Proceedings of the 7th International Conference on Business and Finance

Twum-Darko, Michael (Ed.); Matsoso, Mamorena (Ed.) Book — Published Version Proceedings of the 7th International Conference on Business and Finance Provided in Cooperation with: African Online Scientific Information Systems (AOSIS) Suggested Citation: Twum-Darko, Michael (Ed.); Matsoso, Mamorena (Ed.) (2015) : Proceedings of the 7th International Conference on Business and Finance, ISBN 978-0-620-69915-0, AOSIS Publishing, Durbanville, https://doi.org/10.4102/aosis.7ICBF.2015.02 This Version is available at: https://hdl.handle.net/10419/182275 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-sa/4.0/ Proceedings of the 7 th International Conference on Business and Finance 7th International Conference Cape Town, South Africa 9 Sept. 2015–10 Sept. 2015 Organised by: Cape Peninsula University of Technology, Faculty of Business and Management Sciences Open access at www.icbmd.org Proceedings of the 7th International Conference on Business and Finance ISBN: 978-0-620-69915-0 Proceedings of the 7th International Conference on Business and Finance Hosted by: Journal of Business and Management Dynamics Cape Peninsula University of Technology AOSIS (Pty) Ltd Head Office AOSIS (Pty) Ltd Postnet Suite #110 Private Bag X19 Durbanville 7551, South Africa Tel: +27 021 975 2602 Fax: +27 21 975 4635 Email: [email protected] Website: http://www.aosis.co.za Proceedings of the 7th International Conference on Business and Finance ISBN: 978-0-620-69915-0 How to cite this work: Proceedings of the 7th International Conference on Business and Finance, 2015, AOSIS (Pty) Ltd, Durbanville. http://www.dx.doi.org/10.4102/aosis.7ICBF.2015.02 Listed in OAPEN (http://www.oapen.org), DOAB (http://www.doabooks.org/) and indexed by Google Scholar Proof-reader: Michael Maart Project manager: Madeleine Coetzee, Joleta van Wyk, Duncan Hooker Front Cover: ©wesgro Printed and Bound Mega Digital (Pty) Ltd, South Africa Disclaimer The publisher accept no responsibility for any statement made or opinion expressed in this publication. Consequently, the publishers and copyright holder will not be liable for any loss or damage sustained by any reader as a result of his or her action upon any statement or opinion in this work. Copyright © 2015. Copyright on this work is retained by the author(s). Licensee: AOSIS (Pty) Ltd. This work is licensed under the Creative Commons Attribution License. Every effort has been made to protect the interest of copyright holders. Should any infringement have occurred inadvertently, the publisher apologises and undertakes to amend the omission in the event of a reprint. Index Page i of ii Conference Proceedings Actions and conditions supporting strategic integration of BPM Izienne Loriston, Lisa Seymour University of Cape Town An empirical study of factors that contribute to the emotional and physical well-being of call centre agents Noleen Miller, Rozenda Hendrickse Cape Peninsula University of Technology Capital structure and company performance: The case of free zone companies in Ghana Christiana O. Bonsu Ghana Institute of Management and Public Administration (GIMPA) Challenges of financing small, medium and micro-enterprises: The case of Botswana manufacturing sector Wilbert R. Mutoko North-West University Determinants of inflation in Namibia: A co-integration approach Valdemar João Undji, Teresia Kaulihowa University of Namibia Does corporate social responsibility affect companies’ financial performance? A review of empirical studies Paul-Francois Muzindutsi North-West University Effects of supply chain integration on lead time in the retail industry in Ghana Edward S. Fekpe, Andrew-Vans Bray Ghana Institute of Management and Public Administration e-Government: Institutional and environmental challenges Shawren Singh University of South Africa ETF indexation methods: A risk-adjusted performance analysis W. Peyper, A. Mellet North-West University Evaluating knowledge management implementation in an organisation: A case study in the context of Eskom’s HyperWave Michael Twum-Darko, Sydney B.M. Raboshakga Cape Peninsula University of Technology, Tshwane University of Technology ICT curriculum integration in modern-day classroom Plaatjie Maribe, Michael Twum-Darko Cape Peninsula University of Technology Improving the information security in SMEs to protect customer’s personal identifiable information Floyd Els, Liezel Cilliers University of Fort Hare Indian Companies Act, 2013 – Changing the face of CSR in India Abha Mittal, Aashna Jain University of Delhi The pricing of inflation and exchange rate risks on the South African socially responsible investment index: An application of the APT model Mafedile Fokane, Paul-Francois Muzindutsi North-West University The relationship between head of household characteristics and child deprivation in a South African township Jabulile Makhalima North-West University The role of small, micro- and medium enterprises in employment creation: The case of the manufacturing sector in Botswana Wilbert R. Mutoko North-West University 1 9 14 21 28 35 42 47 54 63 68 75 80 85 90 95 i Proceedings of the 7th International Conference on Business and Finance Conference Declaration Conference Declaration Page ii of ii ii Theme: ‘Creating futures: Sustainable economies?’ Purpose: To share continuous and collaborative research outputs that review existing strategies and to propose mechanisms for the likely achievement of a sustainable economy that is unique but inclusive to different entities in the world. Target audience: This year’s 7th International Conference on Business and Finance (ICBF) continues its tradition of being the premier forum for presentation of research results and experience reports on contemporary issues of finance, accounting, entrepreneurship, business innovation, big data, e-Government, public management, development economics and information systems, including models, systems, applications, and theory. Editorial Policy: All papers were refereed by a double blind reviewing process in line with the Department of Higher Education Training (DHET) refereeing standards. Papers were reviewed according to the following criteria: relevance to conference themes, relevance to audience, contribution to scholarship, standard of writing, originality and critical analysis Prof Mzikayise Shakespeare Binza Dean of Faculty: Business and Management Sciences Cape Peninsula University of Technology, South Africa AOSIS Peer Review Declaration AOSIS certifies that the contributions selected from the 7th International Conference on Business and Finance (ICBF) published in these conference proceedings were evaluated in a two-step review process. An initial selection review process by the chief editor, followed by in-depth double-blind peer reviews by members of the ICBF under the auspices of the editor-in-chief Professors Michael Twum-Darko and Mamorena Matsoso (both affiliated with the Cape Peninsula University of Technology, South Africa). Three peer reviewers were selected due to their academic expertise in Business Management. Prof Andries G. van Aarde Chief Editor: AOSIS Scholarly Books Scientific Committee/Editorial Board Conference Chair Mzikayise Shakespeare Binza, Dean of Faculty of Business and Management Sciences, Cape Peninsula University of Technology, South Africa Co-Conference Chairs Udai Paliwal, University of Namibia, Namibia Anil Kumar, Shri Ram College of Commerce, University of Delhi, India Sannassee Raja Vinesh, University of Mauritius, Mauritius Kesseven D. Padachi, University of Technology, Mauritius Conference Convener Michael Twum-Darko, Acting Head of Graduate Centre for Management, Faculty of Business and Management Sciences Cape Peninsula University of Technology, South Africa Editor-in-Chief Michael Twum-Darko, Acting Head of Graduate Centre for Management, Faculty of Business and Management Sciences Cape Peninsula University of Technology, South Africa Editor Mamorena Matsoso, Cape Peninsula University of Technology, South Africa Members Rozenda Hendrickse, Cape Peninsula University of Technology, South Africa Henrie Benedict, Cape Peninsula University of Technology, South Africa Pieter Steenkamp, Cape Peninsula University of Technology, South Africa Peter Kamala, Cape Peninsula University of Technology, South Africa Andy Bytheway, Information Systems, University of the Western Cape, South Africa Anton du Toit, Monash University, South Africa Charl de Villiers, University of Waikato, United States of America Christian Anyinda, Canadian University of Dubai, United Arab Emirates B. Mngomezulu, University of Kwa-Zulu Natal, South Africa Noluthando Matsiliza, Cape Peninsula University of Technology, South Africa Lorenda Naylor, University of Baltimore, United States of America Andre de la Harpe, Cape Peninsula University of Technology, South Africa Krishna Tummala, Kansas State University, United States of America Prakash Singh, Nelsen Mandela University, South Africa Ben-Piet Venter, United International College, Zhuhai, China Bingwen Yan, Cape Peninsula University of Technology, South Africa Sibongiseni Tunzelana, Cape Peninsula University of Technology, South Africa Chuks Eresia-Eke, University of Pretoria, South Africa Aliyu Olayemi Abdullateef, Swinburne University of Technology, Malaysia Charles B.U. Uwakwe, University of Ibadan, Nigeria Sunday Samson Babalola, University of Venda, South Africa Michael Fakoya, University of Limpopo, South Africa Collins Ngwakwe, University of Limpopo, South Africa Chux Iwu, Cape Peninsula University of Technology, South Africa Willem Lotter, Cape Peninsula University of Technology, South Africa Lawrence Lekhanya, Durban University of Technology, South Africa Shaban Ngole, The Institute of Finance and Management, Tanzania Simon Radipere, University of South Africa, South Africa Darlington Onojaefe, Cape Peninsula University of Technology, South Africa Vivence Kalitayi, Cape Peninsula University of Technology, South Africa Robertson Tengeh, Cape Peninsula University of Technology, South Africa doi:10.4102/jbmd.v5i1.3 Page 1 of 8 Original Research http://www.icbmd.org Authors: Izienne Loriston1 Lisa Seymour1 Affiliations: 1Department of Information Systems, University of Cape Town, South Africa Correspondence to: Lisa Seymour Email: [email protected] Postal address: Leslie Commerce Building, Engineering Mall, Upper Campus, Cape Town, South Africa How to cite this article: Seymour, L. & Loriston, I., 2015, ‘Actions and conditions supporting strategic integration of BPM’, Journal of Business and Management Dynamics 5(1), 8 pages. http://dx.doi.org/10.4102/ jmbd.v5i1.3 Note: This paper was presented at the 2015 7th International Conference on Business and Finance (ICBF). Copyright: © 2015. The Authors. Licensee: AOSIS. This work is licensed under the Creative Commons Attribution License. Actions and conditions supporting strategic integration of BPM Read online: Scan this QR code with your smart phone or mobile device to read online. Business process management (BPM) is a holistic strategic management approach and a top-down methodology that aims at maintaining operational efficiency. Despite its importance to organisations, there is a lack of a practical understanding of how to successfully adopt BPM. To address the gap in the literature, an exploratory case study was performed in a South African company that adopted BPM in 2009. The two-part study specifically aimed to investigate which actions and conditions encourage successful adoption of BPM by targeting the integration between the strategic (top) and task (ground) levels within a BPM environment. The qualitative analysis results show that organisations can have a fair degree of control over the outcome of their BPM implementation. The first part of the interpretive study that focuses on strategy, culture and governance is presented in the article. Actions and conditions that facilitate strategic and task-level integration are described. The study reports conduct within three important themes in the literature. Careful planning around the themes ‘strategic and task-level integration’, ‘BPM enablers’ and ‘business and/or information technology (IT) alignment’ will support the practice regarding BPM implementations because the literature deems the BPM and information systems symbiosis as important. The findings corroborate the literature. Introduction Business process management (BPM) is seen as a key concept and strategy to achieve a more effective organisation, optimise business conduct and gain a competitive advantage (Antonucci & Goeke 2011; Armistead, Pritchard & Machin 1999; Thompson, Seymour & O’Donovan 2009). BPM is a young but growing research area with many researchers calling for a better understanding of the concept and/or strategy for various reasons. Firstly, the factors that contribute to BPM success have not been extensively researched and understood (Thompson et al. 2009). Secondly, even though BPM has been ranked as a key priority by the Gartner Group for a number of years, the current status of BPM research is not aligned with practical implementation and field reports of the methodology (Bandara, Harmon & Rosemann 2011). Thirdly, organisations do not have a sound understanding of what BPM has become. This is reflected by the low levels of maturity in the implementation of the practice and the selection of basic tools where more advanced and appropriate tools are available (Johnston, Munge & Mwalemba 2012). Part of the reason for the low uptake of BPM is that it presents organisations with challenges that arise at its inception, which are primarily caused by its ambiguity in language and semantics (Armistead et al. 1999). These challenges are exacerbated by the different meanings of the term ‘process’ across the various academic domains. Therefore, the main purpose of the research is to better understand the practicality regarding actions and conditions that encourage the linkage and effective integration of strategy and task levels in a BPM environment within the theoretical context stated above. The research builds on the model developed by Thompson et al. (2009), which expanded the theoretical BPM success model of Rosemann, De Bruin & Power (2005) by defining what entails success in a BPM environment and the factors that enable the success. The model identifies six enabler categories: strategy, culture, people and/or resources, governance, information technology (IT) and methods. The data are analysed thematically to derive a list of actions and conditions within the six enabler categories. The article (the first of a two-part study) presents the findings relative to the strategy, culture and governance categories of the expanded BPM success model. The article’s contribution is unique because of the practical report of a 5-year BPM implementation journey. The article is organised as follows: a review of relevant literature is followed by the research strategy and techniques. It concludes by presenting inferences from the collected data in the form of a list of actions and conditions per enabler category, which is illustrated and discussed in the context of a theoretical model. 1 http://www.icbmd.org doi:10.4102/jbmd.v5i1.3 Page 2 of 8 Original Research Literature review For the purpose of brevity, most of the literature will be included in the Discussion section. Figure 1 illustrates a combination of the concepts in the literature that motivated and supported the study. Integrate: The strategy and task levels are linked as the integration between these two is crucial for BPM implementation (Armistead et al. 1999). Consequently, effective integration facilitates the application of strategic intent at an operational level. The outcomes of the study will address the integration by presenting actions that encourage integration. Enable: The Thompson et al. (2009) BPM success model contains six categories of enablers for BPM. The categories, namely strategy, culture, people and/or resources, governance, IT and methods, are illustrated in the context of an organisational pyramid shown in Figure 1. Factors within these enabler categories aid in the implementation of BPM. Align: BPM implementation depends on the clarity of the strategic intent as well as the alignment (Rosemann & De Bruin 2005; Thompson et al. 2009). Likewise, BPM implementation depends on business and IT alignment (BITA). Research method Ethical clearance The main research question of the study is as follows: what can organisations do, from a strategic perspective, to encourage the integration between strategy and task levels in a BPM environment? BPM has not been well researched; therefore, a predominantly inductive approach was chosen for the study. However, an a priori theoretical concept was applied. Three of the six enabler categories in the Thompson et al. (2009) study expanded BPM success model combined with a combination of concepts from the literature and guided the research by providing underlying theoretical concepts from which research objectives were derived. BPM had been implemented over a period of five years in the organisation, where the case study was conducted. Seven respondents who had played a key role during the implementation of BPM in the organisation were identified. These respondents’ profiles are presented in Table 1. The respondents expressed their experiences during the implementation journey. Therefore, an interpretive philosophy was deemed suitable because it extracted the different perspectives of the key role players. Because of the nature of this approach, conclusions could be drawn from the single organisation’s case (Flyvbjerg 2006). The exact position of their roles was not apparent in all cases as certain respondents could not be isolated to a specific level, whereas other roles clearly fitted into a certain organisational level, conducive to the research context provided by Figure 1. For example, two of the respondents acted as interfaces between the divisions and had a strategic focus as well as process and operational exposure. Respondent six was a business support manager (BSM) who had to make strategic decisions based on the requirements and implement process changes. The role also involved testing the IS underpinning BPM as well as implementing the system and concepts at the business operations level. In short, two of the respondents were positioned within the strategic level. Three of the respondents were positioned within the process level, and two were positioned at the task level. A short questionnaire was used to profile the respondents and their exposure to BPM. Semi-structured interviews FIGURE 1: Construct of a combination of concepts from the literature that support the research. INTEGRATE ENABL EA LIGN Strategy or Enterprise Level Process level Implementaon Level Employee Implementaon Level IT Implementaon Level Integraon BITA Methods People / Resources Culture Strategy Governance IT Implement Strategic Priories 2 http://www.icbmd.org doi:10.4102/jbmd.v5i1.3 Page 3 of 8 Original Research followed, which documented their experience during the implementation of BPM. Interview questions were constructed in the context of and tailored to each of the six enabler categories shown in Figure 1. The targeted interview duration was 30 minutes, and it was digitally recorded and subsequently transcribed. The researcher requested consent to record interviews from all participants. Ethical clearance was obtained from the researcher’s university. The data were then collected and coded by means of thematic analysis to recognise patterns across different data sets (Fereday & Muir-Cochrane 2006). Text extracts were taken from the transcribed interviews and then related to the three enabler categories. The first iteration of this process resulted in 354 text extracts from the seven transcribed interviews. The text extracts were iteratively coded into sub-themes. The sub-themes were subsequently allocated to the six enabler categories. This process yielded 223 induced sub-themes spread across the six enabler categories. The result was 24 actions and 16 conditions, which were substantiated by text extracts. The 24 actions and 16 conditions were summarised and coded into a final 6 actions and 5 conditions, which formed the overall result of the second part of the research. The case study was conducted at a financial institution that is a market leader in its competitive segment (hereon ‘FIN’). The study focused on projecting the lessons learnt from this company’s BPM implementation rather than evaluating the state of the company’s success with its BPM implementation. The company which was conscious of the implementation journey had continuously sought to improve its processes. Within South Africa, FIN was a pioneer in the implemented architecture of the business process management system (BPMS), which consisted of a combination of the different layers of technology enabling BPM. The BPMS has delivered business benefits to FIN, such as optimised business operations and smoother functioning business processes which lead to cost reductions and increased client satisfaction. For this reason, its BPM programme continues. Findings The overall distribution of text extracts across the six main themes is shown in Figure 2. The proportion of text extract and the distribution was maintained throughout subsequent thematic analysis iterations. Most of the text extracts emerged as actions and conditions within the ‘strategy’ theme. This is in agreement with the literature which, amongst many definitions, states that BPM is a strategic approach of managing an organisation (Armistead et al. 1999; Johnston et al. 2012). The preliminary findings were 10 actions and 9 conditions as listed in Table 2. These were further coded and reduced to four dominant actions and three dominant conditions, represented in bold font in Table 2. These are now discussed. Culture is seen as a main driver for BPM, and it can cause BPM initiatives to succeed or fail (vom Brocke & Sinnl 2011). Proper governance depends on assigned process owners (Thompson et al. 2009). The study explored the staff experience of BPM from a ‘lessons learned’ and implementation perspective, and the governance aspects seemed least prominent. This could be because of several organisational restructurings resulting from executive management resignations, which was mentioned by one of the respondents. One such restructure was the appointment of a new chief information officer just before the research was conducted; therefore, some of the governance aspects might have been concealed during the research period. In addition, the head of BPM and staff reporting to him were not available for interviews during this period. The respondents who were interviewed were mainly exposed to BPM implementations and the resulting outputs. The researcher could not interview respondents who were more active in the improvement methodology area. Therefore, the ‘governance’ theme is represented by 2% of the conditions and actions. Strategy To obtain good results, an organisation should be aligned with its strategy. There are many areas that may require TABLE 1: Summary of respondent profiles. Respondent Title Primary BPM background Years at company Years of BPM experience Level of role Interview 1 Technical team lead (IT) Technical 3 3 Task Interview 2 Solution designer and/or business liaison Technical and business 15 4.5 Process Interview 3 CIO Business 15 10 Strategic Interview 4 Technology specialist (IT) Technical 18 5 Task Interview 5 Senior systems analyst Technical and business 13 6 Process Interview 6 Business support manager Business 23 4 Process Interview 7 Senior manager (business) Business 5 10 Strategic FIGURE 2: Distribution of text extracts across enabler categories. 10 33 37 0 16 143 020406080 100 120 140 160 Governance Culture Strategy Acons Condions 3 http://www.icbmd.org doi:10.4102/jbmd.v5i1.8 Page 2 of 5 Original Research are completed and the time allocation of their work (Comcare 2006). Because of the lack of task variety, the work tends to be monotonous and repetitive. It was found that when there is no variety in tasks and when repetition occurs, employees more likely experience low levels of cognitive arousal, which results in disengagement from the job (Warr 2007). The job demands placed on call centre agents in terms of customer service delivery, which is associated with high levels of stress, may take a toll on these agents (Holman 2003; Pillay, Butendach & Kanengoni 2014). Dean and Rainnie (2008) found that efficiency demands of call centre work are linked to performance in terms of time pressures associated with workload. Performance monitoring focuses on the number of calls handled during the work hours, which provides data on the number of calls waiting, the proportion of calls answered, the average call duration and the customer waiting time (Banks & Roodt 2011). According to Visser and Rothmann (2008), performance monitoring is viewed as a job demand and is associated with negative employee well-being. Workplace social support, on the other hand, focuses on the impact of support received from supervisors or team leaders and colleagues in the form of problem solving, sharing information, reappraising situations and obtaining advice (Brough & Frame 2004). Supervisor support can either be a source of support or strain for call centre agents (Cappelli 2008). Lack of social support in the workplace is strongly linked to burnout (Maslach, Schaufeli & Leiter 2001). The temperature in a call centre, whether hot or cold, will affect the efficiency and quality of work. According to Seppänen, Fisk and Lei (2006), the indoor temperature affects several human responses, including thermal comfort, perceived air quality, sick building syndrome and work performance. If call centres are humid then it has a direct effect on the health of a call centre employee and his/her work performance (Nor Ruslan et al. 2014). When it comes to workstations and its ergonomic construction, high workstation panels are related to physical and visual discomfort if they are not adjustable (Comcare 2006). Employees should be able to adjust to the interior of their workstation features, giving them more space to arrange furniture and equipment, which in turn decreases stress and overall discomfort (Knoll 2010). Research design and methodology In terms of achieving the core objective of the study, a quantitative research method was used. Quantitative researchers asserted that research must be limited to what we can observe and measure objectively (Welman, Kruger & Mitchell 2006:6). This approach proved apt for a study of this nature. Four call centres participated in the study with a combined target population of 760. Roasoft® Incorporated calculation tool suggested a sample of 200 participants. Whilst the aforesaid sample size was adequate for the study, overall, responses from 275 call centre agents were recorded. Most of the call centre agents who participated in the study were females (61.8%). Male participants thus constituted only 38.2%, and the age of the call centre agents ranged from 21 to 65 and older, which are limitations of the study As mentioned, the combined population size of the four call centres who participated in the study was 760. Out of this population, only 275 respondents participated in the study. The results can thus not be generalised to all call centres in the Cape Metropole but is confined to the case study centres only. A structured questionnaire, developed by using existing measuring instruments used in previous research studies, was administered in the study. The demographic section comprised of basic information pertaining to gender, race, age, industry, years of employment, shifts and working hours, smoking habits and exercise. Job characteristics were measured by using the job dimensions (α = 0.73) and the critical psychological state (α = 0.73) sections of the Job Diagnostic Scale developed by Hackman and Oldham in 1975. Social support was measured by using a 5-point scale based on the instrument developed by Caplan, Cobb, French, Van Harrison and Pinneau in 1975 (Fields 2002). The reliability of the scale was 0.82. Job demands were measured by using a 5-point scale (α = 0.82) developed by Karasek in 1979 (Fields 2002). Performance monitoring was measured by using a 5-point scale (α = 0.71) developed by Sprigg, Smith and Jackson (2003). The physical work environment was measured by using a 5-point scale (α = 0.93) developed by Sprigg et al. (2003). Burnout was measured by using a 5-point Oldenburg Burnout Inventory (α = 0.87) developed by Demerouti and Bakker (2007). Vocal health (α = 0.87), optical health (α = 0.90) and auditory health (α = 0.81) were measured by using a 5-point scale developed by Sprigg et al. (2003). Job stress was measured by using the 5-point NIOSH Generic Job Stress Scale (α = 0.93). The SurveyMonkey software tool was used to compile and complete the structured questionnaire. Data were interpreted by using the Statistical Package for Social Sciences (SPSS). For the purpose of the study, the analysis of variance (ANOVA) technique was used to test the relationships between variables and determine the factors that contribute negatively to emotional and physical well-being of call centre agents in the work environment (National Institute for Occupational Safety and Health, 1988). Results ANOVA analysis The results from the ANOVA analysis presented in Tables 1 and 2 illustrate the factors in the work environment that are linked to exhaustion and disengagement. The results from the ANOVA analysis presented in Table 3 illustrate the factors in the work environment that are linked to physical health problems. The results showed that there is a statistical relationship between skills variety and exhaustion, F(1,196) = 6.119, p = 0.014, skills variety and disengagement, F(1.196) = 41.150, p = 0.000, and skills variety and optical health, F(1.187) = 4.541, p = 0.034. There is a statistical relationship between autonomy and disengagement, F(1.196) = 4.256, p = 0.040. There is a statistically significant relationship between task variety and anxiety, F(1.187) = 4.092, p = 0.045. There is a statistically 10 http://www.icbmd.org doi:10.4102/jbmd.v5i1.8 Page 3 of 5 Original Research significant relationship between supervisory support and exhaustion, F(1.196) = 7.030, p = 0.0009, and supervisory support and optical health, F(1.187) = 5.760, p = 0.017. There is a statistically significant relationship between job demands and exhaustion, F(1.196) = 32.827, p = 0.000, job demands and vocal health, F(1.187) = 5.986, p = 0.015, job demands and optical health, F(1.187) = 7.828, p = 0.006, job demands and auditory health, F(1.187) = 5.455, p = 0.021, and job demands and physical and behavioural stress symptoms, F(1.187) = 4.280, p = 0.040. There is a statistically significant relationship between performance monitoring and exhaustion, F(1.196) = 4.472, p = 0.036, and performance monitoring and auditory health, F(1.187) = 12.093, p = 0.001. There is a statistically significant relationship between temperature and air quality and disengagement, F(1.196) = 5.166, p = 0.024. There is a statistically significant relationship between workstation and auditory health, F(91.187) = 11.014, p = 0.001. Discussion The core objective of the study was to explore which factors in the work environment contribute negatively to emotional and physical well-being. The study showed that the lack of skills variety was a factor that contributed to burnout and optical health problems. The study agrees with Visser and Rothmann (2008) that low levels of skills variety are positively linked to burnout. It also concurs with Sprigg et al.’s (2003) study that the lack of knowledge and training on how to adjust computer display screen can lead to optical health problems. Call centre agents with insufficient skills and training of computer systems and new product knowledge can experience low morale and burnout when dealing with demanding customers. Because call centre agents stare into the computer screen intensively, not knowing how to adjust the contrast and brightness of the screen can lead to optical health problems. It was shown that the lack of autonomy contributes to disengagement. Feelings of not being listened to, not being able to give inputs on decisions (Priebe et al. 2005) and not conducting work on one’s own terms (Vekkaila, Pyhältö & Lonka 2014) can lead to disengagement. Call centre agents who experience a lack of autonomy will feel less committed to complete their tasks and cannot use their own discretion on how to handle customer queries, resulting in them being disengaged from the work tasks. Task identity, on the other hand, is linked to anxiety. According to Lin and Hsieh (2002), a mismatch between task identity and employees’ abilities occurs when task identity requires employees to elevate their abilities. In some call centres, task identity allows the employee to complete a task from beginning to end without sending it to the back office. However, if the agent is stressed by the task or by the demands of the customer along with reaching performance targets in an allocated time, this can lead to anxiety. Lack of social support (supervisory) contributes to exhaustion and optical health problems. Having supervisors who do not support or care about employees and who create an unpleasant work environment for employees is associated with emotional burnout (Lambert et al. 2012). Call centre agents should be encouraged by their supervisors to take regular breaks, away from computer screens, to prevent the risk of visual disorders (Sprigg et al. 2003). The role of the supervisors in call centres should not just be to monitor the performance of call centre agents, but they should be able to coach, motivate and support employees to develop and reach their full potential. The study found that high job demands are associated with exhaustion, vocal and auditory health problems, and physical and behavioural stress symptoms. The study agrees with Toomingas et al.’s (2005) study that call centre work is demanding on the hearing of call centre agents, as a large proportion of the work consists of listening to customers on the telephone. Wearing headsets is a requirement of call centre work, and often sharp noises, known as acoustic shock, penetrate through the headsets causing uncomfortable pain in the ear. Call centre agents rely on their voices to carry out their work and are at the risk of vocal disorders because of work-related excessive oral communication (Vilkman 2004). Because of the vocal demands of call centre work, agents TABLE 1: ANOVA results for exhaustion. Source df F Sig. Skills variety 1 6.118 0.014 Job feedback 11.904 0.169 Task variety and identity 1 0.251 0.617 Autonomy 13.094 0.080 Supervisory support 1 7.030 0.009 Job demands 1 32.827 0.000 Performance monitoring 1 4.472 0.036 Workstation 1 0.224 0.636 Temperature and air quality 1 0.421 0.517 Source: Statistical Consultant, CPUT, 2013 TABLE 2: ANOVA results for disengagement. Source df F Sig. Skills variety 1 41.150 0.000 Task variety and identity 1 0.168 0.683 Autonomy 1 4.256 0.040 Supervisory support 12.529 0.113 Job demands 1 0.884 0.348 Performance monitoring 1 2.335 0.128 Workstation 1 1.673 0.197 Temperature and air quality 1 5.166 0.024 Source: Statistical Consultant, CPUT, 2013 TABLE 3: ANOVA for physical well-being. Source Dependent variable df F Sig. Skills variety Optical health 1 4.541 0.034 Task identity Anxiety 14.092 0.045 Supervisory support Optical health 1 5.760 0.017 Job demands Vocal health 1 5.986 0.015 Optical health 1 7.828 0.006 Auditory health 1 5.455 0.021 Physical and behavioural stress symptoms 1 4.280 0.040 Performance monitoring Auditory health 112.093 0.001 Workstation layout Auditory health 1 11.014 0.001 Source: Statistical Consultant, CPUT, 2013 11 http://www.icbmd.org doi:10.4102/jbmd.v5i1.8 Page 4 of 5 Original Research are forced to handle a high call volume, which results in excessive talking. This excessive handling of calls coupled with the background noise results in raising their voices so that customers can hear them, and also poor air quality, which causes dryness in the throat, can lead to vocal strain. The demands of performance targets can cause call centre agents to feel pressurised and stressed (Taylor et al. 2003). Call centre work is performance–based, which is linked to monetary value, and because of this fact, call centre agents stress about achieving the performance targets, delivering an efficient service and meeting the demands of customers. The results suggest that performance monitoring is linked to exhaustion and auditory health problems. The finding is consistent with Castanheira and Chambel’s (2010) study that performance monitoring is associated with exhaustion and the negative effects of these monitoring systems occur because of the fact that their job demands are high and they have low autonomy. In call centres, performance monitoring is associated with financial rewards and an agent’s appraisal is often based on his/her performance rating. Owing to the financial factor, agents feel that they have no control and involvement in deciding over how much their payment increase will be or whether they will in fact get an increase, as this is decided by their performance ratings. Therefore, they need to achieve those high targets by taking an excessive number of calls, which ultimately gives them ear problems as they constantly wear their headsets. Temperature and air quality are linked to disengagement. Office temperatures that are too hot or too cold as well as poor air quality can lead to a decrease in productivity (Pitzer 2006). Call centre agents have no control over the temperature in the office as the air-conditioning system is centralised. The open-plan office layout of the call centre working environment is often over populated with call centre agents occupying the space, which results in an increase in heat and poor quality of air. The uncomfortable temperature and poor air quality can lead to a decrease in productivity, as employees feel disengaged and lethargic. Workstation layout is linked to auditory health problems. The open-plan office environment in call centres are filled with significant background noise. When the background noise is high, call centre agents need to turn up the volume of their headsets, increasing the risk of exposure to acoustic shock (Westcott 2006). The workstations in the call centre environment are in close proximity to each other without any sound-absorbing partitioning between them. Along with the overcrowding in the office layout, agents talking simultaneously can lead to excessive noise levels, which makes it difficult for the call centre agent to hear the customer at the other end of the line and to concentrate on the call, resulting in the headset volume being turned up. Recommendations Training on new products should be provided on a regular basis, enabling call centre agents to acquire new skills. Call centre organisations should have supportive human resources policies in place which offer training and development, present promotion opportunities and promote supervisor support. Call centre management should reconsider the work design (low task variety, low autonomy, performance targets and performance monitoring) of the call centre environment by allowing call centre agents more autonomy when it comes to the task at hand. In this way, they will cope with the job demands, and burnout and stress will be alleviated. Call centre agents should be allowed to give inputs on the work design, performance targets and monitoring as they know the systems better and can give valuable inputs on what works well and what should be changed. This feedback should be reviewed and implemented where needed, which will give call centre agents a sense of meaningfulness and will also increase work commitment. Performance targets should be based on quality service and not the amount of calls that can be taken. This will in turn eliminate high job demands. Performance monitoring should be used as a developmental tool, whereby call centre agents can expand on their skills, and should not be used to evaluate financial incentives. Workstations should have sound absorption panels which block out background noise, and this will ensure that the customer will be heard without the call centre agents adjusting the volume on their headsets. Training should be provided on how to adjust the screen controls and brightness on monitors, display screen equipment (DSE) and visual screen units (VSE). Regular short breaks should be taken to allow the agents some reprieve from continuously starring at computer screens. Air and temperature control should be at a comfortable level for all employees, and workstations should not be situated directly under the air-conditioning vents. Conclusion Call centre agents are important people within the customer service industry. For this industry to be viable and profitable, the management should see call centre agents as an asset. Therefore, it is important for organisations to change their work design, change aspects of the physical work environment and implement human resource policies that will alleviate the pressure that these agents experience. Implementing these measures will promote positive emotional and physical well-being. Acknowledgements Competing interests The authors declare that they have no financial or personal relationship(s) that may have inappropriately influenced them in writing this article. Authors’ contributions N.M. (Cape Peninsula University of Technology) is the core author of this article and R.H. 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Bonsu1 Affiliation: 1Ghana Institute of Management and Public Administration (GIMPA), Accra, Ghana Correspondence to: Christiana Bonsu Email: [email protected] Postal address: PO Box AH50, Achimota, Accra, Ghana How to cite this article: Bonsu, C.O., 2015, ‘Capital structure and company performance: The case of free zone companies in Ghana’, Journal of Business and Management Dynamics 5(1), 7 pages. http://dx.doi. org/10.4102/jbmd.v5i1.7 Note: This paper was presented at the 2015 7th International Conference on Business and Finance (ICBF). Copyright: © 2015. The Authors. Licensee: AOSIS. This work is licensed under the Creative Commons Attribution License. Capital structure and company performance: The case of free zone companies in Ghana The study investigates the effect of tax savings on the capital structure of free zone companies in Ghana. Using a panel regression model, the study specifically examines the determinants as well as the effect of capital structure on the financial performance of these companies. The study used data from annual reports of these companies from 2009–2012. The results of the study show that tax has a positive and significant relationship with the capital structure of the free zone companies, and even though the companies do not pay corporate tax for the first 10 years, they operate in Ghana and pay the lowest corporate tax after the first 10 years. The regression results also show that the age of the company, size, profitability and company risk are important in influencing the decisions on the capital structure of the free zone companies. Capital structure of the companies has an inverse relationship with return on asset, which measures the financial performance of these companies. The study provides useful recommendations for policy direction and to managers of these companies. Introduction Capital structure refers to a company’s financial framework, which consists of the debt and equity that are used to finance the company. Capital structure is essential in determining how a company finances its overall operations and growth by using different sources of funds. The modern theory of capital structure originated from the groundbreaking contribution of Modigliani and Miller in 1958, under the perfect capital market assumption that if there is no bankruptcy cost and capital markets are frictionless and without taxes, the company’s value is independent of the structure of the capital. In 1963, Miller and Modigliani modified the assumptions to include tax because the use of debt reduces the amount of tax a company has to pay and increases the value of the company. At the corporate level interest on debt is generally deductible from the taxable income, and this provides companies with an incentive to finance their operations with debt rather than equity, especially in countries that levy high tax (Graham 1996, 2000; MacKie-Mason 1990). The relationship between company performance and capital structure has succeeded in attracting a good deal of public interest because it is a tool for socio-economic development. Also when there is good company performance and capital structure, there will be a proper and efficient practice in the administration of business entities. The Ghana Free Zones programme was established by an Act of Parliament (Act 504) in 1995 to promote export-oriented investment in Ghana. It is an integrated programme, which promotes the processing and manufacturing of goods through the establishment of export processing zones and encourages the development of commercial and service activities in the seaport and airport areas. Companies in Ghana registered under the free zone programme enjoy 100% exemption from paying income tax on profits for the first 10 years, and this tax does not exceed 8% thereafter. The three main goals for which the government establishes free zones are: to provide a country with foreign exchange earnings by promoting non-traditional exports; to create jobs and generate income; and to attract foreign direct investment, technology transfer, knowledge spillover, demonstration effects and backward linkages (http://www.gfzb.gov.gh). Problem statement In Ghana a number of researches have been carried out on the determinants of capital structure (Abor 2008; Abor & Biekpe 2004; Amidu 2007; Boateng 2004), capital structure and firm performance (Abor 2005; Kyereboah-Coleman 2007), stock market and capital structure (Bokpin & Isshaq 2008), and the role of debt in balance sheet (Aboagye 1996), amongst others. None of these studies focused on capital structure and performance of free zone companies in Ghana which provided employment to 30 080 employees and contributed $10 104.63 million to Ghana’s export in 2011. In addition, the tax-based theory suggests that in a world with corporate taxes, the tax deductibility of interest for corporations creates a clear preference for debt in the corporate Read online: Scan this QR code with your smart phone or mobile device to read online. 14 http://www.icbmd.org doi:10.4102/jbmd.v5i1.7 Page 2 of 7 Original Research capital structure. Therefore, companies that are highly levered are supposed to outperform their counterparts that are less levered. However, free zone companies do not pay corporate tax for 10 years of operation and also fall within a lower tax bracket (i.e. 0%–8%) after the 10-year period. The non-free zone companies in Ghana pay a corporate tax of about 25%. The absence of corporate tax for 10 years and a very low tax rate after the first 10 years provide a unique environment in which the capital structure theory can be tested to unearth whether the use of debt actually contributes to the value of the company. Research objectives The main objective of this study was to investigate how tax savings influence the capital structure of free zone companies in Ghana. The specific objectives of the study were the following: 1. To examine the determinants of capital structure of these companies 2. To examine the financial performance of the free zone companies. Significance of the study The study seeks to examine the effect of tax savings on the capital structure of free zone companies in Ghana. The results of this study will help researchers know whether Miller and Modigliani modified assumptions on capital structure to include tax shield holds in Ghana. If it does not hold, researchers can investigate further what influenced the capital structure of these companies. The study will also add to the existing literature on the capital structure and performance of companies in Ghana. It will also inform managers of these companies on their financial performance and the steps to be taken to be competitive on the international market, as approximately 70% of their products and services are exported. Review of literature An appropriate capital structure is a critical decision for any business organisation. The decision is important not only because of the need to maximise returns to various stakeholders, but also because of the impact such a decision has on a company’s ability to deal with its competitive environment. The prevailing argument originally developed by Modigliani and Miller (1958) was that an optimal capital structure existed that balanced the risk of bankruptcy with the tax benefits of debt. Once established, the capital structure should provide greater returns to stakeholders than they would have received from all equity companies. The successful selection and use of capital is one of the key elements of the firms’ financial strategy (Kajananthan 2012; Velnampy & Niresh 2012). Brander and Lewis (1986) and Maksimovic (1988) provided the theoretical framework that links capital structure and market structure. Contrary to the profit maximisation objective postulated in the literature on industrial organisation, these theories are similar to corporate finance theory in which it is assumed that the company’s objective is to maximise the wealth of its shareholders. Furthermore, market structure is shown to affect capital structure by influencing the competitive behaviour and strategies of companies. According to Kajananthan (2012), Achchuthan, Kajananthan and Sivathaasan (2013), and Kajananthan and Achchuthan (2013), capital structure is related to corporate governance practices regarding liquidity. Abor (2005) reviewed the impact of capital structure on profitability of the 22 companies listed in the Ghana Stock Exchange from 1998 to 2002. Results showed that there was a positive and significant relationship between capital structure (total debt to total assets (TDTA) ratio) and return on equity (ROE). Abor also indicated that profitable companies have more dependence on financing through liability, and a high percentage (85%) of the liabilities of these companies are of short-term. Abor (2008) compared the capital structures of publicly quoted firms, large unquoted firms, and small and medium enterprises (SMEs) in Ghana. The study also examined the determinants of capital structure decisions amongst the three sample groups. The regression results indicated that age of the firm, size of the firm, asset structure, profitability, risk and managerial ownership are important in influencing the capital structure decisions of Ghanaian firms. Jensen and Meckling (1976) drew attention to the impact of capital structure on the performance of enterprises, number of tests as an extension port to inspect the relationship between performance of firm and financial leverage. However, the results documented were contradictory and mixed. Some studies have reported that positive relationships (Ghosh et al. 2000) also support the argument. Several others have reported a negative relationship between debt and financial achievement like Fama and French (1998) and Simerly and Li (2000). Capital structure is said to be closely linked to the financial performance (Zeitun & Tian 2007). San and Heng (2011), in their research, studied the relationship between capital structure and corporate performance of Malaysian construction sector from 2005–2008. In this study, 49 companies were selected as samples. Results showed that there was a significant relationship between capital structure and corporate performance. Aburub (2012) in his research investigated the impact of capital structure on the firm performance of companies listed in the Palestine Stock Exchange from 2006–2010, in which 28 companies were selected as samples. In this study, ROE, return on assets (ROAs), earnings per share (EPS), market value to book value of equity ratio (MVBR) and Tobin Q ratio as five measures of accounting and market of firm performance evaluation and also as dependent variables, and short-term debt to total assets (SDTA) ratio, long-term debt to total assets (LDTA) ratio, total debt to total assets (TDTA) ratio and total debt to total equity (TDTQ) ratio as four measures of capital structure and also as the independent variables were selected. Results indicated that the capital structure has a positive effect on firm performance evaluation measures. 15 http://www.icbmd.org doi:10.4102/jbmd.v5i1.7 Page 3 of 7 Original Research Onaolapo and Kajola (2010) investigated the effect of capital structure on financial performance of companies listed in the Nigeria Stock Exchange. This study was performed on 30 non-financial companies in 15 industry sectors in a 7-year period from 2001–2007. The results showed that the capital structure (debt ratio, DR) has a significant negative effect on financial measures (ROA and ROE) of these companies. Fosberg and Ghosh (2006) in the research conducted on the 1022 companies in the New York Stock Exchange (NYSE) and 244 companies in the America Stock Exchange (AMEX) concluded that the relationship between capital structure and ROA was negative. Houang and Song (2006), in the research conducted on 1200 Chinese companies during 1994–2003, concluded that financial leverages had a negative relationship with ROA and growth opportunities. Andersen (2005) reviewed the relationship between capital structure and firms performance for 1323 companies from various industries and concluded that there was a significant relationship between capital structure and ROA. Elsayed Ebaid (2009) studied the effect of capital structure on the performance of 64 Egyptian companies from 1997 to 2005. The results suggested that there was a significant negative relationship between ROA and TDTA ratio, but there is a non-significant relationship between ROE and TDTA ratio. Mramor and Crnigoj (2009) concluded that there was a significant negative relationship between financial leverage (TDTA ratio) and ROA ratio. A number of empirical studies have identified company-level characteristics that affect the capital structure of companies. Amongst these characteristics are age of the company, size of the company, asset structure, profitability, growth, company risk, tax and ownership structure. Methodology Data collection and source Data on capital structure and company performance were collected from secondary sources, annual reports of 50 free zone companies for the period of 2009–2012. Research hypothesis To examine the determinants of capital structure of the free zone companies the following hypotheses were tested: H1: there is a positive relationship between size and capital structure of the company. H2: there is a negative relationship between profitability and capital structure of the company. H3: there is a positive relationship between asset structure (collateral) and capital structure. H4: there is a positive relationship between corporate tax rate and capital structure of the company. H5: there is a positive relationship between company age and capital structure of the company. H6: there is a negative relationship between company risk and capital structure. The capital structure of the company was measured by the DR. To examine the effect of the capital structure on the financial performance of the free zone companies, the following hypotheses were tested: H1: there is a negative and significant relationship between debt ratio and company performance. H2: there is a positive and significant relationship between asset turnover ratio and company performance. H3: there is a positive and significant relationship between company size and performance. H4: there is a positive and significant relationship between company age and performance. H5: there is a positive and significant relationship between growth opportunities and company performance. H6: there is a negative relationship between quick ratio and company performance. Measure of company financial performance is ROA. To test the hypotheses on the determinants of capital structure, the study used Abor’s (2008) research model, in which he used the dependent variable, long-term DR as the capital structure and size, profitability, age, tax, asset structure and operation risk as explanatory variables. Model specification A panel regression model was used for the estimation in this study. Panel data involve the pooling of observations on a cross section of units over several time periods. A panel data approach is more useful than either cross-section or time series data alone. One advantage of using the panel data-set is that because of the several data points, the degrees of freedom are increased and collinearity amongst the explanatory variables is reduced; thus, the efficiency of economic estimates is improved. Panel data can also control for individual heterogeneity due to hidden factors, which, if neglected, in time series or cross-sectional estimations, leads to biased results (Baltagi 1995). The panel regression equation differs from a regular time series or cross-sectional regression by the double subscript attached to each variable. The general form of the model can be specified as: Yit = a + bXit + eit (1) Where the subscript i denotes the cross-sectional dimension and t represents the time series dimension. The left-hand variable, Yit, represents the dependent variable in the model, which is the company’s DR. Xit contains the set of explanatory variables in the estimation model, α is the constant and α represents the coefficients. The model for the empirical investigation of the capital structure is as follows: LDRit = b0 + b1SZit + b2PRit + b3COit + b4TXit + b5ORit + b6AGit (2) Where: LDRit = DR (long-term debt/equity + debt) for company i at time t; 16 http://www.icbmd.org doi:10.4102/jbmd.v5i1.7 Page 4 of 7 Original Research SZit = The size of the company (log of sales) for company i at time t; PRit = Earnings before interest and tax divided by total asset for company i at time t; COit = Tangible fixed asset + inventories divided by total assets of company i at time t; TXit = Ratio of tax paid to operating income for company i at time t; ORit = Squared difference between the company’s profitability and the cross-sectional mean of profitability for company i at time t; AG = Number of years since inception of the company to observation date. To test the hypotheses for the effect of the capital structure on the companies’ financial performance, Onaolapo and Kajola’s (2010) research model was used, where the dependent variables, ROA, as accounting measures for evaluating the company’s performance, and independent variable, the DR, as capital structure, were used. They also used variables of asset turnover (TURN), company size (SIZE), company age (AGE), assets tangibility (TANG) and growth opportunities (GROW) as control variables. The research model is as specified below: ROAit = b0 + b1DRit + b2TURNit + b3SIZEit + b4AGEit + b5GROWit + b6QUICKit (3) Where ROA = profit after tax divided by total asset; DRit = total debt divided by total asset; TURNit = sales divided by total asset; SIZEit = natural logarithm of sales; AGEit = number of years since inception of the company to observation date; QUICKit = current asset minus inventories divided by current liabilities; and GROWit = change in the natural logarithm of sales. Results and discussion Regression model of determinants of capital structure of free zone companies in Ghana is presented in Table 1. The results show that the size of the company has a positive and statistically significant relationship with the capital structure of the company. Larger companies are more likely to acquire long-term debt finance in their operations. Especially with the free zone companies in Ghana most of the larger companies are multinational companies and are financed by their parent companies on long-term debt. This finding of positive relationship of long-term debt and size is consistent with previous findings (Abor 2008; Al-Sakran 2001; Barclay & Smith 1996; Barton et al. 1989; Friend & Lang 1988; Hovakimian et al. 2004; Kim et al. 1998; MacKie-Mason 1990). Profitability and long-term debt show a negative and statistically significant relationship. The results of this study clearly support the pecking order hypothesis, in which profitable companies initially rely on less costly, internally generated funds and subsequently look for external resources if additional funds are needed. It is expected that more profitable companies will require less debt finance. This is because profitable companies would have a preference for inside financing over outside debt financing, as the cost of external financing is greater for the company. This is consistent with the findings by Esperança et al. (2003), Hall et al. (2004) and Abor (2008). Tax was found to have a statistically significant positive relationship with long-term DR amongst free zone companies. This suggests that free zone companies with high tax rates rely more on long-term debt. This finding is very interesting because these free zone companies pay the lowest tax rate in Ghana. For the first 10 years of operation, these companies do not pay corporate tax at all and even after the first 10 years the tax ranges from 0%–8%, depending on the company’s location and type of business. The results indicate that free zone companies do not take into consideration the tax savings enjoyed when applying for debt financing. The result is contrary to the findings of Abor (2008) who found a significant and negative association between tax and longterm DRs of quoted companies in Ghana. Thus, the tax-based theory does not hold in Ghana for free zone companies. The results show a positive and statistically significant relationship of company risk with long-term DR at the 10% level, implying that companies with high risk exhibit high DR. This could be due to the fact that most of these TABLE 1: Regression results (Model 2). Variable β t P Constant 0.2003 0.7040 0.4828 Size 0.1273 2.954 0.0038** Profitability -0.6529 -2.7363 0.0072*** Asset structure -0.1785 -1.1262 0.2624 Tax 4.1412 1.7229 0.0875* Company risk 0.8538 1.6875 0.0942* Age -0.0348 -2.6573 0.0090*** R-squared 0.173 - - Adjusted R-squared 0.131 - - F-statistics 4.1190 - - Prob (F-statistic) 0.0009 - - Number of observation 125 - - Dependent variable = debt ratio. ***, **, *, represent significance at 1%, 5% and 10%, respectively. TABLE 2: Regression results (Model 2). Variable β t p Constant -0.0815 0.4994 0.6187 Debt ratio -0.1191 -2.8268 0.0058*** Asset turnover 0.009 0.1562 0.8762 Size 0.0165 0.6484 0.5183 Age 0.0062 1.0817 0.2821 Quick ratio -0.0002 -0.5879 0.5580 Company growth 0.0096 1.677008 0.0969* R-squared 0.134 - - Adjusted R-squared 0.078 - - F-statistics 2.404 - - P (F-statistics) 0.033 - - Durbin-Waston 1.89 - - Dependent variable = return on asset (ROA). ***, * represent significance at 1% and 10%, respectively. 17 http://www.icbmd.org doi:10.4102/jbmd.v5i1.7 Page 5 of 7 Original Research companies are funded on loan by their parent companies and not by the banks which will not give long-term debt to high-risk companies. Age and long-term debt have a positive and statistically significant relationship. These companies do not have access to public equity market because they are not listed in the stock exchange. As a result, long years of business could connote long business relationships with external debt providers and increase their chances of acquiring external long-term debt finance. The effect of the regression model of capital structure on corporate financial performance of free zone companies in Ghana is presented in Table 2. The results show that statistically there is a significant negative relationship between the capital structure or DR and accounting measure of company performance evaluation (ROA) at 1% level. This relationship indicates that the companies that have high DR due to borrowing incur a lot of financial cost, which reduces the net income and hence ROA is reduced. The hypothesis that a company’s capital structure should have a negative impact on its performance is confirmed. The results of this hypothesis are consistent with the research results of Onaolapo and Kajola’s (2010), Fosberg and Ghosh’s (2006), Houang and Song’s (2006), Mramor and Crnigoj’s (2009) and Zeitun and Tian’s (2007) work. Company growth opportunities show a positive and statistically significant relationship with ROA at the 10% level. The results of this hypothesis are not consistent with the results obtained from the researches of Zeitun and Tian (2007) and Onaolapo and Kajola (2010). Size of the company, age, quick ratio and asset structure did not show any significant relationship with ROA. TABLE 3: Investigated companies in research. Name of company Nature of activity Asanska Jewelry Jewelries L’Oréal West Africa Beauty products Belshina Tire Solution Ltd Import and export of heavy duty tires Red Sea Housing (Gh) Ltd Prefabricated building Gold Coast Fruits Ltd Fruit processing Gold Recovery Ghana Ltd Processing of gold waste Globalpak Ltd Polypropylene sack Canada Opticals Laboratories Ltd Optical lenses Jei River Farms Fruit processing Pan Afro King Company Ltd Wood processing SRG Industries Ghana Ltd Plastic products Pioneer Foods Cannery Ltd Fish processing Ayum Forest Products Ltd Wood processing F.A. Fally Ghana Ltd Tissue paper Bomart Farms Ltd Fruit processing Blowsack Industries Ltd Polypropylene sacks Vehrad Import & Export Co. Ltd Haulage Non Ferrous Metals Gh Ltd Lead recovery HPW Fresh & Dry Ltd Fruits and vegetables Cocoa Processing Company Ltd Cocoa processing Peelco Ltd Fruit processing Continental Export Ghana Ltd Seafood Flemingo International Ltd Duty-free shop Diplo FZE Ltd Duty-free shop Intelligent Card Production Magnetic smart card FMC FZCO Ltd Commercial trading Logs & Lumber Ltd Wood processing Golden Exotics Ltd Fruit processing Danica Plastics Ltd Plastic products Praise Export Services Ltd Food processing Kpone Lobster Ltd Sea food Unifruit Ltd Fruit processing Evans Timbers Ltd Wood processing International Packaging Packaging products Decorplast Ltd Plastic products Rubber Plantation Processing rubber into latex Lewadis Commercial trading Blue skies Products Ltd Fruit processing Comet Ghana Ltd Duty free shop Birim Wood Complex Ltd Wood processing Modern Wood Ltd Wood processing Pakmart Ltd Duty free shop ARN Manufacturing Ltd DVD, CD, VCD manufacturing Quintiles West Africa Ltd Clinical research Vegpro Ghana Ltd Horticultural crops ACS–BPS Data processing Mim Cashew & Agricultural Products Ltd Cashew processing Plot Enterprise Ltd Cocoa processing Blowplast Industries Recycling Ltd Plastic waste recycling Bas Van Bureen Ghana Ltd Processing of coconut husk TABLE 4: Descriptive statistics. Variable Mean Standard deviation Min Max Observation Debt ratio 0.658769 0.481428 0.000767 3.736566 96 Age 10.53125 3.906683 4.000000 19.00000 96 Asset structure 0.397692 0.255566 0.002984 0.992414 96 Asset turnover 268041.9 2626251. 0.006612 25731900 96 Profitability 0.016213 0.164391 -0.669163 0.544344 96 Company growth 0.519565 1.374271 -0.661440 12.03963 96 Company risk 0.065175 0.067294 0.000000 0.301992 96 Quick ratio 6.907035 55.53959 0.000684 544.7967 96 Size 6.405198 0.846036 3.789510 7.950192 96 Return on asset 0.009107 0.158491 -0.669163 0.451063 96 Tax 0.006149 0.021756 0.000000 0.144082 96 TABLE 5: Correlation matrix with debt ratio as the dependent variable. Variable Debt ratio Age Asset structure Company risk Profitability Size Tax Debt ratio 1- - - - - - Age -0.192 1- - - - - Asset structure 0.025 -0.055 1- - - - Company risk 0.123 -0.164 0.064 1 - - - Profitability -0.271 0.219 -0.316 -0.185 1- - Size 0.134 0.237 0.181 -0.326 0.049 1 Tax 0.011 0.554 -0.149 -0.149 0.130 0.031 1 TABLE 6: Correlation matrix with ROA as the dependent variable. Variable ROA Debt ratio Quick ratio Company growth Age Size Asset turnover ROA 1- - - - - Debt ratio -0.358 1- - - - - Quick ratio -0.026 -0.153 1- - - - Company growth 0.079 -0.075 -0.025 1- - - Age 0.185 -0.167 -0.017 -0.166 1- - Size 0.019 0.125 -0.079 0.001 0.160 1 - Asset turnover 0.018 0.002 -0.012 -0.028 0.041 0.116 1 18 http://www.icbmd.org doi:10.4102/jbmd.v5i1.7 Page 6 of 7 Original Research Conclusion The study investigated how tax savings influenced the capital structure decisions of free zone companies in Ghana. The study specifically examined the determinants of the companies’ capital structure and how the capital structure influenced the financial performance of the companies. The results showed that company size was found to have a positive relationship with long-term debt. The results of the study seem to support the pecking order hypothesis, given that long-term debt has inverse associations with profitability of the companies. It was found that companies with a highrisk profile do not avoid taking more financial risk by using less long-term debt. The results indicate that older companies are more likely to rely on long-term debt finance. This is because they are often perceived to have better reputations with debt finance providers. Tax was found to have a positive relationship with long-term debt, which means that the free zone companies do not take into consideration the tax savings they enjoy when applying for debt in their capital structure. With regard to the financial performance, the study showed that there is a strong negative and significant relationship between DR and performance measures of free zone companies (ROA). DR determines the financial health of companies. This ratio helps investors to identify risk rate for companies. The company that has a high DR will have a negative impact on company performance and value. Remarkably, free zone companies, by reducing the DR, can increase profitability and thus improve ROA measure. The results also show that there is a significant and positive relationship between company growth opportunities and ROA. Size of the company, age, quick ratio and asset structure did not show any significant relationship with ROA. Given this relationship, it could be noted that DR and company growth are the affecting factors on company financial performance. Recommendations The results of the study prove that an increase in leverage negatively affects the ROA. It also recommends that managers should not use excessive amounts of leverage in their capital structure, they must try to finance their projects with retained earnings and use leverage as a last option. Managers of these free zone companies are advised to consider the tax benefit when applying for debt in their capital structure because of the interest deductibility from taxable income at the corporate level. Policy makers should place greater emphasis on the facilitation of equity capital, as it provides a base for further borrowing, reduces businesses’ sensitivity to economic cycles and provides companies with an access to syndicates of private and institutional venture capital suppliers because these companies are not listed in the Ghana Stock Exchange. Acknowledgements Competing interests The authors declare that they have no financial or personal relationship(s) that may have inappropriately influenced them in writing this article. References Aboagye AQQ, 1996, ‘Financial Statements and Ratios: the Case Ghanaian Public Companies’, in S. Mensah (ed.), pp. 321–335, African Capital Markets: Contemporary Issues, African Capital Markets Forum: Rector Press Limited, United States of America. Abor, J., 2004, ‘Internationalization and financing options of Ghanaian SMEs’, Acta Commercii 4, 60–72. Abor, J., 2005, ‘The effect of capital structure on profitability: An empirical analysis of listed firms in Ghana’, The Journal of Risk Finance 6(5), 438–445. http://dx.doi. org/10.1108/15265940510633505 Abor, J., 2008, ‘Determinants of capital structure of Ghanaian firms’. AERC Research Paper 176 African Economic Research Consortium, Nairobi, March 2008. Aburub, N., 2012, ‘Capital structure and firm performance: Evidence from Palestine stock exchange’, Journal of Money, Investment and Banking 23, 109–117. Achchuthan, S., Kajananthan, R. & Sivathaasan, N., 2013, ‘Corporate governance practices and capital structure: A case in Sri Lanka’, International Journal of Business and Management 8(21), 114. Al-Sakran, S.A. 2001. “Leverage determinants in the absence of corporate tax system: The case of non-financial publicly traded corporations in Saudi Arabia”. Managerial Finance 27(10/11), 58–86. Amidu, M., 2007, ‘Determinants of capital structure of banks in Ghana: An empirical approach’, Baltic Journal of Management 2(1), 67–69. http://dx.doi. org/10.1108/17465260710720255 Andersen, T.J., 2005, ‘Risk management, capital structure, and performance’, Global Business & Economics Anthology 10(3), 37-52. Baltagi, B.H., 1995, Econometric analysis of panel data, Wiley, Cluchester. Barclay, Michael J. and Clifford W. Smith, Jr. 1996. “On financial architecture: Leverage, maturity and priority”. Journal of Applied Corporate Finance, 8: 4–17. Barton, S.L., C.H. Ned and S. 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Houang, G. & Song, F.S., 2006, ‘The determinants of capital structure: Evidence from China’, China Economic Review 14, 14–36. http://dx.doi.org/10.1016/j. chieco.2005.02.007 Hovakimian A, Hovakimian G, Tehranian H (2004). “Determinants of Target Capital Structure: The Case of Dual Debt and Equity Issues.J. Finan. Econ. 71(3): 517–540 Jensen, M. & Meckling, W., 1976, ‘Theory of the firm: Managerial behavior, agency cost and ownership structure’, Journal of Finance 4, 60–72. Kajananthan, R., 2012, ‘Effect of corporate governance on capital structure, case of the Sri Lankan listed manufacturing companies’, Journal of Arts Science and Commerce 3(4), 63–71. Kajananthan, R. & Achchuthan, S., 2013, ‘Liquidity and capital structure’: Special reference to Sri Lanka Telecom Plc. Kim, C., D.C. Mauer, and A.E. Sherman. 1998. “The determinants of corporate liquidity: Theory and evidence”. Journal of Financial and Quantitative Analysis, 33: 335–59. Kyereboah-Coleman, A., 2007, ‘The impact of capital structure on the performance of microfinance institutions’, The Journal of Risk Finance 8(1), 56–71. http://dx.doi. org/10.1108/15265940710721082 MacKie-Mason, J., 1990, ‘Do taxes affect corporate financing nexus: Some empirical evidence’, Midland Corporate Finance Journal 3, 53–59. 19 http://www.icbmd.org doi:10.4102/jbmd.v5i1.17 Page 6 of 7 Original Research is that SMMEs are overloaded with other debt before they approach the bank. This agrees with the findings made by Okurut et al. (2011) from a survey on general SME credit rationing. However, their survey differs from the current study in that the current study focuses on manufacturing SMMEs, while the earlier focuses on general SMEs that are not specific to any industry and it looks at small and medium enterprises, but excludes micro-enterprises. Bank 1 elaborates: ‘Most of the SMMEs have been black listed by Information Trust Company (ITC) because they have been reported for having unpaid debts for the next 7 years so they are rejected for any form of financial assistance. However, at our bank we are more tolerant such that even when a person has been blacklisted at ITC, if they show some commitment to a good working relationship with the bank; we can finance their business, but cautiously’. This assertion reveals one of the main reasons why some manufacturing SMMEs do not even try to get financing from banks. Even if they try, SMMEs rarely admit that banks are not lending money to them due to the SMME’s own indebtedness. This discovery helps the reader to understand that commercial banks do not just decide to refuse financing SMMEs. Rather, some SMMEs make things difficult for themselves by taking on too much credit, which hinders creditworthiness when financing is needed most. Failure to save money for the future Saving money is a general challenge for Botswana as a nation, and manufacturing SMMEs in particular. This notion is supported by IMF (2014) and African Economic Outlook (2014), which say that household debt in Botswana is one of the highest in the region and is a concern. Along these lines, Bank 1 explains: We normally teach our clients to avoid borrowing for every little need and want. For example, if we finance a client’s tender for BWP1 Million. Next time when the same client wins a tender for BWP20 000, we don’t expect the client ask for financing as we assume they saved some money from the previous big tender. This statement proves that banks want SMMEs to grow financially and avoid being too dependent. Therefore, SMMEs need to learn to save money for future use, both for personal and business (Mutoko 2012). By saving money, it helps SMMEs to increase chances of bank financing and to self-finance some minor projects. Other worries by commercial banks towards SMMEs Other worries of the commercial banks when lending to SMMEs include, ‘risk factors’ that is poor financing management, small ‘market size, lack of collateral security, lack of honesty and SMMEs carrying unrealistic dreams and unattainable proposals. Bank 2 elaborates, ‘Some manufacturing SMMEs carry dreams that are too big and unattainable. So as a bank we have to sit with them and clarify to them the need to scale down their dreams and proposals to become realistic. Otherwise we cannot finance unrealistic ideas and projects’. This further clarifies why some SMMEs fail to get external financing. How banks deal with their worries The ways in which commercial banks dealt with their worries when lending money to SMMEs include: Blocking bank account temporarily: The banks block the client’s account so that they cannot withdraw money from the account when the bank transfers the money into the account temporarily for records purpose. Some dishonest SMMEs had been rushing to withdraw the money before due time. As Bank 2 puts it, ‘Some SMME loan applicants are dishonest. When they apply for GPO; we are not supposed to give them cash to finance their tenders. Rather we should pay direct to their suppliers to avoid funds misuse. After funding approval, we transfer the money into the applicant’s bank account for record purpose before we transfer the money from his/her account to suppliers. But some dishonest SMMEs rush to withdraw the money from their account before we transfer to suppliers. They then quickly use the money for personal expenses. So we have learnt that as soon as the money enters applicant’s account, as a bank we lock the money’. By locking the money therefore, the bank secures the money away from applicants who want to dishonestly misuse the business money. Dishonest SMMEs clearly demonstrate that they are not serious with business. Rather they are concerned with personal gain at the expense of business growth. Obtaining financial history: Banks gather information concerning SMMEs’ financial history, which includes past financing from elsewhere, records of cash flows over the years, SMME applicants’ other sources of income and dependence. However, ‘financial history is not easy to get because majority of manufacturing SMMEs do not keep up-to-date accounting records’ (Bank 1). Conclusions on challenges faced by banks in financing SMME manufacturing: Negative tendencies by manufacturing SMMEs result in a blame game where SMMEs blame the bank for not supporting them and banks are also protecting themselves from indebted clients and protect funds which rightly belong to the public. In any case, as Bank 3 mentions, ‘banks are not in the business of losing money’. SMMEs therefore need to ‘clean their hands before blaming bankers’ (Bank 1). This means that SMMEs need to keep records, come out of debt, avoid using business money for personal reasons and learn to avoid borrowing for every little financial need. Conclusion The study concludes that manufacturing SMMEs have potential to help boost Gross Domestic Product, reduce poverty and unemployment and to diversify the economy. If all stakeholders put efforts together, this can be done, regardless of the current challenges besetting the industry. The findings have been very original, which will help increase the body of knowledge on challenges faced by manufacturing SMMEs. Implications of the study are that policy makers, manufacturing SMMEs, commercial banks and tertiary institutions are given homework to improve circumstances, thereby alleviating 26 http://www.icbmd.org doi:10.4102/jbmd.v5i1.17 Page 7 of 7 Original Research financing challenges faced by manufacturing SMMEs and possibly all SMMEs in Botswana. Recommendations SMMEs should keep up-to-date records to meet commercial banks criteria for lending. SMMEs need to save money for business’ future and avoid borrowing always. SMMEs should avoid unnecessary debt, which reduces their credit score. SMMEs should keep clean banking track record and operate business with integrity. SMMEs should separate personal transactions from business transactions to avoid misappropriation of funds. They should also seek help from LEA, bank officials or from competent consultants to ensure they have feasible business plans rather than carry unrealistic dreams. Furthermore, SMMEs need to benchmark with companies in other countries. Government and policy makers should come up with policies and incentives that make it easier for banks to lend money to SMMEs. Commercial banks should offer financing on a case-by-case basis considering among other things a firm’s stage on the company life cycle, potential for success and not just refuse applications. They should consider financing SMMEs that have feasible ideas even when they have no collateral security and to mentor and guide SMMEs rather than just financing them. Symposiums should be held where SMMEs are taught on how to relate with financial institutions and how to keep up-to-date records. Limitations and scope for further research It was not easy to get enough willing participants because some questions were deemed sensitive such as questions on profitability of a firm. The study was also limited due to the fact that majority (63%) of study participants were based in Gaborone. In future, studies should concentrate on the whole country and possibly extend to other countries in the region to be more comprehensive. Acknowledgements The researcher thanks the North West University (Mafikeng, SA) for funding and academic support and Botswana Accountancy College for support. He also thanks his wife, children and all well-wishers. He especially thanks Professor S. M. Kapunda who supervised the study. Competing interests The author declares that they have no financial or personal relationship(s) that may have inappropriately influenced them in writing this article. References Acquah, B.K. & Mosemanegape, B., 2007, ‘Factors contributing to the performance of small business enterprises in Botswana: A case study of Gaborone and environments’, A paper presented at the National Conference on Informal Sector, GICC, Gaborone. African Economic Outlook, 2014, Botswana economic outlook, viewed 15 June 2015, from http://www.africaneconomicoutlook.org/fileadmin/uploads/aeo/2014/ PDF/CN_Long_EN/Botswana_EN.pdf Almeida, H. & Campello, M., 2007, Financing frictions and the substitution between internal and external funds, viewed 29 June 2014, from www.stern.nyu.edu/ halmeida/papers/peck.pdf BIDPA, 2007, Performance and competitiveness of small and medium sized manufacturing enterprises in Botswana, viewed 04 July 2014, from http://bidpa. co.bw BIS, 2012, Financing SMEs and entrepreneurs, http://www.bis.gov.uk CEDA, 2012, The citizen economic empowerment policy (CEE Policy) Paper No. 1., viewed 27 September 2013, from www.trademarksa.org/.../botswana-citizen- economic-empowerment-policy Fatoki, O. & Asah, F., 2011, The impact of firm and entrepreneurial characteristics on access to debt finance by SMEs in King Williams’ Town, South Africa, viewed 22 June 2015, from www.ccsenet.org/journal/index.php/ijbm/article/ download/9534/8160 International Monetary Fund 2014 Botswana, 2014, ‘Article IV Consultation Report – IMF’, viewed 15 June 2015, from www.imf.org/external/pubs/ft/scr/2014/ cr14204.pdf Jefferis, K., 2014, The new policy on small, medium & micro enterprises, viewed 11 February 2014, from http://www.bidpa.bw John Hopkins Bloomberg School of Public Health, 2009. Kaplan, J.M. & Warren, A.C., 2010, Patterns of entrepreneurship management, 3rd edn., John Wiley & Sons, Inc., Hoboken. Kapunda, S.M., 2015, Industrial economics and development: An African perspective, Codestria, Dakar. Katz, J.A. & Green, R.P. II., 2011, Entrepreneurial small business, McGraw-Hill, Irwin. Lewis, Saunders & Thornhill, 2012. Mannathoko, B.J., 2011, ‘Survey analysis of SMMEs in Botswana’, Masters Dissertation, Nelson Mandela Metropolitan University, viewed 27 June 2015, from http://www.dspace.nmmu.ac.za:8080/.../Masters%20Dissertation%20 -%20Bame%20J%202 Moore, C.W., Petty, J.W., Palich, L.E. & Longenecker, J.G., 2010, Managing small business: An entrepreneurial emphasis, 15th edn., International Edition, South Western Cengage Learning, Independence. Mutoko, R.W., 2012, 15 secrets for personal financial success – A simple step-by-step plan for financial freedom, Authorhouse, Bloomington. Nkwe, N., 2012, Tax payers’ attitude and compliance behavior among SMEs in Botswana, viewed 21 September 2014, from www.macrothink.org/journal/index. php/bmh/article/view/3486 Okurut, F.N. & Ama, N.O., 2013, ‘Assessing factors that affect women and youth micro-entrepreneurs in Botswana’, International Journal of Academic Research in Economics and Management Sciences 2(1). Okurut, F.N., Olalekan, Y. & Mangadi, K., 2011, Credit rationing and SME development in Botswana: Implications for economic diversification, viewed 10 July 2014, from www.ajol.info/index.php/boje/article/download/72978/6186. Republic of Botswana, 1998, Policy on SMMEs in Botswana, Ministry of Commerce and Industry, Gaborone. Republic of Botswana, 2012, National development plan 11, Botswana Government Printers, Gaborone. Rhodes, C., 2012, SMMEs House of Commons Library, Standard Note: SN/EP/6078. Stevens, G.V.G., 1993, ‘Internal funds and the investment function’, USA: Board of Governors of the Federal Reserve System International Finance Discussion Papers. Number 450, August 1993, viewed 29 June 2014, from www.federalreserve.gov/ pubs/ifdp/1993/450/ifd450.pdf World Fact Book, 2014, Population figures: Botswana, viewed 14 June 2014, from https://www.cia.gov/library/publications/the-world-factbook/fields/2219. html 27 doi:10.4102/jbmd.v5i1.12 Page 1 of 7 Original Research http://www.icbmd.org Read online: Scan this QR code with your smart phone or mobile device to read online. Authors: Valdemar João Undji1 Teresia Kaulihowa1 Affiliations: 1Faculty of Economic and Management Sciences, University of Namibia, Namibia Correspondence to: Teresia Kaulihowa Email: teeza.k[email protected]om Postal address: 340 Mandume Ndemufayo Avenue Pioneerspark, Windhoek, Namibia Dates: Received: xxx. 2015 Accepted: xxx. 2015 Published: [to be confirmed] How to cite this article: Undji, V.J. & Kaulihowa, T., 2015, ‘Determinants of inflation in Namibia: A cointegration approach’, Journal of Business and Management Dynamics 5(1), 7 pages. http://dx.doi.org/10.4102/ jbmd.v5i1.12 Note: This paper was presented at the 2015 7th International Conference on Business and Finance (ICBF). Copyright: © 2015. The Authors. Licensee: AOSIS. This work is licensed under the Creative Commons Attribution License. Determinants of inflation in Namibia: A co-integration approach The paper aims to examine the determinants of inflation in Namibia for the period 1993–2013. It was necessitated by the recent increase in consumer prices as world economies remain volatile. Moreover, theoretical and empirical predictions are not without ambiguities on the determinants of inflation in any given economy. The paper employed a co-integration technique to assess the determinants of inflation in Namibia. Empirical results suggest that inflation was mainly driven by imports and government spending for the period under review. Policy implications emanating from the study suggest that the country is vulnerable to external price changes from the markets whence its imports come from, especially those from South Africa. Also, the significance of government expenditure postulates that the Namibian government should reconsider its excessive spending (budget deficit) on the economy. Introduction As Namibia is striving to become an industrialised nation by the year 2030 (Vision 2030), it is vital to ensure that solutions that could lead to stabilisation in the general price level of goods and services are brought to light so as to achieve a high economic growth whilst maintaining a low inflation (Odada & Eita 2010). Moreover, Odada and Eita argued that the high rate of economic growth and macroeconomic stability can only be achieved in the presence of steady prices. Inflation, as defined by Pahlvani and Rahimi (2009), is ‘a constant sustained rise in the general price level, as measured by the consumer price index’ and may become a threat to economic growth because it diminishes the purchasing power of money for goods and services of the Namibian population. This fall in purchasing power may in the process prevent the poorest from affording their basic necessities. Therefore, combating high inflation rate becomes a primary objective incumbent upon the monetary authority in every country in order to maintain a healthier economy, and as such, the causes and determinants of inflation must be identified and monitored. Inflation can be easily curbed when the causes are clearly known (Pahlvani & Rahimi 2009). Two studies (Odada & Eita 2010; Ogbokor & Sunde 2011) emphasised the fact that Namibia is a member of a unified market: the Southern Africa Custom Union (SACU), other members being South Africa, Botswana, Lesotho and Swaziland. Apart from this fact, it is also a member of a Common Monetary Area (CMA) with its currency pegged to the South African rand on a one-on-one basis and imports more than 80% of its goods (mainly food) from SACU. Additionally, Odada and Eita (2010) noted that Namibia had not experienced very high levels of inflation since 1980. Their studies also revealed that for the period 1980–1989, average inflation was 12.97%, with the highest level being 15.2% in 1982 and the lowest being 9.1% in 1984. From 1990–2007, average inflation was 8.8%, with the highest level being 17.7 in 1992 (drought year) and the lowest level being 2.3% in 2005. In the same streak, average inflation for the period 1980–2007 was 10.29%, with the highest level being 17.7% in 1992 and the lowest level being 2.3% in 2005. From 1980–2007, the inflation rate trend has been downward in Namibia, meaning that both studies concurred that policy makers and planners have reasonably been successful in dealing with the problem of inflation over the 1990s period. Economists hold conflicting theories with regards to inflation; nonetheless, there are two main types of inflation, namely, the demand–pull inflation and the cost–push inflation. Demand–pull inflation is the inflation emanating from the demand side, for instance, a constant increase in the growth of money supply, increase in government expenditure within the domestic economy, increase in foreign debts and so on. When this happens, there is a mismatch in the equivalent quantity of supply, and producers respond by increasing the general price levels of goods and services, which will consequently result in what we call inflation (Khai 2011). The cost–push inflation, also known as supply–push inflation, happens because of increases in the cost of production of raw materials, that is an increase of price of input units, rising wages because of trade union activities, and so on (Khai 2011; Olatunji et al. 2010). Economic theories postulate Read online: Scan this QR code with your smart phone or mobile device to read online. 28 http://www.icbmd.org doi:10.4102/jbmd.v5i1.12 Page 2 of 7 Original Research that Economic Integration between member countries such as SACU as well as the CMA helps to decrease the prices of goods and services because the imports of goods within these member countries is duty free. Nevertheless, in reality, this has not been the case in Namibia, because recently the general price levels have been increasing and hence the necessity of the study on the determinants of inflation. Moreover, because the Bank of Namibia (BoN) framework acts as a Currency Board (a monetary authority that issues notes and coins fully convertible into a pegged currency at a fixed rate and on demand), the supply of money by BoN is not expected to create inflation in Namibia. It is for this reason that the study is critical as it attempts to prove if indeed these assumptions in monetary economics can hold true. There is a positive relationship between the growth of money supply (a rise in the act of issuing of notes and coins) and inflation (prices) as postulated by the classical economists. It is upon the basis of this belief that controlling the growth of money is vital for a healthier economy that will attract investors in the country. Thus, it is the responsibility of the BoN to ensure that the annual growth rate of money supply is not so excessive that it causes inflation and erodes the value of money. Another gap that the study attempts to tackle is the inclusion of government spending on the consumption of goods and services plus how it impacts price levels in the domestic economy. The main reason for the inclusion of this variable is because the Namibian government has been pursuing an expansionary budget deficit for sometimes now, except in 2006, which rises government expenditure. It is expected that as government expenditure increases, price levels of agricultural goods especially begin to rise too. This causes Namibian produce to become less competitive in the global market as compared to the other international produces. As a result, domestic industries which rely on trade with other economies will be at risk of collapsing (Ogbokor & Sunde 2011). Inflation could pose an adverse and profound impact upon the quality of lives, especially the most poor because of prevailing increases in the general price level of goods and services. It therefore becomes the responsibility of the government to ensure that any variables that could be interplaying in the process of diminishing the purchasing power are closely monitored. Therefore, the study will attempt to shade some insights on the causes/determinants of inflation in Namibia, especially during the period of worldwide financial instability. The objective of the study The general objective of the research study is to examine the effect of some macroeconomic variables, namely, money supply, imports and government expenditure on the level of inflation in Namibia. In quest of the study, the paper tries to achieve three main specific objectives as stated below: 1. To investigate the relationship between money supply and inflation 2. To examine the relationship between government spending and inflation 3. To evaluate the relationship between imports and inflation. Literature review Theoretical literature Theoretical literature on the determinants of inflation is filled with contradictory views with regards to the causes of inflation. Below are the theoretical explanations as postulated by various economists: The demand–pull inflation: Demand–pull inflation exists when the aggregate demand of goods and services from the consumers’ side exceeds the aggregate supply (output) when the economy is at or close to full employment. The excess demand can be a resultant of either the rise in real GDP or the monetary sector of the economy, which is described as ‘too much money chasing too few goods’. The main sources of demand–pull inflation are increases in government spending, increase in money supply and rise in household and firms consumption (Ogbokor & Sunde 2011). The cost–push inflation: Cost–push inflation exists when wages or production costs start rising. The producers in turn pass these rising costs upon the consumers, leading to higher prices. Ogbokor and Sunde (2011) noted that this kind of inflation occurred mainly because of a rise in the cost of imported raw materials and an increase in the cost of labour. The Monetarists’ view: Monetarists’ economists argue that there is a direct relationship between price and money supply. They believe that ‘inflation is always and everywhere a monetary phenomenon’; hence, prices are likely to increase when the rate of inflation in money supply is greater than the rate of increase in real output of goods and services (Johnson 1973 cited in Olatunji et al. 2010). In addition, Goamab (1998) noted that such a situation ( where any extra cash balances is spent on the acquisition of assets) will give rise to excess demand for assets, which will ultimately lead to increases in the general price level, thereby leading to a rise in inflation. The Keynesians’s views: The Keynesians tend to attribute inflation more to demand pressures within the economy. It is not necessarily a monetary phenomenon as opposed by the Monetarists’ economy (Goamab 1998; Ogbokor & Sunde 2011). Furthermore, they believe that inflation is caused by movements in the rate of interest, which is in contrast to the Monetaristic view, which claims that inflation is caused by money supply. The Structuralists’ view: Structuralist economists stressed the significance of demand pressures, cost pressures and business cycles within an economy as the core causes of inflation. Structural inflation, as asserted by Conavese (1982) cited in Odada and Eita (2010), originates from three interrelated phenomena, namely, changes in economic structures which causes changes in relative prices, some money prices (especially wages) are inflationary (or rigid) downwards and an induced growth in money supply occurs to accommodate the resulting increases in the general price level. 29 http://www.icbmd.org doi:10.4102/jbmd.v5i1.12 Page 3 of 7 Original Research Empirical literature The section analyses the empirical works that have been conducted in the area of inflation in Namibia as well as other studies in various countries. The aim is to establish evidence of the existence of this phenomenon in these countries and to verify whether the theories analysed in the theoretical literature do hold true. Empirical studies on Namibia’s inflation: Goamab (1998) conducted a study on inflation in Namibia using data covering the period 1974–1996. The study applied a combination of econometric techniques, namely, co-integration (CI), error correction modelling (ECM) and structural stability testing. The CI method was used to capture potential information about the long-term equilibrium relationship of the model, whereas the ECM was used to evaluate the short-term adjustments in the model and structural stability testing was used to analyse the behaviour of inflation function in Namibia. The study shows that Namibia’s inflation is highly affected both in the short-run as well as in the long-run by external factors. A study was conducted by Odada and Eita (2010) to establish the possible causes of inflation in Namibia. They used annual time series data covering the period 1972–2008. The Augmented Dickey–Fuller (ADF) unit root and CI tests were carried out. The results revealed that money supply and imports have a positive impact on inflation. Also, Ogbokor and Sunde (2011) utilised ordinary least squares (OLS) estimation techniques to analyse and test the hypothesis as to whether inflation is mainly driven by imports using annual macroeconomic data from 1980–2007. They found out that amongst other variables, imports and money supply played a significant role in explaining inflation in Namibia. Empirical studies on other countries’ inflation: Olatunji et al. (2010) did a study for AAAE and AEASA in Nigeria. Time series data were employed using descriptive statistics and CI analysis tools. They concluded that total imports, government expenditure and money supply exert a positive effect on inflation, especially on food prices. In the same view, Arif and Ali (2012) utilised Johanse–Juselius CI method and the ECM to test for both long-run property of the model and shortrun determination in Bangladesh. The study employed data from 1978–2010. They concluded that there was a positive relationship between money supply, government expenditure and imports on inflation in the long-run. On the other hand, there are other studies that have been carried out that found an inverse relationship between the independent variables (imports, government expenditure and money supply) and inflation. Ali and Mim (2011) did a study on the drivers of inflation in eight MENA countries by using annual data from 1980–2009. The study applied estimation techniques, namely, system of Generalised Method of Moments. They concluded that there was a negative relationship between money supply growths and government spending against inflation. In the study by Sola and Peter (2013), the Nigeria Autoregressive model was used covering secondary data ranging from 1970–2008. The results revealed money supply to be positively related to inflation, but government expenditure had an inverse relationship. Also, Adusei (2013) carried out a study on South Africa using time series data starting from 1965–2006 to investigate whether inflation in South Africa is a structural or a monetary phenomenon. Unit root testing, CI analysis, fully modified ordinary least squares, two-stage least squares regression, ECM and pairwise Granger Causality test techniques were conducted. The study disclosed that, amongst other, there was an inverse relationship amongst broad money supply, openness of the South African economy and government expenditure with inflation. Based on the aforementioned literatures, one can firmly say the following: there are mixed findings with regards to the causes of inflation ranging from those refuting and agreeing (or no relationship at all). There are also significant methodological approaches, be it a cross–country study or an individual country study. There is variation in terms of data frequency utilised ranging from monthly, quarterly and annually. There seems to be no study in Namibia that has attempted to study the cause of inflation using government expenditure as a determinant of inflation. It is against this background that the study intends to fill up the gap and add up to the empirical literature for Namibia. Methodology The study will adopt a CI functional approach as used by Olatunji et al. (2010). This is in line with the main objective of the study, which is to discover the links between inflation and its possible determinants in Namibia by employing a CI approach. The study considers Namibia’s Money Supply (M2 = currency, demand deposit, overnight and quasi money), Imports (spending by firms, individuals and government for goods and services produced in foreign nations) and Government Expenditure (spending by the Namibian government for goods and services it consumes in providing public services) as the major determinants of inflation in Namibia. The specific model is expressed as: ϑϑ ϑϑ ϑξ =+ ++ ++ YX XXX ln ln ln ln ln tttt t01 12 2334 4 (1) Where Yt = annual inflation rate, X1 = annual money supply, X2 = annual imports, X3 = annual government expenditure, X4 = annual gross domestic product and ξ is the stochastic error term with the usual properties. The subscript t denotes the time period and the rest are parameters. In light of the objectives of the study, as well as in line with the conceptual framework of the topic and the methodological issues, the estimation technique is carried out in steps. The first step before conducting a CI test will be to carry out a unit root test in order to check whether the variables are stationary, so that spurious regression results are avoided. Stationarity or non-stationarity: To test whether variables are stationary or nonstationary, the study carries out the ADF statistic. However, ADF statistic has limitations in the sense that it has lower power, such that it is likely to under-reject the null hypothesis of unit roots. Because of this constraint, an additional test statistic, the Phillips–Perron (PP) statistic, will be used in the study. This is one gap filled by the study 30 http://www.icbmd.org doi:10.4102/jbmd.v5i1.12 Page 4 of 7 Original Research because there has been no study in Namibia that has used the PP approach to test for unit root. According to Arif and Ali (2012), a stationary time series is one whose basic properties do not change overtime, whilst a non-stationary variable has some sort of upward or downward trends. CI test: An Engle–Granger (E-G) CI method will be applied because the study intends to merely use a single equation, after establishing non-stationarity, in order to determine longterm equilibrium relationships amongst the variables. The study will utilise annual time series data covering the period 1993–2013. The reason for choosing this time interval is that there was no suitable data available prior to independence gained in 1990, and this lack of data for a considerably sufficient period poses a serious estimation challenge. The data in the study were obtained from the Namibian Statistical Agency and the World Bank. Empirical results and analysis Unit root test The ADF test is used to test whether variables exhibit unit root, and it is further confirmed by verifying with the PP test. The reason why such verification is deemed necessary is because ADF test has the tendency of having lower power, such that it is likely to under-reject the null hypothesis of unit roots. Table 1 presents the results of unit root test. Table 1 presents the outcome of the unit root test from the ADF test and the PP test. At all levels, all the variables in both the tests exhibited unit root, that is they are non-stationary. However, after differencing the variables, they all became stationary at 5% for both tests, which indicates that all variables are integrated of degree one, I(1). Differencing is deemed necessary in order to avoid having spurious regression. Seeing that the variables became stationary after the first difference, it was imperative that a CI test be conducted in order to determine whether there was long-run relationship between the series. Testing for CI Two or more variables are said to be co-integrated if they have a long-run, or equilibrium, relationship between them. In economics, this implies that the co-integrated variables will move closely together over time. In the study, the E-G CI test was used mainly because the study used a single equation. This was simply conducted by first obtaining the residuals from the OLS regression, and the ADF test was used to determine CI. The E-G CI test results are presented in Table 2. From Table 2, we can observe that the residual term (ECT) is stationary at all levels, that is I(0). This suggests our variables are co-integrated. In fact, the residual also appeared to be stationary when plotted (see Appendices A1 and A2). This re-affirms that the variables in the model are indeed cointegrated. With these outcomes, it implies that ECM can be estimated. The model in Eqn (1) is re-specified as: YX XX X ln ln ln ln ln ECT tt tt t 01 12 23 3 44 t1 ϑϑ ϑϑ ϑϕξ ∆=+∆ +∆ +∆ + ∆+ + − (2) Where all variables are as defined before and ECTt-1 is the lagged error correction term, which is given by the residual from Eqn (1). Estimating the ECM The ECM integrates short-run dynamics with the long-run equilibrium without losing any long-run information. The ECM is helpful in the derivation of the short-run impacts on the inflation rate in Namibia. Table 3 presents the ECM results. Table 3 reports that both government spending and imports have a positive and significant impact on inflation in Namibia, whilst money supply and gross domestic product have an inverse relationship, but it was however insignificant. The finding strongly proves that government expenditure, followed by imports is the reason for inflation in the Namibian economy. Hence, it is safe to say that Namibia’s inflation rates are import driven. This is because of the spillover TABLE 1: Unit root stationarity test: ADF and PP in levels and first difference. Variables Model specification ADF PP Order of integration Level First difference Level First difference LY Intercept and −3.2757 −3.8718** −2.6956 −3.8624** I(1) trend −2.8704 −3.9786** −2.3694 −3.9907** LX1Intercept and −1.8150 −3.7090** −1.8150 −3.6194** I(1) trend −1.1444 −3.8452** −1.1444 −3.8125** LX2 Intercept and −2.6995 −4.1322** −1.8868 −3.1952** I(1) trend 0.0505 −3.9881** −0.0036 −3.2664** LX3Intercept and −1.1366 −4.1712** −1.1366 −4.1644** I(1) trend 1.1622 −3.8467** 1.3282 −3.8467** LX4Intercept and −2.2952 −4.8089** −2.2870 −4.8089** I(1) trend 0.9190 −4.7072** 0.9190 −4.7081** Source: Author’s compilation and the values were obtained from Eviews. **, The rejection of the null hypothesis is at 5%. TABLE 2: Engle-Granger CI result. ADF –Test Significance level t-statistics P-value Null Hypothesis: ECT has a unit root - - - ADF test statistic - −4.5176 0.0103 Test critical values: 1% level −4.5325 - - 5% level −3.6736** - - 10% level −3.2773 - Source: Author’s compilation and the values were obtained from Eviews. **, The rejection of the null hypothesis is at 5%. TABLE 3: Results from the ECM. Variable Coefficient Standard error t-Statistic Probability DLNX4−1.900757 3.089811 −0.615169 0.5491 DLNX35.178453 1.877023 2.758865 0.0163 DLNX22.330495 0.812770 2.867348 0.0132 DLNX1−0.998563 0.590220 −1.691850 0.1145 ECT −8.754834 2.176754 −4.021967 0.0015 C−0.250351 0.152133 −1.645609 0.1238 R-squared 0.733485 Mean dependent variable −0.012676 F-statistic 7.155531 Durbin-Watson statistic 1.941842 Probability (F-statistic) 0.002024 - 31 http://www.icbmd.org doi:10.4102/jbmd.v5i1.12 Page 5 of 7 Original Research effect of the rise in the prices from industrial countries with which Namibia has trade relations. The strong significance of government expenditure could be because of the excessive involvement of the government (through its expansionary fiscal policy) in combating unemployment and building the country’s infrastructure, which meet the objectives of vision 2030 so as to attract potential investors and in the end achieve industrialisation. We can further observe that the error term is negative and statistically significant. This suggests that the adjustment process to equilibrium is about 875%. Moreover, the model’s DW-statistics of 1.9, which is approximately closer to 2, shows that there is no first-order autocorrelation in the error term. Conclusion and policy implications The study looks at the possible determinants of inflation in Namibia. This is because of the fact that maintaining a low and a stable inflation rate is vital for the sound economic growth of Namibia and for any country desiring to attain macroeconomic stability. The empirical results show that inflation in Namibia is mainly an argument for imports and government expenditure in the short-run. The significance of imports in our analysis suggests that Namibia is heavily an open and import-dependent economy. As a result, the country is vulnerable to external price changes from the markets whence its imports come from, especially those from South Africa. Also, the significance of government expenditure postulates that the Namibian government should reconsider its excessive spending (budget deficit) on the economy. Conversely, the study reveals that GDP and broad money supply exerted a negative impact on inflation, which is contrary to the outcome obtained by Odada and Eita (2010). The policy recommendations that are necessary in order to lessen the momentum of inflation in Namibia are the following: 1. Imports must be minimised in Namibia. This can be achieved by encouraging the domestic manufacturing base of primary products to start adding value to the natural resources they extract. Also, policies (such as lower taxes, tax holiday and land tenure) which would attract investment in the agricultural sector ought to be encouraged in order to enhance the agricultural output and in the process achieve food security as well as to reduce the effects caused by the drastic change in the prices of these imports. 2. It is worth mentioning that the role of government spending is very important for economic growth; however, because of the significance of government expenditure on inflation, the Namibian government should minimise its involvement in the economy. That is, it should stop doing what the private sector can do. This can be achieved by pursuing a contractionary fiscal (or monetary) policy so as to minimise the dangers of deficit spending. 3. The government of Namibia should consider the immediate implementation of import substitution. These inward-looking policies such as higher tariffs, low quotas and infant industry protection should be highly considered if we are to achieve industrialisation by the year 2030. 4. On the basis of the study, we can conclude that inflation in Namibia is triggered by both the demand side factor alongside with the supply side factor, but government expenditure together with imports were found to be critical. It is imperative that future studies should be carried out using a different data set and a different methodological approach in order to determine whether similar findings can be obtained. Acknowledgments Competing interests The authors declare that they have no financial or personal relationship(s) that may have inappropriately influenced them in writing this article. Authors’ contributions V.J.U. (University of Namibia) and T.K. (University of Namibia) contributed equally to the writing of this paper. References Adusei, M., 2013, ‘Is inflation in South Africa a structural or monetary phenomenon?’, British Journal of Economics, Management & Trade 3(1), 60–72. http://dx.doi. org/10.9734/BJEMT/2013/2553 Ali, M.S.B. & Mim, S.B., 2011, ‘What drive inflation in MANE countries?’, International Journal of Economics and Finance 3(4), 119–129. Arif, K.M. & Ali, M.M., 2012, ‘Determinants of inflation in Bangladesh’, Journal of Economic and Sustainable Development 3(12), 9–17. Goamab II, M., 1998, Modelling inflation in Namibia, Occasional Paper, No. 1. Ban of Namibia. Hardwick, P., Khan, B. & Langmead, J., 1999, An introduction to modern economics, Addison Wesley Longman Ltd, Edinburgh/Singapore. Khai, T.M., 2011, ‘Determinants of inflation in Malaysia’, Unpublished master’s thesis, USM. Pahlvani, M. & Rahimi, M., 2009, ‘Sources of inflation in Iran: An application of the ARDL approach’, International Journal of Applied Econometrics and Quantitative Studies 6(1), 61–76. Odada, J.E. & Eita, J.H., 2010, ‘Causes of inflation in Namibia: An empirical exposition’, The African Financial Journal 12, 44–57. Ogbokor, C.A. & Sunde, T., 2011, ‘Is Namibia’s inflation import driven? An econometric investigation’, [Electronic version]. Journal of Development Alternative and Area Studies 30(1, 2), 1–14. Olatunji, G.B., Omotesho, O.A., Ayinde, O.E. & Ayinde, K., 2010, ‘Determinants of inflation in Nigeria: A CI approach’, Contribution paper presented at the Joint 3rd Africa Association of Agricultural Economists (AAAE) and 8th Agricultural Economist Association of South Africa (AEASA) Conference, Cape Town, 19–23rd September. Sola, O. & Peter, A., 2013, ‘Money supply and inflation in Nigeria: Implication for national development’, [Electronic version]. Scientific Research, 4, 161–170. http://dx.doi.org/10.4236/me.2013.43018 32 http://www.icbmd.org doi:10.4102/jbmd.v5i1.12 Page 6 of 7 Original Research FIGURE 1-A1: Plot of residual, ECT. -.08 -.0 -.0 -.0 .00 .0 .0 .0 .08 .0   8 00 0 0 0 08 0  ECT APPENDICES Appendix 1 Appendix 2 TABLE 1-A2: Table of residual, ECT. ADF test Level 1st difference t-statistic P-value Null hypothesis: ECT has a unit root - - - - Exogenous: Constant, linear trend - - - - Lag length: 0 (Automatic –based on SIC, maxlag = 4) - - - - ADF test statistic - - −4.517634 0.0103 Test critical values: 1% level −4.532598 - 5% level - −3.673616 - 10% level - −3.277364 - ADF test equation - - - - Dependent variable: D(ECT) - - - - Method: Least squares - - - - Included observations: 19 after adjustments - - Variable Coefficient Standard error t-Statistic Probability ECT(-1) −1.102251 0.243988 −4.517634 0.0004 C−0.000486 0.014964 −0.032489 0.9745 @TREND(1993) 0.000189 0.001313 0.143804 0.8875 R-squared 0.561415 Mean dependent variable -0.001832 Adjusted R-squared 0.506591 Standard deviation dependent variable - 0.044441 Standard error of regression 0.031217 Akaike information criterion - −3.951767 Sum squared residual 0.015592 Schwarz criterion - −3.802645 Log likelihood 40.54178 Hannan–Quinn criterion - −3.926529 F-statistic 10.24046 Durbin–Watson statistics 1.97610ç1 Probability (F-statistic) 0.001369 - - - 33 http://www.icbmd.org doi:10.4102/jbmd.v5i1.12 Page 7 of 7 Original Research TABLE 1-A3: Data used in the study period 1993–2013 (X4 and Yt were obtained from NSI and the rest of the variables were from the World Bank). Year YtX2X3X1X4 1993 8.55 1.71E + 09 1.13E + 09 32.03505 41 476 1994 10.74 1.78E + 09 1.15E + 09 34.16115 42 194 1995 10.06 1.94E + 09 1.18E + 09 37.81658 43 839 1996 8.00 2.25E + 09 1.21E + 09 39.55621 45 238 1997 8.85 2.32E + 09 1.26E + 09 38.36206 47 147 1998 6.20 2.5E + 09 1.3E + 09 37.90007 48 699 1999 8.59 2.53E + 09 1.35E + 09 41.06174 50 340 2000 9.38 2.4E + 09 1.37E + 09 39.98176 52 098 2001 9.18 2.75E + 09 1.41E + 09 37.70814 52 712 2002 10.96 2.91E + 09 1.37E + 09 35.09389 55 236 2003 7.33 3.22E + 09 1.42E + 09 36.52884 57 578 2004 4.14 2.9E + 09 1.49E + 09 37.07182 64 642 2005 2.28 2.93E + 09 1.4E + 09 37.61627 66 277 2006 4.95 3.4E + 09 1.55E + 09 41.67903 70 965 2007 6.55 4.49E + 09 1.75E + 09 39.85046 74 779 2008 9.06 5.28E + 09 1.9E + 09 41.6751 77 655 2009 9.49 6.26E + 09 1.99E + 09 64.56716 76 522 2010 4.92 5.56E + 09 2.02E + 09 63.21905 81 569 2011 5.00 5.42E + 09 2.17E + 09 63.82857 86 473 2012 6.72 6.26E + 09 2.22E + 09 55.75014 92 258 2013 5.61 7.23E + 09 2.42E + 09 - 96 323 Appendix 3 34 doi:10.4102/jbmd.v5i1.11 Page 1 of 7 Original Research http://www.icbmd.org Read online: Scan this QR code with your smart phone or mobile device to read online. Author: Paul-Francois Muzindutsi1 Affiliation: 1School of Economics, North- West University, South Africa Correspondence to: Paul-Francois Muzindutsi Email: [email protected] Postal address: PO Box 1174, Vanderbijlpark 1900, South Africa How to cite this article: Muzindutsi, P.F., 2015, ‘Does corporate social responsibility affect companies’ financial performance? A review of empirical studies’, Journal of Business and Management Dynamics 5(1), 7 pages. http://dx.doi.org/10.4102/ jbmd.v5i1.11 Note: This paper was presented at the 2015 7th International Conference on Business and Finance (ICBF). Does corporate social responsibility affect companies’ financial performance? A review of empirical studies The increasing changes in environmental, social and economic trends have encouraged companies to be more involved in socially responsible initiatives. Corporate social responsibility (CSR) is the involvement of a company in addressing environmental and social challenges faced by the society. Whilst the main objective of a company is wealth creation and profit maximisation, concerns for contribution to societal development have mooted useful and mutual beneficial business practices with potential financial involvement. The study reviewed and examined CSR theories to locate the impact of these theories on a company’s financial performance. The review and examination of the studies conducted from the 1970s to 2013 found a mixed pattern of the relationship between financial performance and CSR. This mixed pattern provides evidence that the relationship between companies’ financial performance and social performance could be positive, negative or non-significant. This mixed pattern is part of the big ongoing debate on this topic, and such a debate is possibly inevitable, given that empirical studies test different hypotheses, use different methodologies and consider different sectors or industries at different time periods. Introduction Increasing changes in environmental, social and economic trends have encouraged companies to be more involved in socially responsible initiatives, known as corporate social responsibility (CSR). CSR is broadly defined as ‘a company’s positive impact on society and the environment through its operations, products and services and through its interactions with key stakeholders such as employees, customers, investors, communities and suppliers’ (Katsoulakos & Katsoulakos 2006:13). Several terms such as corporate citizenship, corporate accountability, business ethics, corporate social investment (CSI) and corporate responsibility have been used interchangeably with CSR (Amaladoss & Manohar 2013). CSR is therefore associated with different definitions, but such definitions commonly refer the role of companies in integrating social, economic and environmental dimensions to fulfil the needs of all its stakeholders (Barthorpe 2010). Thus, CSR explains how companies direct their activities towards creating value for people (creation of wellbeing inside and outside the organisation), planet (achievement of ecological quality) and profit (maximisation of profit), whilst communicating with all stakeholders on the basis of transparency (Carroll 1999). With the help of CSR, companies are able to address various challenges faced by the society in which they operate. The involvement in CSR means that companies have to channel some resources towards developing strategies that seek to improve their involvement in CSR. Thus, CSR encourages companies to add the social welfare role to their major objective of value maximisation. This role has raised a number of questions, including why should companies be involved in CSR and whether CSR has any effect on companies’ financial performance (Renneboog, Horst & Zhang 2008). To address these questions, a number of theories that seek to explain the motive behind CSR and its contribution to a companies’ performance have been developed. Some theories (Freeman 1999; Freeman & McVea 2001) suggested that a company should benefit from improved CSR, whilst others (Friedman 1970) considered the involvement in CSR as a deviation from a company’s core objective of making profit. Thus, this paper aims at reviewing empirical studies on the relationship between companies’ social performance and financial performance to establish whether the findings support the notion that companies benefit financially from their involvement in CSR. Theoretical approaches of CSR There are a number of theories that explain the motive behind companies’ involvement in CSR, but they are classified into two major categories, namely value maximisation and stakeholder approaches. These two approaches mostly differ when it comes to the process of maximising a Read online: Scan this QR code with your smart phone or mobile device to read online. 35 doi:10.7166/jbmd.v5i1.21 Page 1 of 5 Original Research http://www.icbmd.org Authors: Edward S. Fekpe1 Andrew-Vans Bray1 Affiliations: 1Ghana Institute of Management and Public Administration, Ghana Correspondence to: Edward Fekpe Email: ef[email protected] Postal address: Greenhill, Accra, Ghana How to cite this article: Fekpe, E.S. & Bray, A-V., 2015, ‘Effects of supply chain integration on lead time in the retail industry in Ghana’, Journal of Business and Management Dynamics 5(1), 5 pages. http://dx.doi. org/10.4102/jbmd.v5i1.21 Note: This paper was presented at the 2015 7th International Conference on Business and Finance (ICBF). Effects of supply chain integration on lead time in the retail industry in Ghana Read online: Scan this QR code with your smart phone or mobile device to read online. Supply chain integration is concerned with the close alignment and coordination among parties within a supply chain as a means of improving performance. Inventory management of global supply chains presents challenges to retail businesses in developing economies where several uncertainties relating to order cycle, lead times and inventory decisions exist. This paper examines supply chain integration and its effects on lead times for the retail industry in Ghana. In the retail industry where products have varying shelf lives, the importance of supply chain integration is critical for performance and survival in a competitive business environment. A case study approach was used where purposive sampling was employed to select two retail giants operating in Ghana. It was found that an integrated supply chain results in significant reductions in lead times. Depending on the product category and the degree of supply chain integration, lead time reductions can be as high as 40%. A partnership relationship between the buyer and the supplier results in higher percentage reduction in lead times compared with the adversarial relationships. The benefits of reduced lead times include improved product availability, customer satisfaction, supply chain performance and efficiency. A partnership relationship is recommended to derive maximum benefits of supply chain integration. However, in a new, risky or hostile environment, an adversarial buyer– supplier relationship is recommended. Introduction A supply chain is an integrated process wherein raw materials are transformed into final products, then delivered to customers. Lambert, Cooper and Pagh (1998) defined supply chain management (SCM) as ‘the integration of key business processes from end user through original suppliers, and information that adds value for customers and other stakeholders’. The Council of Supply Chain Management Professionals (CSCMP) noted that SCM encompasses the planning and management of all activities involved in sourcing and procurement, conversion and all logistics management activities. More importantly, SCM also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers and customers. Monczka and Morgan (1997) among others noted that SCM seeks to enhance competitive performance by integrating the internal cross-functions within a company and effectively linking them with external operators of suppliers, operators to be successful. Lambert and Cooper (2000) argued that the extent of joint planning is expected to bear heavily on the success of the supply chain and that though different components may be emphasised at different times during the life of the supply chain, planning transcends the phases. Zigiaris (2000) noted that successful SCM coordinates and integrates all of these activities into a seamless process. This includes integration of supply chain partners such as vendors, carriers, third party companies and even information systems providers. Supply chain integration is a performance-improving approach that develops seamless linkages between the various actors, levels and functions within a supply chain to optimise customer service. The objectives of supply chain integration are to improve efficiency and reduce redundancy while also enhancing product availability. Supply chain integration strives to better connect demand with supply, which can both improve customer service and lower costs. However, it is not always possible to simultaneously achieve all these objectives. Demographic data indicates that Africa’s middle class population has tripled over the last 30 years, and the current trajectory suggests that this segment of the population will grow to over 1.1 billion by 2060 (cited in Africa Media Agency [AMA] 2014). The combined effects of population growth and increased urban migration include increased demand for goods and services and hence potential for significant retail growth. Also, Ghana has been identified as a country with a positive business environment in which foreign retailers can invest given its reputation for political stability and cultural tolerance (McTernan 2014). The objective of this paper is to examine the supply chain integration and the impacts of lead time in the retail industry with cases from Ghana. The premise 42 http://www.icbmd.org doi:10.7166/jbmd.v5i1.21 Page 2 of 5 Original Research is that lead time can be used as proxy to assess the efficiency and performance of the supply chain in competitive business environment. Literature review Integrated SCM is about going from the external customer and then managing all the processes that are needed to provide the customer with value in a horizontal way (Monczka & Morgan 1997). Generally, SCM comprises integrated functions from raw materials to final products. SCM also covers integrated management of every organisation throughout the whole chain. Supply chain integration can be defined as the extent to which all activities within an organisation and the activities of its suppliers, customers and other supply chain members are integrated together (Tutuncu and Kucukusta 2008). Supply chain integration is usually classified into two categories: internal and external. Internal integration is concerned with inter-functional interaction, collaboration, coordination, communication and cooperation within an organisation. In contrast, external integration involves interactions and collaborations with suppliers and customers and other partners in the supply chain that are external to the central company. Customer integration, also termed ‘forward integration’, is intended to ensure effective flow of products and services to customers. Supplier integration (backward integration) is concerned with collaboration and interaction of suppliers to ensure effective flow of supplies (Otchere, Annan & Anin 2013). Treville, Shapiro and Hameri (2004) noted that supply chain integration includes just-in-time delivery, reduction in supplier base, supplier evaluation based on quality and delivery performance, establishment of long-term contracts with suppliers and elimination of paperwork. According to Kauremaa (2013), it is possible to distinguish three main approaches to integrating supply chains that differ from one another in terms of the objectives they have and the results they produce. This is presented schematically in Figure 1. 1. Buyer-centric integration: A buyer-centric model is concerned about the efficiency gains for the buyer. The buyer seeks to streamline its operations and pays for this through accepting greater dependence on the supplier. For its part, the supplier looks for a return on its investment through greater customer loyalty to the supplier and satisfaction. 2. Collaboration-centric integration: In collaborationcentric integration, a channel is created through which the parties can discuss a wide range of issues at various levels between their respective organisations. This sort of approach can not only produce much sought after operational improvements but also a range of unexpected benefits that arise from the better understanding of supplier and buyer of each other’s businesses. 3. Synchronisation: The synchronisation model is about the supplier making use of the increased transparency to improve its own operations. In this case, the buyer might, for example, look to outsource responsibility for replenishment to its supplier in the hope of receiving better service. The supplier, in turn, can cover the cost of the extra work by reducing its inventory levels as a result of the improved visibility and thus reduced uncertainty. Lead time: Lead time is defined as the latency between the initiation and the execution of a process. Lead time is the key issue for enhancing performance of organisations across various industries (Treville et al. 2004). Lead time is a major consideration for retailers and customers in the supply chain. Higher levels of integration results in reduced lead times. Chopra, Reinhardt and Dadahardt (2004) showed that by decreasing the lead time uncertainty, the required safety stock increases. Singh, Sohani and Marmat (2013) noted that in an information-enriched supply chain, firms are closely connected with suppliers and customers both internally and externally because of information sharing resulting in reduced lead time and increased performance. Lead time can be measured in a number of ways, including manufacturing lead time (Jayaram, Vickery & Droge 1999) and customer lead time (Duenyas & Hopp 1995). Customer lead time is the time elapsed from receipt of an order until the finished product is either shipped or delivered to the customer. This paper focuses on customer lead time. Various variables can help reduce the lead times of products or delivery in the retail sector. Because the retailer does not normally add any value to the product yet to be distributed the final consumer, integrating supply chain in relation to lead time reduction is essential in satisfying customer’s demand. The retail industry is much concerned about delivering goods and services to the final consumer. This means delivery is of essence; therefore, ways to reduce lead time must be considered to get the product as close to the consumer as possible and on time. Retail industry landscape in Ghana: According to Deloitte (cited in AMA 2014), ‘Africa’s middle class has tripled over Main objecvesResults Buyer commitment Operaonal benefits to the buyer Unifirm material flow Buyer-supplier collaboraon Operaonal benefits to the supplier Synchronisaon Buyer-centric Collaboraon focus Integraon model Buyer: internal efficiency Supplier: offer addional services / value added Supplier: offer addional services / value added Supplier: Supply chain efficiency Supplier: internal efficiency Source: Kauremaa, J., 2013, ‘Blurring boundaries to deliver results: Supply chain integration’, White Paper, viewed 28 June 2015, from http://www.relexsolutions.com/blurringboundaries-to-deliver-results-supply-chain-integration/ FIGURE 1: Supply chain integration approaches. 43 http://www.icbmd.org doi:10.7166/jbmd.v5i1.21 Page 3 of 5 Original Research the last 30 years, and the current trajectory suggests that the African middle class will grow to 1.1 billion in 2060, making it the world’s fastest growing continent. This growth, coupled with the forecasted GDP growth of over 6%, drives the potential for retail growth on the continent significantly through increased purchasing power and consumer demand’. According to the African Retail Development Index (AMA 2014), African retailers such as South Africa’s Company A, which operates in more than 16 African countries, and Nakumatt, which is based in Kenya which operates in 4 East African countries, have done most of the expansion, but global retailers are moving in. For example, in 2011, Wal-Mart acquired South Africa’s Massmart, and it plans to open 90 supermarkets across Africa over the next 3 years. It is noteworthy that the characteristics of supply chains in Africa are more challenging than many other markets in the world. Therefore, it is important to acknowledge and understand these challenges to develop strategies to mitigate the risks versus the opportunities which the continent offers. In Ghana, the landscape of retail is changing rather rapidly where consumers are gradually shifting from the traditional open market shops to supermarkets. McTernan (2014) noted a recent study that most Ghanaians still do their weekly shop at street markets (69%) or from street vendors (26%), while 17% now shop in supermarkets. In other words, even though retail business is huge, the formal retail sector in Ghana is very limited and the biggest component of the retail industry is informal trade. Regardless, the formal retail market in Ghana is visibly and rapidly expanding. According to McTernan (2014), ‘new shopping centres are sweeping the continent, and they are bigger, shinier and busier. In West Africa, Ghana is taking the lead with the largest in the region’. The Accra Mall, which was built in 2007, has a capacity of 20 000 square metres of retail space. The $100 m West Hills Mall was completed in 2014 and covers 27 700 square metres. According to McTernan (2014), Ghana is considered an ideal location in West Africa because of ‘political stability, lower costs and the ease of doing business have meant that retail investors can plan for the long term and use the country as a growth hub, attracting customers from across the region’. South African companies are leading the way in retail development in Ghana. In another study (Euromonitor News 2015), Ghana is seen to be on track to becoming Africa’s next hotspot for retailers. Ghana has been identified as a country with a positive business environment in which foreign retailers can invest. The country is developing a reputation for political stability and cultural tolerance and has made huge strides in diminishing its poverty problems. According to the study, Ghana is also seen as the doorway for foreign investors to tap the 250 million consumers in the region, and an exit point for landlocked nations such as Niger. Moreover, as an English-speaking nation, Ghana has close ties with American and British businesses. This reflects the strength of fast moving consumer goods (FMCG) companies in the country (Euromonitors News 2015). Methodology Given the diversity of the retail industry in terms of type and size, a case study approach was adopted for this study. Yin (2003) noted a case study is an empirical inquiry that investigates a contemporary phenomenon within its real-life context especially when the boundaries are not clear between the phenomenon and the context. Yin (2003) further argued that the unique strength of case studies is its ability to deal with a full variety of evidence-documents, interviews and observations. According to Baxter and Jack (2008), qualitative case study is an approach that facilitates exploration of a phenomenon within its context using a variety of data sources. The case study approach is considered appropriate for this research. The study involved data collection through interviews of key players and analysis of historical data. Case selection and data collection: Purposive sampling was employed to select two retail giants operating in Ghana that are of foreign origin. To conceal the identities of these companies, there are referred to as Company A and Company B. These two companies being of foreign origin, obviously obtain their goods from both local (Ghanaian) and foreign suppliers. Even though the sample size may not be statistically representative, they invariably reflect the general characteristics of retail companies that have integrated their operations with partners in their supply chains. However, the selected companies can be considered to be representative of the experiences and practices of the foreign retail companies operating in Ghana, which is becoming a fairly competitive market place. The sample does not include indigenous Ghanaian retail companies. Therefore, no comparative analysis between foreign-based and local retail companies could be conducted. The focus of the study is to examine the impacts of supply chain integration on lead time, which is critical for the foreign-based retail companies. Data was collected through interviews and analysis of historical data. Interviews: For the interviews, a semi-structured guide was used. The questionnaire was structured to capture information on the categories of products, the sources of merchandise (foreign and local), average lead times and levels of integration, as indicated by supplier relationship and experiences with suppliers and suppliers’ supplier, as well as information sharing among retails and suppliers. The respondents were selected based on their knowledge of inventory and procurement policies and practices and the operations of the company. Historical data: In an attempt to measure the impacts of supply chain integration on lead time, a few categories of products that are common to the two companies were selected and the lead times before and after integration were analysed. It should be noted that the boundaries between none and full supply chain integration are not clearly defined for both companies. Furthermore, there are differences among the lead times for the individual products in each category. Consequently, for the purposes of this analysis, the lead times before and after integration are average values for the categories of products. 44 http://www.icbmd.org doi:10.7166/jbmd.v5i1.21 Page 4 of 5 Original Research Findings and discussions In general, the two companies sampled sell identical products with a few exceptions. Company A indicated that 60% of their products are sourced locally and 40% from foreign sources. The corresponding figures from Company B are 55% local and 45% foreign. The average lead times of locally sourced items are 7 and 5 days for Company A and Company B, respectively. The lead times for foreign items are about 10 times longer than the locally sourced items. These lead times present the average of all products (local of foreign). Depending on the origin of the item, the actual lead time could be shorter. The reasons for long lead times for foreign-sourced items (especially those arriving by sea) cannot be explained herein partly because the actual origins were not disclosed. However, the long lead times could be attributed, in part, to the long processing times at the sea ports of entry. Information gathered clearly indicated that the partners in the various supply chains have established collaborative relationships where they share information relating to sales figures, customer complaints, and stock inflow and outflow. The two companies also confirmed that the multi-tier relationship with the suppliers and suppliers’ supplier has helped to receive goods and services earlier than the anticipated lead time. The ordering systems or replenishment practices are however different. Company A uses an Automatic Ordering System that is configured to monitor inventory levels and generate orders for replenishment. Obviously this company uses the continuous inventory monitoring system. In contrast, Company B has two systems of ordering: (1) corporate order which is sourced from South Africa and (2) local orders which are raised through a local third party agent. In assessing the impacts of supply chain integration on lead times, three categories of products were selected: groceries (fruits and vegetables), household goods and appliances. The suppliers of these groups of products are different for the two retail companies. Table 1 compares the lead times before and after supply chain integration for the three product groups. It is noted, in general, supply chain integration results in significant reduction in lead times. It is also noted that even though the retail companies use different suppliers, the percentage reductions in lead times are identical for a given product group. Between the two companies, Company B appears to experience high reductions in lead times following supply chain integration compared with Company A. For example, for groceries, Company A experiences about 44% reduction in lead time while Company B enjoys roughly 55% reduction in lead time. The reasons for the marked differences in lead time reductions between the two companies are not clearly evident. However, the differences could be attributed several factors including the type of buyer–supplier relationships, degree or level of supply chain integration, efficiency of the suppliers, among others. Buyer–supplier relationships The two companies each has a platform for sharing information concerning improvement of relationship, indicating that they use that for frequent meetings. However, they have different types of business relationships with their partners in the supply chains. Company A has adversarial relationship with its suppliers, whereas Company B maintains a partnership relationship. A partnership relationship is a tailored business relationship based on mutual trust, openness, shared risk and shared rewards that results in business performance greater than would be achieved by the two firms working together in the absence of partnership. Partnerships, however, are costly in terms of the time and effort required. In contrast, adversarial relationship is one wherein businesses treat each other and their clients as adversaries instead of as partners. There is little or no trust between them, and their means of communicating with each other is very formal. They do not have direct contact and no direct involvement in each other’s activities. In the right business environment, a partnership relationship is the appropriate approach, but in a risky and hostile environment, it is best to apply an adversarial approach (Differencebetween.net). In terms of integration, the type of buyer–supplier relationship appears to suggest that Company A which maintains adversarial business relationship adopts the buyercentric model which is concerned about the efficiency gains for the buyer. In this model, the buyer seeks to streamline its operations, for example by reducing the amount of manual work in order processing. The buyer pays for this through accepting greater dependence on the supplier. Company B which operates the partnership relationship appears to adopt the synchronised integration model. In this model, the buyer (i.e. the retail company) outsources responsibility for replenishment to its suppliers in the hope of receiving better service. The suppliers make use of the increased transparency to improve their own operations, for example, reducing its inventory levels as a result of the improved visibility and thus reduced uncertainty. Regardless of the type of business relationships, both companies have multi- TABLE 1: Comparison of lead times for select products. Variable Company A Company B Groceries Household and personal care Appliances Groceries Household and personal care Appliances Lead time before SCI (days) 12 12 31 911 30 Lead time after SCI (days) 7 7 27 5 5 21 Reduction of lead time (days) 5 5 4 4 6 9 % Reduction of lead time 42%42%13%55%44%30% 45 http://www.icbmd.org doi:10.7166/jbmd.v5i1.21 Page 5 of 5 Original Research tier relationships with their partners, that is, relationships with the suppliers and their supplier. The essence of this to ensure that the logistics requirements are met, quality is not compromised and cost is effectively managed. Information from the interviews indicates that multi-tier relationship has helped to receive goods and services earlier than the anticipated lead times. Trkman and Groznik (2006) described different benefits of supply chain integration to include enhancement of the process of information sharing inside-out of the organisation resulting in cost reduction. It also enables retail organisations to do effective renovation and business process modelling which increase efficiency and profit margins. Li, Ragu-Nathan, Ragu-Nathan and Rao (2006) also added that supply chain integration enables the organisation to gain a sustainable competitive advantage and enables it to realise its goals and objectives. Singh et al. (2013) also concluded that investing in levels of connectivity and interdependency through supply chain integration results in reduction in lead time Conclusion There are different models or approaches to collaboration between buyers and suppliers. In the retail industry where products have varying shelf lives, the importance of supply chain integration is critical for performance and survival in a competitive business environment. An integrated supply chain results in significant reductions in lead times. Depending on the product category, and the degree and maturity of the supply chain integration, lead time reductions before and after integration can be as high as 40%. Furthermore, a partnership relationship between the buyer and the supplier is considered the preferred approach because it results in higher percentage reduction in lead time compared with the adversarial relationship. However, in a risky and hostile environment, it is best to apply an adversarial approach. Acknowledgements Competing interests The authors declare that they have no financial or personal relationship(s) that may have inappropriately influenced them in writing this article. Authors’ contributions E.D.F. (Ghana Institute of Management and Public Administration) and A-V.B. (Ghana Institute of Management and Public Administration) contributed equally to the writing of this article. References African Media Agency (AMA), 2014, Comment Ghana Retail Industry offers huge potential for DHL, viewed 04 June 2015, from http://www.modernghana.com / news/539172/1/ghana-retail-industry-offers-huge-potential-for-dh.html Baxter, P. & Jack, S., 2008, ‘Qualitative case study methodology: Study design and implementation for novice researchers’, The Qualitative Report 13(4), 544–559, viewed 20 May 2015, from http://www.nova.edu/ssss/QR/QR13-4/baxter.pdf Chopra, S., Reinhardt, G. & Dadahardt, M., 2004, ‘The effect of lead time uncertainty on safety stocks’, Decision Sciences 35(1), 1–24. 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Jayaram, J., Vickery, S. & Droge, C., 1999, ‘Supply chain management dimensions, supply chain performance and organizational performance: An integrated framework’, viewed 10 June 2015, from http://www.ccsenet.org/ijbm Kauremaa, J., 2013, ‘Blurring boundaries to deliver results: Supply chain integration’, White Paper, viewed 28 June 2015, from http://www.relexsolutions.com/blurring -boundaries-to-deliver-results-supply-chain-integration/ Lambert, D.M. & Cooper, M.C., 2000, ‘Issues in supply chain management’, Industrial Marketing Management 29, 65–83. http://dx.doi.org/10.1016/S0019 - 8501(99)00113-3 Lambert, D.M., Cooper, M.C. & Pagh, J.D., 1998, ‘Supply chain management: Implementation issues and research opportunities’, The International Journal of Logistics Management 9(2), 2. http://dx.doi.org/10.1108/09574099810805807 Li, S., Ragu-Nathan, B., Ragu-Nathan, T.S. & Rao, S.S., 2006, ‘The impact of supply chain management practices on competitive advantage and organizational performance’, The International Journal of Management Science 34(2), 107–124. http://dx.doi.org/10.1016/j.omega.2004.08.002 McTernan, B., 2014, Bigger is better for Ghana’s malls, viewed 10 June 2015, from http://www.theafricareport.com/West-Africa/bigger-is-better-for-ghanas -malls.html Monczka, R.M. & Morgan, J., 1997, ‘What’s wrong with supply chain management?’, Purchasing, 122, 69–72. Otchere, A.F., Annan, J. & Anin, E.K., 2013, ‘Achieving competitive advantage through supply chain integration in the Cocoa Industry: A case study of Olam Ghana and produce buying company limited’, International Journal of Business and Social Research (IJBSR) 3(2), 131–143. Singh, R.J., Sohani, N. & Marmat, H., 2013, ‘Effect of lean/JIT practices and supply chain integration on lead time performance’, Journal of Supply Chain Management Systems 2(2), 34–41. Treville, S., Shapiro, R.D. & Hameri, A., 2004, ‘From supply chain to demand chain: The role of lead time reduction in improving demand chain performance’, Journal of Operations Management 21(6), 613–627. http://dx.doi.org/10.1016/j. jom.2003.10.001 Trkman, P. & Groznik, A., 2006, ‘Measurement of supply chain integration benefits’, Interdisciplinary Journal of Information, Knowledge, and Management 1, 562. Tutuncu, O. & Kucukusta, D., 2008, ‘The role of supply chain management integration in quality management system for hospitals’, International Journal of Management Perspectives 1(1), 31–39. Yin, R.K., 2003, Case study research: Design and methods, 3rd edn., Sage, Thousand Oaks, CA. Zigiaris, S., 2000, ‘The supply chain management’, in INNOREGIO: Dissemination of innovation and knowledge management techniques, viewed 12 August 2015, from http://www.adi.pt/docs/innoregio_sup_management.pdf 46 doi:10.4102/jbmd.v5i1.4 Page 1 of 7 Original Research http://www.icbmd.org Author: Shawren Singh1 Affiliation: 1School of Computing, University of South Africa, South Africa Correspondence to: Shawren Singh Email: [email protected] Postal address: PO Box 392, UNISA 0003, South Africa How to cite this article: Singh, S., 2015, ‘e-Government: Institutional and environmental challenges’, Journal of Business and Management Dynamics 5(1), 7 pages. http://dx.doi.org/10.4102/ jbmd.v5i1.4 Note: This paper was presented at the 2015 7th International Conference on Business and Finance (ICBF). Copyright: © 2015. The Authors. Licensee: AOSIS. This work is licensed under the Creative Commons Attribution License. e-Government: Institutional and environmental challenges Read online: Scan this QR code with your smart phone or mobile device to read online. The design, development and implementation of e-Government applications are affected by several factors, which include institutional and environmental challenges within the organisation. To understand these institutional and environmental challenges, 36 South African senior civil servants from the national government were interviewed. The interview data were analysed using principles of content and interpretive analysis. A key institutional and environmental challenge is related to the problems that affect senior managers. Senior managers are frustrated, disenfranchised or expunged of managerial authority, which in turn has an effect on the design, development and implementation of e-Government applications. The practical implications of this research are that in the government the management structure within the state has to show a greater level of agility, and the government should proactively engage with key stakeholders within the state to develop a common shared vision for the use of e-Government applications. Introduction e-Government application design and development is at the heart of any e-Government initiative because during the design process what is offered to the citizens and how it will be of value to them are decided. The designing of e-Government applications is a challenging issue because the applications are frequently large and complex and require large sums of money, the system’s objective can be difficult to define, senior government officials who do not have adequate information and communications technology (ICT) expertise sometime interfere and they have a fairly wide range of stakeholders who need to feel that the e-Government application is providing some form of benefit to them. According to Abrahams (2009), South African e-Government applications face challenges because of the fragmented nature of the government’s administration and its communications processes. Furthermore, unlike many other ICT applications, e-Government applications are often conducted under public scrutiny. When mistakes are made in e-Government applications, they tend to be expensive, impact large numbers of citizens and are embarrassing to civil servants and politicians (Singh & Averweg 2015). e-Government applications require adequate online services, infrastructure and human capital, but with all these in place, the issue of making individual systems work still remains, which depends on how the government’s designers design, develop and implement the systems, which is the focus of this research. Background The design and development of e-Government applications is not an extensively researched area for either the developed or the developing world; the current e-Government research appears to be policy-focused (Hernández, Bolívar & Muñoz 2012). Grönlund and Horan (2004) pointed out that the literature on ICT in the government can be traced back to the early days of data processing in the 1970s, which were long before the Internet and the Web were developed1. In more recent years, the governments became aware of the advantages of employing Internet technologies to facilitate service delivery as a result of becoming aware of its success in the e-business sector (Bannister 2012; Becker, Algermissen & Niehaves 2006; Worrall 2011). The US National Performance Review (Heeks & Bailur 2007) first used the term e-Government in 1993 (Annttiroiko 2008). The Government Direct Green Paper, one of the first government publications on e-Government in the UK, was published in November 19962 and outlined the way in which the government was going to use ICT (ePractice.eu 2007) to deliver services. In 1997, the National Performance Review in the USA recommended the use of ICT to deliver services to citizens (Relyea & Hogue 2004). The first academic paper to use the term electronic 1. It is argued by some authors that the government’s use of technology began with the use of Herman Hollerith’s card readers in the 19th century when it was employed in order to facilitate the completion of the census counting. 2.This green paper represents a prospectus for the Electronic Delivery of Government Services. 47 http://www.icbmd.org doi:10.4102/jbmd.v5i1.4 Page 2 of 7 Original Research government was published in 1996 by Milward and Snyder, who defined electronic government as the ‘use of technology to link citizen to government services’ (Milward & Snyder 1996:262). Almost two decades of experience, with numerous types of e-Government systems being developed, e-Government systems still experience crippling challenges (Abu-Shanab & Khasawneh 2014; Dombrowski et al. 2014; Gauld & Goldfinch 2006). In this context, poor investment decisions have not only been made in situations where there has been an inadequate return on investment, but also include incidents where ICT applications failed to work or caused considerable disruption to the organisations attempting to apply the technology (Belardo, Ballou & Pazer 2004; Gauld & Goldfinch 2006; Heeks 2002a, 2002b, 2002c; Mitev 1996). Estimates of the extent of e-Government failures range considerably. The New Zealand Government lost a modest $17 million on ICT for health care, when it purchased an American-developed ICT system which was designed to manage health information and then abandoned the system within two years (Gauld & Goldfinch 2006). The Irish Government spent an estimated €156 million on a Health Services Administration system called PPARS and obtained no return on the investment (Comptroller and Auditor General 2005). But in the UK, where government services are much larger, the National Health Service wasted an estimated $24.5 billion on an ICT health care system which they were not able to successfully implement (Heeks 2007). Purpose of the study The purpose of this research was to identify and explore issues related to the institutional and environmental challenges that affect the development of e-Government applications in South Africa. Furthermore, the study proposes a theoretical conjecture on how senior managers deal with issues related to institutional and environmental challenges. In the South African context, adequate attention has not been paid to how institutional and environmental challenges affect the development of e-Government applications because of the challenges researchers experience in getting access to senior government managers. The research question for this study is: What are the issues that affect senior managers within the government? Methodology The research strategy that was used in this research was qualitative in nature. A qualitative approach is important because the evidence that was required to develop a better understanding of issues related to institutional and environmental challenges could not be collected using an experimental design. The evidence required had to be collected from knowledgeable informants, in the form of interviews, who have been involved with or interacted with e-Government applications. In addition to the interviews, the evidence also comprises reports, government website examinations, project documents and media reports. The data required to answer the research question were primarily qualitative in nature. To understand how the South African Government develops and implements its e-Government applications, it is necessary to investigate how proposed applications are conceived; how these ideas are taken from a conceptual state to a project or programming phase; how the planned applications are then actualised; and what type of benefits the project sponsors and/or champions expect to achieve. Myers (2009) argued that it was important to use a focused, structured, context-specific dialogue for the open exchange of ideas and meanings for a clear understanding. In the context of this qualitative research, dialogue is not only an appropriate method for data collection (Costantino 2008) but a highly effective one. Furthermore, qualitative research is iterative in nature (Mills, Eurepos & Wiebe 2010; Yin 2011); a useful way of understanding this was provided by Remenyi (2012) who pointed out that when using a qualitative approach for data collection, such as interviews, the researcher was involved in a learning experience in which the data collection technique, as well as the instrument, might be improved by means of an iterative feedback loop. This feedback loop is important because it gives the researcher the opportunity to reflect on the research instrument and the process of data collection. The research method involved identifying informants within the South African Public Service Sector who have direct involvement with e-Government policy development or project implementation and evaluation. These informants were interviewed on a face- to-face basis, and the discussions with them were recorded. Transcripts were prepared and used in conjunction with other documentary evidence for data analysis. Data analysis was performed by using principles of content analysis and interpretive analysis. The unit of analysis for this research is the decision-making process which is employed across a number of different government entities. Selection of informants The following heuristic was used in the selection of informants. Informants had to have worked for the government. Informants could be employed by the national government, the provincial government, the local government or a government agency. Practical and logistical concerns that influence the selection of informants are: government officials are geographically dispersed, both the prospective informant and researcher have time constraints, the researcher has limited funding, the ethics protocol is a guide for the researcher not to wander outside the boundaries of the accepted interview questions, and the researcher is unknown to the prospective informants. A further selection of criteria is applied: ‘prospective informants must be involved with, or be affected by, government ICT and prospective informants must be at a senior or upper management level in the public sector’. If informants met the criteria, they were interviewed. All informants who were interviewed were senior managers. They were not contractors and therefore are considered civil servants as they are permanently employed by the state. 48 http://www.icbmd.org doi:10.4102/jbmd.v5i1.4 Page 3 of 7 Original Research The informants are categorised into four groups: national government, provincial government, local government and government agencies. There were: 16 informants from 9 different departments that represented national government; 4 informants from 4 different departments that represented provincial government; 3 informants from 3 different departments that represented local government; and 13 informants from 7 different government agencies. Research consent forms and information leaflets were provided before the interview to the informants and on the day of the interview. Only after the informants had signed the Informed Consent Documents, did the data collection process start. Data collection The method of data collection for this study was semistructured interviews (Leedy & Ormrod 2010; Saunders, Lewis & Thornhill 2009). Semi-structured interviews were appropriate because the they give the researcher some structure, whilst allowing the researcher the opportunity to explore in depth important issues as they arose. The questions that were posed to informants were derived from the extant literature and a three-round Delphi study (Singh 2013) that was used to acquire a deeper understanding of the issues that affect e-Government. Informants were asked the following question: ‘Can you please describe the management approach that is used in the design and development of e-Government systems?’ a. Please describe the management approach. b. If there is no management approach, who would take charge and ownership? ‘How does this happen?’ Data analysis The two principal approaches to analysing qualitative data are content analysis and interpretive analysis. Content analysis requires counting the concepts discussed with the informants to develop and understand the situation. Interpretive analysis looks beyond counts of concepts to a direct understanding of the meaning of the data obtained. Atlas.ti facilitated the coding of the transcripts and allowed the researcher to group codes, concepts and constructs. Figure 1 shows the coding cycles. The transcripts were uploaded to Atlas.it, and codes were developed. In the first cycle of the coding, the text was read, reflected upon and then key issues in the text were identified and coded. The 913 quotations represented the key issues in the text. Further reflection on the quotations resulted in the quotations being reduced to 280 codes. During this phase, the quotations that presented the same type of issue were grouped together. In the second cycle of coding, after reflecting on the codes, the codes that presented similar issues were grouped together to develop 42 concepts. Then in the third cycle of the coding, after reflecting on the 42 concepts, these concepts were reduced to 8 themes. One of these themes related to institutional and environmental challenges, which is the focus of this paper. Findings Institutional and environmental challenges to e-Government applications Institutional and environmental challenges refer to the organisational setting within which e-Government applications are designed and developed. Different organisational settings have a direct impact on how ICT opportunities are perceived, how systems are designed and how the organisation’s implements them in order to take advantage of their potential benefits (Bannister 2012). The development of e-Government applications happens in an environment that is traditionally inflexible and not conducive to creative ICT development and structural change as a result of ICT initiatives. The implications are that the government may not realise the benefits of the proposed e-Government application. From the analysis, the elements within this theme are: problems affecting senior mangers; problems regarding the appropriate use of ICT; problems regarding organisational process; problems regarding policy; and problems regarding clarity of ICT strategy. These themes are discussed in the following section. Problems affecting senior mangers Informal communication affects senior managers’ (and users’) perceptions of e-Government applications. Informal communication is a casual exchange of information and FIGURE 1: The three-phase coding cycle. First Cycle Coding Second Cycle Coding Third Cycle Coding 8 hemes 42 Concepts 280 Codes 913 Quotaons Themes used to develop narrave 49 http://www.icbmd.org doi:10.4102/jbmd.v5i1.4 Page 4 of 7 Original Research some informants referred to this type of communication as the grapevine. This is demonstrated by the following comments from informants: ‘Most people [managers and users] would be vaguely aware through the grapevine that there is something happening’. ‘I [senior manager] tend to keep my ear to the ground whenever something [new ICT projects] is coming down the line’. ‘I think that was quite helpful because those are very influential people. If they [senior managers] say they are not happy regardless of whether there was a mistake in, you know, small thing as a semicolon, if he’s not happy and he broadcast that then everybody is not going to be happy’. Further, senior managers who are not ICT savvy assess the merits of e-Government initiatives. Senior managers who are not ICT savvy do not understand how ICT is used in the organisation or are under-prepared to understand ICT. These senior managers struggle to make decisions, as demonstrated by the following comments from informants: ‘So it’s a crisis management [in relation to ICT projects]. It’s not a management by objective’. ‘They [senior managers] can’t see that [in relation to the ICT project], if they do this like this [make a particular decision], the consequences a year, two years, three years, probably get down the line, is going to be that…’ However, if an ICT person is able to package the problem and solution in an elegant, trustworthy and understandable manner, then the senior management will be inclined to accept the proposal. Packaging the problem refers to the senior manager understanding the economic issues related to the e-Government application. This is demonstrated by the following comment from an informant: ‘if I went to my leadership [director] with a problem and I said, look, we have to spend 5 million rand, doing a particular thing and that particular thing would enable the project to go live more smoothly, you know, the questions would be around budget availability and all that and does the cost justify it. But once they are satisfied with the fundamental information, they would then support me’. In addition, senior managers in government are being reassigned or are being moved horizontally within the government to other posts in different departments. These types of movement have an unsettling effect on the productivity of the department, as demonstrated by the following comments from informants: ‘I must say, last time I was in a different unit than where I am now because we were not restructured yet’. ‘We’ve had some structure changes lately. And those people [directors] are relatively new; they’re finding their feet and one day they will be settled’. ‘We then went and did business processes and did full enterprise architecture for a further 10 million, so that’s 13 million gone. New head of strategy [director] came in and said forget about that and they appointed consultants to reengineer the organisation’. Senior managers find themselves in a position of frustration because they are stripped of their decision-making authority, and these decisions are made by committees. This is demonstrated by the following comments from informants: ‘we [senior managers] do not have the powers to make decisions, because most of the time you know, you find that there is a challenge A [lack of skills, resources, understanding], you know how to resolve it technically, however because you haven’t run this past your director or your superior you cannot say that in a meeting, in a project meeting’. ‘And then I just lost interest in Knowledge Management in government basically because you know, you can’t … on a stranglehold’. ‘people from private sector they don’t last in the government because you [senior managers] are so alone in the process, you are trying to push, you are trying to make a difference and all that but people are not receiving it that way’. Besides senior managers being frustrated, senior managers do not understand how the technology is being applied, as demonstrated by the following comments from informants: ‘They find it difficult to conceptualise technical problems or the technical jargon and so you might get some unreasonable requests’. ‘The previous DG [director general] came from arts-related background. I don’t think he ever switched his laptop on’. ‘… it’s literally just rubberstamped by the senior management [directors] because they do not have the technical background to really decide whether this is something that is going to fly or not. That’s why they are going to the advisory panel I think’. Senior managers’ lack of understanding of how ICT is applied in government leads to the problems regarding the appropriate use of ICT. The narrative excerpts from the informants illustrate that there are gaps in understanding (Singh 2013) by senior managers on how to effectively use ICT. These gaps in understanding create challenges that subordinate members of staff recognise, but in most cases they are unable to do anything about these challenges. Problems regarding the appropriate use of ICT The problem regarding the appropriate use of ICT in government is a phenomenon that is characterised by a low level of understanding of how e-Government applications are developed and designed. This is demonstrated by the following comments from informants: ‘I think a lot of them [senior managers] don’t understand information technology, they don’t understand what information technology can do and sometimes when a project has possibly been not successful or it’s been floored they may have a negative view about information systems what they can do’. ‘the application of ICT in particular areas of government is seen as a ‘foreign concept’, for example the application of voice recognition applications’. Also within the government there is strong scepticism amongst civil servants as to the creditability of the information produced by e-Government applications, as demonstrated by the following comments from informants: ‘I think that is in their minds [managers and directors], I think in a way they are still sceptical about whether the system has really managed to get them the information that they are looking for’. ‘You see, even if you [managers and directors] are afraid to take that step you will also not trust those systems that keep that data, yeah’. 50 http://www.icbmd.org doi:10.4102/jbmd.v5i1.4 Page 5 of 7 Original Research Next, senior managers are in ivory towers or are disconnected from the realistic application of ICT. Senior managers who are in ivory towers do not understand how or when to use ICT appropriately, as demonstrated by the following comments from informants: ‘a senior manager team would make a decision to implement something and even a guy that is at a level below me ask him a question that should have been asked by one of his peers in the meeting where they made a decision and you know, they don’t respond’. ‘…it is very painful or sad because you sit in a meeting with senior management, executive management of the organization and you would see your CIO giving information that does not make sense there, but you can’t say it to them and even when you come back and say you know what you have committed to this thing, and that’s not the way you are doing, you are going to have problems here and here and here and being the way they are they will never go back and say you know what I made a mistake maybe you know for what reasons but I believe that if you go back and say you know what I think this might not work and come up with an alternative before you can spend the money they might respect you and trust you’. ‘But the senior managers [directors] they don’t see that problem because it’s just too distant from where they are sitting. It sounds like a very logical business requirement because everybody is using like this’. A further reason why there are problems regarding the appropriate use of ICT in government is because some senior managers do not lead by example and use the technology at their disposal, as demonstrated by the following comments from informants: ‘Some of the very senior people won’t even use a PC, some of them won’t even type a word, some of them don’t even know how to type in Word. So it’s a huge challenge. It’s a difficult thing, but the organization works around it’. ‘…secretaries answer all their bosses’ email’. Because senior managers are not using the technology and have downward delegated the management of their communications, a level of bureaucracy in the organisational process is created. The narrative from informants illuminates that there is a lack of appropriate ICT knowledge (Pihir, Tomicic-Pupek & Androcec 2013) amongst senior managers. This leads to a situation where it is a challenge to introduce, design and develop e-Government systems. A further consequence is that the entire process of delivering an e-Government system becomes slow. Problems regarding organisational process There are several types of organisational process problems (bureaucracy) that exist in government. These problems are agreed to bureaucracy, prolonged bureaucracy and difficult bureaucracy. Agreed to bureaucracy is a bureaucracy that all key stakeholders have negotiated and agree to, as demonstrated by the following comments from informants: ‘…we decided to go through a committee structure in order to make sure that the decision making is appropriate’. ‘It is a bureaucratic approach but it’s an agreed process on both sides, that is, the change request procedure that you would follow’. ‘Any project or any initiative that needs to be approved goes through the IT steering committee, and essentially after that goes to the head of department for approval. So nothing happens in the IT space without approval from the head of department’. Prolonged bureaucracy is a bureaucracy that is characterised by prolonged delays in time before any action can be taken, as demonstrated by the following comments from informants: ‘And that put the whole thing [ICT initiative] in another year, took another year to get everything signed. And struggled to trace where the documentation was and what was holding it up’. ‘…, it [approval] can take long, very long, what I mean by long is it’s not a measure of few days or just a week, it can take very long because people have to sit and because ICT is a bit specialized, there aren’t many people who are able…’ ‘After 18 months of trying [seeking approval], there’s a lot of, the internal processes are very sluggish, very, very sluggish’. Then there is difficult bureaucracy. Difficult bureaucracy is characterised by ambiguities within the organisational process, as demonstrated by the following comments from informants: ‘We have many levels of management. In fact to be precise I think we have 22 levels of management’. ‘…but most of the time it’s budgets are the problem. In order to get something done now, in the next financial year in March, you should have motivated for it long, long time ago, early last year already so that it’s on the radar’. ‘I do not know how to make contact with another department, can I phone them, must I ask the DG [Director General] to phone them, and it’s bad’. The bureaucracy of the government is associated with policies within the government. This series of narratives from the informants illustrates an issue of poorly managed public expenditure that do not produce efficient public services because of waste, delays, mismanagement or poor organisational and management skills (Heeks 2000a). Problems regarding policy ICT policies development within the government is a topdown approach. This is demonstrated by the following comment from an informant: ‘in every policy process, you have to go to -- you know once it’s been to top management [director general] and to the minister and then it has to go to the cluster’. However, there are those managers who ignore the restrictive policies, as demonstrated by the following comment from an informant: ‘…they [directors] just say don’t worry about the policy but you know, you can be held liable for it’. 51 http://www.icbmd.org doi:10.4102/jbmd.v5i1.13 Page 5 of 9 Original Research Risk-adjusted performance measures The study follows industry best practice and conducts the return performance analysis of the various ETFs using an array of risk-adjusted performance measures. The six performance measures used as part of the study differ primarily with the adjustment for risk (Mayo 2000:249). The Sharpe ratio considers total risk; the Treynor ratio considers only the systematic risk; the Sortino ratio accounts for the downside risk below a specified threshold rate; the Calmar ratio considers risk as the maximum downturn that an investment exhibited; and the Information ratio incorporates the tracking error as its risk measurement. A detailed examination of each measure is provided to emphasise the importance of its use in the study. Various characteristics of each of these measurements validated its use in the study. In addition, however, some shortcomings with each of the above-mentioned measurements created the need for results to be compared to other measures of portfolio performance. The total ris10 measurement used by the Sharpe ratio ensured that less diversified ETFs could be evaluated (Le Sourd 2007). However, the use of the standard deviation of returns as risk measure essentially penalises upside variation in the return series (De Wet, Krige & Smit 2008). The Sharpe ratio relies on the assumption that returns are normally distributed (Eling & Schuhmacher 2007:2633), which is not the case for our sample of ETFs. The Treynor ratio can be considered a closely related portfolio performance ratio, which uses the beta of the portfolio as the risk measurement (Bacon 2004). Both the Sortino and Calmar ratios hold the benefit that upside risk is not penalised, as risk measurements are incorporated differently into each of these ratios. The use of downside risk in the Sortino ratio ensures that a specified minimum level of return could be selected to determine the deviation of returns away from such a level. The Sortino ratio allows for a user-defined minimum level of return to be set which, if chosen incorrectly, could over- or understate the downside risk (Amenc et al. 2004:21). Because of the use of daily data for the study, the minimum level of return was set at zero. The limited data for the study allowed for only a three-year bull market to be included. As such, no extreme downturns were observed in the period under review. However, incorporating the Calmar ratio into the analysis provided some manner to observe the performance of each ETF in reaction to its most extreme event (maximum downturn). The Information ratio holds particular importance for its application to ETF performance measurement. The use of the tracking error as the risk measurement is of great importance with passively managed investment products such as ETFs. The inclusion of the tracking error in the calculation of the information ratio provided a good comparison of how well each ETF performed relative to the benchmark market index. The information ratio as a 10. Measured by the standard deviation of returns. technique to evaluate the performance of various indexation methodologies has also been applied in numerous other studies (Arnott et al. 2005, 2010). Eling and Schuhmacher (2007:2633) stated that a primary argument for the selection of a performance measure rests on the fund’s return distribution. Investment funds exhibiting non-normal return distributions cannot be evaluated sufficiently with the use of performance ratios such as the Sharpe and Treynor ratios (Sharma 2004). The use of only the first two moments11 of the return distribution in the Sharpe and Treynor measurements can provide inconsistent results when returns are not normally distributed. The Sortino ratio improves on this drawback of the Sharpe and Treynor measures by allowing asymmetrical return to be evaluated (Kanellakos 2005:76). Utilising downside risk allows for the skewness12 of the distribution to be incorporated into the calculation (Amenc et al. 2004:21). Similarly, the Calmar ratio is not only concerned with the mean and variance but also applies to the maximum downturn experienced over the period under review. However, the Calmar and Sortino ratios only consider the lower partial moments, which reflects upside and downside variability differently. The final performance measure, the Omega ratio, overcomes all the limitations experienced by the other performance measures. The Omega ratio incorporates all four moments of the distribution of returns; inter alia the mean, variance, skewness and kurtosis (Togher & Barsbay 2007). The Omega performance measure considers both the upside potential (higher partial moments) and the downside potential (lower partial moments) of a portfolio for the entire distribution of return (Kazemi, Schneeweis & Gupta 2003). By using the entire cumulative distribution function, the Omega ratio needs to make no assumptions about the shape of the distributions (Keating & Shadwick 2002). Subsequently, fund rankings obtained using the Omega ratio will be noticeably different from those obtained by other performance measures. Keating and Shadwick (2002) state that when the higher moments of the distribution are important,13 the Omega will provide a correction for the simplifying assumptions made in other performance measures. The Omega also differs from other measures of performance as the ratio is expressed as gains to losses, rather than in the form of (expected) return and risk (Van Dyk, Van Vuuren & Styger 2012). Botha (2006:1) summarises the supremacy of the Omega ratio by stating that the Omega is superior to both the Sharpe and Sortino ratio. The above-mentioned comparison between the different performance measures highlights the importance of each ratio as part of the overall analysis. The Omega ratio exhibits some distinct characteristics, and subsequently, the findings obtained with the use of the Omega ratio will carry a greater weighting in the conclusion. 11. The mean and variance. 12. Skewness can be considered as the third moment of the distribution. 13. The importance of the higher moments is dependent upon the existence of normality in the return distribution. 58 http://www.icbmd.org doi:10.4102/jbmd.v5i1.13 Page 6 of 9 Original Research Findings and discussion Distribution statistics The return distribution characteristics for the ETFs included in the study are presented in Tables 1 (South Africa) and 2 (United States). It is important to evaluate the descriptive statistics associated with each ETF and the market index to determine to what extent the return distributions compare with a normal distribution. The negative skewness and high kurtosis values will cause any performance measures that rely heavily on the first two moments of the distribution to misrepresent the overall level of risk. Traditional performance measures such as the Sharpe ratio and Treynor ratio, therefore, need to be interpreted with caution. Results obtained by performance ratios (such as the Omega) that do incorporate higher order moments will deliver more consistent rankings (Eling & Schuhmacher 2007:2633). The descriptive statistics for the data set reveal that the assumption of normality does not hold for the period under review and as such requires a metric that incorporates the higher order moments of the distribution. The Omega ratio was identified as the superior ratio in this regard as it contains the ability to deliver consist ranking results at various levels of a return threshold. Performance measurement Table 3 and Table 4 provide a summary of the performance measurement ranking obtained from the selected ETFs during the period under review. The Sharpe ratio analysis provided a means to compare the ETF indexation methodologies on a risk-adjusted basis. The use of standard deviation as the risk measure delivered results that incorporated total risk into the computation. For the SA sample, it was indicated that the rankings of the Sharpe ratios were consistent with the absolute return rankings. Fundamentally weighted ETFs were dominant, whilst the equally weighted ETF ranked poorly. For the US sample, the risk-adjusted rankings of the Sharpe ratio differed considerably from the absolute return rankings, which indicated that the equally weighted ETF was most affected by the risk adjustment. The leveraged ETF category revealed risky characteristics and significantly poor risk-adjusted rankings. TABLE 1: Descriptive statistics for SA market ETFs. Market Mean Median Maximum Minimum Standard. deviation Skewness Excess kurtosis JSE Top 40 Index 0.0006 0.0010 0.0414 -0.0338 0.0104 -0.1541 1.2421 ETF U 0.0006 0.0010 0.0416 -0.0341 0.0105 -0.1662 1.2491 ETF V 0.0006 0.0013 0.0387 -0.0385 0.0107 -0.2383 1.0594 ETF W 0.0006 0.0000 0.2454 -0.1846 0.0178 1.8515 76.2768 ETF X 0.0006 0.0012 0.0471 -0.0481 0.0096 -0.1833 2.0936 ETF Y 0.0006 0.0012 0.0349 -0.0326 0.0105 -0.0510 0.6980 ETF Z 0.0004 0.0000 0.0991 -0.1119 0.0139 -0.3860 14.8989 Source: Compiled by the authors TABLE 2: Descriptive statistics for US market ETFs. Market Mean Median Maximum Minimum Standard deviation Skewness Excess kurtosis S&P 500 Index 0.0005 0.0007 0.0474 -0.0666 0.0103 -0.4768 5.2160 ETF A 0.0006 0.0008 0.0465 -0.0652 0.0102 -0.5000 4.9624 ETF B 0.0006 0.0009 0.0448 -0.0641 0.0102 -0.4710 4.6956 ETF C 0.0006 0.0009 0.0516 -0.0648 0.0103 -0.4742 5.3082 ETF D 0.0006 0.0013 0.0507 -0.0709 0.0105 -0.5241 5.3333 ETF E 0.0006 0.0010 0.0513 -0.0732 0.0114 -0.5021 5.0418 ETF F 0.0006 0.0008 0.0364 -0.0553 0.0094 -0.5087 3.8237 ETF G 0.0011 0.0015 0.0934 -0.1287 0.0205 -0.4973 5.0574 ETF H -0.0012 -0.0016 0.1290 -0.0948 0.0205 0.4718 5.0142 ETF I 0.0017 0.0025 0.1430 -0.1970 0.0310 -0.5027 5.1318 ETF J -0.0019 -0.0027 0.2021 -0.1507 0.0311 0.5109 5.3641 Source: Compiled by the authors TABLE 3: SA ETFs – Overall summary. Ranking key Best Worst Annual compound returns Fundamental Fundamental Index Market cap Market cap Market cap Equal Sharpe Fundamental Fundamental Index Market cap Market cap Market cap Equal Treynor Market cap Fundamental Fundamental Market cap Index Market cap Equal Calmar Index Fundamental Market cap Fundamental Market cap Market cap Equal Sortino Fundamental Fundamental Index Market cap Market cap Equal Market cap Information Fundamental Fundamental Market cap Market cap Market cap Equal Omega (+RFR threshold) Fundamental Index Market cap Market cap Fundamental Market cap Equal Omega (-RFR threshold) Index Market cap Market cap Market cap Fundamental Fundamental Equal Source: Compiled by the authors 59 http://www.icbmd.org doi:10.4102/jbmd.v5i1.13 Page 7 of 9 Original Research The Treynor ratio analysis incorporated beta as the risk measurement. The analysis of the ETF indexation categories on the basis of their systematic risk characteristics proved to deliver alternate rankings. The SA sample highlighted the importance of beta values, as market cap–weighted ETFs ranked better when compared with the Sharpe rankings. A noticeable difference between the Treynor and Sharpe rankings exemplified the existence of higher levels of unsystematic risk in alternatively indexed ETFs. Inverse leveraged ETFs provided misleading results during the US Treynor analysis. The negative beta values and negative excess returns of this category skewed results in favour of inverse leveraged ETFs. However, the close similarity between the Treynor and Sharpe rankings was a noticeable observation in the US sample. The improved diversification within the US sample, as indicated by this finding, could have resulted from the relatively large number of underlying securities included in the US ETF index. The Sortino rankings obtained from the SA sample showed inconsistent results to the Sharpe and Treynor rankings. In general, fundamentally weighted ETFs proved to outperform relative to other ETF categories, with some noticeable outliers observed for the market cap–weighted category. The downside risk measure used during the Sortino analysis penalised those ETFs that showcased a severely skewed data distribution. The significantly skewed distributions of leveraged ETFs in the US sample subsequently were affected greatly as these ETFs delivered poor Sortino rankings. The inclusion of the Calmar ratio in the study allowed for a measure to capture the extreme downturn of the ETF returns. The examination of a predominant bull market phase of the economy in the study, however, nullified the true benefit of the Calmar ratio. The Calmar ratio rankings for both the US and SA market provided mixed results, with no clear ranking of ETF categories. The importance of tracking errors led to the inclusion of the Information ratio into the performance evaluation. Comparisons in the SA ETF market showed that fundamentally weighted ETFs performed better when compared to alternative indexation methodologies. The US sample showed contrasting results as market cap–weighted ETFs outperformed when analysing the Information ratios. The importance of the number of securities in the underlying index, the beta values of the ETFs and the impact these factors have on the tracking errors were combined factors that create such differences between the various samples. Leveraged ETFs, as measured in the US sample, delivered good ranking results after adjusting tracking errors for the leveraged factor. The Omega ratio was the decisive performance ratio for the study, as it exhibited unique characteristics that allowed the incorporation of higher order moments of the return distributions. The Omega ratio was considered at both a positive (positive value of the risk-free rate) and negative (negative value of the risk-free rate) threshold level. The separation between the threshold levels was made to illustrate the change in rankings that resulted from the respective threshold levels. Fundamentally weighted ETFs were shown to possess the ability to deliver an outperformance of alternatively indexed ETFs when returns were positive, as was indicated by the positive threshold level in the SA sample. Similarly, the US sample illustrated that leveraged ETFs, with the support of the significant benefits that they hold, could deliver substantial outperformance when returns were positive. The negative Omega threshold analysis provided the most significant finding of the study. Analysis of a negative threshold level allowed for the riskiness of each ETF category to be evaluated. Rankings obtained from the negative Omega threshold analysis delivered significantly altered rankings compared to other performance measures. In the SA sample, the market cap–weighted ETFs dominated and proved to be the preferred ETF indexation category when considering negative returns. The US sample delivered similar results and also proved the market cap–weighted ETFs to be superior. Leveraged ETFs performed poorly when analysed on a negative return threshold basis. The high number of negative returns in the data series of leveraged ETFs had a severe impact on the rankings of both long- and short-leveraged ETFs. TABLE 4: US ETFs—Overall summary. Ranking key Best Worst Annual compound returns 3× Long leveraged 2× Long leveraged Equal Market cap Market cap Market cap Fundamental Fundamental Index -2× Short leveraged -3× Short leveraged Sharpe Fundamental Market cap Market cap Market cap Fundamental Equal 2× Long leveraged Index 3× Long leveraged -3× Short leveraged -2× Short leveraged Treynor Fundamental -2× Short leveraged -3× Short leveraged Market cap Market cap Market cap Fundamental Equal 2× Long leveraged Index 3× Long leveraged Calmar 3× Long leveraged Fundamental Market cap Market cap Equal Fundamental Market cap 2× Long leveraged Index -3× Short leveraged -2× Short leveraged Sortino Fundamental Market cap Market cap Market cap Fundamental Equal Index 2× Long leveraged 3× Long leveraged -3× Short leveraged -2× Short leveraged Information (index excluded) 2× Long leveraged 3× Long leveraged Market cap Market cap Market cap Equal Fundamental Fundamental -3× Short leveraged -2× Short leveraged - Omega (+RFR threshold) 3× Long leveraged 2× Long leveraged Market cap Market cap Market cap Index Equal Fundamental Fundamental -3× Short leveraged -2× Short leveraged Omega (-RFR threshold) Market cap Market cap Market cap Index Fundamental Fundamental Equal 2× Long leveraged 3× Long leveraged -2× Short leveraged -3× Short leveraged Source: Compiled by the authors 60 http://www.icbmd.org doi:10.4102/jbmd.v5i1.13 Page 8 of 9 Original Research Conclusion Based on the risk-adjusted performance measurements in the study, the following key conclusions can be made. Fundamentally weighted ETFs can be seen to be performing better when analysed with standard performance measures that do not incorporate the distribution characteristics of returns. During a market upswing, measures such as the Sharpe ratio, Treynor ratio, Sortino ratio and Calmar ratio, which do not incorporate all moments of the distribution function, can show preferential results for fundamentally weighted ETFs. The Omega ratio holds the ability to capture higher order moments for the distribution of returns. This conveys alternative rankings of the indexation categories, particularly when analysed at a negative threshold level. Market cap–weighted ETFs can be said to hold lower levels of risk than all other ETF categories when measured by a negative Omega threshold. Leveraged ETFs hold the capacity to deliver substantial returns, but significant risks are linked to improved returns. A strong upward trending market does not present favourable conditions for the performance of equally weighted ETFs, in comparison to alternatively indexed ETFs. Future research could include a comparison of ETF diversification with a measurement such as the principal component analysis, which is not dependent on the existence of a true market portfolio. The data frequency and observation period are other noteworthy areas of future improvement for the study. With restricted historical data availability for some fundamentally weighted ETFs, the study was reduced to the most recent three-year period. Extension of the time period would allow for analysis beyond that of an ordinary bull market phase. Inclusion of data from multiple countries could further enhance the robustness of the findings. However, in the present moment, in consideration of the available time frame and data, the study proved successful in its findings. At the time of writing, two new fundamentally weighted ETFs were being launched into the SA market, which indicated the continuous innovation in the SA ETF market. The study, however, highlights that such developments bring with it unique risks that justify thoughtful adoption of alternative ETFs into a portfolio. Acknowledgements Competing interests The authors declare that they have no financial or personal relationship(s) that may have inappropriately influenced them in writing this article. Authors’ contributions W.P. (North-West University) and A.M. (North-West University) contributed equally to the writing of this article. References Amenc, N., Goltz, F. & Martellini, L., 2013, ‘Smart beta 2.0’, Journal of Index Investing 4(3), 15–23. 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Waring, M.B. & Siegel, L.B., 2003, ‘The dimensions of active management: Why alpha and active risk are the only things that matter’, Journal of Portfolio Management 29(3), 35–51. Yahoo Finance, 2014, Supplier of data, viewed 10 February 2014, from http://finance. yahoo.com Zeng, L. & Luo, F., 2013, ‘10 years later: Where in the world is equal weight indexing now?’, viewed 12 March 2014, from https://papers.ssrn.com/sol3/papers. cfm?abstract_id=2257481 62 doi:10.4102/jbmd.v5i1.6 Page 1 of 5 Original Research http://www.icbmd.org Authors: Michael Twum-Darko1 Sydney B.M. Raboshakga2 Affiliations: 1Cape Peninsula University of Technology, South Africa 2Tshwane University of Technology, South Africa Correspondence to: Michael Twum-Darko Emails: dark[email protected] Postal address: PO Box 1906, Bellville 7535, South Africa How to cite this article: Twum-Darko, M. & Raboshakga, S.B.M., 2015, ‘Evaluating knowledge management implementation in an organisation: A case study in the context of Eskom’s HyperWave’, Journal of Business and Management Dynamics 5(1), 5 pages. http://dx.doi.org/10.4102/ jbmd.v5i1.6 Note: This paper was presented at the 2015 7th International Conference on Business and Finance (ICBF). Copyright: © 2015. The Authors. Licensee: AOSIS. This work is licensed under the Creative Commons Attribution License. Evaluating knowledge management implementation in an organisation: A case study in the context of Eskom’s HyperWave Read online: Scan this QR code with your smart phone or mobile device to read online. In this paper, the interpretive philosophy was adopted and drawn from structuration theory’s (ST) concept of enactment of technology-in-practice (ETiP). ETiP was used as a lens to understand and interpret factors influencing the implementation of knowledge management (KM) in an organisation where knowledge transfer/sharing is critical to its operational efficiency. Eskom, a power utility organisation in South Africa was used as the case study and the HyperWave KM system implementation was used as the object of analysis. The study’s rationale was that at all levels of operations of an organisation the need to establish systems to manage the creation, capture, flow and delivery of knowledge and information is critical. The challenge is that such systems are often seen to clash with the corporate culture and as a result have a limited impact. The study investigated the challenges of implementing KM at Eskom. Using the concept of ETiP, a conceptual framework was developed, which guided the collection and analysis of data from questionnaires and existing documents that were verified by unstructured interviews. Forty-three respondents completed the research questionnaires and 15-minute semi-structured interviews were conducted with four individual participants. Questionnaires and interview questions were based on the KM improvement model regarding (1) measures of organisational support: (a) leadership, (b) incentive, (c) coworker, (d) supervisor and (e) organisational culture; (2) knowledge content quality; (3) KMS quality; and (4) perceived usefulness of knowledge sharing. Introduction Organisations, at all levels of operations, need to establish systems to manage the creation, capture, flow and delivery of knowledge and information. Furthermore, Wang and Lai (2014) alluded to this observation and argued that systems are being designed by many organisations to facilitate knowledge management (KM), the management of intellectual property and the development of sustainable competitive advantages. Knowledge management systems (KMS) are being implemented in an attempt to increase the quality and speed of knowledge creation and distribution in organisations. The problem is that such systems are often seen to clash with the corporate culture and as a result have a limited impact. Wang and Lai (2014) alluded to this and highlighted that this could be because the literature is still rather limited in terms of presenting a comprehensive picture of the issues related to KMS adoption in organisations. The paper aimed at exploring factors likely to influence the implementation of KM in an organisation where knowledge transfer/sharing is critical to its operational efficiency. The study investigated the challenges of implementing KM in an organisation using Eskom as a case study. The paper provides a summary of a research undertaken to tease out the research problem, highlighting the underpinning theory, literature review, research approach, interpretation of results and conclusion. According to Sabri (2014), knowledge is considered as one of the most important assets that achieves competitive advantage in the organisation. It is important that an organisation establishes systems to manage the creation, capture, flow and delivery of knowledge and information available amongst all levels of the organisation. The major challenge of managing knowledge is less its creation and more its capture and integration (Grant 1996). Geisler and Wickramasinghe (2015) have alluded to this observation and argued that embracing KM and implementing any KM initiative are a very challenging endeavour, which could be divided into (1) getting employees on board, (2) having business goal, (3) not allowing technology to dictate KM, (4) identifying technology to support KM, (5) approaching to KM and (6) identifying who is to lead KM efforts. According to Coakes (2004), it is now realised that KM is not a technology-driven ‘fix’. KM begins with the social and cultural elements throughout an organisation. A KM strategy should begin with establishing ‘who’, ‘what’ and ‘why’, and the ‘How’ can then be supported by using technology. The following activities were identified by Award and Ghaziri (2003) in relation to what is expected of the management to support 63 http://www.icbmd.org doi:10.4102/jbmd.v5i1.6 Page 2 of 5 Original Research KM in an organisation: economics and strategic planning; training; compensation and reward; and performance appraisal. Akhavan et al. (2010) identified eight factors that were common in successful KM projects. These factors were senior management support; clearly communicated KMS purpose/goals; linkages to economic performance; multiple channels for knowledge transfer; motivational incentives for KM users; a knowledge-friendly culture; a solid technical and organisational infrastructure; and a standard, flexible knowledge structure. Each organisation has its unique culture, which develops overtime to reflect the organisation’s identity in two dimensions: visible and invisible. The visible dimension of culture is reflected in the espoused values, philosophy and mission of the firm, whilst the invisible dimension lies in the unspoken set of values that guide employees’ actions and perceptions in the organisation (McDermott & O’Dell 2001). Theoretical framework and research approach Overview of structuration theory The dimensions of duality of structure of Giddens’ structuration theory (ST) were used to tease out the research problem. In its original formulation, ST pays little attention to technology (Jones 1999). According to Giddens (1986), one of the most important applications of ST to information system’s research lies in the recognition of structure and agency as duality, which makes a clear distinction between structure and agency, yet recognising them as dependent on each other interactively. One of the problems of implementing KM is that it cannot be imposed on people and it can only be successful when people realise the benefits thereof. A proper change management programme that takes both the business and the people into account must be employed. In Table 1, social structure and human interaction are divided into three columns. Each structure and interaction is then associated with each other recursively via the linking modalities (interpretive scheme, facility and norm). Three forms of structure are given here, representing various embedded social realities: signification, domination and legitimation. Walsham (2005) drew attention to three modalities of human agency/structure, namely interpretive schemes, norms and power relations. Furthermore, interpretive schemes relate to how things are represented in communities and organisations. In the case of Eskom, the researcher looked at instances as employees communicate; they use interpretive schemes to help them make sense of their interaction; and at the same time these interactions change or reproduce the same interpretive schemes that are embedded in structures as signification. This paper looked at how HyperWave was presented to Eskom employees. A focus on interpretive schemes led to questions such as why particular forms of presentation were chosen in particular contexts, and what types of representation were perceived to be valuable by the individuals within particular communities. This led to the conceptualisation of the problem shown in Figure 1. Deducing from the views of Walsham (2005), norms relate to what is normally represented and for whom, and this will answer the question why particular forms of representation were chosen. That is, how was HyperWave introduced to Eskom employees? In the same context, Walsham’s (2005) power relations imply a focus on who requires particular representations and for what purposes. ST assisted in understanding and interpreting the effect of people in power, in this case group IT project managers and managers from the business. Thus, how Eskom managers view and support KM in an organisation can have an effect on obtaining the required results when implementing the system, looking at the decisions made and what informed them and what role did they play in KMS implementation. ST has been used successfully by Walsham (2005) in a compound UK case study from where the theoretical schema shown was developed, and the questions generated through the use of ST were illustrated through their application The case Eskom is a South African electrical power utility, which has over 40 000 employees. With so many employees, one could imagine how much knowledge is carried by those employees and how much knowledge is shared between them. Eskom employees in different business units and levels interact with customers, suppliers, contractors, tertiary institutions, government departments, shareholders, regulators and other stakeholders on a daily basis to carryout various tasks. The interaction and collaboration with such external parties is a common practice throughout Eskom and essential as a ‘state’ and ‘public’ enterprise. With Eskom embarking on projects of building new power stations, retired employees had to be called back to assist as certain skills and knowledge were required from them. It is believed that if they had working KM processes in place this could have been avoided. Eskom KM policy is to help Eskom to manage its knowledge in such a manner that it would enhance the achievement of the business priorities through optimisation and delivery of knowledge in the organisation. The policy is to ensure that the implementation of an effective and efficient KM programme to maximise the benefit of (1) human capital management: tacit knowledge (experience) of experts in the organisation is an important catalyst to mitigate Eskom’s TABLE 1: The dimensions of the duality of structure Signification Domination Legitimation Modality Interpretive scheme Facility Norm Interaction Communication Power Sanction Structure(s) System(s) Structuration Rules and resources, or set of transformation relationships, organised as properties of social systems Reproduced relations between actors or collectiveness, organised as regular social practices Conditions governing the continuity or transmutation of structures, and therefore the reproduction of social systems Source: Giddens, A., 1986, The constitution of society: Outline of the theory structure, University of California Press, Bekerly. 64 http://www.icbmd.org doi:10.4102/jbmd.v5i1.6 Page 3 of 5 Original Research escalating intellectual property risk; (2) learning and growth: learning, training, development and succession planning are crucial to Eskom if the imperatives of Eyethu are to be realised; (3) collaboration and knowledge sharing: to achieve the objectives of the Revised Business Model, Eskom needs to rapidly and effectively learn from its experiences. The value chain adopted in Eskom consists of three parts: (1) collection of the intellectual capital that focus on capturing and converting tacit knowledge into documents and records (e.g. lessons learnt); (2) transformation that looks at security, classification and change management with the focus of getting people to collaborate and to share knowledge in the organisation; and (3) monitor and control processes to manage and ensure that the aforementioned (i.e. the first two parts) are being taken care. To enable collaboration and sharing of information in Eskom, an electronic KM software application was acquired. One of the reasons was to overcome demographic stumbling blocks. Current electronic KM platforms take into consideration collaboration, document management, work flow and interactive knowledge, which enable seamless interaction amongst actors, i.e. stakeholders. In Eskom it was envisaged that a KM electronic platform would have the capabilities to enable experts in the organisation to interact, allowing questions to be asked, e-learning functionality and search capabilities. Furthermore, Eskom did realise that certain parts of the KM framework could be utilised to capture experience-based knowledge of people. Methodology In this research, two epistemological approaches were used, which were positivist and interpretive. The positivist approach made use of questionnaires to collect data from the participants. The interpretive approach made use of semi-structured interviews to gain more insight and to interact with the participants. The latter approach enabled the use of existing documents in the organisation to obtain more information about a problem. On the basis of the type of research undertaken and the unit of analysis, case study is the suitable approach, which made it easy for the research to be undertaken. Interviews, questionnaires and documented papers were used to assist and carry out the research. The population selected for the research was mainly Eskom Group IT staff members in the Enterprise Development, and e-mail was adopted as a means of communication. Group IT employee participants were requested to answer questions via multiple choice options, thus providing the researcher with data that will be analysed and interpreted. One-to-one interviews with participants were conducted to get more information on the research. Fifteen-minute interviews with selected Group IT employees were conducted. Policy documents, minutes of meetings regarding KM and KMS in the organisation were studied. Method triangulation can be identified by the use of questionnaires, interviews and previous documented data. Four main\key questions were identified: (1) do managers support KM initiatives in the organisation? (to aim at identifying managers’ support and view towards KM); (2) regarding human factors affecting KM in the organisation, how is organisation’s culture towards KM? (to look at how Eskom employees perceive KM in an organisation, social interactions and behaviour of employees); (3) regarding non-human factors affecting KM in the organisation, how is KMS (HyperWave) affecting KM in an organisation? (to understand the role IT plays in KM, in this case KMS, also to understand the need to balance emphasis on IT at the expense of social and cultural facets of KM); (4) do employees use or share knowledge as required by the business? (to aimed at determining whether employees share knowledge as required by the business and stipulated by company policy). FIGURE 1: Problem conceptualisation. Provisions of: a) Policies, b) Regulaons, c) Legislaon, Structure Inscribed as funconalies in an In formaon System (IS) Culture and Climate InteraconModality Agency Adopon Acceptance Assimilaon Improved Knowledge Management System 65 http://www.icbmd.org doi:10.4102/jbmd.v5i1.6 Page 4 of 5 Original Research Results and interpretation Introduction To address the research topic, five groups were identified to assist or undertake the research. The groups are measures of organisational support, knowledge content quality, KMS quality, perceived usefulness of knowledge sharing and user satisfaction. Questionnaires and interviews were used to obtain data about the research topic, which were then written down and analysed. Data analysis was conducted to understand or get a view of the state of KM in the organisation. The research will also evaluate the implementation of KM in the organisation with the aim of retaining or keeping knowledge in Eskom and improving knowledge sharing. Eskom was looked at to determine how the organisation views knowledge and the importance of keeping knowledge thereof, also looking at the measures taken by the organisation to manage or implement KM in the company. The aim of research questionnaire used was to get a view of the KM status in Eskom and also to identify ways in which KM could be implemented to further improve knowledge sharing. Figure 1 depicts feedback received from employees using the hypotheses outlined in this article. The red arrows in Figure 1 show Eskom results that did not conform to the set hypotheses and the ones highlighted in green did conform to the hypotheses. Measures of organisational support Leadership: According to participants’ feedback, although management took a decision to implement KM in the organisation, it appears that there is a lack of support from the top management to ensure that it does achieve its goal of KM and sharing in the organisation. This can be attributed to the lack of meetings organised by the management, lack of commitment and not periodically reviewing the effectiveness of KM. The top management does view KM as important in the organisation but hardly supports it. Incentives: Employees are to some extent rewarded for knowledge sharing, but more can be done to encourage employees as participants believe individuals are not visibly rewarded for team work. Co-worker: As per the feedback received, co-workers are reluctant to share solutions and problems, which is one of the main reasons why KM was implemented in the company. It was also discovered that co-workers do not encourage by action and words to share knowledge. Supervisor: It is reported that most supervisors do encourage employees to share work-related solutions, which is good for KM. However, there is an issue of not organising regular meetings to discuss or to get a view of how the knowledge could be shared in their department. Organisation culture: Changing people’s behaviour from knowledge hoarding to knowledge sharing seems to be the biggest challenge. Not all employees take responsibility for KM, and the prevailing notion is that KM is a task for a designated few people, which might be a problem if people have negative view towards KM. Knowledge content quality: Positive feedback was received from participants as most of them said they do use or refer to shared knowledge. This means that they are of the view of the knowledge shared of good quality; otherwise they were not going to use it. Knowledge management system quality: Positive feedback was received as most were aware of the deployed KMS in the company. The system is also accessible from anywhere in the company, which makes it easy to be used and regarded as well documented. It must be mentioned that participants regard lack of training as a contributing factor to IT deployment in KM. Perceived usefulness of knowledge sharing: According to the feedback received, it seems that co-workers and supervisors do not view knowledge sharing as useful, and that supervisors do talk about knowledge sharing, but they do not hold knowledge sharing meetings as often as required. The co-workers do encourage by action to share knowledge. It must be noted that a positive feedback was received from participants as they said KM is significant on employee development, innovation, improving employee competitive advantage, inventory reduction and cost-cutting. User satisfaction: According to the feedback received, most employees were aware of the KMS (HyperWave) deployed in the company, and they are using the system. It can be said that most employees use shared knowledge, but it must be mentioned that perceived usefulness of knowledge sharing showed that co-workers do not get encouraged by action to share a solution and to share the knowledge. Supervisors do not hold regular meetings to share knowledge, and this might lead to users not being satisfied. Contribution and future research The research framework was formed based on the case study using Eskom’s HyperWave as the unit of analysis. The problem conceptualisation that was refined to the general framework requires further research to validate its global use. The problem conceptualisation was derived from ST and, in relation to the work of Orlikowski and Robey (1991), can be used for studying the interaction between IT and organisations, the relationships amongst technology, people and organisation. The framework provides more insight on complex interplay of all elements (human and nonhuman) that could be involved in KMS implementation. The questionnaire as the main data collection technique created the opportunity to use semi-structured interviews to verify and affirm certain data collected to enrich. Analysis of certain documents added more meaning to the data analysis. It must be noted that this paper intended to identify best practice that can be deployed by an organisation to implement KM. The first practical contribution is the understanding provided by the case study. Another is highlighting how things should 66 http://www.icbmd.org doi:10.4102/jbmd.v5i1.6 Page 5 of 5 Original Research be done, in this case, how KMS should be implemented. This is informed by a phase-by-phase approach described by the general framework shown in Figure 2. This could further assist in future and similar projects as the project team will have steps to follow for the project to be implemented to achieve its objectives. Most importantly, the general framework considers human and non-human factors when implementing KMS. What is new in this paper that makes a significant contribution to the body of knowledge is the proposed general framework to guide project leaders in KMS implementation in an organisation. Given the above information, the general framework also adapted the Technology Acceptance Model (TAM) to determine if KMS will be used satisfactorily. TAM was important as, according to Davis (1989), TAM assigns considerable weight to two key determinants: perceived usefulness and perceived ease of use. Additional contribution is the application of ST as the underpinning theory for the study, which was used to conceptualise the phenomenon using Eskom as a case study and the implementation of the HyperWave KMS as an objective of analysis. The theory also guided the literature review process, the design of data collection instrument and the analysis and interpretation thereof. Further contribution is that this paper can be of a contemporary interest to scholars and practitioners in the area of KM and KMS. It was revealed in the literature review process that there has not been enough research undertaken on KM and KMS, but there have been an increasing number of studies, including this paper. This paper also serves as a guide for organisations looking to invest in KM. The final contribution this paper makes is for those in the academia involved in KM implementation (public or private organisation) and ICT/IS research. Conclusion The potential to implement effective KM in an organisation exists. However, it is subject to a number of variables in the organisation. The variables concerned are mainly internal. Human agency consists of authoritative resources, which in this research are the top management and supervisors. These authoritative resources need to do more to encourage and support effective KM in Eskom. Also the organisation needs to put more emphasis on improving organisational culture towards KM. According to the feedback received, IT has no adverse effect on KM implementation in the organisation. Furthermore, according to the feedback received, participants find it easy to use HyperWave, and they do add/share data through the system. In general, Eskom has done a lot to see through KM implementation in the organisation by putting down KM policies. Also having a dedicated KM department in place shows how important KM is to the organisation and deploying IT in the form of KMS (HyperWave) as part of KM. Having invested so much in KM, Eskom needs to further educate its employees on how important KM is not only to the organisation but also to employee(s) themselves to encourage them not to work in silos and not to be threatened by sharing knowledge. Acknowledgements Competing interests The authors declare that they have no financial or personal relationship(s) that may have inappropriately influenced them in writing this article. Authors’ contributions M.T-D. (Cape Peninsula University of Technology) and S.B.M.R. (Tshwane University of Technology) contributed equally to the writing of this paper. References Akhavan, P., Adalatia, M.S., Sharifi-Yazdi, S. & Hosnavia, R., 2010, ‘The challenges of knowledge management portals application and implementation: An Iranian organizations case study’, International Journal of Industrial Engineering Computations 1, 79–93. http://dx.doi.org/10.5267/j.ijiec.2010.01.008 Award, E.M. & Ghaziri, H., 2003, Knowledge management, Prentice Hall, Upper Saddle River. Coakes, E., 2004, ‘Knowledge management a primer’, Communications of the Association for Information Systems 14, 406–489. 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Will, J., Bertrand, M. & Fransoo, J.C., 2002, ‘Operations management research methodologies using quantitative modeling’, International Journal of Operations & Production Management, 22(2), 241–264. http://dx.doi. org/10.1108/01443570210414338 Yeung, A.S., Lin, J.H., Tay, E.G., Hui, C. & Low, E-L., 2014, ‘Pre-service teachers’ motivation in using digital technology’, Australian Journal of Teacher Education 39(3), 135–153. http://dx.doi.org/10.14221/ajte.2014v39n3.1 74 Page 1 of 5 Original Research doi:10.4102/jbmd.v5i1.7http://www.icbmd.org Authors: Floyd Els1 Liezel Cilliers1 Affiliations: 1Department of Information Systems, University of Fort Hare, South Africa Correspondence to: Liezel Cilliers Email: [email protected]a Postal address: 50 Church Street, East London 5201, South Africa How to cite this article: Els, F. & Cilliers, L. ‘Improving the information security in SMEs to protect customer’s personal identifiable information’, Journal of Business and Management Dynamics 5(1), 5 pages. http://dx.doi.org/10.4102/ jbmd.v5i1.7 Note: This paper was presented at the 2015 7th International Conference on Business and Finance (ICBF). Copyright: © 2015. The Authors. Licensee: AOSIS. This work is licensed under the Creative Commons Attribution License. Improving the information security in SMEs to protect customer’s personal identifiable information Read online: Scan this QR code with your smart phone or mobile device to read online. Small and medium enterprises (SMEs) are increasingly making use of e-commerce to increase profitability. SMEs often do not have the necessary internal controls in place to secure the personal identifiable information (PII) that is collected from customers during e-commerce transactions because the size and nature of an SME prevent it from addressing these risks. This article explores the critical success factors (CSFs) that must be considered by an SME to protect the PII of customers collected on their e-commerce site. A literature review was performed to identify possible barriers for the implementation of information security in SMEs. Furthermore, the Confidentiality-Integrity-Availability triad and ISO/IEC 27002 standards were used to group the identified barriers, and from this process CSFs were formulated for consideration. There are six CSFs that were identified to improve the information security in SMEs, which include management commitment, information security training, access control, infrastructure security, security policies and periodic audits. The recommendation of this paper is that these six CSFs must be considered to improve the information security of SMEs in South Africa. Introduction Small and medium enterprises (SMEs) are crucial to the economic stability of developing countries (Duan et al. 2002). In South Africa, SMEs contribute to 35% of the national gross domestic product (GDP), which therefore plays a vital role in job creation, investment, income generation and poverty alleviation (Abor & Quartey 2010). For an SME to be sustainable there are many opportunities for the owner to consider. One such opportunity includes the use of e-commerce to expand the customer base in the global market. However, because of the implementation of new technologies, some problems can be expected. SMEs in South Africa are characterised by poor information and communications technology utilisation and limited human and financial resources, which expose the SMEs to new risks (Parida, Westerberg & Ylinenpaa 2009). Typical problems that SMEs will encounter in the area of e-commerce include changes in technology, innovation of products and customer demands (Abor & Quartey 2010). One of the main risks associated with e-commerce is the security of customer information, also called personally identifiable information (PII). Although there are legislations in place to protect the customer, SMEs are known not to comply with these information security standards (Campbell & Hartcher 2015; Jiang & Li 2010; Ju Xiang 2009). SMEs either do not understand the privacy risks associated with the loss of customer information or, if they do, are overwhelmed by the security standards and regulations that must be implemented (Campbell & Hartcher 2015). This problem is further compounded as the SME typically has limited human and financial resources available to implement information security controls (Powell 2011). This article explores the critical success factors (CSFs) that must be considered by an SME to protect the PII of customers collected on its e-commerce site. To accomplish this goal, a qualitative literature search was conducted. Relevant papers reflecting the purpose of the study were identified from four databases: ACM, EBSCO, ProQuest and JSTOR. A search strategy was used to identify articles with ‘small and medium enterprises’, ‘information security’, ‘privacy’ and ‘personal identifiable information’ as keywords. Papers published between January 2000 and October 2015 were considered, without language restriction. The literature search identified 53 references. The reference titles and abstracts were reviewed by one author for relevance to the study. The identified articles were analysed, making use of an inductive approach to contribute to the argument and CSFs presented in the paper. The purpose of the search was to identify relevant, high-quality studies that documented the barriers that prevent SMEs from implementing internal information security controls to protect the PII of their customers. The rest of the paper is structured as follows: the next section provides a definition for SMEs, as well as an explanation of what PII entails. This is followed by a discussion of the risks that are associated with both SMEs and the collection of PII. Subsequently, an overview of the Confidentiality-Integrity-Availability 75 Page 2 of 5 Original Research http://www.icbmd.org doi:10.4102/jbmd.v5i1.7 (CIA) triad, ISO/IEC 27002 Security Standard and the four pillars of information security will be provided, and finally the CSFs to enable an SME to protect the PII of customers on its e-commerce site will be discussed. Literature review The characteristics of an SME are most commonly used to determine if a business falls into this category. The characteristics include the number of employees that the business employs, the annual turnover, capital assets and the SME’s contribution towards the GDP (Abor & Quartey 2010). In South Africa, an SME is recognised by the National Small Business Amendment Act (2003) as an organisation that employs no more than 250 employees with a turnover of less than R4 million and a total gross asset value of less than R2 million. Recently, SMEs have started to use e-commerce to improve the geographical reach of their business and attract new customers (Cheng 2009). Beckinsale, Levy and Powell (2006) found that there are three drivers that determine if an SME will adopt e-commerce, which include the perceived benefits, organisational readiness and external pressures. The perceived benefits of e-commerce for an SME include a reduction in operation costs and an increase in market share because of increased visibility in the global market (Jahanshahi et al. 2012). The flexibility of SMEs enables the business to quickly respond to new business needs, such as e-commerce, as decisions can be taken quickly by the owner (Karahanna et al. 2013). Organisational readiness refers to the aptitude of the owner to take risks and the availability of appropriate information technology (IT) infrastructure (Alghamdi, Nguyen & Jones 2013). Olatokun and Kebonye (2010) stated that SMEs tended to be labour-intensive rather than capital-intensive as the business cannot afford the IT equipment to automate tasks and services. The degree of formalisation in an SME refers to the extent to which a business’s work is standardised (Robbins 2006). Most SMEs are family-orientated businesses and are dependent on the interaction of a small number of people employed by the business. The size of SMEs means that there is a low degree of formalisation with no clear hierarchical structures or policies and procedures about how the company operates as the owner is responsible for most of the decision-making (Nicolescu 2009). Often there is also an informal environment in the SME, which deters the owner to establish effective governance systems to promote accountability amongst employees (Jiang & Li 2010; Nicolescu 2009). The importance of IT governance in the SME will depend on the knowledge and skill of the owner. If the owner does not consider the protection of the PII of their customers as a priority, or does not have the necessary skills to manage the information security of the website, it is unlikely that proper security controls will be put in place (Nicolescu 2009). In addition, Abor and Quartey (2010) stated that the employees of an SME usually did not possess any specialised skills and that SMEs also tended not to invest in their employees’ training and development because of insufficient funds. This means that it is highly unlikely that the employees will be able to develop or maintain an e-commerce site for the business (Shemi & Procter 2013). External pressure refers to the needs of the customers of the SME to make use of e-commerce as a convenient tool. The literature reports that customers need the be assured that their information that is provided on the websites will be protected (Jiang & Li 2010; Teketel & Berhanu 2009). This lack of information security controls for an SME can undermine consumer trust, as the software and security measures, such as third party assurance seals, are too expensive for the SME to purchase (Olatokun & Kebonye 2010). Personal identifiable information PII is commonly referred to as any form of information that can be used to identify, locate and contact an individual (Narayanan & Shmatikov 2009). The information collected could include an individual’s demographics, address, financial details, educational status or employment history (Jessup & Neal 2009). Hackers often steal this information with the goal to combine the pieces of personal information, which in itself appears innocuous, in order to compromise an individual’s identity (McCallister, Grance & Scarfone 2010). PII can be compromised in two ways: when data are transmitted across an e-commerce network or because of the physical theft of devices that store sensitive information. The latter is possible in an SME because of poorly understood data and security practices. If there are no internal controls in place to secure PII, the SME will not even be aware that sensitive data are taken from the system (Jiang & Li 2010). Because of the lack of financial and technical resources, SMEs are often unable to observe good governance practices in the business. An information security policy is an effective means of defining, describing and documenting security principles that are based upon SMEs’ core beliefs. The policy should also establish a standardised baseline of expectation for the behaviour of all personnel as to comply with regulatory mandates and governance principles. Therefore, the policy will minimise or prevent any form of risk in order to protect the company assets and PII of customers (Ihonvbere 2010; Tittel 2008). Security and privacy policies are often not considered to be important in an SME, as it does not contribute directly to the profit margin of the business (Glynn 2012; Park et al. 2008). The lack of information security controls leaves the SME susceptible to possible instances of fraudulent activities, whether from an external or internal threat (Campbell & Hartcher 2015; Jiang & Li 2010). It is therefore important that the information security standards of the business are either in place or improved. This is achievable through the implementation and utilisation of internal controls within the SME. If these are in place, it will improve the trustworthiness of the e-commerce site of the SME, which in turn will improve the profitability of the business (Michel 2012). CIA triad – Model of security The CIA triad is in an information systems security term that relates to the important aspect of data protection. This security model was developed as a tool to put in place 76 Page 3 of 5 Original Research doi:10.4102/jbmd.v5i1.7http://www.icbmd.org measures relating to information security. The main objective of information security is to assure the confidentiality, integrity and availability of PII that is crucial for the continuity of a business’s operations and functionalities (Ihonvbere 2010; Tittel 2008). The following section discusses the confidentiality, integrity and availability triad as can be seen in Figure 1. Confidentiality of data: The purpose of confidentiality is to ensure that PII is only accessible by authorised individuals. Confidentiality also relates to the broader concept of data privacy, thus limiting the access to PII within an SME (Whitman & Mattord 2009). The next section of the CIA triad relates to data integrity. Integrity of data: Data integrity relates to the assurance as well as the trustworthiness of information that data have not been altered inappropriately, either accidently or deliberately (Whitman & Mattord 2009). Any information that is transmitted or recorded and entered into the system should reflect actual, reliable and correct records or instances, without corruption (Ihonvbere 2010; Whitman & Mattord 2009). The following section discusses the final aspect of the CIA triad: availability of data. Availability of data: The last aspect of the CIA triad, availability, guarantees that PII is readily available to authorised users because modern businesses are highly dependent on a functioning information system (Whitman & Mattord 2009). Confidentiality, integrity and availability are often taken for granted by SME owners. Information security is often associated with services that engage with sensitive information, such as financial, legal, human resources or business documentation. SMEs question the need for security controls in their business as this type of information exposure is limited (Campbell & Hartcher 2015). The following section will discuss the ISO/IEC 27002 security standard. ISO/IEC 27002 standard The International Organization for Standardization (ISO/IEC) is the world’s largest developer of voluntary International Standards (ISO/IEC 27000 2014). The ISO/ IEC 27002 standard provides a ‘code of practice’ that can be used for high-level security management that is intended as a common basis and practical guideline for SMEs to develop security standards and effective security management practices. The standard is based on 11 sections but cannot be used for certification purposes. Instead, the ISO/IEC 27001 standard was developed as an information security management system (ISO/IEC 27000 2014). The objective of these standards is to ensure compliance with all statutory, regulatory, certificatory or contractual obligations, and these requirements should be explicitly defined, documented and kept up to date (ISO/IEC 27000 2014). The following section introduces the CSF developed to ensure that internal control in the SME will provide for the secure collection and storage of PII. Critical success factors The focus of this paper was to identify CSFs that are necessary to ensure that internal information security controls are in place in SMEs to protect the PII of their customers. The CIA triad provides the general foundations for the development of the CSF. Additionally, the ISO/IEC 27002 Security Standard was discussed as it provides a code of practice for information security management. A CSF refers to the specific activities, procedures or areas that a business depends upon for success or survival and is unique for each SME. The CSFs that are recommended for an SME to make sure that there are internal controls in place to protect the PII of customers are discussed in the following sections. CSF01 – Management commitment The owner of an SME has a commitment and responsibility to ensure that an information security policy is in place. As discussed earlier, the knowledge of the owner will determine the level of attention that is given to security controls in the SME. In addition, the owner should ensure that the policy is enforced and managed in accordance with ISO/IEC 27001 and 27002 security standards (Binder et al. 2010; Shanmugam, CheHaat & Ali 2012). Once the policy is in place, the next step is to provide user training and awareness programme. CSF02 – Information security training The second CSF relates to employee or user awareness and training. It is important that all employees of an SME should receive some form of training with regard to the security policies of the SME, as this training will encourage compliance (Mendes 2012). Furthermore, if the information security knowledge of employees increases, they will be able to help the SME recover from undesirable situations, as Source: Bhaiji, Y., 2008, Chapter 1 – Overview of network security, Cisco Academy, Indianapolis. FIGURE 1: CIA triad. Confidenality Security Model Integrity Availability 77 Page 4 of 5 Original Research http://www.icbmd.org doi:10.4102/jbmd.v5i1.7 well as be able to detect situations that can lead to adverse situations (de Vos & Willemse 2011; Kelly 2011; Mendes 2012; Shanmugam et al. 2012). Following the implementation of employee or user awareness and training, it is essential that an access control system is placed within the business. CSF03 – Access control Access control relates to the appropriate physical access controls, guards and surveillance systems that are implemented within an SME. The goal of this CSF is to ensure the protection of the work environment, as well as any other areas that contain sensitive information assets (Kelly 2011; Park et al. 2008). The following CSF relates to the Infrastructure Security Standards that must govern the information security policies in the SME. CSF04 – Infrastructure security Infrastructure security relates to computer and network security procedures and methods. As such, the IT staff or IT vendors are able to securely manage the technological infrastructure in a defined and documented manner that adheres to effective information security practices. This ensures the compliance of regulatory standards for the protection of sensitive organisational information, as well as the prevention of unauthorised access to this information (Kelly 2011; Park et al. 2008). With an effective and efficient security infrastructure in place, the next CSF relates to the implementation of security policies to ensure that a secure environment is possible through regulations and standards. CSF05 – Security policies Security policies relate to how an SME has defined and documented its management approach to security and legal compliances. More importantly, these security policies must be implemented in a manner that complies with the SMEs’ responsibilities and duties to protect confidential and sensitive information, as well as prevent any access, exposure or distribution of such information (Binder et al. 2010; Park et al. 2008). Subsequently, with an efficient security policy in place, it is important to continuously assess the various policies and regulations in place. This therefore leads to the final CSF. CSF06 – Periodic assessment The final CSF relates to periodic assessment. This factor aims to ensure that an SME pertains to an assessment or review of its security programme and polices, dealing with managerial and technical aspects. It is important that this assessment is conducted annually to further ensure security and reliability of an SME. With the integration of periodic assessments within the SMEs, information and data loss or theft prevention can be dealt with effectively and sufficiently, furthermore contributing to the importance of security and regulatory policies (Binder et al. 2010; Shanmugam et al. 2012). The following section provides an overview of how each of the CSFs can be mapped to the four pillars as discussed in the previous section. Critical success factors and the four pillars of information security The four pillars of information security refer to the different aspects that an SME should take into consideration to assist in ensuring that sufficient security standards are met. The four pillars are based on data protection and recovery, the detection of unwanted states of access and furthermore the compliance with regulation, standards and policies. These pillars focus on an SMEs’ perspective in ensuring organisational and customer security: • Protection: protecting confidential and sensitive information; • Detection: detecting or preventing of unwanted states or programmes from unauthorised access; • Recovery: making initiatives in the case of an emergency or unexpected, unwanted situation; and • Compliance: ensuring that policies, standards and legal regulations or requirements are organisationally met (Shanmugam et al. 2012). It is essential that the CSFs identified above are able to ensure the enforcement of regulations and policies, as well as the protection of PII. Table 1 provides an illustration of how each CSF aligns with the four pillars in assisting with the security concerns of SMEs previously discussed previously. From Table 1 it is noted that the CSF will assist an SME to be compliant with various security standards, policies or regulations. Compliance is one of the key aspects that will determine the successful protection of PII. SMEs are often overwhelmed by the volume of security standards and regulations that must be complied with. Additionally, SMEs do not comprehend the potential risks associated with not having to comply with such standards and regulations, which result in the ignorance of security measures. The identified CSFs will provide the SME with a specific security framework that it can use to make sure that the necessary internal controls are in place to protect and detect potential harmful situations during the collection of PII. Conclusion This article explored the CSFs that are considered by an SME to improve the protection of the PII of customers collected on e-commerce sites. This was done through an in-depth literature review of experts in the field of information security and internal controls as well as PII collection, resulting in TABLE 1: CSFs and four pillars. Success factors Protection Detection Recovery Compliance Top management commitment - - - √ Employee and user awareness/training √ √ √ √ Access control √ √ - √ Infrastructure security √ √ - √ Third-party assurance √ - - √ Security policies √ √ √ √ Periodic assessment - √ - √ 78 Page 5 of 5 Original Research doi:10.4102/jbmd.v5i1.7http://www.icbmd.org the CSFs. These CSFs were created through the utilisation and understanding of the CIA triad and ISO/IEC 27002 Security Standards. The CIA triad provided a foundation of information confidentiality, integrity and availability, whilst the ISO/IEC 27002 provided a more in-depth observation of information security. Therefore, the CSFs can be utilised in an SME to ensure that any PII that is collected is effectively and efficiently secured and managed, in addition to creating a more secure working environment. Once a secure environment is achieved through the implementation of these CSFs, the mitigation of the risks discussed in the research is possible. Acknowledgements Competing interests The authors declare that they have no financial or personal relationship(s) that may have inappropriately influenced them in writing this article. Authors’ contributions F.E. (University of Fort Hare) and L.C. (University of Fort Hare) contributed equally to the writing of this article. References Abor, J. & Quartey, P., 2010, ‘Issues in SME development in Ghana and South Africa’, International Research Journal of Finance and Economics 39, 215–228. 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Teketel, T. & Berhanu, Z., 2009, ‘Internal control in Swedish small and medium size enterprises’, Master’s thesis, Umeå Universitet, Umeå. Tittel, E., 2008, ABCs of IT security for CPAs, American Institute of Certified Public Accountants, Washington. Whitman, B. & Mattord, H., 2009, Principles of information security, Thomson Course Technology, Boston. 79 doi:10.4102/jbmd.v5i1.14 Page 1 of 5 Original Research http://www.icbmd.org Authors: Abha Mittal1 Aashna Jain1 Affiliations: 1University of Delhi, India Correspondence to: Aashna Jain Email: [email protected] Postal address: N-3, Top Floor, Rajouri Garden, New Delhi- 110027, India How to cite this article: Mittal, A. & Jain, A., 2015, ‘Indian Companies Act, 2013 – Changing the face of CSR in India’, Journal of Business and Management Dynamics 5(1), 5 pages. http://dx.doi. org/10.4102/jbmd.v5i1.14 Note: This paper was presented at the 2015 7th International Conference on Business and Finance (ICBF). Copyright: © 2015. The Authors. Licensee: AOSIS OpenJournals. This work is licensed under the Creative Commons Attribution License. Indian Companies Act, 2013 – Changing the face of CSR in India Read online: Scan this QR code with your smart phone or mobile device to read online. The Indian Companies Act, 2013, is the first of its kind in the world. One of the most applauded aspects of the new Company Law regime is the mandatory corporate social responsibility (CSR) spending requirement, which is governed by Section 135 of the act. The CSR provision would change the way Indian corporates do business because till now CSR has largely been a voluntary contribution by corporates. The choices we make today are going to influence our generations to come. This provision can make CSR a driver of capital formation in neglected areas of national interest as India is a fast-growing emerging economy but also faces numerous human development challenges. It is clear that there will be an immense flow of funds and this flow will help companies effect the pressing societal challenges, but a disciplined approach is necessary so that companies can make an unprecedented contribution to India’s future. This paper makes an attempt to understand the provisions of Section 135 of the new Companies Act, 2013, its implications and implementation. It also studies the spending patterns before the implementation of the act and the henceforth expected change. Introduction The Indian Companies Act, 2013, the first of its kind in the world, redefines the landscape of the Indian social sector, heralding a new era on the path to inclusive growth (FICCI–Accenture 2014). One of the most applauded aspects of the new Company Law regime is the mandatory social spending requirement (corporate social responsibility, CSR) governed by Section 135 of the act. Faced with innumerable economic and social challenges as our country is, our lawmakers could not have ushered in a more revolutionary change through the new law (Vaidyanathan & Thacker 2014). The CSR provision would change the way Indian corporates do business because till now CSR has largely been a voluntary contribution by corporates (Grant Thornton). Even as many companies have been reaching out to the under privileged for decades, driven by the trusteeship concept, there are several organisations that have not been engaged in the community development space (FICCI–Accenture 2014). For the first time in India, CSR has become a concrete resource allocation platform backed by legislative support. The new law presents several opportunities for Indian companies to not only strengthen their CSR efforts but also shape India’s economic future and their own global competitiveness (FICCI–Accenture 2014). The choices we make today are going to influence our generations to come. The inclusion of the CSR mandate is an attempt to supplement the government’s efforts of equitably delivering the benefits of growth and to engage the corporate world with the country’s development agenda (PWC 2013).This provision can make CSR a driver of capital formation in neglected areas of national interest as India is a fast-growing emerging economy but also faces numerous human development challenges. These include maternal health problems, infant mortality and intractable diseases such as malaria and tuberculosis (FICCI–Accenture 2014). Take maternal health for instance, India and Nigeria accounted for one third of global maternal deaths in 2013. An estimated 50 000 maternal deaths occurred in India in 2013. Although India has been able to substantively reduce its maternal mortality rate (MMR), India runs the risk of missing the MMR target set under the auspices of the Millennium Development Goals. While the government is launching extensive interventions, it is evident that more efforts need to be taken to achieve the desired MMR targets. The CSR Rules 2014 provide an opportunity to corporations to work with public agencies and help the nation achieve the desired MMR targets (FICCI–Accenture 2014). CSR is the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large (WBCSD). The UNIDO defines CSR as a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (‘triple-bottom-line approach’), while 80 http://www.icbmd.org doi:10.4102/jbmd.v5i1.14 Page 2 of 5 Original Research addressing the expectations of shareholders and stakeholders. In this sense, it is important to draw a distinction between CSR, which can be a strategic business management concept, and charity, sponsorships or philanthropy. Even though the latter can also make a valuable contribution to poverty reduction, directly enhance the reputation of a company and strengthen its brand, the concept of CSR clearly goes beyond that (UNIDO). Today, CSR has become a worldwide concept whereby organisations consider the interests of society by taking responsibility for the impact of their activities on customers, employees, shareholders, communities and the environment in all aspects of their operations. It is one of the most important global issues with serious challenges and implications on almost all sectors. Surging economies, including India, are coping with issues related to poverty, child rights, community welfare etc. and are a hotbed for an innovative CSR Scenario, which is still shaping up (KPMG & ASSOCHAM 2008). CSR – Global scenario ‘India would become the first country to mandate corporate social responsibility (CSR) through a statutory provision’, said Mr. Sachin Pilot, ex- Corporate Affairs Minister (KPMG 2014). Social and economic initiatives, as a responsibility of the companies, are gaining popularity internationally. The Financial Reporting Council in the United Kingdom is in the process of introducing guidelines for disclosures regarding environmental, social and governance issues by a company. The intention is for these to replace the existing ‘business review’ section of annual reports, and companies would be required to provide complete disclosure about their business activities, including social efforts (Vaidyanathan & Thacker 2014). In India, the concept of CSR is governed by Section 135 of the Companies Act, 2013, which was passed on 29 August 2013. The CSR provisions within the act are applicable to companies with an annual turnover of Rs. 1000 crores and more, or a net worth of Rs. 500 crores and more, or a net profit of Rs. 5 crores and more. The act encourages companies to spend at least 2% of their average net profit of the previous 3 years on CSR activities, such as eradicating extreme hunger and poverty; promoting education; promoting gender equality and empowering women; reducing child mortality and improving maternal health; combating human immunodeficiency virus (HIV), acquired immune deficiency syndrome (AIDS), malaria and other diseases; ensuring environmental sustainability; providing employment-enhancing vocational skills; funding social business projects; contributing to the Prime Minister’s National Relief Fund or any other fund set up by the central government or the state governments for socio-economic development and relief and funds for the welfare of the scheduled castes, the scheduled tribes, other backward classes, minorities and women; and such other matters as may be prescribed (Grant Thornton). Companies can also collaborate with each other for jointly undertaking CSR activities, provided that each of the companies are able to individually report on such projects (Bahl 2014). The new rules will be applicable from the fiscal year 2014–2015 onwards (PWC 2013). The act lists out a set of activities eligible under CSR (PWC 2013). The 2013 act stipulates that the company shall give preference to the local area and areas where it operates (Grant Thornton). The CSR activities should not be undertaken in the normal course of business and must be with respect to any of the activities mentioned in Schedule VII of the 2013 act. Contribution to any political party is not considered to be a CSR activity, and only activities in India would be considered for computing CSR expenditure (Bahl 2014). Also, activities meant exclusively for employees and their families will not qualify (PWC 2013). CSR spending in India on various activities (before the new act) The FICCI–Accenture Report conducted in-depth conversations with 30 senior leaders from companies and civil society organisations to understand the industry response to this changing CSR environment; this was complemented with a survey of 20 companies (FICCI–Accenture 2014). These discussions revealed the growing understanding within businesses towards leveraging CSR as a platform to initiate actions benefiting their business as well as the nation. Most large- and medium-sized companies are viewing CSR initiatives as their contribution to the developmental agenda TABLE 1: CSR spending requirements. Sr. No. Country Whether CSR spending/reporting mandatory Countries not having mandatory guidelines for CSR spending/reporting 1. UK Voluntary guidelines in place for CSR reporting 2. USA Voluntary reporting by companies in sustainability reports 3. China Voluntary reporting by companies in sustainability reports 4. Germany Voluntary reporting by companies in sustainability reports 5. Australia Voluntary reporting by companies in sustainability reports Countries having mandatory guidelines for CSR spending/reporting 1. France Mandatory reporting for listed companies in annual reports on CSR activities 2. Denmark Investors and state-owned companies to include information on CSR in their annual financial reports 3. Sweden Mandatory reporting by state-owned companies 4. Indonesia Natural resource–based companies must allocate budgets for CSR programmes and the programmes must be run according to government regulations 5. Malaysia Compulsory for companies listed on Bursa Malaysia to disclose their CSR activities or practices Source: KPMG, 2014, ‘CSR in India – A changing landscape’, Report, March 2014. 81 http://www.icbmd.org doi:10.4102/jbmd.v5i1.14 Page 3 of 5 Original Research of the society, rather than simply as efforts that grant them a ‘license to operate’ (FICCI–Accenture 2014). A study of the CSR activities undertaken by the top 200 firms in the year 2012–2013 across 10 industries attempts to get an industry-level analysis of the nature of these activities (Bansal & Rai 2014). Most of the firms undertake CSR expenditure for the welfare of the rural communities (Table 2), especially around their areas of operation. A possible reason could be to generate goodwill amongst people in the neighbourhood and become familiar with the area and its needs, which, in turn, would minimise costs of providing services. Contrary to the developed countries where CSR activities are undertaken mainly in the area of environment, in India it is mainly undertaken in the social sector (Bansal & Rai 2014). In the light of the recent legislation, it would be interesting to see how companies would change their CSR strategies. After community development, education (including skill development) attracts the largest share of CSR expenditure. Health is also a major area where firms like to invest (Bansal & Rai 2014). Implications of Companies Act, 2013 (CSR) An increasing number of businesses, high-net-worth individuals and mid-tier professionals want to contribute to societal growth through active engagement. These organisations and individuals have significant resources and experience and are no longer interested in ‘cheque philanthropy’. They are ready to play a far more active role in shaping growth trajectories of institutions and accelerating social change (FICCI–Accenture 2014). According to the Indian Institute of Corporate Affairs (IICA), about Rs. 200 billion (roughly US$ 3.2 billion) could be unlocked from a pool of around 16 000 companies for CSR spending during 2014–2015 (FICCI–Accenture 2014). CSR initiatives in Indian companies stand to benefit tremendously, thanks to significantly more predictable spending (FICCI– Accenture 2014) (see Table 3). Companies allocating percentage of their PAT each year for CSR activities: Businesses capitalise on natural, social, human and economic resources to have the long-term perspective such that future is sustainable and stable. They need to make sustainability a core driver of their strategy. The real challenge, however, lies in the widespread adoption of these initiatives. The ‘Business Responsibility: India Survey, 2013’ helps to understand where the initiatives stood before the implementation of the new act (India Survey 2013). The surveyed companies include the top 200 companies by market capitalisation, and the survey was conducted using a questionnaire technique (India Survey 2013). Sixty-five per cent of the respondents claim to allocate a certain percentage of their PAT each year for CSR activities (Figure 1). Of these, about 25% companies commit at least 2% of their PAT on CSR activities. About the same percentage of companies claims to spend up to 2%. Almost 12% companies suggest that their CSR budget varies between years and are dependent on projects (India Survey 2013). Expected increase in CSR expenditure and reporting: Forbes India survey realised that many firms, even among the top 100 firms by revenue (FY 2012), do not report their CSR expenditure or even declare the social causes they support, as they are not required to do so by law. But all this will change now that the new Companies Act, 2013, requires formal reporting of CSR efforts by corporates. The data pack, compiled by CSRidentity.com, together with Forbes India, tells you how much each company will have to fork out on CSR, once they are bound by law (Jayashankar, Paul & Bhat 2013). TABLE 2: Sector-wise CSR expenditure, 2012–2013. Industry Health (%)Education (%)Community development/ rural development (%) Environment (%)Total (%) Oil and gas 23.50 35.29 29.41 11.76 100 Automobile 40.00 10.00 40 10 100 Consumer durables 24.76 21.34 15.25 28.75 100 Iron and steel 35.29 23.53 35.29 5.88 100 Banking and financial services 8.57 20.00 48.57 35 100 Power 10.00 10.00 45 35 100 Infrastructure 8.35 30.55 44.44 16.66 100 Cement 22.20 25.00 29 23.8 100 Paper and pulp 19.90 24.10 18 38 100 Pharmaceutical 30.00 28.00 22.00 20.00 100 Source: Bansal, S. & Rai, S., 2014, ‘An analysis of corporate social responsibility expenditure in India’, Economic Political Weekly XLIX. Note: Calculated from the annual reports of the top 200 firms for the year 2012–2013. TABLE 3: CSR budget in India. CSR budget (Rs. millions) Number of companies Up to Rs. 5 13 346 Rs. 5–10 1196 Rs. 10–50 1186 Rs. 50–100 182 Rs. 100–200 79 Rs. 200–500 43 Rs. 500 or more 25 Source: FICCI Accenture Report, 2014, Organizing for success on corporate responsibility: The path to high performance Grant Thornton: Implications of Companies Act, 2013 corporate social responsibility. 82 http://www.icbmd.org doi:10.4102/jbmd.v5i1.14 Page 4 of 5 Original Research Implementation of the act The CSR regime complements the efforts of the government and non-government organisations by requiring companies in India to initiate activities for the economic wellbeing of the underprivileged and for the environment. Companies can also join hands to undertake CSR projects (Vaidyanathan & Thacker 2014). Experts say that these companies should outsource the CSR activities to civil society sector instead of creating an army of people for carrying out the CSR activities. They should allow not for profit companies to actually execute the programme at the ground level (Business Standard 2015). When a company chooses an initiative that fits its values and purpose, it should commit managerial talent to the chosen problem, and should address it just as it would do in a business situation (Kasturi Rangan 2014). A company should carefully choose the activities where it can bring its resources and competence to play. An engineering company is likely to have better skills at addressing problems of lack of sanitation, a software company might have better skills at addressing education and a consumer goods company would be better at addressing public health and hygiene issues (Kasturi Rangan 2014). Every company should attempt to move the needle on the social or environmental problem it undertakes. Big companies, by bringing their technical and organisational skills to bear, not just money, should attempt to uplift the capability of their social value chain partners (this often will be the local government) and make a real dent on the problem. Analysis of CSR activities of top 100 companies shows that the mode of giving has primarily been through non-government organisations and other social organisations as around 90% (Figure 2) companies are channelling their funds through them (FICCI–Accenture 2014). While majority of companies have established in-house foundations to engage in social activities, around 10% of the organisations choose to design and execute activities directly through them. Conclusion A robust and thriving development sector is central to India’s quest for equitable, inclusive and sustainable growth (PWC 2013). The Indian Companies Act, 2013, marks a paradigm shift in India’s corporate law regime and has far-reaching implications for both domestic companies and overseas investors with a presence in India (Shroff 2014). India’s development sector Source: India Survey, 2013, Business Responsibility: India Survey, 2013, from http://www. sustainabledevelopment.in/pdf/whatwethink/Business_Responsibility_India_Survey_2013.pdf. FIGURE 1: Companies allocating percentage of their PAT each year for CSR activities out of 200 surveyed companies. 2 3 11. No Response (3%) 2. Yes (65%) 3. No (32%) TABLE 4: Excerpt of spending on CSR by top 100 companies. Sr. No. Company Revenue (FY 2012) Avgas PAT Actual spend 2% of PAT 1. Indian Oil Corporation (IOC) 442 459 7783 83 156 2. Reliance Industries 368 571 21 138 288 423 3. Bharat Petroleum Corporation 223 315 1438 8 29 4. Hindustan Petroleum Corporation 195 891 1118 27 22 5. Tata Motors 170 678 8437 15 169 6. Oil & Natural Gas Corporation (ONGC) 151 121 23 660 121 473 7. State Bank of India (SBI) 147 197 13 056 71 261 8. Tata Steel 135 976 3895 146 78 9. PNB GILTS 104 628 29 NA 1 10. Hindalco Industries 82 549 3597 28 72 11. Coal India 78 410 11 759 119 235 12. Bharti Airtel 71 506 6511 33 130 13. MMTC 67 023 129 3 3 14. NTPC 66 366 9334 49 187 15. Larsen & Toubro 64 960 4818 70 96 16. Essar Oil 63 428 -201 NA N/A 17. Mahindra & Mahindra 63 030 2948 22 59 18. Mangalore Refinery & Petrochemicals 57 214 1066 NA 21 19. Tata Consultancy Services (TCS) 48 894 8935 51 179 20. Bharat Heavy Electricals 50 654 5823 37 116 Total (100) 1765 5611 Source: Jayashankar, M., Paul, C. & Bhat, S., 2013, ‘CSR report card: Where companies stand’, Forbes India, March 18, 2013. Note: Companies are ranked on basis of revenue. Revenue figures are indicative of the company’s financial performance in financial year 2011–2012 (FY12) only. All figures are in Rs Crore and have been rounded off to the nearest decimal point. Avgas PAT refers to the average of profit after tax recorded by a company in the last three financial years (FY10, FY11 and FY12). NA stands for data ‘not available’ for companies which do not disclose their CSR spends in their annual reports. 2% of PAT refers to the amount that a company needs to spend in CSR activities as per the government mandate. N/A implies not applicable; according to government policy, loss-making firms do not need to invest in CSR. 83 doi:10.4102/jbmd.v5i1.20 Page 1 of 5 Original Research http://www.icbmd.org Author: Jabulile Makhalima1 Affiliation: 1School of Economics Sciences, North-West University, South Africa Correspondence to: Jabulile Makhalima Email: [email protected] Postal address: Private Bag X6001, Potchefstroom 2520, South African How to cite this article: Makhalima, J., 2015, ‘The relationship between head of household characteristics and child deprivation in a South African township’, Journal of Business and Management Dynamics 5(1), 5 pages. http://dx.doi.org/10.4102/ jbmd.v5i1.20 Note: This paper was presented at the 2015 7th International Conference on Business and Finance (ICBF). Copyright: © 2015. The Authors. Licensee: AOSIS OpenJournals. This work is licensed under the Creative Commons Attribution License. The relationship between head of household characteristics and child deprivation in a South African township Read online: Scan this QR code with your smart phone or mobile device to read online. Children all over, particularly in the developing world, are increasingly becoming more and more vulnerable as the poverty rate at the household-level remains high. Children’s circumstances are to a great extent dependent on the circumstances of the head of the household. Head of household characteristics, such as employment status, education level, gender, marital status and age among other things, have a direct impact on the children in the household. The paper looks at the relationship between the head of household characteristics and child welfare in the household. The paper uses data collected from households in Boipatong Township in 2013. A child deprivation index was used as a measure of child welfare in the household. A number of questions were used to measure the level of child deprivation. Based on the responses, an index was calculated. An Ordinary Least Squares regression was used to determine the household head characteristics that significantly affect child deprivation. Results from the regression analysis show that there is a significant negative relationship between income and child deprivation. In the sample, the parameter ‘age of the head of household’ shows that the children are less deprived when the parent in the household is older. The results further show that children from families where the parents are married or living together are less deprived than those from single-parent households. Employment status was also found to be an important attribute. The formally employed parents reduced the likelihood of children being deprived as opposed to the unemployed parents whose children were more likely to be deprived. Introduction Individuals can be deprived because of a shortage of resources of all types, not just financial, and deprivation may possibly be defined in an extensive way to cover a wide range of facets of a person’s living conditions. Deprivations are incoherently viewed as undesirable and unsatisfactory conditions, emotional, material, behavioural or physical, as documented by means of a fair-minded degree of social consent. Deprivations include a lack to some degree commonly believed as necessary, a sufficient income, good well-being, etc. (Gordon et al. 2003:6). Children are increasingly becoming more and more vulnerable as the poverty rate on household level remains high. Children’s circumstances are to a great extent dependent on the circumstances of the head of household. Head of household characteristics such as employment status, education level, gender, marital status and age among other things have a direct impact on the children in the household. The paper looks at the relationship between the head of household characteristics and child welfare in the household. The paper uses data collected from households in Boipatong in 2013. A Child Deprivation Index was used as a measure of child welfare in the household. A number of questions were used to measure the level of child deprivation. Based on the responses, an index was calculated. An Ordinary Least Squares (OLS) regression was used to determine the household head characteristics that significantly affect the deprivation index. The rest of the paper is organised as follows: the second section presents a literature review on deprivation and head of household characteristics to be considered as determinants of child deprivation in the regression analysis. The third section presents the methodology followed and the fourth section presents results and discussion. The conclusion is presented in the fifth section. Literature review A child is said to be in poverty when they experiences deprivation of fundamental aspect that are essential to their most basic well-being. These elements may include material items, spiritual wellness and emotional wellness that are crucial to their existence. In the absence of these fundamentals, a child’s wellbeing is compromised and is unable to take a stand as a valued member of society. There is a pressing need to study child poverty and deprivation for the simple 90 [Document text truncated for crawler view.]