Standards of Objectivity through Critical Discussion
Reviews should be conducted objectively. Authors are encouraged to
make explicit the internal criteria they use to evaluate the validity of their
contributions to knowledge. Personal criticism of the author is inappropriate.
Referees should express their views clearly with supporting arguments in the
spirit of enhancing the quality of the paper through the mutual rational controls of critical discussion.
Acknowledgement of Sources
Reviewers should identify relevant published work that has not been cited
by the authors. References to the ideas of others should be accompanied by
the relevant citation. A reviewer should also call to the editor’s attention any
substantial similarity or overlap between the manuscript under consideration
and any other published paper of which they have personal knowledge.
Disclosure and Conflict of Interest
Information or ideas obtained through peer review must only be used
with the explicit agreement of the participants in the peer review. Reviewers
65
should not consider manuscripts in which they have conflicts of interest resulting from competitive, collaborative, or other relationships or connections with
any of the authors, companies, or institutions connected to the papers.
Duties of Authors
________________________________________
Reporting standards
Authors of reports of original research should present an accurate account
of the work performed as well as an objective discussion of its significance. Underlying data should be represented accurately in the paper. A paper should
contain sufficient detail and references to permit others to judge the validity
of the contributions to knowledge. Authors are asked to provide the raw data
in connection with a paper for editorial review, and should be prepared to provide public access to such data and should in any event be prepared to retain
such data for at least two years after publication.
Fraudulent or knowingly inaccurate statements constitute unethical behavior and are unacceptable.
We believe it is important to emphasise that the editorial board is not responsible for copyrights and for any ethical consequences of the publication
of any particular contribution (written or in the form of multimedia). However,
we expect that all people providing sources of data for published accounts
have been given informed consent and that no one in any way involved in the
processes of the research has been coerced into co-operation or is unknowingly being co-opted. Authors should have written permission of parents to
include photos or videos of children and juveniles into research accounts.
Originality and Plagiarism
The Editorial Board of JAM recognise different cultural beliefs about the
acceptability of quoting the ideas of others as if they were one’s own. The documents concerning the submission of papers for JAM review recognise these
different cultural beliefs and emphasise the statement that ‘authors should
ensure that they have written entirely original works, and if the authors have
used the work and/or words of others that this has been appropriately cited or
quoted.’
Concurrent Publication
Submitting the same manuscript to more than one journal concurrently,
constitutes unethical publishing behaviour and is unacceptable.
66
Authorship of the Paper
Authorship should be limited to those who have made a significant contribution to the conception, design, execution, or interpretation of the reported study.
All those who have made significant contributions should be listed as co-authors.
Where there are others who have participated in certain substantive aspects of the
research project, they should be acknowledged or listed as contributors.
The corresponding author should ensure that all appropriate co-authors
and no inappropriate co-authors are included on the paper, and that all co-authors have seen and approved the final version of the paper and have agreed
to its submission for publication.
Disclosure and Conflicts of Interest
All authors should disclose in their manuscript any financial or other substantive conflict of interest that might be construed to influence the results
or interpretation of their manuscript. All sources of financial support for the
project should be disclosed.
Fundamental errors in published works
When an author or reader discovers a significant error or inaccuracy in the
published work, it is the author’s obligation to promptly notify the journal editor and work with the editor to retract or correct the paper.
67
Printed in 100 copies.
Journal of Accounting and Management is published in two issues a year.
Journal of Accounting and Management is a free periodical of the Croatian
Accountant – Independent Association of Accountants, Tax Advisors and Finance
Professionals.
70
I SSN 1 8 4 8 - 1 3 7X
9 771848 137005

Journal of Accounting and Management

Transcription

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